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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 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)Registrants telephone number including area 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)Registrants telephone number including area code
    
    (615) 377-0377
  o þ
  o þ
  þ o
 þ
  o o þ
 o þ




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##### 



INDEX
  
 PagePART IItem 1.
    
    Business
    
    
    2Item 1A.
    
    Risk Factors
    
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    
    13Item 2.
    
    Properties
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
    
    
    14Item 6.
    
    Selected Financial Data
    
    
    14Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8.
    
    Financial Statements and Supplementary Data
    
    
    36Item 9.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    71Item 9A.
    
    Controls and Procedures
    
    
    71Item 9B.
    
    Other Information
    
    
    71PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    72Item 11.
    
    Executive Compensation
    
    
    74Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    84Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    85Item 14.
    
    Principal Accountant Fees and Services
    
    
    86PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    87Signatures
    
    
    98Ex-12.1 Statement Re: Computation of Ratio of Earnings to Fixed ChargesEx-21.1 List of SubsidiariesEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 Certification
  1




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PART I
 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 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.
   
 ITEM 1. BUSINESS
 Overview
   2




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Advertising Inserts
  Premedia
Services
  
    
    providing comprehensive services, including print services, as well as managed
premedia services at customer locations;
    
    enhancing customer workflow through technology leadership.
  Competitive Strengths
  Leading
Provider of Print Solutions to our Customers
 Strong, Diverse Customer Base
 High Quality Assets and Investments in Technology
 3




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National Scope with Regional Focus
 Competitive Cost Structure.
 Strong Management Team.
 Our Strategy
  Growing Print Volumes Profitably through the Strength of our Customer Relationships
 Improving Customer and Service Mix.
 4




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Continuing to Reduce Costs.
 Expanding our Printing Solutions through Disciplined Capital Expenditures.
 Print Segment
  Advertising Inserts.
 Comics.
 Other Publications.
 Print Production.
  5




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Premedia Services Segment
   Customers and Distribution
 Customers.
  6




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Distribution.
 Sales and Marketing
   Competition
   Raw Materials
  Seasonality
  7




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Backlog
  Our Employees
  Governmental and Environmental Regulations
 -
 
 ITEM 1A. RISK FACTORS
  Our substantial indebtedness could have a material adverse effect on our financial health and our
ability to obtain financing, and to refinance our existing indebtedness, in the future and to react
to changes in our business.
  
    
    $61.9 million of borrowings outstanding under our $90.0 million Amended and Restated
Credit Agreement with Banc of America Securities, LLC, as Sole Lead Arranger and Sole
Book Manager, and Bank of America, N.A., as Administrative Agent, and certain lenders (as
amended, the 2005 Credit Agreement), including a $35.0 million term loan payable in
full on December 15, 2009 (the 2005 Term Loan Facility) and $26.9 million of borrowings under a revolving credit
facility that expires on December 15, 2009 (the 2005
Revolving Credit Facility), when all borrowings thereunder become payable
in full;
    
    $4.7 million of borrowings outstanding under our $35 million revolving trade
receivables facility (as amended, the Receivables Facility) entered into on September
26, 2006 with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book
Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender,
and certain other lenders (which facility expires on December 15, 2009, when all
borrowings thereunder become payable in full);
    
    $280.0 million of our outstanding 10% Senior Second Secured Notes Due 2010 (the
10% Notes), which mature on June 15, 2010; and
    
    $5.5 million of capital lease obligations.
   
    
    make it more difficult for us to satisfy our obligations under our 10% Notes, our 2005
Credit Agreement and our Receivables Facility;
 8




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
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, which would reduce the availability of our cash flow from
operations to fund working capital, capital expenditures or other general corporate
purposes;
    
    make it more difficult to refinance our obligations, including those under the 2005
Credit Agreement, the Receivables Facility and the 10% Notes, as they come due;
    
    limit our ability to purchase paper and other raw materials under satisfactory credit
terms thereby limiting our sources of supply or increasing the cash required to fund
operations, or both;
    
    limit our ability to borrow additional funds in the future, if we need them, due to
financial and restrictive covenants in our indebtedness;
    
    increase our vulnerability to general adverse economic and general industry
conditions, including interest rate fluctuations, because a portion of our borrowings are
and will continue to be at variable rates of interest;
    
    limit our flexibility in planning for, or reacting to, changes in our business and industry; and
    
    place us at a disadvantage compared with competitors that have proportionately less debt.
  In Fiscal Years 2007, 2006, 2005, and 2004, our earnings were insufficient to cover fixed charges.
Our ability to make payments on our indebtedness, to refinance our existing indebtedness and to
operate our business depends on our ability to generate significant amounts of cash in the future.
Our ability to generate such significant amounts of cash depends on many factors beyond our
control.
      9




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The agreements and instruments governing our indebtedness contain restrictions and limitations that
could significantly affect our ability to operate our business.
  
    
    a first lien leverage ratio test; and
    
    a minimum total liquidity test.
 -
  
    
    incur or guarantee additional debt;
    
    create or permit to exist certain liens;
    
    pledge assets or engage in sale-leaseback transactions;
    
    make capital expenditures, other investments or acquisitions;
    
    prepay, redeem, acquire for value, refund, refinance, or
exchange certain debt (including the 10% Notes), subject to certain
exceptions;
    
    repurchase or redeem equity interests;
    
    change the nature of our business;
    
    pay dividends or make other distributions;
    
    enter into transactions with affiliates;
    
    dispose of assets or enter into mergers or other business
combinations; and
    
    place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries.
     
    
    incur additional debt;
    
    pay dividends, acquire shares of capital stock, make payments on subordinated debt or
make investments;
    
    make distributions from restricted subsidiaries;
    
    issue or sell capital stock of restricted subsidiaries;
    
    issue guarantees;
    
    sell or exchange assets;
    
    enter into transactions with shareholders and affiliates;
    
    enter into sale-leaseback transactions;
    
    create liens; and
    
    effect mergers.
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If we are unable to retain key management personnel, our business could be adversely affected.
 -
 We are subject to competitive pressures.
  
    
    customer preferences for larger printers with a greater range of services;
    
    capital requirements; and
    
    competitive pricing pressures.
   11




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Because our business is sensitive to changes in paper prices, our business could be adversely
affected if paper prices increase significantly and we are unable to pass through price increases
to our customers.
    Demand for our services may decrease due to a decline in customers or an industry sectors
financial condition or due to an economic downturn.
  If we do not keep pace with technological changes, we will not be able to maintain our competitive
position.
  Our noncompliance with or liability for cleanup under environmental regulations or efforts to
comply with changes to current environmental regulations could adversely affect our business.
  
    
    govern activities or operations that may adversely affect the environment, such as
discharges to air and water, as well as handling and disposal practices for solid and
hazardous wastes; and
    
    impose liability for the costs of cleaning up, and certain damages resulting from,
sites of past spills, disposals or other releases of hazardous substances.
  12




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Metalmark controls us, and its interests and those of the Morgan Stanley Funds could be in conflict
with our interests.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
  Environmental Matters
    
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  13




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Information
  Holders
  Dividends
  Recent Sales of Unregistered Securities
  
 ITEM 6. SELECTED FINANCIAL DATA
   14




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ACG Holdings, Inc.
Selected Financial Data
 Fiscal Year Ended March 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Statements of Operations Data:Sales
    
    $
    445,026
    
    
    
    434,489
    
    
    
    449,513
    
    
    
    471,102
    
    
    
    517,139Cost of sales
    
    
    397,115
    
    
    
    385,150
    
    
    
    403,641
    
    
    
    409,321
    
    
    
    445,493Gross profit
    
    
    47,911
    
    
    
    49,339
    
    
    
    45,872
    
    
    
    61,781
    
    
    
    71,646Selling, general and administrative expenses
    
    
    27,539
    
    
    
    26,792
    
    
    
    28,824
    
    
    
    32,734
    
    
    
    37,614Restructuring costs (benefit) and other charges (a)
    
    
    (445
    )
    
    
    (1,167
    )
    
    
    10,037
    
    
    
    8,140
    
    
    
    1,722Operating income
    
    
    20,817
    
    
    
    23,714
    
    
    
    7,011
    
    
    
    20,907
    
    
    
    32,310Interest expense, net
    
    
    40,305
    
    
    
    37,541
    
    
    
    34,050
    
    
    
    34,166
    
    
    
    28,584Loss on early extinguishment of debt (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,196
    
    
    
    Other expense (c)
    
    
    1,714
    
    
    
    4,119
    
    
    
    313
    
    
    
    489
    
    
    
    1,503Income tax expense (benefit) (d)
    
    
    (193
    )
    
    
    (3,369
    )
    
    
    (1,685
    )
    
    
    11,441
    
    
    
    1,559Income (loss) from continuing operations
    
    
    (21,009
    )
    
    
    (14,577
    )
    
    
    (25,667
    )
    
    
    (28,385
    )
    
    
    664Discontinued operations: (e)Loss from operations, net of $0 tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    979Loss on disposal, net of $0 tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444
    
    
    
    Net loss
    
    $
    (21,009
    )
    
    
    (14,577
    )
    
    
    (25,667
    )
    
    
    (28,841
    )
    
    
    (315
    )Balance Sheet Data (at end of period):Working capital deficit
    
    $
    (6,330
    )
    
    
    (15,704
    )
    
    
    (10,660
    )
    
    
    (15,772
    )
    
    
    (29,820
    )Total assets
    
    $
    226,733
    
    
    
    231,502
    
    
    
    258,898
    
    
    
    267,913
    
    
    
    278,441Long-term debt and capitalized leases, including current installments
    
    $
    352,110
    
    
    
    324,284
    
    
    
    309,951
    
    
    
    298,298
    
    
    
    231,757Stockholders deficit
    
    $
    (243,638
    )
    
    
    (229,732
    )
    
    
    (212,740
    )
    
    
    (188,775
    )
    
    
    (107,699
    )Other Data:Net cash provided (used) by operating activities
    
    $
    (12,167
    )
    
    
    (5,213
    )
    
    
    (3,575
    )
    
    
    21,163
    
    
    
    45,647Net cash used by investing activities
    
    $
    (12,703
    )
    
    
    (5,523
    )
    
    
    (7,172
    )
    
    
    (13,118
    )
    
    
    (27,446
    )Net cash provided (used) by financing activities
    
    $
    24,870
    
    
    
    10,760
    
    
    
    10,822
    
    
    
    (7,924
    )
    
    
    (22,680
    )Capital expenditures (including capital lease obligations entered into)
    
    $
    12,701
    
    
    
    12,486
    
    
    
    6,907
    
    
    
    15,966
    
    
    
    28,652Ratio of earnings to fixed charges (f)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.07
    xEBITDA (g)
    
    $
    37,733
    
    
    
    39,078
    
    
    
    29,749
    
    
    
    41,054
    
    
    
    54,279
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NOTES TO SELECTED FINANCIAL DATA
 (a)
    
    In March 2005, we approved a restructuring plan for our premedia services segment, which was
designed to improve operating efficiencies and overall profitability. We recorded $1.5
million of costs under this plan in Fiscal Year 2005. We recorded $(0.1) million and $(0.3)
million of costs for this plan in Fiscal Year 2007 and Fiscal Year 2006, respectively.In March 2005, we approved a restructuring plan for our print segment, to reduce
manufacturing costs and improve profitability. We recorded $3.1 million of costs under this
plan in Fiscal Year 2005. We recorded $(0.9) million of costs for this plan in Fiscal Year
2006.In February 2005, we approved a restructuring plan for our print and premedia services
segments, to reduce overhead costs and improve operating efficiency and profitability. We
recorded $3.8 million of costs under this plan in Fiscal Year 2005. We recorded $(0.1)
million and $(0.4) million of costs for this plan in Fiscal Year 2007 and Fiscal Year 2006,
respectively.In January 2004, we approved a restructuring plan for our print and premedia services
segments, which was designed to improve operating efficiency and profitability. We recorded
$5.7 million of costs under this plan in Fiscal Year 2004. We recorded $(0.2) million,
$(0.1) million and $(0.7) million of costs for this plan in Fiscal Year 2007, Fiscal Year
2006 and Fiscal Year 2005, respectively.In July 2003, we implemented a restructuring plan for our print and premedia services
segments to further reduce our selling, general and administrative expenses. We recorded
$1.8 million of costs under this plan in Fiscal Year 2004.In the fourth quarter of Fiscal Year 2003, we approved a restructuring plan for our print and
premedia services segments, which was designed to improve operating efficiency and
profitability. We recorded $1.2 million of costs under this plan in Fiscal Year 2003. We
recorded $(0.2) million of costs for this plan in Fiscal Year 2004.In January 2002, we approved a restructuring plan for our print and premedia services
segments, which was designed to improve asset utilization, operating efficiency and
profitability. We recorded $8.6 million of costs under this plan in Fiscal Year 2002. We
recorded an additional $0.5 million, $0.7 million and $0.4 million of costs for this plan in
Fiscal Year 2006, Fiscal Year 2005 and Fiscal Year 2004, respectively.In addition, we recorded $1.6 million, $0.4 million and $0.5 million of other charges in our
print and premedia services divisions in Fiscal Year 2005, Fiscal Year 2004 and Fiscal Year
2003, respectively. See note 14 to our consolidated financial statements appearing elsewhere
in this Report for further discussion of this restructuring activity.(b)
    
    As part of a refinancing transaction entered into on July 3, 2003, we recorded a loss related
to the early extinguishment of debt of $3.2 million, net of zero taxes. This loss related to
the write-off of deferred financing costs associated with our old bank credit agreement and
our
123/4%
Senior Subordinated Notes Due 2005 (the
123/4%
Notes), neither of which remain outstanding or in effect as of
the date of this Report.(c)
    
    In the fourth quarter of the fiscal year ended March 31, 2006, we concluded that certain
non-production information technology assets of the print segment were fully impaired as a
result of our periodic assessment. This impairment resulted in a charge of $2.8 million. The
impairment charge is classified within other, net in the consolidated statement of operations
for the fiscal year ended March 31, 2006.(d)
    
    In Fiscal Year 2007, income tax benefit relates primarily to an adjustment recorded in the
first quarter of $0.4 million to reflect the tax benefit associated with a change in estimate
with respect to our income tax liability, net of tax expense related to taxable income in
foreign jurisdictions. The valuation allowance increased by $6.0 million in Fiscal Year 2007
as a result of changes in the deferred tax items. This increase primarily includes an $8.8
million increase related to the tax effect of temporary differences generating deferred tax
assets and a decrease of $2.8 million related to the tax effect of the decrease in the
additional minimum pension liability, which is a component of other comprehensive income
(loss).
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In Fiscal Year 2006, income tax benefit relates primarily to an adjustment recorded in the
third quarter of $3.6 million to reflect the tax benefit associated with a change in estimate
with respect to our income tax liability, net of tax expense related to taxable income in
foreign jurisdictions. The valuation allowance increased by $7.1 million in Fiscal Year 2006
as a result of changes in the deferred tax items. This increase primarily includes a $6.1
million increase related to the tax effect of temporary differences generating deferred tax
assets and an increase of $1.0 million related to the tax effect of the increase in the
additional minimum pension liability, which is a component of other comprehensive income
(loss).In Fiscal Year 2005, income tax benefit relates primarily to tax benefit from losses in
foreign jurisdictions and to an adjustment recorded in the third quarter of $0.4 million to
reflect the tax benefit associated with a change in estimate with respect to our income tax
liability. The valuation allowance increased by $9.6 million in
Fiscal Year 2005 as a result
of changes in the deferred tax items. This increase included a $9.6 million increase related
to the tax effect of temporary differences generating deferred tax assets, net of a decrease
of $0.4 million related to the tax effect of the decrease in the additional minimum pension
liability, which is a component of other comprehensive income (loss).In the second quarter of Fiscal Year 2004, the valuation allowance for deferred tax assets
was increased by $12.8 million, resulting in a corresponding debit to deferred income tax
expense. This adjustment reflected a change in circumstances which resulted in a judgment
that, based on the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109) that restrict our ability to consider forecasts of
future income, a corresponding amount of deferred tax assets may not be realized. The change
in circumstances arose from our assessment of the economic climate, particularly the
continuance of competitive pricing pressures in our industry, and the expected increase in
annual interest costs arising from the issuance of our 10% Notes in July 2003 that provided
negative evidence about our ability to realize certain deferred tax assets. We will reverse
our valuation allowance into income when and to the extent sufficient evidence arises to
support the realization of the related deferred tax assets. The valuation allowance
increased by $18.4 million in the fiscal year ended March 31, 2004 (Fiscal Year 2004) as a
result of changes in the deferred tax items. This increase primarily included the $12.8
million increase discussed above and a $5.6 million increase related to the tax effect of
temporary differences generating deferred tax assets, which is net of a decrease of $1.3
million related to the tax effect of the decrease in the additional minimum pension
liability, a component of other comprehensive income (loss). In the third quarter of Fiscal
Year 2004, we recorded an adjustment of $2.2 million to reflect the tax benefit associated
with a change in estimate with respect to our income tax liability.The valuation allowance increased by $3.5 million in the fiscal year ended March 31, 2003
(Fiscal Year 2003) as a result of changes in the deferred tax items. This increase is
primarily due to a $5.0 million increase related to the tax effect of the additional minimum
pension liability, which is a component of other comprehensive income (loss), partially
offset by a decrease in other temporary differences generating deferred tax assets.(e)
    
    In June 2003, we made a strategic decision to sell the operations of our digital visual
effects business, Digiscope, for a de minimis amount. This resulted in a net loss of
approximately $0.4 million in the quarter ended June 30, 2003, which is net of zero income tax
benefit. As a result of this sale, Digiscope has been accounted for as a discontinued
operation, and accordingly, Digiscopes operations are segregated in our consolidated
financial statements. Sales, cost of sales and selling, general and administrative expenses
attributable to Digiscope for Fiscal Year 2003 have been reclassified and presented within
discontinued operations. Sales attributable to Digiscope for Fiscal Year 2004 and Fiscal Year
2003 were $0.8 million and $3.2 million, respectively.(f)
    
    The ratio of earnings to fixed charges is calculated by dividing earnings (representing
consolidated pretax income or loss from continuing operations) before fixed charges by fixed
charges. Fixed charges consist of interest expense, net amortization of debt issuance
expense, and that portion of operating lease rental expense which we deem to be representative
of interest. The deficiency in earnings to cover fixed charges is computed by subtracting
earnings before fixed charges, income taxes and discontinued operations from fixed charges.
The deficiency in earnings required to cover fixed charges for Fiscal Years 2007, 2006, 2005
and 2004 was $21.2 million, $17.9 million, $27.4 million and $16.9 million, respectively.(g)
    
    We have included EBITDA because we believe that investors regard EBITDA as a key measure of a
leveraged companys operating performance as it removes interest, taxes, depreciation and
amortization from the operational results of our business. EBITDA is defined as earnings
before net interest expense, income tax expense (benefit), depreciation and amortization.
EBITDA is not a measure of financial performance under U.S. generally accepted
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accounting
principles and should not be considered an alternative to net income (loss) (or any other
measure of performance under U.S. generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. Our calculation of
EBITDA may be different from the calculations used by other companies and therefore
comparability may be limited. Certain covenants in our debt agreements are based on, or
include EBITDA, subject to certain adjustments. The following table provides a
reconciliation of EBITDA to net loss:
 Fiscal Year Ended March 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands)EBITDA
    
    $
    37,733
    
    
    
    39,078
    
    
    
    29,749
    
    
    
    41,054
    
    
    
    54,279Depreciation and amortization
    
    
    (18,630
    )
    
    
    (19,483
    )
    
    
    (23,051
    )
    
    
    (24,288
    )
    
    
    (24,451
    )Interest expense, net
    
    
    (40,305
    )
    
    
    (37,541
    )
    
    
    (34,050
    )
    
    
    (34,166
    )
    
    
    (28,584
    )Income tax (expense) benefit
    
    
    193
    
    
    
    3,369
    
    
    
    1,685
    
    
    
    (11,441
    )
    
    
    (1,559
    )Net loss
    
    $
    (21,009
    )
    
    
    (14,577
    )
    
    
    (25,667
    )
    
    
    (28,841
    )
    
    
    (315
    )
  Fiscal Year Ended March 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands)Restructuring costs (benefit)
    
    $
    (445
    )
    
    
    (1,167
    )
    
    
    8,369
    
    
    
    7,768
    
    
    
    1,191Other charges
    
    
    
    
    
    
    
    
    
    
    1,668
    
    
    
    372
    
    
    
    531Loss on early extinguishment
of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,196
    
    
    
    Loss from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    456
    
    
    
    979Impairment of assets
    
    
    
    
    
    
    2,830
    
    
    
    
    
    
    
    
    
    
    
    750Total
    
    $
    (445
    )
    
    
    1,663
    
    
    
    10,037
    
    
    
    11,792
    
    
    
    3,451
 18




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
  
    
    the relationships we have developed with key long-term customers and the capital we have
devoted to those relationships;
    
    the balance between capacity and demand in our industry sector; and
    
    our experienced management teams clear focus on servicing the retail advertising insert
and newspaper markets.
       19




---



##### Table of Contents



Recent Performance
  
    
    the continuance of competitive pricing due to a modest amount of excess industry capacity;
    
    incremental costs associated with the start-up of a replacement press in one of our print facilities;
    
    incremental costs associated with the start-up of a newspaper service facility; and
    
    increased utility costs and foreign exchange losses.
  
    
    reduced volume;
    
    the impact of competitive pricing in this segment; and
    
    reductions in certain service requirements related to one major customer.
   -
 -
 Our Restructuring Results and Cost Reduction Initiatives
   
    
    reduced headcount in the manufacturing and the selling and administrative areas;
    
    the closure and sale of the Pittsburg, California print facility; and
    
    the consolidation of our two premedia services facilities in New York, New York.
   20




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##### Table of Contents



Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Three Year2005
    
    
    2006
    
    
    2007
    
    
    TotalFiscal Year 2002 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    $
    (29
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )Lease termination costs  Print
    
    
    739
    
    
    
    465
    
    
    
    
    
    
    
    1,204Total restructuring costs
    
    
    710
    
    
    
    465
    
    
    
    
    
    
    
    1,175Fiscal Year 2003 Plan CostsRestructuring costs:Severance & other employee costs  Premedia
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Other costs  Premedia
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )Total restructuring benefit
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )July 2003 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    12
    
    
    
    
    
    
    
    11
    
    
    
    23Severance & other employee costs  Premedia
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )Total restructuring costs
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11January 2004 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    (234
    )
    
    
    (117
    )
    
    
    
    
    
    
    (351
    )Severance & other employee costs  Premedia
    
    
    (107
    )
    
    
    (66
    )
    
    
    (223
    )
    
    
    (396
    )Lease termination costs  Print
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Other costs  Print
    
    
    (275
    )
    
    
    117
    
    
    
    (15
    )
    
    
    (173
    )Other costs  Premedia
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    (75
    )Total restructuring benefit
    
    
    (694
    )
    
    
    (66
    )
    
    
    (238
    )
    
    
    (998
    )Fiscal Year 2005 Plant and SG&A Reduction Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    3,044
    
    
    
    (263
    )
    
    
    (39
    )
    
    
    2,742Severance & other employee costs  Premedia
    
    
    458
    
    
    
    
    
    
    
    (3
    )
    
    
    455Other costs  Print
    
    
    200
    
    
    
    (124
    )
    
    
    (50
    )
    
    
    26Other costs  Premedia
    
    
    50
    
    
    
    
    
    
    
    (47
    )
    
    
    3Total restructuring costs (benefit)
    
    
    3,752
    
    
    
    (387
    )
    
    
    (139
    )
    
    
    3,226
 21




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##### Table of Contents



Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Three Year2005
    
    
    2006
    
    
    2007
    
    
    TotalFiscal Year 2005 Pittsburg Facility Closure Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    2,293
    
    
    
    (812
    )
    
    
    
    
    
    
    1,481Lease termination costs  Print
    
    
    803
    
    
    
    (117
    )
    
    
    
    
    
    
    686Other costs  Print
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Total restructuring costs (benefit)
    
    
    3,136
    
    
    
    (929
    )
    
    
    
    
    
    
    2,207Other charges:Asset impairment charge  Print
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    1,266Total other charges
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    1,266Fiscal Year 2005 New York Premedia
Consolidation Plan CostsRestructuring costs:Severance & other employee costs  Premedia
    
    
    195
    
    
    
    (40
    )
    
    
    
    
    
    
    155Lease termination costs  Premedia
    
    
    1,271
    
    
    
    (207
    )
    
    
    (79
    )
    
    
    985Other costs  Premedia
    
    
    15
    
    
    
    (3
    )
    
    
    
    
    
    
    12Total restructuring costs (benefit)
    
    
    1,481
    
    
    
    (250
    )
    
    
    (79
    )
    
    
    1,152Other charges:Asset impairment charge  Premedia
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    402Total other charges
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    402Total restructuring costs (benefit)
    
    
    8,369
    
    
    
    (1,167
    )
    
    
    (445
    )
    
    
    6,757Total other charges
    
    
    1,668
    
    
    
    
    
    
    
    
    
    
    
    1,668Total restructuring costs (benefit) and
other charges
    
    $
    10,037
    
    
    
    (1,167
    )
    
    
    (445
    )
    
    
    8,425
 22




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##### Table of Contents



Fiscal Year Ended March 31,2007
    
    
    2006
    
    
    2005(Dollars in thousands)SalesPrint
    
    $
    396,535
    
    
    
    380,648
    
    
    
    393,922Premedia Services
    
    
    48,491
    
    
    
    53,841
    
    
    
    55,591Total
    
    $
    445,026
    
    
    
    434,489
    
    
    
    449,513Gross ProfitPrint
    
    $
    35,598
    
    
    
    34,205
    
    
    
    30,575Premedia Services
    
    
    12,303
    
    
    
    15,134
    
    
    
    15,293Other
    
    
    10
    
    
    
    
    
    
    
    4Total
    
    $
    47,911
    
    
    
    49,339
    
    
    
    45,872Gross MarginPrint
    
    
    9.0
    %
    
    
    9.0
    %
    
    
    7.8
    %Premedia Services
    
    
    25.4
    %
    
    
    28.1
    %
    
    
    27.5
    %Total
    
    
    10.8
    %
    
    
    11.4
    %
    
    
    10.2
    %EBITDAPrint (a)
    
    $
    33,730
    
    
    
    31,571
    
    
    
    22,997Premedia Services (a)
    
    
    8,777
    
    
    
    11,070
    
    
    
    10,059Other (b)
    
    
    (4,774
    )
    
    
    (3,563
    )
    
    
    (3,307
    )Total
    
    $
    37,733
    
    
    
    39,078
    
    
    
    29,749EBITDA MarginPrint
    
    
    8.5
    %
    
    
    8.3
    %
    
    
    5.8
    %Premedia Services
    
    
    18.1
    %
    
    
    20.6
    %
    
    
    18.1
    %Total
    
    
    8.5
    %
    
    
    9.0
    %
    
    
    6.6
    %
 
 (a)
    
    In Fiscal Year 2007, EBITDA for the print and premedia services segments includes the impact
of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the
print and premedia services segments in Fiscal Year 2006 includes the impact of restructuring
benefit of ($0.9) million and ($0.3) million, respectively, and for the print segment also
includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and
premedia services segments in Fiscal Year 2005 includes the impact of restructuring costs and
other charges of $7.8 million and $2.2 million, respectively. For additional information
about our restructuring plan, see   Our Restructuring Results and Cost Reduction
Initiatives above.(b)
    
    Other operations include corporate general and administrative expenses. In addition, in
Fiscal Year 2007, EBITDA for other operations includes the impact of incremental legal
expenses associated with two lawsuits in which the Company
is the plaintiff. 23




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##### Table of Contents



PremediaPrint
    
    
    Services
    
    
    Other
    
    
    TotalFiscal Year 2007EBITDA
    
    $
    33,730
    
    
    
    8,777
    
    
    
    (4,774
    )
    
    
    37,733Depreciation and amortization
    
    
    (16,563
    )
    
    
    (2,067
    )
    
    
    
    
    
    
    (18,630
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (40,305
    )
    
    
    (40,305
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    193Net income (loss)
    
    $
    17,167
    
    
    
    6,710
    
    
    
    (44,886
    )
    
    
    (21,009
    )Fiscal Year 2006EBITDA
    
    $
    31,571
    
    
    
    11,070
    
    
    
    (3,563
    )
    
    
    39,078Depreciation and amortization
    
    
    (16,767
    )
    
    
    (2,716
    )
    
    
    
    
    
    
    (19,483
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (37,541
    )
    
    
    (37,541
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    3,369
    
    
    
    3,369Net income (loss)
    
    $
    14,804
    
    
    
    8,354
    
    
    
    (37,735
    )
    
    
    (14,577
    )Fiscal Year 2005EBITDA
    
    $
    22,997
    
    
    
    10,059
    
    
    
    (3,307
    )
    
    
    29,749Depreciation and amortization
    
    
    (19,867
    )
    
    
    (3,184
    )
    
    
    
    
    
    
    (23,051
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (34,050
    )
    
    
    (34,050
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,685
    
    
    
    1,685Net income (loss)
    
    $
    3,130
    
    
    
    6,875
    
    
    
    (35,672
    )
    
    
    (25,667
    )
 24




---



##### Table of Contents



Historical Results of Operations
 Fiscal Year 2007 vs. Fiscal Year 2006
  Print
 Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 Restructuring Costs (Benefit) and Other Charges.
 Other Expense (Income).
 EBITDA.
 Premedia Services
 Sales.
 Gross Profit.
 25




---



##### Table of Contents



Selling, General and Administrative Expenses.
 Restructuring Costs (Benefit) and Other Charges.
 Other Expense (Income).
 EBITDA.
 Other Operations
  Interest Expense
  Income Taxes
   Net Loss
  Additional Minimum Pension Liability
  26




---



##### Table of Contents



Fiscal Year 2006 vs. Fiscal Year 2005
  Print
 Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 Restructuring Costs (Benefit) and Other Charges.
 Other Expense (Income).
 EBITDA.
 Premedia Services
 Sales.
 Gross Profit.
 27




---



##### Table of Contents



Selling, General and Administrative Expenses.
 Restructuring Costs (Benefit) and Other Charges.
 Other Expense (Income).
 EBITDA.
 Other Operations
  Interest Expense
  Income Taxes
  Net Loss
  Additional Minimum Pension Liability
  28




---



##### Table of Contents



Liquidity and Capital Resources
 Overview of Liquidity and Capital Resources
  
    
    $5.9 million under the 2005 Revolving Credit Facility; and
    
    $24.8 million under the Receivables Facility, including $1.1 million based on
receivables purchased from Graphics at March 31, 2007 and an additional $23.7 million if
Graphics Finance had purchased from Graphics all other eligible receivables at March 31,
2007.
        
    
    $12.2 million of operating activities (see our Consolidated Statements of Cash Flows
appearing elsewhere in this Report);
    
    $12.7 million in cash capital expenditures; and
    
    $6.7 million to service other indebtedness (including repayment of capital lease
obligations of $3.8 million and payment of deferred financing costs of $2.9 million).
    29




---



##### Table of Contents



May 2005 Refinancing
  
    
    a $55 million revolving credit facility ($40 million of which may be used for letters
of credit), maturing on December 15, 2009, which is not subject to a borrowing base
limitation (the 2005 Revolving Credit Facility); and
    
    a $35 million non-amortizing term loan facility, maturing on December 15, 2009 (the
2005 Term Loan Facility).
     
    
    a first lien leverage ratio test; and
    
    a minimum total liquidity test.
  
    
    incur or guarantee additional debt;
    
    create or permit to exist certain liens;
    
    pledge assets or engage in sale-leaseback transactions;
    
    make capital expenditures, other investments or acquisitions;
    
    prepay, redeem, acquire for value, refund, refinance, or
exchange certain debt (including the 10% Notes), subject to certain
exceptions;
    
    repurchase or redeem equity interests;
    
    change the nature of our business;
    
    pay dividends or make other distributions;
    
    enter into transactions with affiliates;
    
    dispose of assets or enter into mergers or other business combinations; and
    
    place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries.
  30




---



##### Table of Contents



September 2006 Revolving Trade Receivables Facility
         Value Added Revenue and Print Impressions for the Print Segment
  Fiscal Year Ended March 31,2007
    
    2006
    
    2005Print segment VAR (in thousands)
    
    $
    191,366
    
    
    
    181,364
    
    
    
    188,422Print impressions (in millions)
    
    
    11,354
    
    
    
    11,207
    
    
    
    11,279
 31




---



##### Table of Contents



Fiscal Year Ended March 31,2007
    
    
    2006
    
    
    2005(Dollars in thousands)Print segment sales
    
    $
    396,535
    
    
    
    380,648
    
    
    
    393,922Paper, ink and subcontract services
    
    
    (205,169
    )
    
    
    (199,284
    )
    
    
    (205,500
    )Print segment VAR
    
    $
    191,366
    
    
    
    181,364
    
    
    
    188,422
 Impact of Inflation
  Seasonality
  Environmental
  New Accounting Pronouncements
  32




---



##### Table of Contents



Critical Accounting Estimates
   Allowance for Doubtful Accounts
  33




---



##### Table of Contents



Restructuring
  Contingencies
  Deferred Taxes
  Contractual Obligations and Commercial Commitments
  Payments Due By PeriodContractual Obligations
    
    Total
    
    
    < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years(Dollars in thousands)Long-term debt
    
    $
    346,580
    
    
    
    
    
    
    
    66,580
    
    
    
    280,000
    
    
    
    Interest payments on fixed rate
debt (a)
    
    
    98,000
    
    
    
    28,000
    
    
    
    56,000
    
    
    
    14,000
    
    
    
    Capital lease obligations
    
    
    5,530
    
    
    
    3,435
    
    
    
    2,095
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    9,792
    
    
    
    3,347
    
    
    
    5,094
    
    
    
    1,351
    
    
    
    Pension obligations (b)
    
    
    713
    
    
    
    713
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    460,615
    
    
    
    35,495
    
    
    
    129,769
    
    
    
    295,351
    
    
    
    
 
 (a)
    
    Excludes interest on $66.6 million of variable rate borrowings outstanding at March 31,
2007, as such borrowing levels and related rates of interest fluctuate.(b)
    
    Although we expect to make contributions to our pension plan in future years, those
amounts cannot be estimated at this time. See note 9 to our consolidated financial
statements appearing elsewhere in this Report. 34




---



##### Table of Contents



Commitment Due By PeriodOther Commercial
    
    
    
    
    
    < 1 year
    
    1-3 years
    
    3-5 years
    
    > 5 yearsCommitments
    
    Total
    
    (Dollars in thousands)Standby letters of credit
    
    $
    22,257
    
    
    
    18,723
    
    
    
    106
    
    
    
    58
    
    
    
    3,370
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative Information.
 Qualitative Information .
    35




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Page No.The following consolidated financial statements of ACG Holdings, Inc. are included in this Report:Report of Independent Registered Public Accounting Firm
    
    
    37Consolidated Balance Sheets  March 31, 2007 and 2006
    
    
    38For the Years Ended March 31, 2007, 2006 and 2005:Consolidated Statements of Operations
    
    
    40Consolidated Statements of Stockholders Deficit
    
    
    41Consolidated Statements of Cash Flows
    
    
    42Notes to Consolidated Financial Statements
    
    
    44
  I.
    
    Condensed Financial Information:Condensed Consolidated Financial Statements (parent company only)
for the years ended March 31, 2007, 2006 and 2005, and as of March 31,
2007 and 2006II.
    
    Valuation and qualifying accounts
  36




---



##### Table of Contents



37




---



##### Table of Contents



ACG HOLDINGS, INC.
 
   March 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    
    Receivables:Trade accounts, less allowance for doubtful accounts of
$1,017 and $1,275 at March 31, 2007 and 2006,
respectively
    
    
    44,385
    
    
    
    41,080Other
    
    
    2,645
    
    
    
    3,463Total receivables
    
    
    47,030
    
    
    
    44,543Inventories
    
    
    7,146
    
    
    
    7,714Deferred income taxes
    
    
    962
    
    
    
    1,409Prepaid expenses and other current assets
    
    
    4,997
    
    
    
    4,733Total current assets
    
    
    60,135
    
    
    
    58,399Property, plant and equipment:Land and improvements
    
    
    3,185
    
    
    
    3,058Buildings and improvements
    
    
    29,959
    
    
    
    28,332Machinery and equipment
    
    
    223,737
    
    
    
    212,904Furniture and fixtures
    
    
    14,369
    
    
    
    13,007Leased assets under capital leases
    
    
    22,972
    
    
    
    23,119Equipment installations in process
    
    
    2,334
    
    
    
    6,850296,556
    
    
    
    287,270Less accumulated depreciation
    
    
    (214,772
    )
    
    
    (199,504
    )Net property, plant and equipment
    
    
    81,784
    
    
    
    87,766Excess of cost over net assets acquired
    
    
    66,548
    
    
    
    66,548Other assets
    
    
    18,266
    
    
    
    18,789Total assets
    
    $
    226,733
    
    
    
    231,502
  38




---



##### Table of Contents



ACG HOLDINGS, INC.
 March 31,2007
    
    
    2006Liabilities and Stockholders DeficitCurrent liabilities:Current installments of capital leases
    
    $
    3,435
    
    
    
    3,731Trade accounts payable
    
    
    32,892
    
    
    
    33,845Accrued expenses
    
    
    29,651
    
    
    
    36,367Income tax payable
    
    
    487
    
    
    
    160Total current liabilities
    
    
    66,465
    
    
    
    74,103Long-term debt and capital leases, excluding current installments
    
    
    348,675
    
    
    
    320,553Deferred income taxes
    
    
    2,677
    
    
    
    3,866Other liabilities
    
    
    52,554
    
    
    
    62,712Total liabilities
    
    
    470,371
    
    
    
    461,234Commitments and contingenciesStockholders deficit:Common stock, voting, $.01 par value, 5,852,223 shares
authorized, 158,205 shares issued and outstanding at March
31, 2007 and March 31, 2006
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    2,038
    
    
    
    2,038Accumulated deficit
    
    
    (230,769
    )
    
    
    (209,760
    )Other accumulated comprehensive loss, net of tax
    
    
    (14,909
    )
    
    
    (22,012
    )Total stockholders deficit
    
    
    (243,638
    )
    
    
    (229,732
    )Total liabilities and stockholders deficit
    
    $
    226,733
    
    
    
    231,502
  39




---



##### Table of Contents



ACG HOLDINGS, INC.
 
   Year ended March 31,2007
    
    
    2006
    
    
    2005Sales
    
    $
    445,026
    
    
    
    434,489
    
    
    
    449,513Cost of sales
    
    
    397,115
    
    
    
    385,150
    
    
    
    403,641Gross profit
    
    
    47,911
    
    
    
    49,339
    
    
    
    45,872Selling, general and administrative expenses
    
    
    27,539
    
    
    
    26,792
    
    
    
    28,824Restructuring costs (benefit) and other charges
    
    
    (445
    )
    
    
    (1,167
    )
    
    
    10,037Operating income
    
    
    20,817
    
    
    
    23,714
    
    
    
    7,011Other expense (income):Interest expense
    
    
    40,405
    
    
    
    37,624
    
    
    
    34,087Interest income
    
    
    (100
    )
    
    
    (83
    )
    
    
    (37
    )Other, net
    
    
    1,714
    
    
    
    4,119
    
    
    
    313Total other expense
    
    
    42,019
    
    
    
    41,660
    
    
    
    34,363Loss before income taxes
    
    
    (21,202
    )
    
    
    (17,946
    )
    
    
    (27,352
    )Income tax benefit
    
    
    (193
    )
    
    
    (3,369
    )
    
    
    (1,685
    )Net loss
    
    $
    (21,009
    )
    
    
    (14,577
    )
    
    
    (25,667
    )
  40




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##### Table of Contents



ACG HOLDINGS, INC.
 
   OtherVoting
    
    
    Additional
    
    
    
    
    
    
    accumulatedcommon
    
    
    paid-in
    
    
    Accumulated
    
    
    comprehensivestock
    
    
    capital
    
    
    deficit
    
    
    income (loss)
    
    
    TotalBalances, March 31, 2004
    
    $
    2
    
    
    
    2,103
    
    
    
    (169,516
    )
    
    
    (21,364
    )
    
    $
    (188,775
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (25,667
    )
    
    
    
    
    
    
    (25,667
    )Other comprehensive income (loss), net of tax:Change in cumulative
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    593
    
    
    
    593Change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,009
    
    
    
    1,009Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,065
    )Executive stock compensation
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Balances, March 31, 2005
    
    $
    2
    
    
    
    2,203
    
    
    
    (195,183
    )
    
    
    (19,762
    )
    
    $
    (212,740
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (14,577
    )
    
    
    
    
    
    
    (14,577
    )Other comprehensive income (loss), net of tax:Change in cumulative
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    183Change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,433
    )
    
    
    (2,433
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,827
    )Executive stock compensation
    
    
    
    
    
    
    (165
    )
    
    
    
    
    
    
    
    
    
    
    (165
    )Balances, March 31, 2006
    
    $
    2
    
    
    
    2,038
    
    
    
    (209,760
    )
    
    
    (22,012
    )
    
    $
    (229,732
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (21,009
    )
    
    
    
    
    
    
    (21,009
    )Other comprehensive income (loss), net of tax:Change in cumulative
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (116
    )Change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,219
    
    
    
    7,219Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,906
    )Balances, March 31, 2007
    
    $
    2
    
    
    
    2,038
    
    
    
    (230,769
    )
    
    
    (14,909
    )
    
    
    (243,638
    )
  41




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##### Table of Contents



ACG HOLDINGS, INC.
 
   Year ended March 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (21,009
    )
    
    
    (14,577
    )
    
    
    (25,667
    )Adjustments to reconcile net loss to net cash used
by operating activities:Other charges  non-cash (note 14)
    
    
    
    
    
    
    
    
    
    
    1,668Depreciation
    
    
    18,567
    
    
    
    19,130
    
    
    
    22,594Amortization of other assets
    
    
    63
    
    
    
    353
    
    
    
    457Amortization of deferred financing costs
    
    
    3,537
    
    
    
    3,001
    
    
    
    2,487Loss (gain) on disposals of property, plant and equipment
    
    
    2
    
    
    
    312
    
    
    
    (75
    )Impairment of asset
    
    
    
    
    
    
    2,830
    
    
    
    Deferred income tax benefit
    
    
    (742
    )
    
    
    (3,632
    )
    
    
    (824
    )Changes in assets and liabilities:Decrease (increase) in receivables
    
    
    (2,487
    )
    
    
    6,061
    
    
    
    (5,395
    )Decrease (increase) in current income taxes receivable
    
    
    
    
    
    
    78
    
    
    
    (78
    )Decrease (increase) in inventories
    
    
    568
    
    
    
    2,759
    
    
    
    (1,968
    )Increase (decrease) in trade accounts payable
    
    
    (953
    )
    
    
    (6,611
    )
    
    
    10,440Increase (decrease) in accrued expenses
    
    
    (7,465
    )
    
    
    (6,679
    )
    
    
    385Increase (decrease) in current income taxes payable
    
    
    327
    
    
    
    160
    
    
    
    (9
    )Decrease in other liabilities
    
    
    (2,190
    )
    
    
    (9,880
    )
    
    
    (6,312
    )Other
    
    
    (385
    )
    
    
    1,482
    
    
    
    (1,278
    )Total adjustments
    
    
    8,842
    
    
    
    9,364
    
    
    
    22,092Net cash used by operating activities
    
    
    (12,167
    )
    
    
    (5,213
    )
    
    
    (3,575
    )
 42




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##### Table of Contents



ACG HOLDINGS, INC.
 Year ended March 31,2007
    
    
    2006
    
    
    2005Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (12,701
    )
    
    
    (12,486
    )
    
    
    (6,876
    )Proceeds from sale of property, plant and equipment
held for sale (note 3)
    
    
    
    
    
    
    6,877
    
    
    
    Proceeds from other sales of property, plant and equipment
    
    
    145
    
    
    
    283
    
    
    
    176Other
    
    
    (147
    )
    
    
    (197
    )
    
    
    (472
    )Net cash used by investing activities
    
    
    (12,703
    )
    
    
    (5,523
    )
    
    
    (7,172
    )Cash flows from financing activities:Net increase (decrease) in revolver borrowings
    
    
    31,580
    
    
    
    (16,000
    )
    
    
    16,000Net increase (decrease) in long-term debt, net
    
    
    
    
    
    
    35,000
    
    
    
    Deferred financing costs paid
    
    
    (2,956
    )
    
    
    (3,573
    )
    
    
    (800
    )Repayment of capital lease obligations
    
    
    (3,754
    )
    
    
    (4,667
    )
    
    
    (4,378
    )Net cash provided by financing activities
    
    
    24,870
    
    
    
    10,760
    
    
    
    10,822Effect of exchange rates on cash
    
    
    
    
    
    
    (24
    )
    
    
    (75
    )Change in cash
    
    
    
    
    
    
    
    
    
    
    Cash and cash equivalents:Beginning of period
    
    
    
    
    
    
    
    
    
    
    End of period
    
    $
    
    
    
    
    
    
    
    
    Supplemental disclosure of cash flow information:Cash paid (received) for:Interest
    
    $
    36,099
    
    
    
    33,863
    
    
    
    31,480Income taxes, net of refunds
    
    $
    233
    
    
    
    15
    
    
    
    (887
    )Non-cash investing activities:Assets purchased under capital lease obligations
    
    $
    
    
    
    
    
    
    
    
    31
  43




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##### Table of Contents



ACG HOLDINGS, INC.
 
  (1)
    
    Summary of Significant Accounting PoliciesACG Holdings, Inc. (Holdings) has no operations or significant assets other than its
investment in American Color Graphics, Inc. (Graphics),
(collectively, the Company).
Holdings is dependent upon distributions from Graphics to fund its obligations. However,
Graphics ability to pay dividends or lend to Holdings was restricted under the terms of
its debt agreements at March 31, 2007. See note 6 below for further discussion of the
2005 Credit Agreement, the Receivables Facility and the 10% Notes (as defined herein).
The 2005 Revolving Credit Facility (as defined herein) is secured by substantially all of
the assets of Graphics. Receivables sold to Graphics Finance (as defined herein) under
the Receivables Facility (as defined herein) are released from this lien at the time they
are sold. Holdings has guaranteed Graphics indebtedness under the 2005 Credit Agreement,
which guarantee is secured by a pledge of all of Graphics and Graphics subsidiaries
stock. The Receivables Facility is secured by substantially all the assets of Graphics
Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance
pursuant to a receivables contribution and sale agreement. Graphics services these
receivables pursuant to a servicing agreement with Graphics Finance. The 10% Notes are
fully and unconditionally guaranteed on a senior basis by Holdings, and by all future
domestic subsidiaries of Graphics.The two business segments of the commercial printing industry in which the Company
operates are (i) print and (ii) premedia services.The Company continues to operate in a challenging business environment due to, among other
factors, excess industry capacity and significant competition. Such challenges have
contributed to three consecutive fiscal years of net losses and cash used by operating activities.
While management has prepared analyses indicating that the Companys forecasted results of
operations for the fiscal year ending March 31, 2008 will allow it to remain in compliance
with debt covenants and maintain sufficient liquidity to meet its operating requirements
for the twelve month period subsequent to March 31, 2007, such analyses contain certain
estimates and assumptions deemed reasonable by management that could differ from actual
results. Management believes that the Company will continue to be challenged by difficult
industry conditions.Significant accounting policies are as follows:
 (a)
    
    Basis of PresentationThe consolidated financial statements include the accounts of Holdings and all
greater than 50%-owned subsidiaries, which are consolidated under United States
generally accepted accounting principles.All significant intercompany transactions and balances have been eliminated in
consolidation.Earnings-per-share data has not been provided since Holdings common stock is
closely held.(b)
    
    Revenue RecognitionPrint revenues are recognized upon the completion of production. Shipment of
printed material generally occurs upon completion of this production process.
Materials are printed to unique customer specifications and are not returnable.Premedia services revenues are recognized as services are performed. Delivery of
electronic files, proofs and plates generally occurs upon completion of the
production process. Services are performed to unique customer specifications and
are not returnable.Credits relating to specification variances and other customer adjustments have
historically not been significant for either the print or premedia services
business segments.
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##### Table of Contents



ACG HOLDINGS, INC.
  (c)
    
    Cash and Cash EquivalentsThe Company uses available cash balances on hand and borrowings under its 2005
Revolving Credit Facility and Receivables Facility (defined herein), to fund
operating disbursements and, to the extent applicable, invest in overnight cash
investments. Cash on hand of approximately $2.9 million and $6.7 million
(including $5.1 million of liquid overnight cash investments) at March 31, 2007 and
2006, respectively, is presented net of outstanding checks, which resulted in a
reclassification of $9.6 million and $10.4 million at March 31, 2007 and 2006
respectively, to trade accounts payable in the consolidated balance sheets. The
Company considers all highly liquid investments with maturities of three months or
less to be cash equivalents.(d)
    
    Trade Accounts ReceivableTrade accounts receivable represents payments due from customers net of allowances
for doubtful accounts. The Company continuously monitors collections and payments
from its customers. Allowances for doubtful accounts are maintained based on
historical payment patterns, aging of accounts receivable and actual write-off
history. The Company estimates losses resulting from the inability of its
customers to make required payments.(e)
    
    InventoriesInventories are valued at the lower of first-in, first-out (FIFO) cost or market
(net realizable value).(f)
    
    Property, Plant and EquipmentProperty, plant and equipment is stated at cost. Depreciation, which includes
amortization of assets under capital leases, is based on the straight-line method
over the shorter of the estimated useful lives of the assets or the remaining terms
of the leases. Estimated useful lives used in computing depreciation and
amortization expense are 3 to 15 years for furniture and fixtures and machinery and
equipment and 15 to 25 years for buildings and improvements. Expenditures related
to maintenance and repairs are expensed as incurred.(g)
    
    Excess of Cost Over Net Assets AcquiredThe excess of cost over net assets acquired (or goodwill) is accounted for in
accordance with the guidance set forth in Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142
requires goodwill to be evaluated at least annually for impairment. The Company
performed the required annual impairment tests of goodwill as of December 31, 2006
and 2005, and noted no impairment.The Company has goodwill associated with its two distinct segments, print and
premedia services, and has determined that there are no additional reporting units
within these segments, as there are no further components representing a
business. Therefore, the impairment test for goodwill is calculated for each of
the segments. The test is calculated by deducting the estimated carrying value of
each reporting unit from the estimated enterprise value of each reporting unit.
The estimated enterprise value is calculated by multiplying 12 months trailing
EBITDA (defined as earnings before net interest expense, income tax expense,
depreciation and amortization) by an assumed market multiple, which the Company
believes to be reasonable based upon recent sales activity of businesses operating
in comparable industries as the Companys segments. The estimated carrying value
is calculated by deducting the liabilities, excluding interest-bearing debt, from
total assets of the respective segment. A calculation in which the estimated
enterprise value exceeds the estimated carrying value results in a conclusion of no
impairment. If it is determined that the estimated carrying value exceeds the
estimated enterprise value, the Company would calculate the implied fair value of
goodwill by deducting the fair value of all tangible and intangible net assets,
including unrecognized intangible assets, of the segment from the fair value of the
segment. If the implied fair value of goodwill is less than the carrying value, an
impairment loss would be recognized.
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##### Table of Contents



ACG HOLDINGS, INC.
  (h)
    
    Impairment of Long-Lived AssetsThe Company evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires
periodic assessment of certain long-lived assets for possible impairment when
events or circumstances indicate that the carrying amounts may not be
recoverable. Long-lived assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are independent of
the cash flows of other groups of assets. If it is determined that the carrying
amounts of such long-lived assets are not recoverable, the assets are written down
to their fair value.In the fourth quarter of the fiscal year ended March 31, 2006, the Company
concluded that certain non-production information technology assets of the print
segment were fully impaired as a result of its periodic assessment under SFAS 144.
This impairment resulted in a non-cash charge of $2.8 million. The impairment
charge was classified within other, net in the consolidated statement of operations
for the fiscal year ended March 31, 2006.(i)
    
    Other AssetsFinancing costs related to the 2005 Credit Agreement (as defined herein) are
deferred and amortized over the term of the agreement. Financing costs related to
the Old Revolving Credit Facility (as defined herein) are amortized over the term of
the 2005 Credit Agreement. Financing costs related to the Receivables Facility (as
defined herein) are deferred and amortized over the term of the agreement. See
note 6 for further discussion. Financing costs related to the 10% Notes (as defined
herein) are deferred and amortized over the term of the 10% Notes. Covenants not
to compete are amortized over the terms of the underlying agreements.(j)
    
    Income TaxesIncome taxes are provided using the liability method in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). Management evaluates the need for a valuation allowance for deferred tax
assets and determines whether the Companys deferred tax assets will more likely
than not be realized through sources of future taxable income as defined by SFAS
109, including the future reversal of existing taxable temporary differences.(k)
    
    Foreign Currency TranslationThe assets and liabilities of the Companys Canadian facility, which include
interdivisional balances, are translated at year-end rates of exchange while
revenue and expense items are translated at average rates for the year.Translation adjustments are recorded as a separate component of stockholders
deficit. Since the transactions of the Canadian facility are denominated in its
functional currency and the interdivisional accounts are of a long-term investment
nature, no remeasurement gains and losses pertaining to such balances are included
in the Companys consolidated results of operations.(l)
    
    EnvironmentalEnvironmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future period
revenue generation, are expensed. Environmental liabilities are provided when
assessments and/or remedial efforts are probable and the related amounts can be
reasonably estimated.
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##### Table of Contents



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



ACG HOLDINGS, INC.
  In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error Corrections (SFAS 154), a replacement of
Accounting Principles Board Opinion No. 20, Accounting Changes (APB 20) and
Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in
Interim Financial Statements (SFAS 3). SFAS 154 requires retrospective
application to prior periods financial statements of a voluntary change in
accounting principle unless it is impracticable. APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. The adoption of SFAS 154 as of April 1, 2006 has had no
impact on the consolidated financial statements as a whole.In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), to clarify the accounting for uncertainty in income taxes
in financial statements prepared in accordance with the provisions of SFAS 109 and
to provide greater consistency in criteria used to determine benefits related to
income taxes. In accounting for uncertain tax positions, the Company currently
applies the provisions of Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies (SFAS 5). SFAS 5 provides that a contingency
should be recorded if it is probable that an uncertain position will become an
actual future liability. FIN 48 provides that the benefit of an uncertain position
should not be recorded unless it is more likely than not that the position will be
sustained upon review. FIN 48 is effective for fiscal years beginning
after December 15, 2006. In accordance, the Company will adopt FIN 48 as of April 1,
2007. The cumulative effect of applying FIN 48 will be reported as an adjustment
to the April 1, 2007 balance sheet. The Company does not believe the adoption of FIN 48
will have a material impact on the consolidated financial statements as a whole.In September 2006, the FASB issued Statement of Financial Accounting Standards No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158).
SFAS 158 requires an entity to (a) recognize in its statement of financial position
an asset for a defined benefit postretirement plans overfunded status or a
liability for a plans underfunded status; (b) measure a defined benefit
postretirement plans assets and obligations that determine its funded status as of
the end of the employers fiscal year; and (c) recognize changes in the funded
status of a defined benefit postretirement plan in comprehensive income (loss) in
the year in which the changes occur. The requirement to recognize the funded
status of a defined benefit postretirement plan prospectively and the disclosure
requirements are effective for the Company for the fiscal year ending March 31,
2008. The requirement to measure plan assets and benefit obligations as of the
date of the Companys fiscal year end will be effective for the fiscal year ending
March 31, 2009. The Company has begun its analysis of the impact of the adoption
of SFAS 158 but does not currently anticipate a significant impact on the
consolidated financial statements as a whole.
 (2)
    
    InventoriesThe components of inventories are as follows (in thousands):
 March 31,2007
    
    
    2006Paper
    
    $
    5,036
    
    
    
    5,959Ink
    
    
    152
    
    
    
    140Supplies and other
    
    
    1,958
    
    
    
    1,615Total
    
    $
    7,146
    
    
    
    7,714
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##### Table of Contents



ACG HOLDINGS, INC.
  (3)
    
    Assets and Liabilities Held for SaleAt March 31, 2005, the Company held certain assets and obligations under capital leases
for sale at a fair value of $8.1 million and $1.0 million, respectively. On March 16,
2005, the Company ceased operations at the Pittsburg, California facility, resulting in
the write-off of certain assets totaling approximately $0.5 million
(see note 14). In March 2005, the Company also executed a letter of intent with a
prospective buyer to sell certain of the print facilitys other assets, some of which were
subject to capital lease obligations. On April 20, 2005, the Company completed the sale
of these assets for an aggregate selling price of approximately $8.1 million (including
$0.1 million of miscellaneous closing and settlement costs and $6.9 million of property,
plant and equipment) and terminated $1.0 million of related capital lease obligations. In
accordance with the guidance set forth in SFAS 144, the Company wrote down the assets held
for sale to fair value, resulting in a $0.7 million impairment charge, which was
classified within restructuring costs and other charges in the consolidated statement of
operations for the fiscal year ended March 31, 2005.(4)
    
    Other AssetsThe components of other assets are as follows (in thousands):
 March 31,2007
    
    
    2006Deferred financing costs, less accumulated
amortization of $10,720 in 2007 and $7,183
in 2006
    
    $
    10,885
    
    
    $
    11,466Spare parts inventory, net of valuation allowance
of $100 in 2007 and 2006
    
    
    7,315
    
    
    
    6,965Other
    
    
    66
    
    
    
    358Total
    
    $
    18,266
    
    
    
    18,789
 (5)
    
    Accrued ExpensesThe components of accrued expenses are as follows (in thousands):
 March 31,2007
    
    
    2006Compensation and related taxes
    
    $
    5,876
    
    
    
    4,849Employee benefits
    
    
    10,176
    
    
    
    15,159Interest
    
    
    10,012
    
    
    
    9,268Restructuring
    
    
    1,140
    
    
    
    4,127Other
    
    
    2,447
    
    
    
    2,964Total
    
    $
    29,651
    
    
    
    36,367
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##### Table of Contents



ACG HOLDINGS, INC.
  (6)
    
    Notes Payable, Long-Term Debt and Capital LeasesLong-term debt, including capital leases, is summarized as follows (in thousands):
 March 31,2007
    
    
    20062005 Revolving Credit Facility
    
    $
    26,900
    
    
    
    2005 Term Loan Facility
    
    
    35,000
    
    
    
    35,000Receivables Facility
    
    
    4,680
    
    
    
    10% Senior Second Secured Notes Due 2010
    
    
    280,000
    
    
    
    280,000Capital leases
    
    
    5,530
    
    
    
    9,284Total long-term debt and capital leases
    
    
    352,110
    
    
    
    324,284Less: current installments
    
    
    3,435
    
    
    
    3,731Long-term debt and capital leases,
excluding current installments
    
    $
    348,675
    
    
    
    320,553
 May 5, 2005 Refinancing Transaction
  
    
    a $55 million revolving credit facility ($40 million of which may
be used for letters of credit), maturing on December 15, 2009
which is not subject to a borrowing base limitation, (the 2005
Revolving Credit Facility); and
    
    a $35 million non-amortizing term loan facility maturing on
December 15, 2009 (the 2005 Term Loan Facility).
    50




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##### Table of Contents



ACG HOLDINGS, INC.
   
    
    incur or guarantee additional debt;
    
    create or permit to exist certain liens;
    
    pledge assets or engage in sale-leaseback transactions;
    
    make capital expenditures, other investments or acquisitions;
    
    prepay, redeem, acquire for value, refund, refinance, or
exchange certain debt (including the 10% Notes), subject to certain
exceptions;
    
    repurchase or redeem equity interests;
    
    change the nature of its business;
    
    pay dividends or make other distributions;
    
    enter into transactions with affiliates;
    
    dispose of assets or enter into mergers or other business combinations; and
    
    place restrictions on dividends, distributions or transfers to the Company from its subsidiaries.
    September 26, 2006 Revolving Trade Receivables Facility
     51




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##### Table of Contents



ACG HOLDINGS, INC.
         10% Senior Second Secured Notes
  Amendments to Credit Facilities
   52




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##### Table of Contents



ACG HOLDINGS, INC.
   Long-Term
    
    
    CapitalFiscal Year
    
    Debt
    
    
    Leases2008
    
    $
    
    
    
    $
    3,7132009
    
    
    
    
    
    
    1,9662010
    
    
    66,580
    
    
    
    2072011
    
    
    280,000
    
    
    
    2012
    
    
    
    
    
    
    Total
    
    $
    346,580
    
    
    
    5,886Imputed interest
    
    
    
    
    
    
    (356
    )Present value of minimum lease payments
    
    
    
    
    
    $
    5,530
  53




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##### Table of Contents



ACG HOLDINGS, INC.
  (7)
    
    Income TaxesDeferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts
as measured by tax laws and regulations. Significant components of the Companys deferred
tax liabilities and assets as of March 31, 2007 and 2006 are as follows (in thousands):
 March 31,2007
    
    
    2006Deferred tax liabilities:Book over tax basis in property, plant and equipment
    
    $
    8,508
    
    
    
    11,558Foreign taxes
    
    
    1,715
    
    
    
    1,924Accumulated amortization
    
    
    3,207
    
    
    
    2,806Total deferred tax liabilities
    
    
    13,430
    
    
    
    16,288Deferred tax assets:Allowance for doubtful accounts
    
    
    399
    
    
    
    500Accrued expenses and other liabilities
    
    
    5,164
    
    
    
    8,546Net operating loss carryforwards
    
    
    65,536
    
    
    
    55,892AMT credit carryforwards
    
    
    1,203
    
    
    
    1,203Additonal minimum pension liability
    
    
    5,645
    
    
    
    8,477Cumulative translation adjustment
    
    
    203
    
    
    
    157Other, net
    
    
    1,429
    
    
    
    953Total deferred tax assets
    
    
    79,579
    
    
    
    75,728Valuation allowance for deferred tax assets
    
    
    67,864
    
    
    
    61,897Net deferred tax assets
    
    
    11,715
    
    
    
    13,831Net deferred tax liabilities
    
    $
    1,715
    
    
    
    2,457
 Management has evaluated the need for a valuation allowance for deferred tax assets and
believes that certain deferred tax assets will more likely than not be realized through the
future reversal of existing taxable temporary differences of the Company. The valuation
allowance increased by $6.0 million during the fiscal year ended March 31, 2007 as a result
of an increase in the deferred tax items, which is net of a $2.8 million decrease related
to the tax effect of the decrease in the additional minimum pension liability, which is a
component of other comprehensive income (loss).The valuation allowance increased by $7.1 million during the fiscal year ended March 31, 2006
as a result of an increase in the deferred tax items, which includes an increase of $1.0
million related to the tax effect of the increase in the additional minimum pension
liability, which is a component of other comprehensive income (loss).
 54




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ACG HOLDINGS, INC.
  During fiscal years ended March 31, 2007 and 2006, the Company recorded adjustments of $0.4
million and $3.6 million, respectively, to reflect the tax benefit associated with changes in
estimate with respect to its income tax liability.Income tax expense (benefit) attributable to loss from continuing operations consists of (in
thousands):
 Year ended March 31,2007
    
    
    2006
    
    
    2005CurrentFederal
    
    $
    
    
    
    
    
    
    
    
    State
    
    
    119
    
    
    
    89
    
    
    
    129Foreign
    
    
    430
    
    
    
    174
    
    
    
    (990
    )Total current
    
    
    549
    
    
    
    263
    
    
    
    (861
    )DeferredFederal
    
    
    
    
    
    
    (482
    )
    
    
    (310
    )State
    
    
    (525
    )
    
    
    47
    
    
    
    (417
    )Foreign
    
    
    (217
    )
    
    
    (3,197
    )
    
    
    (97
    )Total deferred
    
    
    (742
    )
    
    
    (3,632
    )
    
    
    (824
    )Income tax benefit
    
    $
    (193
    )
    
    
    (3,369
    )
    
    
    (1,685
    )
 The effective tax rates for the fiscal years ended March 31, 2007, 2006 and 2005 were 0.9%,
18.8% and 6.2%, respectively. The difference between these effective tax rates relating to
continuing operations and the statutory federal income tax rate is composed of the following
items:
 Year Ended March 31,2007
    
    
    2006
    
    
    2005Statutory tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, less
federal tax impact
    
    
    0.1
    
    
    
    (0.4
    )
    
    
    (0.1
    )Foreign taxes, less federal
tax impact
    
    
    (0.3
    )
    
    
    (0.5
    )
    
    
    2.3Other nondeductible expenses
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Change in valuation allowance
    
    
    (35.4
    )
    
    
    (33.4
    )
    
    
    (31.4
    )Change in cumulative translation adjustment
    
    
    0.1
    
    
    
    (1.1
    )
    
    
    (2.0
    )Previously accrued taxes
    
    
    2.0
    
    
    
    20.2
    
    
    
    1.6Other, net
    
    
    (0.6
    )
    
    
    (1.0
    )
    
    
    1.3Effective income tax rate
    
    
    0.9
    %
    
    
    18.8
    %
    
    
    6.2
    %
 55




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ACG HOLDINGS, INC.
  As of March 31, 2007, the Company had available net operating loss carryforwards (NOLs) for
state purposes of $125.1 million, which can be used to offset future state taxable income. If
these NOLs are not utilized, they will begin to expire in 2008 and will be totally expired in
2027.As of March 31, 2007, the Company had available NOLs for federal purposes of $172.1 million,
which can be used to offset future federal taxable income. If these NOLs are not utilized,
they will begin to expire in 2011 and will be totally expired in 2027.The Company also had available an alternative minimum tax credit carryforward of $1.2 million,
which can be used to offset future taxes in years in which the alternative minimum tax does
not apply. This credit can be carried forward indefinitely.The Company has alternative minimum tax NOLs in the amount of $186.0 million, which will begin
to expire in 2011 and will be totally expired in 2027.(8)
    
    Other LiabilitiesThe components of other liabilities are as follows (in thousands):
 March 31,2007
    
    
    2006Deferred revenue agreements (see note 12)
    
    $
    41,540
    
    
    
    45,641Postretirement liabilities (see note 9)
    
    
    3,037
    
    
    
    3,457Pension liabilities and other benefit obligations
    
    
    5,361
    
    
    
    11,601Restructuring
    
    
    1,125
    
    
    
    Other
    
    
    1,491
    
    
    
    2,013Total
    
    $
    52,554
    
    
    
    62,712
 (9)
    
    Employee Benefit PlansDefined Benefit Pension PlansPension PlansThe Company sponsors defined benefit pension plans covering full-time employees of the Company
who had at least one year of service at December 31, 1994. Benefits under these plans
generally are based upon the employees years of service and, in the case of salaried
employees, compensation during the years immediately preceding retirement. The Companys
general funding policy is to contribute amounts within the annually calculated actuarial range
allowable as a deduction for federal income tax purposes. The plans assets are maintained by
trustees in separately managed portfolios consisting primarily of equity and fixed income
securities. In October 1994, the Board of Directors approved an amendment to the Companys
defined benefit pension plans, which resulted in the freezing of additional defined benefits
for future services under the plans effective January 1, 1995.Supplemental Executive Retirement PlanIn October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan
(SERP), which is a defined benefit plan, for certain key executives. In July 2005, the
Board of Directors approved an amendment to this plan (the Amended and Restated Supplemental
Executive Retirement Plan). The aggregate accumulated benefit obligation under this plan, as
amended, was approximately $0.5 million and $0.6 million at March 31, 2007 and 2006,
respectively.
 56




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ACG HOLDINGS, INC
  Defined Benefit Postretirement PlansPostretirement BenefitsThe Company provides certain other postretirement benefits, primarily life and health
insurance. Full-time employees who are eligible for benefits under the defined benefit
pension plans, have attained age 55 and have at least five years of service are entitled to
postretirement health care and life insurance coverage. Postretirement life insurance
coverage is provided at no cost to eligible retirees. Special cost-sharing arrangements for
health care coverage are available to employees whose age plus years of service at the date of
retirement equals or exceeds 85 (Rule of 85). Any eligible retiree not meeting the Rule of
85 must pay 100% of the required health care insurance premium.Effective January 1, 1995, the Company amended the health care plan changing the health care
benefit for all employees retiring on or after January 1, 2000. This amendment had the effect
of reducing the accumulated postretirement benefit obligation by approximately $3 million.
This reduction is reflected as unrecognized prior service cost and is being amortized on a
straight line basis over 15.6 years, the average remaining years of service to full
eligibility of active plan participants at the date of the amendment.Effective February 1, 2006, the Company amended the health care plan changing the post 65
healthcare benefits for all current and future retirees. This amendment had an immaterial
impact on the accumulated postretirement benefit obligation at March 31, 2006.401(k)Defined Contribution PlanEffective January 1, 1995, the Company amended its 401(k) defined contribution plan. Eligible
participants may contribute up to 15% of their annual compensation subject to maximum amounts
established by the Internal Revenue Service and receive an employer-matching contribution on
amounts contributed. Through March 16, 2003, the employer-matching contribution was made
bi-weekly and equaled 2% of annual compensation for all plan participants plus 50% of the
first 6% of annual compensation contributed to the plan by each employee, subject to maximum
amounts established by the Internal Revenue Service. Beginning March 17, 2003 through
December 31, 2004, the employer matching contribution was made bi-weekly and equaled 25% of
the first 6% of annual compensation contributed to the plan by each employee, subject to
maximum amounts established by the Internal Revenue Service. Subsequent to December 31, 2004,
the employer matching contributions were made bi-weekly and equaled 50% of the first 6% of
annual compensation contributed to the plan by each employee, subject to maximum amounts
established by the Internal Revenue Service. The Companys contribution under this Plan
amounted to $1.7 million during the fiscal year ended March 31, 2007, $1.6 million during the
fiscal year ended March 31, 2006 and $1.1 million during the fiscal year ended March 31, 2005.
 57




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ACG HOLDINGS, INC.
   Defined Benefit
    
    
    Defined BenefitPension Plans
    
    
    Postretirement Plan2007
    
    
    2006
    
    
    2007
    
    
    2006Change in Benefit ObligationBenefit obligation at beginning of
year
    
    $
    72,621
    
    
    
    69,624
    
    
    
    2,412
    
    
    
    2,823Service cost
    
    
    455
    
    
    
    462
    
    
    
    22
    
    
    
    34Interest cost
    
    
    4,208
    
    
    
    4,321
    
    
    
    128
    
    
    
    179Plan amendments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    441Actuarial loss (gain)
    
    
    (2,432
    )
    
    
    3,537
    
    
    
    (131
    )
    
    
    251Expected benefit payments
    
    
    (3,774
    )
    
    
    (5,323
    )
    
    
    (470
    )
    
    
    (716
    )Benefit obligation at end of year
    
    $
    71,078
    
    
    
    72,621
    
    
    
    2,136
    
    
    
    2,412Change in Plan AssetsFair value of plan assets at
beginning of year
    
    $
    57,283
    
    
    
    49,675
    
    
    
    
    
    
    
    Actual return on plan assets
    
    
    7,637
    
    
    
    3,196
    
    
    
    
    
    
    
    Employer contributions:Pension Plans
    
    
    5,718
    
    
    
    8,017
    
    
    
    
    
    
    
    SERP
    
    
    50
    
    
    
    1,718
    
    
    
    
    
    
    
    Postretirement Plan
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    275Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    441Benefits paid
    
    
    (3,774
    )
    
    
    (5,323
    )
    
    
    (470
    )
    
    
    (716
    )Fair value of plan assets at end of
year
    
    $
    66,914
    
    
    
    57,283
    
    
    
    
    
    
    
    Funded Status
    
    $
    (4,164
    )
    
    
    (15,338
    )
    
    
    (2,136
    )
    
    
    (2,412
    )Unrecognized net actuarial (gain) loss
    
    
    14,392
    
    
    
    21,611
    
    
    
    (12
    )
    
    
    109Unrecognized prior service gain
    
    
    
    
    
    
    
    
    
    
    (1,282
    )
    
    
    (1,566
    )Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    112Additional minimum pension liability
    
    
    (14,392
    )
    
    
    (21,611
    )
    
    
    
    
    
    
    Accrued benefit liability
    
    $
    (4,164
    )
    
    
    (15,338
    )
    
    
    (3,337
    )
    
    
    (3,757
    )
 58




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ACG HOLDINGS, INC.
  Defined BenefitDefined Benefit Pension Plans
    
    Postretirement Plan2007
    
    2006
    
    2007
    
    2006Weighted  Average AssumptionsDiscount rate  benefit obligation
    
    
    6.25
    %
    
    
    6.00
    %
    
    
    6.25
    %
    
    
    6.00
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/ARate of compensation increase
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 The Company uses a December 31 measurement date for its defined benefit pension and
postretirement plans. For measurement purposes under the defined benefit postretirement
plan, a 10 percent annual rate of increase in the per capita cost of covered health care
benefits (including prescription drugs) was assumed for March 31, 2007. This rate was
assumed to decrease gradually to 5 percent through the fiscal year ending 2013 and remain at
that level thereafter.
 Defined Benefit Pension Plans
    
    
    Defined Benefit Postretirement Plan2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Components of Net Periodic Benefit Cost
(in thousands)Service cost
    
    $
    455
    
    
    
    462
    
    
    
    468
    
    
    
    22
    
    
    
    34
    
    
    
    31Interest cost
    
    
    4,208
    
    
    
    4,321
    
    
    
    4,217
    
    
    
    128
    
    
    
    179
    
    
    
    170Expected return on plan assets
    
    
    (4,868
    )
    
    
    (4,262
    )
    
    
    (3,510
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284
    )
    
    
    (222
    )
    
    
    (222
    )Amortization of unrecognized loss
    
    
    2,017
    
    
    
    2,001
    
    
    
    2,022
    
    
    
    
    
    
    
    
    
    
    
    Settlement loss
    
    
    
    
    
    
    169
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    Recognized net actuarial (gain) loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    2
    
    
    
    (43
    )Net periodic benefit cost (income)
    
    $
    1,812
    
    
    
    2,691
    
    
    
    3,243
    
    
    
    (144
    )
    
    
    (7
    )
    
    
    (64
    )
 Expected Future Benefit PaymentsThe following benefit payments are expected to be paid (in thousands) to eligible plan
participants under the Companys defined benefit pension plans and defined benefit
postretirement plan.
 Defined Benefit
    
    
    Defined BenefitFiscal Year
    
    Pension Plans
    
    
    Postretirement Plan (a)2008
    
    $
    4,473
    
    
    
    2052009
    
    
    4,546
    
    
    
    2062010
    
    
    4,625
    
    
    
    2062011
    
    
    4,710
    
    
    
    2042012
    
    
    4,815
    
    
    
    2022013  2017
    
    
    25,239
    
    
    
    934Total
    
    $
    48,408
    
    
    
    1,957
 
 (a)
    
    Represents expected benefit payments net of plan participants contributions. 59




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ACG HOLDINGS, INC.
  Assumed health care cost trend rates have a significant effect on the amounts reported for
the medical component of the defined benefit postretirement plan. A one-percentage point
change in the assumed health care cost trend rates would have the following effects (in
thousands):
 1% Point
    
    1% PointIncrease
    
    DecreaseEffect on total of service and interest
cost components of expense
    
    $
    4
    
    
    
    (3
    )Effect on postretirement benefit obligation
    
    $
    63
    
    
    
    (58
    )
 Plan AssetsThe Companys defined benefit pension plans reflect weighted-average target allocations as of
March 31, 2007 and the percentages of the fair value of plan assets by asset category are
allocated at March 31, 2007 and 2006 as follows:
 TargetAllocation
    
    
    Percentage of Plan Assets2007
    
    
    2007
    
    
    2006Global equity securities
    
    
    73.6
    %
    
    
    74.0
    %
    
    
    73.3
    %Fixed income securities
    
    
    21.9
    %
    
    
    21.0
    %
    
    
    20.9
    %Real Estate
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    4.6
    %Cash
    
    
    0.0
    %
    
    
    0.5
    %
    
    
    1.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The Companys pension plans long-term target asset allocation is shown above. The long-term
allocation targets reflect the Companys asset class return expectations and tolerance for
investment risk within the context of the pension plans long-term obligations. The
long-term asset allocation is supported by an analysis that incorporates historical and
expected returns by asset class as well as volatilities and correlations across asset classes
and the Companys liability profile. Due to market conditions and other factors, actual
asset allocations may vary from the target allocation outlined above.To develop the expected long-term rate of return on assets assumption, the Company considered
the historical returns and future expectations for returns for each asset class, as well as
the target asset allocation of the present portfolio. This resulted in the selection of the
8.5% long-term rate of return on asset assumption for 2007.It is the Companys practice to fund amounts for the defined benefit pension plans at least
sufficient to meet the minimum requirements set forth in applicable employee benefit laws and
local tax laws. Liabilities in excess of these funding levels are included in the Companys
consolidated balance sheets. Employer contributions for the defined benefit pension plans
for the fiscal year ending March 31, 2008 are estimated to be approximately $0.7 million.(10)
    
    Capital StockAt March 31, 2007, capital stock consists of Holdings common stock (Common Stock). Each
share of Common Stock is entitled to one vote on each matter common shareholders are entitled
to vote. Dividends on the Common Stock are discretionary by the Board of Directors and are
restricted by the 2005 Credit Agreement (see note 6).
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ACG HOLDINGS, INC.
  (11)
    
    Stock Option PlansCommon Stock Option PlansIn 1993, the Company established the ACG Holdings, Inc. Common Stock Option Plan. This plan,
as amended, (the 1993 Common Stock Option Plan) is administered by a committee of the Board
of Directors (the Committee) and currently provides for granting up to 17,322 shares of
Common Stock. On January 16, 1998, the Company established another common stock option plan
(the 1998 Common Stock Option Plan). This plan is administered by the Committee and
provides for granting up to 36,939 shares of Common Stock. The 1993 Common Stock Option Plan
and the 1998 Common Stock Option Plan are collectively referred to as the Common Stock
Option Plans. Stock options may be granted under the Common Stock Option Plans to
officers and other key employees of the Company at the exercise price per share of Common
Stock, as determined at the time of grant by the Committee in its sole discretion. All
options are 25% exercisable on the first anniversary date of a grant and vest in additional
25% increments on each of the next three anniversary dates of each grant. All options expire
10 years from the date of grant.A summary of activity under the Common Stock Option Plans is as follows:
 Weighted-AverageExercise
    
    ExercisableOptions
    
    Price ($)
    
    Options (a)Outstanding at March 31, 2004
    
    
    9,197
    
    
    
    .01
    
    
    
    6,946Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,301
    )
    
    
    .01Outstanding at March 31, 2005
    
    
    7,896
    
    
    
    .01
    
    
    
    7,131Granted
    
    
    2,504
    
    
    
    .01Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,047
    )
    
    
    .01Outstanding at March 31, 2006
    
    
    9,353
    
    
    
    .01
    
    
    
    6,466Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    9,353
    
    
    
    .01
    
    
    
    7,475
 
 (a)
    
    At March 31, 2007, 2006 and 2005 all exercisable options had a $.01/option exercise
price. Black-Scholes Option Pricing Model Wtd. Avg. AssumptionsFiscal Year
    
    #
    
    Wtd. Avg.
    
    Exercise
    
    Risk Free
    
    Annual
    
    
    
    
    
    ExpectedEnded
    
    Options
    
    Grant Date
    
    Price per
    
    Interest
    
    Dividend
    
    Expected
    
    LifeMarch 31,
    
    Granted
    
    Fair Value ($)
    
    Option ($)
    
    Rate (%)
    
    Yield (%)
    
    Volatility
    
    (Years)2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006
    
    
    2,504
    
    
    
    
    
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (a)
    
    As the grant date Fair Value was $0, the Black-Scholes pricing was not
calculated. The weighted-average remaining contractual life of the options outstanding at March 31, 2007
was 4.1 years. A total of 7,974 options for shares (including 2,224 previously exercised
options that were subsequently canceled) of Holdings Common Stock were reserved for issuance,
but not granted under the Common Stock Option Plans at March 31, 2007.
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ACG HOLDINGS, INC.
  There was no stock compensation expense recorded in the fiscal year ended March 31, 2007.
The Company recorded a net reversal of prior years stock compensation expense of
approximately $0.2 million in the fiscal year ended March 31, 2006, and recognized net stock
compensation expense of $0.1 million in the fiscal year ended March 31, 2005.(12)
    
    Commitments and ContingenciesThe Company incurred rent expense of $3.6 million, $3.2 million and $4.3 million for the
fiscal years ended March 31, 2007, 2006 and 2005, respectively, under various operating
leases. Future minimum rental commitments under existing operating lease arrangements at
March 31, 2007 are as follows (in thousands):
 Fiscal Year2008
    
    $
    3,3472009
    
    
    2,9412010
    
    
    2,1532011
    
    
    1,1432012
    
    
    208Thereafter
    
    
    Total
    
    $
    9,792
 The Company has employment agreements with three of its principal officers. These
agreements provide for minimum salary levels as well as incentive bonuses, which are payable
if specified management goals are attained. The aggregate commitment for future compensation
under these agreements, excluding bonuses, is approximately $3.1 million.In the fiscal year ended March 31, 1998, the Company entered into multi-year contracts to
purchase a portion of the Companys raw materials to be used in its normal operations. In
connection with such purchase agreements, pricing for a portion of the Companys raw
materials is adjusted for certain movements in market prices, changes in raw material costs
and other specific price increases while purchase quantity levels are variable based upon
certain contractual requirements and conditions. The Company is deferring certain
contractual provisions over the life of the contracts, which are being recognized as the
purchase commitments are achieved and the related inventory is sold. The amount deferred at
March 31, 2007 is $41.5 million and is included within Other liabilities in the Companys
consolidated balance sheet.Graphics, together with over 300 other persons, has been designated by the U. S.
Environmental Protection Agency as a potentially responsible party (a PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA, also known as
Superfund) at a solvent recovery operation that closed in 1989. Although liability under
CERCLA may be imposed on a joint and several basis and the Companys ultimate liability is
not precisely determinable, the PRPs have agreed in writing that Graphics share of removal
costs is approximately 0.583%; therefore Graphics believes that its share of the anticipated
remediation costs at such site will not be material to its business or the Companys
consolidated financial statements as a whole.Graphics received written notice, dated May 10, 2004, of its potential liability in
connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California.
Gibson Environmental, Inc. operated the (six acre) Site as a storage and treatment facility
for used oil and contaminated soil from June 1987 through October 1995. Graphics received
the notice and a Settlement Offer from LECG, a consultant representing approximately
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ACG HOLDINGS, INC.
  60 companies comprising the Gibson Group Trust. Graphics is investigating this matter but it
believes its potential liability in connection with this Site will not be material
to its business or the Companys consolidated financial statements as a whole.Based upon an analysis of Graphics volumetric share of waste contributed to the sites, the
Company maintains a reserve of approximately $0.1 million in connection with these
liabilities in its consolidated balance sheets at March 31, 2007 and 2006. The Company
believes this amount is adequate to cover such liabilities.The Company has been named as a defendant in several legal actions arising from its normal
business activities. In the opinion of management, any liabilities that may arise from such
actions will not, individually or in the aggregate, have a material adverse effect on the
Companys consolidated financial statements as a whole.(13)
    
    Interim Financial Information (Unaudited)Quarterly financial information follows (in thousands):
 NetGross
    
    
    IncomeSales
    
    
    Profit
    
    
    (Loss)Fiscal Year 2007
    
    Quarter Ended:June 30
    
    $
    110,010
    
    
    
    12,146
    
    
    
    (3,342
    )September 30
    
    
    111,654
    
    
    
    12,347
    
    
    
    (4,374
    )December 31
    
    
    120,065
    
    
    
    13,118
    
    
    
    (4,454
    )March 31
    
    
    103,297
    
    
    
    10,300
    
    
    
    (8,839
    )(a)Total
    
    $
    445,026
    
    
    
    47,911
    
    
    
    (21,009
    )Fiscal Year 2006
    
    Quarter Ended:June 30
    
    $
    108,270
    
    
    
    12,650
    
    
    
    (2,390
    )September 30
    
    
    105,460
    
    
    
    11,776
    
    
    
    (4,198
    )December 31
    
    
    118,724
    
    
    
    14,911
    
    
    
    2,252
    (b)March 31
    
    
    102,035
    
    
    
    10,002
    
    
    
    (10,241
    )(c)Total
    
    $
    434,489
    
    
    
    49,339
    
    
    
    (14,577
    )
 
 (a)
    
    Includes ($0.4) million of pre-tax restructuring benefit.(b)
    
    Includes ($0.5) million of pre-tax restructuring benefit.(c)
    
    Includes ($0.7) million of pre-tax restructuring benefit and a non-cash asset
impairment charge of $2.8 million. (14)
    
    Restructuring Costs and Other ChargesFiscal Year 2005 Restructuring CostsNew York Premedia Consolidation PlanIn 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
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ACG HOLDINGS, INC.
  charges in the consolidated statement of operations for the fiscal year ended March 31,
2005. The costs of this restructuring plan were accounted for in accordance with the
guidance set forth in Statement of Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS 146). This restructuring charge
was composed of severance and related termination benefits, lease termination costs primarily
related to future lease commitments and other costs. In the quarter ended March 31, 2007,
the Company reduced the restructuring reserve related to this plan by approximately $0.1
million due to certain changes in assumptions related to lease termination costs. The
Company also reduced the restructuring reserve related to this plan by approximately $0.3
million in the quarter ended March 31, 2006. This was primarily the result of lower than
anticipated severance and other employee costs due to certain terminated employees obtaining
other employment during their severance periods and certain changes in assumptions related to
lease termination costs. These reductions of the restructuring reserve are and were
classified within restructuring costs (benefit) and other charges in the consolidated
statement of operations for the fiscal years ended March 31, 2007 and 2006, respectively.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2007 (in thousands):
 03/31/06
    
    
    
    
    
    
    
    
    
    
    03/31/07Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceLease termination
costs
    
    $
    576
    
    
    
    (162
    )
    
    
    (79
    )
    
    
    335Other costs
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12$
    588
    
    
    
    (162
    )
    
    
    (79
    )
    
    
    347
 The process of consolidating the two premedia services facilities and the elimination of
certain personnel within the Company was substantially completed by April 30, 2005. During
the fiscal year ended March 31, 2006, $0.6 million of these costs were paid. As of March 31,
2007 the Company believes the restructuring reserve of approximately $0.3 million is
adequate. The Company anticipates that approximately $0.1 million of these costs will be paid
during each fiscal year through March 31, 2010. These payments will be funded through cash
generated from operations and borrowings under the Companys 2005 Revolving Credit Facility
and Receivables Facility.Pittsburg Facility Closure PlanIn March 2005, the Companys Board of Directors approved a restructuring plan for the print
segment to reduce manufacturing costs and improve profitability. This plan included the
closure of the Pittsburg, California print facility. This action resulted in the elimination
of 136 positions within the Company.As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1
million in the quarter ended March 31, 2005 associated with this plan. This charge was
classified within restructuring and other charges in the consolidated statements of
operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan
were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring
charge was composed of severance and related termination benefits, lease termination costs
and other costs. The Company reduced the restructuring reserve related to this plan by
approximately $0.8 million in the quarter ended December 31, 2005 as a result of lower than
anticipated severance and other employee costs due to certain terminated employees obtaining
other employment during their severance periods. The Company further reduced the
restructuring reserve related to this plan by approximately $0.1 million in the quarter ended
March 31, 2006 as a result of certain changes in assumptions related to lease termination
costs. These reductions of the reserve were classified within restructuring costs (benefit)
and other charges in the consolidated statements of operations for the fiscal year ended
March 31, 2006.
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ACG HOLDINGS, INC.
  The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2007 (in thousands):
 03/31/06
    
    
    
    
    
    
    03/31/07Restructuring
    
    
    
    
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Reserve BalanceLease termination costs
    
    $
    599
    
    
    
    (1
    )
    
    
    598Other costs
    
    
    26
    
    
    
    (10
    )
    
    
    16$
    625
    
    
    
    (11
    )
    
    
    614
 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, 2006, $0.6
million of these costs were paid and in the fiscal year ended March 31, 2005, $1.0 million of
these costs were paid. As of March 31, 2007 the Company believes the restructuring reserve
of approximately $0.6 million is adequate. The Company anticipates that these costs will be
paid by March 31, 2008. These payments will be funded through cash generated from operations
and borrowings under the Companys 2005 Revolving Credit Facility and Receivables Facility.Plant and SG&A Reduction PlanIn 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 $3.8
million in the quarter ended March 31, 2005 associated with this plan. This charge was
classified within restructuring costs and other charges in the consolidated statements of
operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan
were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring
charge was composed of severance and related termination benefits and other costs. The
Company reduced the reserve related to this plan by approximately $0.1 million in the quarter
ended March 31, 2007 and approximately $0.4 million in the quarter ended March 31, 2006. These
reductions were primarily the result of lower than anticipated severance and other employee
costs due to certain terminated employees obtaining other employment during their severance
periods. These reductions of the reserve are and were classified within restructuring costs
(benefit) and other charges in the consolidated statements of operations for the fiscal years
ended March 31, 2007 and 2006, respectively.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2007 (in thousands):
 03/31/06
    
    
    
    
    
    
    
    
    
    
    03/31/07Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceSeverance and
Other employee costs
    
    $
    848
    
    
    
    (735
    )
    
    
    (42
    )
    
    
    71Other costs
    
    
    103
    
    
    
    (3
    )
    
    
    (97
    )
    
    
    3$
    951
    
    
    
    (738
    )
    
    
    (139
    )
    
    
    74
 Employee terminations related to this plan were substantially completed by March 31, 2005.
During the fiscal year ended March 31, 2006, $2.1 million of these costs were paid and during
the fiscal year ended March 31, 2005, $0.3 million of those costs were paid. As of March 31,
2007 the Company believes the restructuring
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ACG HOLDINGS, INC.
  reserve of approximately $0.1 million is adequate. The Company anticipates these costs will
be paid by March 31, 2008. These payments will be funded through cash generated from
operations and borrowings under the Companys 2005 Revolving Credit Facility and Receivables
Facility.Fiscal Year 2004 Restructuring CostsJanuary 2004 PlanIn January 2004, the Company implemented a restructuring plan for the print and premedia
services segments designed to improve operating efficiency and profitability. This plan
included a consolidation of capacity and the related downsizing of a print facility in
Stevensville, Ontario, a reduction of personnel in certain of the Companys other print and
premedia facilities and the elimination of certain selling and administrative positions.
These actions included the elimination of 208 positions within the Company.As a result, the Company recorded a pre-tax restructuring charge of approximately $5.7
million in the quarter ended March 31, 2004 associated with this plan. This charge was
classified within restructuring costs and other charges in the consolidated statements of
operations for the fiscal year ended March 31, 2004. The costs of this restructuring plan
were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring
charge was composed primarily of severance and related termination benefits. The Company
reduced the restructuring reserve for this plan by approximately $0.2 million in the quarter
ended March 31, 2007, as a result of changes in facts and circumstances related to this plan.
The Company also reduced the restructuring reserve related to this plan by approximately
$0.1 million and $0.7 million in the quarters ended March 31, 2006 and 2005, respectively.
These reductions were primarily the result of lower than anticipated severance and other
employee costs due to the terminated employees obtaining other employment during their
severance periods. These reductions are and were classified within restructuring costs
(benefit) and other charges in the consolidated statements of operation for the fiscal years
ended March 31, 2007, 2006 and 2005, respectively.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2007 (in thousands):
 03/31/06
    
    
    
    
    
    
    
    
    
    
    03/31/07Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceSeverance and
other employee costs
    
    $
    223
    
    
    
    
    
    
    
    (223
    )
    
    
    Other costs
    
    
    110
    
    
    
    (95
    )
    
    
    (15
    )
    
    
    $
    333
    
    
    
    (95
    )
    
    
    (238
    )
    
    
    
 During the fiscal year ended March 31, 2006, $0.5 million of these costs were paid, in
the fiscal year ended March 31, 2005, $2.3 million of these costs were paid and in the fiscal
year ended March 31, 2004, $1.8 million of these costs were paid. As of March 31, 2007, the
Company has paid all costs associated with this plan.July 2003 PlanIn July 2003, the Company implemented a restructuring plan for the print and premedia
services segments to further reduce its selling, general and administrative expenses. This
plan resulted in the termination of four administrative employees.As a result of this plan, the Company recorded a pre-tax restructuring charge of
approximately $1.8 million in the quarter ended September 30, 2003. This charge was
classified within restructuring costs and other charges in the consolidated statements of
operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was
accounted for in accordance with the guidance set forth in SFAS 146. The restructuring
charge was composed of severance and related termination benefits.
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ACG HOLDINGS, INC.
  The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2007 (in thousands):
 03/31/06
    
    
    
    
    
    
    
    
    
    03/31/07Restructuring
    
    
    
    
    
    Reserve
    
    RestructuringReserve Balance
    
    Activity
    
    Adjustment
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    102
    
    
    
    (113
    )
    
    
    11
    
    
    
    
 During the fiscal year ended March 31, 2006, $0.3 million of these costs were paid and
in each of the fiscal years ended March 31, 2005 and 2004, $0.7 million of these costs were
paid. As of March 31, 2007, the Company has paid all costs associated with this plan.Fiscal Year 2002 Restructuring CostsIn January 2002, the Companys Board of Directors approved a restructuring plan for the print
and premedia services segments designed to improve asset utilization, operating efficiency
and profitability. This plan included the closing of a print facility in Hanover,
Pennsylvania, and a premedia services facility in West Palm Beach, Florida, the downsizing of
a Buffalo, New York premedia services facility and the elimination of certain administrative
personnel. This action resulted in the elimination of 189 positions within the Company.As a result of this plan, the Company recorded a pre-tax restructuring charge of
approximately $8.6 million in the fourth quarter of the fiscal year ended March 31, 2002.
This charge was classified within restructuring costs and other charges in the consolidated
statements of operations for the fiscal year ended March 31, 2002. The cost of this
restructuring plan was accounted for in accordance with the guidance set forth in Emerging
Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The restructuring charge included severance and related
termination benefits, lease termination costs primarily related to future lease commitments,
equipment deinstallation costs directly associated with the disassembly of certain printing
presses and other equipment, and other costs primarily including legal fees, site clean-up
costs and the write-off of certain press related parts that provided no future use or
functionality. In the quarter ended March 31, 2007, the Company recorded non-cash imputed
interest associated with sub-lease income to this reserve of less than $0.1 million. This
imputed interest is classified as interest expense in the consolidated statement of
operations for the fiscal year ended March 31, 2007. The Company recorded an additional $0.2
million, $0.3 million and $0.7 million of restructuring charges related to this plan in the
quarters ended March 31, 2006, December 31, 2005 and March 31, 2005, respectively, and an
additional $0.2 million in each of the quarters ended March 31, 2004 and September 30, 2003.
These charges are primarily related to future lease commitments and were classified within
restructuring costs (benefit) and other charges in the consolidated statements of operations
for the fiscal years ended March 31, 2006, 2005 and 2004.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2007 (in thousands):
 03/31/06
    
    
    
    
    
    
    
    
    
    03/31/07Restructuring
    
    
    
    
    
    
    
    
    
    RestructuringReserve
    
    
    
    
    
    Reserve
    
    ReserveBalance
    
    Activity
    
    Adjustment
    
    BalanceLease termination
costs
    
    
    1,528
    
    
    
    (333
    )
    
    
    35
    
    
    
    1,230
 The process of closing two facilities and downsizing one facility, including equipment
deinstallation and relocation of that equipment to other facilities within the Company, was
completed by March 31, 2002. During each of the fiscal years ended March 31, 2006 and 2005,
$0.5 million and of these costs were paid, in the fiscal
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ACG HOLDINGS, INC.
  year ended March 31, 2004, $0.9 million of these costs were paid and in each of the fiscal
years ended March 31, 2003 and 2002, $3.4 million of these costs were paid. As of March 31,
2007, the Company believes the restructuring reserve of approximately $1.2 million is
adequate. The Company anticipates that $0.3 million of the
restructuring reserve balance will be paid in the fiscal year ending March 31, 2008, $0.2
million will be paid during the fiscal year ending March 31, 2009, $0.3 million will be paid
in the fiscal year ending March 31, 2010 and $0.4 million will be paid in the fiscal year
ending March 31, 2011. These payments will be funded through cash generated from operations
and borrowings under the 2005 Revolving Credit Facility and Receivables Facility.Other ChargesThe Company recorded no other charges in the fiscal years ended March 31, 2007 and 2006.
Other charges of approximately $1.6 million were recorded in the fourth quarter of the fiscal
year ended March 31, 2005. These other charges represented the impairment associated with
restructuring initiatives reflecting the decision to abandon certain Company assets and to
write-down other assets to fair value. The $1.6 million impairment charge recorded
in the fourth quarter of fiscal year ended March 31, 2005, included $1.2 million related to
the write-off of certain assets and the write-down to fair value of the assets held for sale
in the Pittsburg, California print facility (see note 3). The provision was based on a
review of the Companys long-lived assets in accordance with SFAS 144. These impairment
charges were classified within restructuring costs (benefit) and other charges in the
consolidated statements of operations.(15)
    
    Parent Guarantee of Subsidiary DebtGraphics, the issuer of the 10% Notes, is a wholly owned subsidiary of Holdings. Holdings
has no other subsidiaries. Holdings has fully and unconditionally guaranteed the payment of
principal and interest on the 10% Notes. The 10% Notes are fully and unconditionally
guaranteed on a senior basis by Holdings and by future domestic subsidiaries of Graphics
(subject to certain exceptions). Holdings conducts no business other than as the sole
shareholder of Graphics and has no significant assets other than the capital stock of
Graphics, all of which is pledged to secure Holdings obligations under the 2005 Credit
Agreement. Holdings is dependent upon distributions from Graphics to fund its obligations.
Graphics ability to pay dividends or lend funds to Holdings is restricted under the terms of
the indenture governing the 10% Notes and the 2005 Credit Agreement (see note 6).(16)
    
    Industry Segment InformationThe Company has significant operations principally in two industry segments: (1) print and
(2) premedia services. All of the Companys print business and assets are attributed to the
print division and all of the Companys premedia services business and assets are attributed
to the premedia services division. The Companys corporate expenses have been segregated and
do not constitute a reportable segment.The Company has two reportable segments: (1) print and (2) premedia services. The print
business produces advertising inserts, comics (Sunday newspaper comics, comic insert
advertising and comic books) and other publications. The Companys premedia services
business assists customers in the design, creation and capture; manipulation; storage;
transmission and distribution of images. The majority of the premedia services work leads to
the production of four-color separations in a format appropriate for use by printers.The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on segment EBITDA,
which is defined as earnings before net interest expense, income tax expense (benefit),
depreciation and amortization. The Company generally accounts for intersegment revenues and
transfers as if the revenues or transfers were to third parties, that is, at current market
prices.The Companys reportable segments are business units that offer different products and
services. They are managed separately because each segment requires different technology and
marketing strategies. A substantial portion of the revenue, long-lived assets and other
assets of the Companys reportable segments are attributed to or located in the United
States.
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ACG HOLDINGS, INC.
  Premedia
    
    
    CorporatePrint
    
    
    Services
    
    
    and Other(In thousands)
    
    (a)
    
    
    (a)
    
    
    (b)
    
    
    TotalFiscal Year Ended March 31, 2007Sales
    
    $
    396,535
    
    
    
    48,491
    
    
    
    
    
    
    
    445,026EBITDA
    
    $
    33,730
    
    
    
    8,777
    
    
    
    (4,774
    )
    
    
    37,733Depreciation and amortization
    
    
    (16,563
    )
    
    
    (2,067
    )
    
    
    
    
    
    
    (18,630
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (40,405
    )
    
    
    (40,405
    )Interest income
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    100Income tax benefit
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    193Net income (loss)
    
    $
    17,167
    
    
    
    6,710
    
    
    
    (44,886
    )
    
    
    (21,009
    )Total assets
    
    $
    203,135
    
    
    
    11,527
    
    
    
    12,071
    
    
    
    226,733Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    11,139
    
    
    
    1,562
    
    
    
    
    
    
    
    12,701Fiscal Year Ended March 31, 2006Sales
    
    $
    380,648
    
    
    
    53,841
    
    
    
    
    
    
    
    434,489EBITDA
    
    $
    31,571
    
    
    
    11,070
    
    
    
    (3,563
    )
    
    
    39,078Depreciation and amortization
    
    
    (16,767
    )
    
    
    (2,716
    )
    
    
    
    
    
    
    (19,483
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (37,624
    )
    
    
    (37,624
    )Interest income
    
    
    
    
    
    
    
    
    
    
    83
    
    
    
    83Income tax benefit
    
    
    
    
    
    
    
    
    
    
    3,369
    
    
    
    3,369Net income (loss)
    
    $
    14,804
    
    
    
    8,354
    
    
    
    (37,735
    )
    
    
    (14,577
    )Total assets
    
    $
    205,753
    
    
    
    12,852
    
    
    
    12,897
    
    
    
    231,502Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    10,651
    
    
    
    1,835
    
    
    
    
    
    
    
    12,486Fiscal Year Ended March 31, 2005Sales
    
    $
    393,922
    
    
    
    55,591
    
    
    
    
    
    
    
    449,513EBITDA
    
    $
    22,997
    
    
    
    10,059
    
    
    
    (3,307
    )
    
    
    29,749Depreciation and amortization
    
    
    (19,867
    )
    
    
    (3,184
    )
    
    
    
    
    
    
    (23,051
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (34,087
    )
    
    
    (34,087
    )Interest income
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    37Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,685
    
    
    
    1,685Net income (loss)
    
    $
    3,130
    
    
    
    6,875
    
    
    
    (35,672
    )
    
    
    (25,667
    )Total assets
    
    $
    230,490
    
    
    
    15,179
    
    
    
    13,229
    
    
    
    258,898Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    5,418
    
    
    
    1,489
    
    
    
    
    
    
    
    6,907
 69




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ACG HOLDINGS, INC.
  
 (a)
    
    EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2007
includes the impact of restructuring benefit of ($0.1) million and ($0.3) million,
respectively. EBITDA for the print and premedia services segments in the fiscal year ended
March 31, 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3)
million, respectively, and the print segment also includes a non-cash asset impairment charge
of $2.8 million. EBITDA for the print and premedia services segments in the fiscal year ended
March 31, 2005 includes the impact of restructuring costs and other charges of $7.8 million
and $2.2 million, respectively.(b)
    
    EBITDA for corporate and other includes corporate general and administrative expenses. In
addition, corporate and other in the fiscal year ended March 31, 2007, includes incremental
legal expenses associated with two lawsuits in which the Company is the plaintiff. 70




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ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  
 ITEM 9B. OTHER INFORMATION
  71




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Name
    
    Age
    
    Position with Graphics and/or HoldingsStephen M. Dyott
    
    
    55
    
    
    Chairman, President of Holdings, Chief Executive Officer and DirectorKathleen A. DeKam
    
    
    46
    
    
    President, GraphicsPatrick W. Kellick
    
    
    49
    
    
    Senior Vice President/Chief Financial Officer and SecretaryStuart R. Reeve
    
    
    43
    
    
    President, New Business DevelopmentDenis S. Longpré
    
    
    52
    
    
    Executive Vice President, SalesEric T. Fry
    
    
    40
    
    
    DirectorMichael C. Hoffman
    
    
    44
    
    
    DirectorHwan-Yoon
F. Chung
    
    
    33
    
    
    Director
 Stephen M. Dyott
 Kathleen A. DeKam
 Patrick W. Kellick
 Stuart R. Reeve
 Denis S. Longpré
 Eric T. Fry
 72




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##### Table of Contents



Michael C. Hoffman
 Hwan-Yoon
F. Chung
 Code of Ethics
  Audit Committee Financial Expert
  73




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11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
  OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION PROGRAM
  
    
    executives total direct compensation (consisting of salary, annual incentive
compensation and long-term equity incentive opportunities) should be competitive;
    
    a substantial portion of executives compensation should be at risk and should vary
based on our financial and operational performance as well as the executives level of
responsibility and individual performance; and
    
    compensation should be designed to reward both individual and collective achievement in
order to align the interests of management with those of our shareholders.
 ELEMENTS OF EXECUTIVE COMPENSATION
  
    
    Direct compensation, consisting of:
 -
    
    Base salary;-
    
    Annual incentive opportunities; and-
    
    Long-term incentives through the issuance of stock options.
 
    
    Other compensation and benefits, consisting of participation in our broad-based employee benefit plans
    
    Severance benefits
    
    Special retention bonuses
  Base Salaries
  74




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Annual Cash Incentive Compensation
  Long-term Incentives through the Issuance of Stock Options
  Other Compensation and Benefits
  Severance Benefits
  Special Retention Bonuses
  , The Wall Street
Journal
 -
 75




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##### Table of Contents




    
    Cause means termination of employment by Graphics because of:
 -
    
    any act or omission that constitutes a material breach by the Executive of any
of his obligations under the retention bonus agreement;-
    
    the continued willful failure or refusal of the Executive to substantially
perform the duties reasonably required of him as an employee of Graphics;-
    
    any willful and material violation by the Executive of any Federal or state
law or regulation applicable to the business of Graphics, Holdings or any of
their respective subsidiaries, or the Executives conviction of a felony, or any
willful perpetration by the Executive of a common law fraud that is materially
injurious to Graphics; or-
    
    any other willful misconduct by the Executive which is materially injurious to
the financial condition or business reputation of, or is otherwise materially
injurious to, Graphics, Holdings or any of their respective subsidiaries or
affiliates;
 provided, however, (x) the good faith performance by the Executive of the duties
required of him pursuant to the retention bonus agreement, or (y) any act or omission of
the Executive based upon authority given by or pursuant to an action of the Board of
Directors or upon the advice of counsel for Graphics, is conclusively presumed not to be
willful or to constitute a failure or refusal on the part of the Executive. In
addition, if any such Cause relates to the Executives obligations under the retention
bonus agreement, Graphics must provide the Executive written notice of its intention to
terminate and of the grounds for such termination, and the Executive has 20 business
days to cure such Cause to the reasonable satisfaction of the Board (or in the event
such Cause is not susceptible to cure within such period, Cause will not exist if the
Executive has taken all reasonable steps within such period to cure such Cause, to the
reasonable satisfaction of the Board, as promptly as practicable thereafter).
    
    Good Reason means any of the following, without the Executives prior written
consent:
 -
    
    a decrease in the Executives base rate of compensation or a failure by
Graphics to pay material compensation due and payable to the Executive in
connection with his employment;-
    
    a material diminution of the responsibilities or title of the Executive with
Graphics;-
    
    Graphics requiring the Executive to be based at any office or location more
than 20 miles from his principal employment location on the date of the retention
bonus agreement, except for any change in employment location agreed to with the
Executive prior to April 19, 2007; or-
    
    a material breach by Graphics of any term or provision of the retention bonus
agreement;
 provided, however, no event or condition described above constitutes Good Reason unless
(i) the Executive provides Graphics written notice of his objection to such event or
condition, (ii) such event or condition is not cured by Graphics within 20 business days
(or in the event that such event or condition is not curable within such period,
Graphics has not taken all reasonable steps within such period to cure such event or
condition as promptly as practicable thereafter) and (iii) the Executive resigns his
employment with Graphics and its subsidiaries not more than 40 business days following
the expiration of the 20 business day period.
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SUMMARY COMPENSATION TABLE
   Non-EquityName and
    
    
    
    
    
    
    
    
    
    Incentive Plan
    
    All OtherPrincipal Position
    
    Year
    
    Salary ($)
    
    Compensation ($)
    
    Compensation ($)
    
    Total ($)(a)
    
    (b)
    
    (c)
    
    (g)
    
    (i)
    
    (j)Stephen M. Dyott
Chairman and Chief
Executive Officer
    
    
    2007
    
    
    
    575,000
    
    
    
    325,000
    (1)
    
    
    30,478
    (2)
    
    
    930,478Kathleen M. DeKam
President, Graphics
    
    
    2007
    
    
    
    350,000
    
    
    
    225,000
    (1)
    
    
    19,140
    (3)
    
    
    594,140Patrick W. Kellick
Senior Vice
President, Chief
Financial Officer
and Secretary
    
    
    2007
    
    
    
    325,000
    
    
    
    225,000
    (1)
    
    
    19,893
    (4)
    
    
    569,893Stuart R. Reeve
President, New
Business
Development
    
    
    2007
    
    
    
    350,000
    
    
    
    125,000
    (1)
    
    
    19,152
    (3)
    
    
    494,152Denis S. Longpré
Executive Vice
President, Sales
    
    
    2007
    
    
    
    275,000
    
    
    
    125,000
    (1)
    
    
    
    
    
    
    400,000
 
 (1)
    
    Retention bonus paid in April 2007, with respect to
retention bonus agreement dated July 1, 2005.(2)
    
    Includes automobile lease payments, life insurance premiums paid and $5,308 contributed to
Graphics 401(k) plan for the Named Executive Officer.(3)
    
    Includes an automobile allowance, life insurance premiums paid and $5,250 contributed to
Graphics 401(k) plan for the Named Executive Officer.(4)
    
    Includes an automobile allowance, annual physical examination, life insurance premiums paid
and $5,250 contributed to Graphics 401(k) plan for the Named Executive Officer. GRANTS OF PLAN-BASED AWARDS
  77




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EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
 Employment Agreements with Messrs. Dyott and Kellick and Ms. DeKam .
 
    
    Term. Three years for Mr. Dyott and two years for Ms. DeKam and Mr. Kellick,
subject to automatic one-year extensions thereafter.
    
    Base Salary. $575,000 per annum for Mr. Dyott, $350,000 for Ms. DeKam and $325,000
for Mr. Kellick (plus, for Ms. DeKam and Mr. Kellick, an automobile allowance of $1,100
per month). In each case, the Executives base salary shall be reviewed by our Board
of Directors, based upon the Executives performance, not less often than annually, and
may be increased but not decreased. Mr. Dyott is entitled to use of an automobile of
at least the same type and model as the automobile currently being provided to Mr.
Dyott on terms no less favorable to the Executive.
    
    Annual Bonus. The Board shall annually adopt a bonus plan and performance criteria.
The target bonus is at least 75% of base salary (as defined) for Mr. Dyott and at least 50% of base
salary (as defined) for Ms. DeKam and Mr. Kellick.
    
    Special Retention Bonus. See description above.
    
    Employee Benefits. The Executive participates in all employee benefit plans,
programs or arrangements established by Graphics for, or made available to, its senior
executives. Mr. Dyott is entitled to five weeks of paid vacation annually, Ms. DeKam
and Mr. Kellick are entitled to four weeks each of paid vacation annually.
    
    Severance Benefits. See below under -Termination and Change in Control
Payments.
    
    Nonsolicitation Covenants. For three years following termination of employment (two
years for Ms. DeKam and Mr. Kellick), the Executive may not solicit or endeavor to
entice away from Graphics, Holdings or their respective subsidiaries any employee or
client of Graphics, Holdings or their respective subsidiaries.
    
    Noncompetition Covenants. For three years following termination of employment (two
years for Ms. DeKam and Mr. Kellick), the Executive may not be affiliated with a
Competitor. However, if Graphics exercises its right not to extend the employment
term, or the Executives employment by Graphics is terminated or the Executive resigns
and, in either case, (i) the Executive is not entitled to severance payments or, if
entitled thereto, does not receive such payments in full, or is entitled to less than
the full amount described therein, and (ii) in the case of Ms. DeKam and Mr. Kellick
only, Mr. Dyott has ceased (for any reason) to be the chief executive officer of
Graphics at any time prior to, or prior to the end of the one hundred eightieth day
after, the date of such termination or resignation, the Executives obligations under
the noncompete shall terminate as of the date of termination of employment or
resignation. For purposes of the noncompete, a Competitor is defined as any person
that prints retail advertising inserts or provides premedia services for printing and
has annual combined retail advertising insert printing and premedia revenues for the
most recently ended annual reporting period in excess of $250 million.
    
    280G Cutback. In the event the golden parachute excise tax under Section 280G of
the Internal Revenue Code would apply to any amounts payable to the Executive under the
employment agreement or otherwise, such amount will be cut back to $1 less than the
amount that would trigger coverage of Section 280G.
 Severance Agreements with Mr. Reeve and Mr. Longpré.
 78




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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
  Option Awards
 Number of
    
    Number ofSecurities
    
    SecuritiesUnderlying
    
    UnderlyingUnexercised
    
    UnexercisedOptions
    
    Options
    
    
    
    
    
    Option(#)
    
    (#)
    
    Option Exercise
    
    ExpirationName
    
    Exercisable
    
    Unexercisable
    
    Price ($)
    
    Date(a)
    
    (b)
    
    (c)
    
    (e)
    
    (f)Kathleen M. DeKam
    
    
    402.25
    
    
    
    
    
    
    $
    0.01
    
    
    
    01/15/2009President, Graphics
    
    
    425.50
    
    
    
    1,276.50
    (1)
    
    $
    0.01
    
    
    
    12/05/2015Patrick W. Kellick
    
    
    900.00
    
    
    
    
    
    
    $
    0.01
    
    
    
    03/21/2013Senior Vice
    
    
    200.50
    
    
    
    601.50
    (1)
    
    $
    0.01
    
    
    
    12/05/2015President, Chief
Financial Officer
and SecretaryStuart R. Reeve
    
    
    110.25
    
    
    
    
    
    
    $
    0.01
    
    
    
    07/27/2009President, New
    
    
    360.00
    
    
    
    
    
    
    $
    0.01
    
    
    
    04/01/2012Business 
DevelopmentDenis S. Longpré
    
    
    543.00
    
    
    
    
    
    
    $
    0.01
    
    
    
    01/19/2008Executive Vice
    
    
    207.00
    
    
    
    
    
    
    $
    0.01
    
    
    
    01/05/2010President, Sales
 
 (1)
    
    33.3% of the unexercised options vest on December 5, 2007,
33.3% vest on December 5, 2008, and the
remaining 33.3% vest on
December 5, 2009. 79




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PENSION BENEFITS
 Number of Years
    
    Present Value ofof Credited
    
    AccumulatedName
    
    Plan Name
    
    Service
    
    Benefit ($)(a)
    
    (b)
    
    (c)
    
    (d)Stephen
M. Dyott
Chairman and Chief
Executive Officer
    
    American Color
Graphics, Inc.
Salaried Employees
Pension Plan
(1)
    
    3 years, 3 months
    
    
    42,774
    (1)Kathleen
M. DeKam
President, Graphics
    
    American Color
Graphics, Inc.
Salaried Employees
Pension Plan
(1)
    
    8 years, 4 months
    
    
    14,678
    (1)Supplemental
Executive
Retirement Plan
(2)
    
    1 year, 9 months
    
    
    145,539
    (2)Patrick
W. Kellick
Senior Vice President,
Chief Financial
Officer and Secretary
    
    American Color
Graphics, Inc.
Salaried Employees
Pension Plan
(1)
    
    6 years, 5 months
    
    
    42,480
    (1)Stuart
R. Reeve
President, New
Business Development
    
    American Color
Graphics, Inc.
Salaried Employees
Pension Plan
(1)
    
    5 years, 4 months
    
    
    21,842
    (1)
 
 (1)
    
    In October 1994, the Board of Directors approved an amendment to the defined benefit
Pension Plan (the Plan) that resulted in the freezing of additional defined benefits for
future services under such plan effective January 1, 1995. Thus, no further service-related
benefits have accrued under this Plan since 1994. The present value of accumulated benefit
for each Named Executive Officer was determined utilizing the RP-2000 Mortality Table for
male and female lives and a 6.25% discount rate.(2)
    
    After five years of vesting service (through July 5, 2010) the Supplemental Executive
Retirement Plan, which is a defined benefit plan, provides that Ms. DeKam will be eligible
for an annual benefit payable upon retirement on or after attaining age 65, or the present
value of such benefit at an earlier date under certain circumstances. As specified in a
schedule attached to the plan, at March 31, 2007, Kathleen A. DeKam will be entitled to a
$50,000 annual benefit payable at age 65. At March 31, 2007, this plan included one Named
Executive Officer (Ms. DeKam) and one former executive. The present value of the accumulated
benefit for Ms. DeKam was determined utilizing the RP-2000
Mortality Table for female lives and a 6.25% discount rate. TERMINATION AND CHANGE IN CONTROL PAYMENTS
 Mr. Dyott.
 80




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For purposes of Mr. Dyotts employment agreement:
    
    Cause means termination of Mr. Dyott by Graphics because of :
 -
    
    any act or omission that constitutes a material breach by Mr. Dyott of any of his
obligations under his employment agreement;-
    
    the continued willful failure or refusal of Mr. Dyott to substantially perform the
duties reasonably required of him as an employee of Graphics;-
    
    any willful and material violation by Mr. Dyott of any Federal or state law or
regulation applicable to the business of Graphics, Holdings or any of their
respective subsidiaries, or Mr. Dyotts conviction of a felony, or any willful
perpetration by Mr. Dyott of a common law fraud that is materially injurious to
Graphics; or-
    
    any other willful misconduct by Mr. Dyott which is materially injurious to the
financial condition or business reputation of, or is otherwise materially injurious
to, Graphics, Holdings or any of their respective subsidiaries or affiliates;
 provided, however, (x) the good faith performance by Mr. Dyott of the duties required of him
pursuant to his employment agreement, (y) any act or omission of Mr. Dyott based upon
authority given by or pursuant to an action of the Board or upon the advice of counsel for
Graphics or (z) any disagreement with respect to the advisability, timing or implementation
of the sale of any capital stock or assets of Graphics or Holdings, shall be conclusively
presumed not to be willful or to constitute a failure or refusal on the part of Mr. Dyott.
In addition, Mr. Dyott has a 20 business day period to cure any purported Cause related to
Mr. Dyotts obligations under his employment agreement to the reasonable satisfaction of the
Board before he may be terminated for Cause (or, if the event is not susceptible to cure
within such period, to take all reasonable steps to cure such Cause, to the reasonable
satisfaction of the Board, as promptly as practicable thereafter). For purposes of
determining whether Cause has occurred, no act, or failure to act, on Mr. Dyotts part shall
be deemed willful unless committed, or omitted, by Mr. Dyott in bad faith.
    
    Good Reason means any of the following, without Mr. Dyotts prior written consent:
 -
    
    a decrease in Mr. Dyotts base rate of compensation or a failure by Graphics to
pay material compensation due and payable to Mr. Dyott in connection with his
employment;-
    
    a material diminution of the responsibilities or title of Mr. Dyott with Graphics
or Holdings;-
    
    Graphics requiring Mr. Dyott to be based at any office or location more than 20
miles from his principal employment location as of April 19, 2007;-
    
    a material breach by Graphics of any term or provision of the employment
agreement;-
    
    receipt by Mr. Dyott of written notice from Graphics of its intention not to
extend the term of his employment;-
    
    the failure by Graphics to obtain from any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all the
business or assets of Graphics an express written assumption and agreement to perform
under Mr. Dyotts employment agreement; or-
    
    a Change of Control occurs;
 81




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provided, however, Good Reason (other than a Change of Control) does not occur unless (i)
Graphics fails to cure the event constituting Good Reason within 20 business days of receipt
of notice from Mr. Dyott, and (ii) Mr. Dyott actually resigns his employment not more than
40 business days following the expiration of the 20-business day
cure period. In addition, a Change of Control does not constitute Good Reason unless Mr.
Dyott resigns within 40 business days after the closing of such Change of Control or within
10 business days after the first anniversary of such Change of Control.Change of Control is defined in Mr. Dyotts employment agreement to occur when (a) any
person (as defined below) shall acquire, whether by purchase, exchange, tender offer, merger,
consolidation or otherwise, beneficial ownership of securities of Graphics constituting a
majority of the combined voting power of the securities of Graphics, (b) any person shall
acquire all or substantially all the assets of Graphics pursuant to a sale, dissolution or
liquidation, (c) any person shall acquire the ability to appoint or elect a majority of the
members of the Board of Directors of Graphics or Holdings, or (d) the Designated Investors
shall otherwise cease to beneficially own at least 30% of the combined voting power of the
securities of Graphics. For purposes of this definition, person shall have the meaning
given in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, except that such
term shall not include (i) any stockholder of Holdings or Graphics as of April 19, 2007 and
each of their respective affiliates (the Designated Investors), (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of Graphics or any of its
affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of
such securities, and (iv) a corporation owned, directly or indirectly, by the Designated
Investors, such that the aggregate ownership of securities or assets of Graphics or the
ability to appoint or elect directors of Graphics that is attributable to such Designated
Investors would not decrease to a level that would result in a Change of Control, if such
ownership or ability was deemed to be held directly in Graphics. The completion of an
initial public offering in which no person acquires beneficial ownership of a majority of the
combined voting power of the securities of such person shall not constitute a Change of
Control, nor shall the acquisition of beneficial ownership of securities of Graphics by a
person that has a class of securities registered under Section 12 of the Securities Exchange
Act of 1934, if such acquisition does not result in the Designated Investors owning 30% or
less of the combined voting power of the securities of Graphics.
 Ms. DeKam and Mr. Kellick.
 Mr. Reeve and Mr. Longpré .
  82




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Name
    
    Salary and Bonus ($)
    
    Employee Benefits ($)(1)
    
    Total ($)Stephen M. Dyott
Chairman and Chief
    
    
    2,700,000
    
    
    
    77,922
  
    
    
    2,777,922Executive OfficerKathleen M. DeKam
President, Graphics
    
    
    1,150,000
    
    
    
    30,942
    
    
    
    1,180,942Patrick W. Kellick
Senior Vice
President, 
Chief
Financial Officer
    
    
    1,100,000
    
    
    
    37,034
    
    
    
    1,137,034and SecretaryStuart R. Reeve
President, New
Business
    
    
    700,000
    
    
    
    38,957
    
    
    
    738,957DevelopmentDenis S. Longpré
Executive Vice
    
    
    275,000
    
    
    
    27,171
    
    
    
    302,171President Sales
 
 (1)
    
    Consists of continuing welfare plan coverage. The value is based on the type of insurance
coverage we carried for each executive officer as of March 31, 2007 and is valued at the
premiums in effect on that date. Also consists of continuation of auto allowance, where
applicable, and accrued vacation pay. DIRECTOR COMPENSATION
  Compensation Committee Interlocks and Insider Participation
  83




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  Shares ofHoldings
    
    Percent ofName
    
    Common Stock
    
    ClassMorgan Stanley Capital Partners III, L.P.
    
    
    22,497.9
    
    
    
    14.2MSCP892 Investors, L.P.
c/o Metalmark Capital LLC
1177 Avenue of the Americas
New York, NY 10036Morgan Stanley Capital Investors, L.P.
    
    
    835.1
    
    
    
    0.5The Morgan Stanley Leveraged Equity Fund II, L.P.
    
    
    59,450.0
    
    
    
    37.61585 Broadway 
New York, NY 10036First Plaza Group Trust
    
    
    17,000.0
    
    
    
    10.8c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258Directors and Named Executive Officers:Stephen M. Dyott
    
    
    14,970.0
    
    
    
    9.5Kathleen A. DeKam (a)
    
    
    2,234.5
    
    
    
    1.4Patrick W. Kellick (b)
    
    
    2,909.5
    
    
    
    1.8Stuart R. Reeve (c)
    
    
    2,610.0
    
    
    
    1.6Denis S. Longpré (d)
    
    
    750.0
    
    
    
    0.5Eric T. Fry
    
    
    
    
    
    
    Michael C. Hoffman
    
    
    
    
    
    
    Hwan-Yoon F. Chung
    
    
    
    
    
    
    All directors and executive officers as a
Group (eight persons, including Messrs. Dyott,
Kellick, Reeve and Longpré and Ms. DeKam) (e)
    
    
    23,474.0
    
    
    
    14.5
 
 (a)
    
    Includes 827.75 common stock options exercisable within 60 days.(b)
    
    Includes 1,100.50 common stock options exercisable within 60 days.(c)
    
    Includes 470.25 common stock options exercisable within 60 days.(d)
    
    Includes 750.00 common stock options exercisable within 60 days.(e)
    
    Includes 3,148.50 common stock options exercisable within 60 days. 84




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Relationship With Metalmark and Morgan Stanley
  Stockholders Agreement
  Tax Sharing Agreement
  85




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Fiscal Year Ended March 31,2007
    
    
    2006(In thousands)Audit fees (a)
    
    $
    415
    
    
    
    428Audit-related fees (b)
    
    
    133
    
    
    
    70Tax fees (c)
    
    
    40
    
    
    
    42All other fees
    
    
    
    
    
    
    Total fees
    
    $
    588
    
    
    
    540
 
 (a)
    
    Audit fees consist of fees for professional services related to the audit of our
consolidated financial statements, review of financial statements included in our
quarterly reports, comfort letters and other services related to SEC matters, as well as
services that are normally provided by the independent auditor in connection with
statutory filings or engagements.(b)
    
    Audit-related fees consist of employee pension and benefit plan audits and fees
related to the review of financing agreements.(c)
    
    Tax fees include the review of federal, state, local and Canadian tax returns as
well as tax planning and consultation on new tax legislation, regulations, rulings and
developments. Board of Directors Pre-Approval Policies
   86




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    The following documents are filed as a part of this Report:
          Financial Statement Schedules
 Schedules
    
    Page No.I.
    
    Condensed Financial Information of Registrant:Condensed Financial Statements (parent company only) for the years endedMarch 31, 2007, 2006 and 2005 and as of March 31, 2007 and 2006
    
    
    90II.
    
    Valuation and qualifying accounts
    
    
    97
  Exhibits
 Exhibit No.
    
    Description3.1
    
    Certificate of Incorporation of Graphics, as amended to date*3.2
    
    By-laws of Graphics, as amended to date*3.3
    
    Restated Certificate of Incorporation of Holdings, as amended to date*3.4
    
    By-laws of Holdings, as amended to date*10.1
    
    Amended and Restated Credit Agreement dated as of May 5, 2005, among Graphics and
Holdings; with Banc of America Securities, as Sole Lead Arranger, and Bank of America, N.A., as
Administrative Agent, and certain lenders####10.1 (a)
    
    First Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as
of September 26, 2006, among Graphics and Holdings; with Bank of America, N.A., as
Administrative Agent and L/C Issuer; and Banc of America Securities, LLC, as Sole Lead
Arranger and Sole Book Manager, and certain lenders****10.1 (b)
    
    Second Amendment to May 5, 2005 Amended and Restated Credit Agreement dated
as of March 30, 2007, among Graphics and Holdings; with Banc of America, N.A. as Agent;
and Banc of America Securities, LLC as Sole Lead Arranger and Sole Book Manager, and
certain lenders *****10.1 (c)
    
    Third Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as
of June 13, 2007, among Graphics and Holdings; with Bank of America, N.A., as Agent, and
certain lendersvv
 87




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##### Table of Contents



Exhibit No.
    
    Description10.2
    
    Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and
Stephen M.Dyott#####10.3
    
    Severance Letter, dated August 1, 1999, between Graphics and Stuart Reeve***10.4
    
    Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and
Patrick W. Kellick#####10.5
    
    Severance Letter, dated January 14, 2000, between Graphics and Denis S.
Longprév10.6
    
    Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and
Kathleen A. DeKam#####10.7
    
    Amended and Restated Stockholders Agreement, dated as of August 14, 1995, among
Holdings,the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital
Partners III, L.P. and the additional parties named therein**10.7 (a)
    
    Amendment No. 1, dated January 16, 1998, to Amended and Restated Stockholders
Agreement
dated as of August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., and the
additional parties named herein10.8
    
    Stock Option Plan of Holdings10.9
    
    Common Stock Option Agreement Form10.10
    
    Holdings Common Stock Option Plan10.11
    
    Amended and Restated American Color Graphics, Inc. Supplemental Executive Retirement
Plan10.12
    
    Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America,
N.A., as Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior
Funding, Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication
Agent; and the financial institutions named therein as Lenders#10.12 (a)
    
    First Amendment to Credit Agreement dated as of February 9, 2004 to Credit
Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as
Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior Funding,
Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication Agent; and
the financial institutions named therein as Lenders###10.12 (b)
    
    Second Amendment to Credit Agreement dated as of February 11, 2005 to Credit
Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as
Administrative Agent, Collateral Agent and as a Lender; GECC Capital Markets Group,
Inc., as Syndication Agent; and the financial institutions named therein as
Lenders 10.12 (c)
    
    Third Amendment to Credit Agreement dated as of April 7, 2005 to Credit
Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as
Administrative Agent, Collateral Agent and as a Lender; GECC Capital Markets Group,
Inc., as Syndication Agent; and the financial institutions named therein as Lenders10.13
    
    Indenture (including the form of the 10% Notes) dated as of July 3, 2003, among
Graphics, Holdings and The Bank of New York#10.14
    
    Purchase Agreement dated June 19, 2003, among Graphics, Holdings and Morgan
Stanley & Co. Incorporated, Banc of America Securities LLC and Credit Suisse First
Boston LLC, as Initial Purchasers##10.15
    
    Registration Rights Agreement dated June 19, 2003, among Graphics, Holdings and
Morgan Stanley & Co. Incorporated, Banc of America Securities LLC and Credit Suisse
First Boston LLC##10.16
    
    Intercreditor Agreement dated July 3, 2003, by and among Bank of America, N.A.,
The Bank of New York and Graphics##10.17
    
    Security Agreement dated July 3, 2003, among Graphics, Holdings and the Bank of
New York##10.18
    
    Pledge Agreement dated July 3, 2003, by Graphics and Holdings in favor of The
Bank of New York, as Trustee##10.19
    
    Executive Incentive Compensation Program 10.20
    
    Credit Agreement dated as of September 26, 2006, among American Color Graphics
Finance, LLC; with Bank of America, N.A., as Administrative Agent and Collateral Agent;
and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager****10.21
    
    Security Agreement dated as of September 26, 2006, between American
Color Graphics Finance, LLC; among Bank of America, N.A., as Collateral Agent****
 88




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##### Table of Contents



Exhibit No.
    
    Description10.22
    
    Servicing Agreement dated as of September 26, 2006, by and among American Color
Graphics, Inc., as Servicer, American Color Graphics Finance, LLC, as Purchaser, and
Bank of America,N.A., as Administrative Agent and Collateral Agent****10.22 (a)
    
    First Amendment to September 26, 2006 Servicing Agreement dated as of March
30, 2007, among Graphics, as Servicer, Graphics Finance, as Purchaser, and Bank of
America, N.A. as Administrative Agent, and certain lenders*****10.23
    
    Contribution and Sale Agreement dated as of September 26, 2006, by and between
American Color Graphics, Inc., as Seller and American Color Graphics Finance, LLC, as
Purchaser****10.24
    
    Retention Bonus Agreement (form) dated as of April 19, 2007, between Graphics
and employee.#####10.25
    
    Stock Option Agreement (form) dated as of April 19, 2007, between Holdings and
grantee#####10.26
    
    Omnibus Amendment Of Loan Documents dated as of June 13, 2007, among Graphics,
Graphics Finance, and Bank of America, N.A., as Agent, and certain
lendersvv12.1
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges21.1
    
    List of Subsidiaries31.1
    
    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
 
 *
    
    Incorporated by reference from Amendment No. 2 to Form S-1 filed on October 4, 1993  Registration number 33-65702.
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 2005 
Commission file number 33-97090.#
    
    Incorporated by reference from Post Effective Amendment No. 9 to Form S-1 filed on July 16, 2003  Commission file
number 33-97090.v
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 2006 
Commission file number 33-97090.##
    
    Incorporated by reference from Form S-4 filed on November 6, 2003  Registration number 33-97090.**
    
    Incorporated by reference from Form S-4 filed on September 19, 1995  Registration number 33-97090.
    
    Incorporated by reference from Amendment No. 2 to Form S-4 filed on November 22, 1995  Registration number
33-97090.vv
    
    Incorporated by reference from the Form 8-K filed June 19, 2007  Commission file number 33-97090.***
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 
Commission file number 33-97090.
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 
Commission file number 33-97090.###
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 
Commission file number 33-97090.****
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 
Commission file number 33-97090.
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 1998 
Commission file number 33-97090.####
    
    Incorporated by reference from the Form 8-K filed May 6, 2005  Commission file number 33-97090.*****
    
    Incorporated by reference from the Form 8-K filed April 13, 2007 Commission file number 33-97090.
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 
Commission file number 33-97090.#####
    
    Incorporated by reference from the Form 8-K filed April 20, 2007  Commission file number 33-97090. 89




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 ACG HOLDINGS, INC.
    March 31,2007
    
    
    2006AssetsCurrent assets:Receivable from subsidiary
    
    $
    1,098
    
    
    
    1,134Total assets
    
    $
    1,098
    
    
    
    1,134Liabilities and Stockholders DeficitLiabilities of subsidiary in excess of assets
    
    $
    244,736
    
    
    
    230,830Income taxes payable
    
    
    
    
    
    
    36Total liabilities
    
    
    244,736
    
    
    
    230,866Commitments and contingenciesStockholders deficit:Common stock, voting, $.01 par value, 5,852,223
shares authorized,158,205 shares issued and
outstanding at March 31, 2007 and March 31, 2006
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    2,038
    
    
    
    2,038Accumulated deficit
    
    
    (230,769
    )
    
    
    (209,760
    )Other accumulated comprehensive loss, net of tax
    
    
    (14,909
    )
    
    
    (22,012
    )Total stockholders deficit
    
    
    (243,638
    )
    
    
    (229,732
    )Total liabilities and stockholders deficit
    
    $
    1,098
    
    
    
    1,134
  90




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 ACG HOLDINGS, INC.
    Year ended March 31,2007
    
    
    2006
    
    
    2005Equity in loss of subsidiary
    
    $
    21,009
    
    
    
    14,577
    
    
    
    25,667Net loss
    
    $
    21,009
    
    
    
    14,577
    
    
    
    25,667
  91




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 ACG HOLDINGS, INC.
    Year ended March 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities
    
    $
    
    
    
    
    
    
    
    
    Cash flows from investing activities
    
    
    
    
    
    
    
    
    
    
    Cash flows from financing activities
    
    
    
    
    
    
    
    
    
    
    Net change in cash
    
    $
    
    
    
    
    
    
    
    
    
  92




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 ACG HOLDINGS, INC.
   Description of ACG Holdings, Inc.
    1.
    
    Basis of PresentationThe accompanying condensed financial statements (parent company only) include the accounts of
Holdings and its investments in Graphics accounted for in accordance with the equity method,
and do not present the financial statements of Holdings and its subsidiary on a consolidated
basis. These parent company only financial statements should be read in conjunction with the
ACG Holdings, Inc. consolidated financial statements. The Acquisition was accounted for
under the purchase method of accounting applying the provisions of Accounting Principles
Board Opinion No. 16 (APB 16).2.
    
    GuaranteesAs set forth in ACG Holdings, Inc. consolidated financial statements, a substantial portion
of Graphics long-term obligations has been guaranteed by Holdings.Holdings has guaranteed Graphics indebtedness under the 2005 Credit Agreement, defined
below, which guarantee is secured by a pledge of all of Graphics stock. Borrowings under
the 2005 Credit Agreement are secured by substantially all assets of Graphics. Holdings is
restricted under its guarantee of the 2005 Credit Agreement from, among other things,
entering into mergers, acquisitions, incurring additional debt or paying cash dividends.On July 3, 2003, Graphics issued $280 million of 10% Senior Second Secured Notes Due 2010
(the 10% Notes) bearing interest at 10% and maturing June 15, 2010. The 10% Notes are
fully and unconditionally guaranteed on a senior basis by Holdings and by future domestic
subsidiaries of Graphics (subject to certain exceptions).3.
    
    Dividends from Subsidiaries and InvesteesNo cash dividends were paid to Holdings from any consolidated subsidiaries, unconsolidated
subsidiaries or investees accounted for by the equity method during the periods reflected in
these condensed financial statements.
 93




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
 4.
    
    Tax Sharing AgreementHoldings and Graphics (collectively the Company) are parties to an amended and restated tax
sharing agreement effective July 27, 1989. Under the terms of the agreement, Graphics (the
income from which is consolidated with that of Holdings for U.S. federal income tax purposes)
is liable to Holdings for amounts representing U.S. federal income taxes calculated on a
stand-alone basis. Each year Graphics pays to Holdings the lesser of (i) Graphics U.S.
federal tax liability computed on a stand-alone basis and (ii) its allocable share of the U.S. federal tax liability of the consolidated group. Accordingly, Holdings is not currently
reimbursed for the separate tax liability of Graphics to the extent Holdings losses reduce
the consolidated tax liability. Reimbursement for the use of such Holdings losses will
occur when the losses may be used to offset Holdings income computed on a stand-alone basis.
Graphics has also agreed to reimburse Holdings in the event of any adjustment (including
interest or penalties) to consolidated income tax returns based upon Graphics obligations
with respect thereto. No reimbursement obligation currently exists between Graphics and
Holdings. Also under the terms of the tax sharing agreement, Holdings has agreed to
reimburse Graphics for refundable U.S. federal income taxes equal to an amount which would be
refundable to Graphics had Graphics filed separate U.S. federal income tax returns for all
years under the agreement. Graphics and Holdings have also agreed to treat foreign, state
and local income and franchise taxes for which there is consolidated or combined reporting in
a manner consistent with the treatment of U.S. federal income taxes as described above.5.
    
    Notes Payable and Long-Term DebtMay 5, 2005 RefinancingOn May 5, 2005, the Company entered into an Amended and Restated Credit Agreement with Banc
of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America,
N.A., as Administrative Agent, and certain lenders (as amended, the 2005 Credit Agreement)
which resulted in the refinancing of the Companys $70 million senior secured revolving
credit facility, which would have matured on July 3, 2008, (the
Old Revolving Credit Facility)
and significantly improved the Companys liquidity position. The 2005 Credit Agreement is a
$90 million secured facility comprised of:
 
    
    a $55 million revolving credit facility ($40 million of which may be used for
letters of credit), maturing on December 15, 2009, which is not subject to a
borrowing base limitation, (the 2005 Revolving Credit Facility); and
    
    a $35 million non-amortizing term loan facility maturing on December 15, 2009
(the 2005 Term Loan Facility).
 Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing
market rates, at either (a) LIBOR plus a margin of 5.75% for loans at March 31, 2007, or (b)
an alternate base rate (based upon the greater of the agent banks prime lending rate or the
Federal Funds rate plus 0.5%) plus a margin of 4.75% for loans at March 31, 2007. Margin
levels increase as the levels of receivables sold by Graphics to Graphics Finance (as defined
below) meet certain thresholds under the Receivables Facility (as defined below). In
addition, Graphics is obligated to pay specified unused commitment, letter of credit and
other customary fees.Borrowings under the 2005 Term Loan Facility must be repaid in full on the facilitys
maturity date of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan
Facility and the 2005 Revolving Credit Facility under certain circumstances with excess cash
flows and proceeds from certain sales of assets, equity issuances and incurrences of
indebtedness.Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics
assets. Receivables sold to Graphics Finance (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.
 94




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
 The 2005 Credit Agreement requires satisfaction of a first lien leverage ratio test. In
addition, the 2005 Credit Agreement includes various other customary affirmative and negative
covenants and events of default. These covenants, among other things, restrict the Companys
ability to:
 
    
    incur or guarantee additional debt;
    
    create or permit to exist certain liens;
    
    pledge assets or engage in sale-leaseback transactions;
    
    make capital expenditures, other investments or acquisitions;
    
    prepay, redeem, acquire for value, refund, refinance, or
exchange certain debt (including the 10% Notes), subject to certain
exceptions;
    
    repurchase or redeem equity interests;
    
    change the nature of our business;
    
    pay dividends or make other distributions;
    
    enter into transactions with affiliates;
    
    dispose of assets or enter into mergers or other business combinations; and
    
    place restrictions on dividends, distributions or transfers to the Company from its subsidiaries.
 September 26, 2006 Revolving Trade Receivables FacilityOn September 26, 2006, American Color Graphics Finance, LLC (Graphics Finance), a newly
formed wholly-owned subsidiary of Graphics, entered into a $35 million revolving trade
receivables facility (as amended, the Receivables Facility) with Banc of America
Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as
Administrative Agent, Collateral Agent and Lender, and certain lenders. The Receivables
Facility improved Graphics overall liquidity position.The maximum borrowing availability under the Receivables Facility is $35 million.
Availability at any time is limited to a borrowing base linked to 85% of the balances of
eligible receivables less certain minimum excess availability requirements. Graphics expects
most of its receivables from U.S. customers will be eligible for inclusion in the borrowing
base.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 contained in the 2005
Credit Agreement. In addition, the Receivables Facility contains other customary affirmative
and negative covenants and events of default. It also contains other covenants customary for
facilities of this type, including requirements related to credit and collection policies,
deposits of collections and maintenance by each party of its separate corporate identity,
including maintenance of separate records, books, assets and liabilities and disclosures
about the transactions in the financial statements of Holdings and its consolidated
subsidiaries. Failure to meet these covenants could lead to an acceleration of the
obligations under the Receivables Facility, following which the lenders would have the right
to sell the assets securing the Receivables Facility.The Receivables Facility expires on December 15, 2009, when all borrowings thereunder become
payable in full.Interest on borrowings under the Receivables Facility is floating, based on existing market
rates, at either (a) an adjusted LIBOR rate plus a margin of 4.25% at March 31, 2007 or (b)
an alternate base rate (based upon the greater of the agent banks prime lending rate or the
Federal Funds rate plus 0.5%) plus a margin of 3.25% at March 31, 2007. In addition, Graphics
Finance is obligated to pay specified unused commitment and other customary fees.
 95




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SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 ACG HOLDINGS, INC.
   10% Senior Second Secured NotesThe 10% Notes mature June 15, 2010, with interest payable semi-annually on June 15 and
December 15. The 10% Notes are redeemable at the option of Graphics in whole or in part on
June 15, 2007, at 105% of the principal amount, plus accrued interest. The redemption price
will decline each year after 2007 and will be 100% of the principal amount of the 10% Notes,
plus accrued interest, beginning on June 15, 2009. Upon a change of control, Graphics will
be required to make an offer to purchase the 10% Notes, unless such
requirement has been waived. The purchase price will equal 101%
of the principal amount of the 10% Notes on the date of purchase, plus accrued interest.Amendments to Credit FacilitiesOn June 13, 2007, the 2005 Credit Agreement and the Receivables Facility were amended to (a)
increase the maximum permissible first lien leverage ratios as of the last day of the fiscal
quarters ending September 30, and December 31, 2007, and March 31, 2008, and (b) require that the
Company maintain certain levels of minimum total liquidity at November 30, December 13, and
December 31, 2007, and at the end of each month thereafter through March 31, 2008.The Company is currently in compliance with the covenant requirements set forth in the 2005 Credit
Agreement and the Receivables Facility, as amended.
 96




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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.
 Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Expense /
    
    Write-
    
    Other
    
    End ofof Period
    
    (Income)
    
    offs
    
    Adjustments
    
    Period(in thousands)Fiscal Year ended March 31, 2007Allowance for doubtful accounts
    
    $
    1,275
    
    
    
    (237
    )
    
    
    (21
    )
    
    
    
    
    
    
    1,017Reserve for inventory obsolescence
    
    $
    328
    
    
    
    (109
    )
    
    
    (68
    )
    
    
    
    
    
    
    151Income tax valuation allowance
    
    $
    61,897
    
    
    
    
    
    
    
    
    
    
    
    5,967
    (a)
    
    
    67,864Fiscal Year ended March 31, 2006Allowance for doubtful accounts
    
    $
    1,783
    
    
    
    (110
    )
    
    
    (250
    )
    
    
    (148
    )
    
    
    1,275Reserve for inventory obsolescence
    
    $
    267
    
    
    
    102
    
    
    
    (41
    )
    
    
    
    
    
    
    328Income tax valuation allowance
    
    $
    54,772
    
    
    
    
    
    
    
    
    
    
    
    7,125
    (b)
    
    
    61,897Fiscal Year ended March 31, 2005Allowance for doubtful accounts
    
    $
    2,853
    
    
    
    257
    
    
    
    (1,327
    )
    
    
    
    
    
    
    1,783Reserve for inventory obsolescence
    
    $
    285
    
    
    
    114
    
    
    
    (132
    )
    
    
    
    
    
    
    267Income tax valuation allowance
    
    $
    45,185
    
    
    
    
    
    
    
    
    
    
    
    9,587
    (a)
    
    
    54,772
 
 (a)
    
    The increase in the valuation allowance relates to current year losses for which no tax
benefit has been recorded, partially offset by a decrease in deferred tax assets related to
the additional minimum pension liability.(b)
    
    The increase in the valuation allowance relates to current year losses for which no tax
benefit has been recorded and an increase in deferred tax assets related to the additional
minimum pension liability. 97




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##### Table of Contents



SIGNATURES
  ACG Holdings, Inc.American Color Graphics, Inc.Date/s/ Stephen M. Dyott
    
    June 27, 2007Stephen M. DyottChairman, President and Chief Executive OfficerACG Holdings, Inc.Chairman and Chief Executive OfficerAmerican Color Graphics, Inc.Director of ACG Holdings, Inc. and American Color Graphics, Inc.
  Signature
    
    Title
    
    Date/s/ Patrick W. Kellick
    
    Senior Vice President
    
    June 27, 2007Patrick W. Kellick
    
    Chief
Financial Officer
and Secretary
(Principal Financial Officer)/s/ Linda G. Plisco
    
    Assistant Corporate Controller
    
    June 27, 2007Linda G. Plisco
    
    (Principal
Accounting Officer)/s/ Michael C. Hoffman
    
    Director
    
    June 27, 2007Michael C. Hoffman/s/ Eric T. Fry
    
    Director
    
    June 27, 2007Eric T. Fry/s/ Hwan-Yoon Chung
    
    Director
    
    June 27, 2007Hwan-Yoon Chung
 98




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##### Table of Contents



ACG HOLDINGS, INC.
 Annual Report on Form 10-K
 Fiscal Year Ended March 31, 2007
 Index to Exhibits
 Exhibit No.
    
    Description12.1
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges21.1
    
    List of Subsidiaries31.1
    
    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
 99