UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

or

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

For the transition period from                     to                    

Commission file number 33-97090

ACG HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	62-1395968
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

100 Winners Circle, Brentwood, Tennessee	37027
(Address of Principal Executive Offices)	(Zip Code)

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

AMERICAN COLOR GRAPHICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

New York	16-1003976
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

100 Winners Circle, Brentwood, Tennessee	37027
(Address of Principal Executive Offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes oNo þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

ACG Holdings, Inc. has 160,067 shares outstanding of its Common Stock, $.01 Par Value, as of October 31, 2005 (all of which are privately owned and not traded on a public market).

INDEX

	PAGE
PART I.FINANCIAL INFORMATION
Item 1.Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2005 and March 31, 2005		3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2005 and 2004		5
Condensed Consolidated Statements of Operations for the Six Months Ended September 30, 2005 and 2004		6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2005 and 2004		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		29
Item 4. Controls and Procedures.		29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.		30
Item 6. Exhibits.		30
SIGNATURES		31
EXHIBIT INDEX		32
EX-12.1 STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO

2

ACG HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

	September 30, 2005			March 31, 2005
	(Unaudited)
Assets
Current assets:
Cash	$	—			—
Receivables:
Trade accounts, less allowance for doubtful accounts of $1,386 and $1,783 at September 30, 2005 and March 31, 2005, respectively		49,327			46,992
Income tax receivable		65			78
Other		3,750			3,420
Total receivables		53,142			50,490
Inventories		11,390			10,447
Deferred income taxes		2,235			2,235
Prepaid expenses and other current assets		4,513			5,192
Assets held for sale		—			8,112
Total current assets		71,280			76,476
Property, plant and equipment		287,998			287,095
Less accumulated depreciation		(195,984	)		(189,626	)
Net property, plant and equipment		92,014			97,469
Excess of cost over net assets acquired		66,548			66,548
Other assets		20,851			18,405
Total assets	$	250,693			258,898

     See accompanying notes to condensed consolidated financial statements.

3

ACG HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par values)

	September 30, 2005			March 31, 2005
	(Unaudited)
Liabilities and Stockholders’ Deficit
Current liabilities:
Current installments of capitalized leases	$	3,588			3,631
Obligations under capital leases held for sale		—			1,036
Trade accounts payable		32,324			40,365
Accrued expenses		40,692			42,104
Total current liabilities		76,604			87,136
Long-term debt and capitalized leases, excluding current installments		322,459			305,284
Deferred income taxes		8,216			8,148
Other liabilities		62,805			71,070
Total liabilities		470,084			471,638
Commitments and contingencies (note 8)
Stockholders’ deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized, 160,067 shares issued and outstanding at September 30, 2005 and March 31, 2005		2			2
Additional paid-in capital		2,023			2,203
Accumulated deficit		(201,771	)		(195,183	)
Other accumulated comprehensive loss, net of tax		(19,645	)		(19,762	)
Total stockholders’ deficit		(219,391	)		(212,740	)
Total liabilities and stockholders’ deficit	$	250,693			258,898

     See accompanying notes to condensed consolidated financial statements.

4

ACG HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(In thousands)

(Unaudited)

	Three Months Ended
	September 30,
	2005			2004
Sales	$	105,460			106,605
Cost of sales		93,684			95,982
Gross profit		11,776			10,623
Selling, general and administrative expenses		6,308			6,883
Operating income		5,468			3,740
Other expense (income):
Interest expense		9,486			8,519
Interest income		(10	)		—
Other, net		291			(11	)
Total other expense		9,767			8,508
Loss before income taxes		(4,299	)		(4,768	)
Income tax expense (benefit):
Current		(60	)		(1,199	)
Deferred		(41	)		(106	)
Total income tax benefit		(101	)		(1,305	)
Net loss	$	(4,198	)		(3,463	)

     See accompanying notes to condensed consolidated financial statements.

5

ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)

	Six Months Ended
	September 30,
	2005			2004
Sales	$	213,730			217,455
Cost of sales		189,304			193,969
Gross profit		24,426			23,486
Selling, general and administrative expenses		11,994			13,453
Operating income		12,432			10,033
Other expense (income):
Interest expense		18,563			16,857
Interest income		(63	)		—
Other, net		482			(148	)
Total other expense		18,982			16,709
Loss before income taxes		(6,550	)		(6,676	)
Income tax expense (benefit):
Current		87			(956	)
Deferred		(49	)		(69	)
Total income tax expense (benefit)		38			(1,025	)
Net loss	$	(6,588	)		(5,651	)

     See accompanying notes to condensed consolidated financial statements.

6

ACG HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

	Six Months Ended
	September 30,
	2005			2004
Cash flows provided (used) by operating activities:
Net loss	$	(6,588	)		(5,651	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		9,717			11,440
Amortization of other assets		144			228
Amortization of deferred financing costs		1,483			1,223
Deferred income tax benefit		(49	)		(69	)
Increase in working capital and other		(19,910	)		(16,964	)
Net cash used by operating activities		(15,203	)		(9,793	)
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment		(4,312	)		(3,201	)
Proceeds from sale of property, plant and equipment held for sale (note 3)		6,877			—
Proceeds from other sales of property, plant and equipment		167			170
Other		(162	)		(60	)
Net cash provided (used) by investing activities		2,570			(3,091	)
Cash flows provided (used) by financing activities:
Proceeds from 2005 term loan facility (note 4)		35,000			—
Net increase (decrease) in revolver borrowings		(16,000	)		15,394
Repayment and buyout of capital lease obligations		(2,904	)		(2,039	)
Payment of deferred financing costs		(3,457	)		(435	)
Net cash provided by financing activities		12,639			12,920
Effect of exchange rates on cash		(6	)		(36	)
Net change in cash		—			—
Cash:
Beginning of period		—			—
End of period	$	—			—

     See accompanying notes to condensed consolidated financial statements.

7

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Description of the Company

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

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and are in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three and six-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2006. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2005.

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Certain prior period information has been reclassified to conform to current period presentation.

2. Inventories

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

	September 30,		March 31,
	2005		2005
Paper	$	9,433		8,503
Ink		135		171
Supplies and other		1,822		1,773
Total inventories	$	11,390		10,447

3. Assets and Liabilities held for Sale

At March 31, 2005, the Company held certain assets and obligations under capital leases for sale at a fair value of $8.1 million and $1.0 million, respectively. On March 16, 2005, the Company ceased operations at the Pittsburg, California print facility, resulting in the write-off of certain assets totaling approximately $0.5 million. 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 $6.9 million for property, plant and equipment, $1.1 million for other assets and $0.1 million of miscellaneous closing and settlement costs) and terminated $1.0 million of related capital lease obligations. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company wrote down the assets held for sale to fair value,

8

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

resulting in a $0.7 million impairment charge, in the quarter ended March 31, 2005. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. As a result, the Company recorded no gain or loss on this transaction in the three or six months ended September 30, 2005.

4. May 5, 2005 Refinancing Transaction

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

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

• $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, plus agreed upon margin levels. In addition, Graphics is obligated to pay specified commitment and letter of credit 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, issuance of equity and incurrence of indebtedness.

Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics’ assets. In addition, Holdings has guaranteed all such indebtedness under the 2005 Credit Agreement, which guarantee is secured by a pledge of all of Graphics’ capital stock.

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

• change the nature of its business;

• pay dividends or make other distributions;

• make capital expenditures, other investments or acquisitions;

• enter into transactions with affiliates;

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

• incur or guarantee additional debt;

• repay debt or repurchase or redeem equity interests and debt;

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

• create or permit to exist certain liens, and

• pledge assets or engage in sale-leaseback transactions.

9

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company was in compliance with the covenant requirements set forth in the 2005 Credit Agreement at September 30, 2005.

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

At September 30, 2005, the Company had no borrowings outstanding under the 2005 Revolving Credit Facility and had letters of credit outstanding of approximately $26.9 million. As a result, the Company had additional borrowing availability under the 2005 Revolving Credit Facility of approximately $28.1 million. During the quarter ended June 30, 2005, the Company used the proceeds from the 2005 Term Loan Facility to repay borrowings outstanding under the Revolving Credit Facility (of which balance was $16.0 million as of March 31, 2005) and settle certain other of its obligations.

5. Comprehensive Income (Loss)

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

Total comprehensive loss for the three and six months ended September 30, 2005 and 2004 is as follows (in thousands):

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net loss	$	(4,198	)		(3,463	)		(6,588	)		(5,651	)
Foreign currency translation adjustment, net of tax		358			803			117			389
Total comprehensive loss	$	(3,840	)		(2,660	)		(6,471	)		(5,262	)

6. Income Taxes

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

The Company recorded income tax benefit of $0.1 million and income tax expense of less than $0.1 million for the three and six months ended September 30, 2005, respectively. The benefit in the three months ended September 30, 2005 relates primarily to income tax benefit in foreign jurisdictions. Income tax benefit from U.S. losses during the three and six months ended September 30, 2005 was primarily offset by an increase in the valuation allowance.

The Company recorded income tax benefit of $1.3 million and $1.0 million for the three and six months ended September 30, 2004, respectively. The benefit relates primarily to income tax benefit in foreign jurisdictions. Income tax benefit from U.S. losses during these periods was primarily offset by an increase in the valuation allowance.

10

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

7. Employee Benefit Plans

Components of Net Periodic Benefit Cost (in thousands)

	Defined Benefit						Defined Benefit
	Pension Plans						Postretirement Plan
	Three months ended						Three months ended
	September 30,						September 30,
	2005			2004			2005			2004
Service cost	$	97			111			12			10
Interest cost		967			1,005			62			65
Expected return on plan assets		(861	)		(829	)		—			—
Amortization of prior service cost		—			—			(56	)		(55	)
Amortization of unrecognized loss		409			478			—			—
Recognized net actuarial gain		—			—			(6	)		(7	)
Net periodic benefit cost	$	612			765			12			13

	Six months ended						Six months ended
	September 30,						September 30,
	2005			2004			2005			2004
Service cost	$	232			235			25			23
Interest cost		2,242			2,121			124			134
Expected return on plan assets		(2,131	)		(1,755	)		—			—
Amortization of prior service cost		—			—			(111	)		(111	)
Amortization of unrecognized loss		1,002			1,011			—			—
Recognized net actuarial gain		—			—			(13	)		(21	)
Net periodic benefit cost	$	1,345			1,612			25			25

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB issued FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-2”), which discusses certain accounting and disclosure issues required by the Act. FSP FAS 106-2 was effective in the quarter ended September 30, 2004 for the Company.

The Company has concluded that the prescription drug benefits provided under its postretirement plans are actuarially equivalent to the Medicare benefit as necessary to qualify for the subsidy based on management’s understanding of the Medicare Reform legislation and confirmation from the Company’s actuarial consultants. FSP FAS 106-2 provides two alternative methods of transition when adopted, retroactive to the date of enactment or prospective from the date of adoption. In the quarter ended September 30, 2004, the Company adopted FSP FAS 106-2 and elected the retroactive transition method. Application of FSP FAS 106-2 resulted

11

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

in an immaterial reduction in the accumulated postretirement benefit obligation for the three and six months ended September 30, 2005. The effect of the subsidy was immaterial to the Company’s net periodic postretirement benefit cost for the three and six months ended September 30, 2005.

8. Commitments and Contingencies

The Company has an employment agreement with one of its principal officers. The agreement provides for a minimum salary level as well as incentive bonuses, which are payable if specified management goals are attained. The aggregate commitment for future compensation at September 30, 2005, excluding bonuses, is approximately $1.7 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 September 30, 2005 is $48.0 million and is included within Other liabilities in the Company’s condensed 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 condensed consolidated financial statements as a whole.

Graphics received written notice, dated May 10, 2004, of its potential liability in connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson Environmental, Inc. operated the six acre site as a storage and treatment facility for used oil and contaminated soil from June 1987 through October 1995. Graphics received the notice and a settlement offer from LECG, a consultant representing approximately 60 companies comprising the Gibson Group Trust. Graphics has begun its investigation into this matter but it believes its potential liability in connection with this site will not be material to its business or the Company’s condensed 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 included within Other liabilities in its condensed consolidated balance sheet at September 30, 2005. 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 condensed consolidated financial statements as a whole.

12

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

9. Restructuring Costs

Fiscal Year 2005 Restructuring Costs

New York Premedia Consolidation Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $1.5 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated 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 Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This restructuring charge was composed of severance and related termination benefits, lease termination costs primarily related to future lease commitments and other costs.

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2005 (in thousands):

	03/31/05					09/30/05
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance
Severance and other employee costs	$	195		(155	)		40
Lease termination costs		1,271		(206	)		1,065
Other costs		15		—			15
	$	1,481		(361	)		1,120

As of September 30, 2005 the Company believes the restructuring reserve of approximately $1.1 million is adequate. The Company anticipates that $0.4 million of these costs will be paid during the fiscal years ending March 31, 2006 and 2007, $0.2 million will be paid during the fiscal year ending March 31, 2008, $0.1 million will be paid during the fiscal year ending March 31, 2009 and the remaining less than $0.1 million will be paid during the fiscal year ending March 31, 2010. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

Pittsburg Facility Closure Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The cost of this restructuring plan was 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.

13

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2005 (in thousands):

	03/31/05					09/30/05
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance
Severance and other employee costs	$	1,329		(465	)		864
Lease termination costs		774		(44	)		730
Other costs		37		(11	)		26
	$	2,140		(520	)		1,620

During the fiscal year ended March 31, 2005, $1.0 million of these costs were paid. As of September 30, 2005 the Company believes the restructuring reserve of approximately $1.6 million is adequate. The Company anticipates that $0.9 million of these costs will be paid during the fiscal year ending March 31, 2006 and the remaining $0.7 million will be paid during fiscal year ending March 31, 2007. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

Plant and SG&A Reduction Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $3.8 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 cost of this restructuring plan was 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 following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2005 (in thousands):

	03/31/05					09/30/05
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance
Severance and other employee costs	$	3,208		(1,271	)		1,937
Other costs		249		(19	)		230
	$	3,457		(1,290	)		2,167

During the fiscal year ended March 31, 2005, $0.3 million of these costs were paid. As of September 30, 2005 the Company believes the restructuring reserve of approximately $2.2 million is adequate. The Company anticipates that $0.8 million of these costs will be paid during the fiscal year ending March 31, 2006, $1.1 million will be paid during the fiscal year ending March 31, 2007 and the remaining $0.3 million will be paid during the fiscal year ending March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

14

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Fiscal Year 2004 Restructuring Costs

January 2004 Plan

In January 2004, the Company approved 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 cost of this restructuring plan was 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 related to this plan by approximately $0.7 million in the quarter ended March 31, 2005. This reduction was primarily the result of lower than anticipated severance and other employee costs due to the terminated employees obtaining other employment during their severance periods.

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2005 (in thousands):

	03/31/05					09/30/05
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance
Severance and other employee costs	$	813		(316	)		497
Other costs		77		(30	)		47
	$	890		(346	)		544

During the fiscal years ended March 31, 2005 and 2004, $2.3 million and $1.8 million of these costs were paid, respectively. As of September 30, 2005, the Company believes the restructuring reserve of approximately $0.5 million is adequate. The Company anticipates that $0.3 million of these costs will be paid during the fiscal year ending March 31, 2006 and the remaining $0.2 million will be paid during the fiscal year ending March 31, 2007. These costs will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

July 2003 Plan

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

As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $1.8 million in the quarter ended September 30, 2003. This charge was classified within restructuring costs in the condensed consolidated statements of operations in the quarter ended September 30, 2003. 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.

15

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2005 (in thousands):

	03/31/05					09/30/05
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance
Severance and other employee costs	$	430		(158	)		272

During each of the fiscal years ended March 31, 2005 and 2004, $0.7 million of these costs were paid. As of September 30, 2005, the Company believes the restructuring reserve of approximately $0.3 million is adequate. The Company anticipates that approximately $0.2 million of these costs will be paid during the fiscal year ending March 31, 2006 and the remaining $0.1 million will be paid during the fiscal year ending March 31, 2007. These costs will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

Fiscal Year 2002 Restructuring Costs

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

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

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2005 (in thousands):

	03/31/05					09/30/05
	Restructuring					Restructuring
	Reserve					Reserve
	Balance		Activity			Balance
Lease termination costs	$	1,524		(248	)		1,276

16

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

The process of closing two facilities and downsizing one facility, including equipment deinstallation and relocation of that equipment to other facilities within the Company, was completed by March 31, 2002. During the fiscal years ended March 31, 2005 and March 31, 2004, $0.5 million and $0.9 million of these costs were paid, respectively, and in the fiscal years ended March 31, 2003 and March 31, 2002, $3.4 million of these costs were paid in each year. As of September 30, 2005, the Company believes the restructuring reserve of approximately $1.3 million is adequate. The Company anticipates that approximately $0.2 million of these costs will be paid during the fiscal year ending March 31, 2006, $0.3 million will be paid in each of the fiscal years ending March 31, 2007 and 2008 and $0.2 million will be paid in each of the fiscal years ending March 31, 2009 and 2010 and the remaining $0.1 million will be paid during the fiscal year ending March 31, 2011. These costs will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

10. Industry Segment Information

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

The Company has two reportable segments: (1) print and (2) premedia services. The print business produces advertising inserts, comics (Sunday newspaper comics, comic insert advertising and comic books) and other publications. The Company’s premedia services business assists customers in the 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 each of the segments are the same as those used by the Company in its condensed consolidated financial statements. The Company evaluates performance based on segment EBITDA which is defined as earnings before net interest expense, income tax expense, depreciation and amortization. The Company generally accounts for intersegment sales and transfers as if the sales 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 sales, long-lived assets and other assets of the Company’s reportable segments are attributed to or located in the United States.

				Premedia			Corporate
(In thousands)	Print			Services			and Other			Total
Six Months Ended September 30, 2005
Sales	$	186,213			27,517			—			213,730
EBITDA	$	17,438			6,019			(1,646	)		21,811
Depreciation and amortization		(8,509	)		(1,352	)		—			(9,861	)
Interest expense		—			—			(18,563	)		(18,563	)
Interest income		—			—			63			63
Income tax expense		—			—			(38	)		(38	)
Net income (loss)	$	8,929			4,667			(20,184	)		(6,588	)
Total assets	$	220,261			15,242			15,190			250,693
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	3,799			513			—			4,312

17

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

				Premedia			Corporate
(In thousands)	Print			Services			and Other			Total
Six Months Ended September 30, 2004
Sales	$	189,648			27,807			—			217,455
EBITDA	$	16,886			6,522			(1,559	)		21,849
Depreciation and amortization		(10,085	)		(1,583	)		—			(11,668	)
Interest expense		—			—			(16,857	)		(16,857	)
Income tax benefit		—			—			1,025			1,025
Net income (loss)	$	6,801			4,939			(17,391	)		(5,651	)
Total assets	$	240,637			15,643			15,479			271,759
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	2,559			642			—			3,201
Three Months Ended September 30, 2005
Sales	$	91,671			13,789			—			105,460
EBITDA	$	7,997			3,077			(1,014	)		10,060
Depreciation and amortization		(4,227	)		(656	)		—			(4,883	)
Interest expense		—			—			(9,486	)		(9,486	)
Interest income		—			—			10			10
Income tax benefit		—			—			101			101
Net income (loss)	$	3,770			2,421			(10,389	)		(4,198	)
Total assets	$	220,261			15,242			15,190			250,693
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	2,153			218			—			2,371
Three Months Ended September 30, 2004
Sales	$	92,447			14,158			—			106,605
EBITDA	$	6,943			3,429			(818	)		9,554
Depreciation and amortization		(5,004	)		(799	)		—			(5,803	)
Interest expense		—			—			(8,519	)		(8,519	)
Income tax benefit		—			—			1,305			1,305
Net income (loss)	$	1,939			2,630			(8,032	)		(3,463	)
Total assets	$	240,637			15,643			15,479			271,759
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	1,619			341			—			1,960

18

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

11. Impact of Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which was later revised in December 2003, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Historically, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46, as revised and interpreted, changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 applied immediately to variable interest entities created after December 31, 2003 and to existing entities created before December 31, 2003 in the first fiscal year beginning after December 15, 2004. The Company has no variable interest entities created after December 31, 2003. The adoption of FIN 46 as of April 1, 2005 has had no effect on Company’s condensed consolidated financial statements as a whole.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised), “Accounting for Stock-Based Compensation” (“SFAS 123R”). The Company accounts for share-based payments using the fair value based method described in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The requirements of SFAS 123R generally are the same as SFAS 123, except that SFAS 123R provides significant additional guidance regarding the valuation of employee stock options. The Company currently uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS 123R on April 1, 2006. 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 as required under current guidance. For the six months ended September 30, 2005 and 2004, as well as for the fiscal year ended March 31, 2005, the Company recognized no operating cash flows for such excess tax deductions. The Company does not anticipate the adoption of SFAS 123R will have a material impact on its condensed consolidated financial statements as a whole.

19

ACG HOLDINGS, INC.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

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

• a failure to achieve expected cost reductions or to execute other key strategies,

• fluctuations in the cost of paper, ink and other key raw materials,

• changes in the advertising and print markets,

• actions by our competitors, particularly with respect to pricing,

• the financial condition of our customers,

• downgrades of our credit ratings,

• our financial condition and liquidity and our leverage and debt service obligations,

• the general condition of the United States economy,

• interest rate and foreign currency exchange rate fluctuations,

• the level of capital resources required for our operations,

• changes in the legal and regulatory environment,

• the demand for our products and services, and

• other risks and uncertainties, including the matters set forth in this Report generally and those described from time to time in our filings with the Securities and Exchange Commission.

All forward-looking statements in this Report are qualified by these cautionary statements and are made only as of the date of this Report. We do not undertake any obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not undertake, and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

20

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

The following table summarizes our results of operations for the three months ended September 30, 2005 (the “2005 Three-Month Period”), the three months ended September 30, 2004 (the “2004 Three-Month Period”), the six months ended September 30, 2005 (the “2005 Six-Month Period”) and the six months ended September 30, 2004 (the “2004 Six-Month Period”):

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Sales:
Print	$	91,671			92,447			186,213			189,648
Premedia Services		13,789			14,158			27,517			27,807
Total	$	105,460			106,605			213,730			217,455
Gross Profit:
Print	$	7,751			6,484			16,718			15,600
Premedia Services		4,026			4,140			7,710			7,888
Other		(1	)		(1	)		(2	)		(2	)
Total	$	11,776			10,623			24,426			23,486
Gross Margin:
Print		8.5	%		7.0	%		9.0	%		8.2	%
Premedia Services		29.2	%		29.2	%		28.0	%		28.4	%
Total		11.2	%		10.0	%		11.4	%		10.8	%
EBITDA:
Print	$	7,997			6,943			17,438			16,886
Premedia Services		3,077			3,429			6,019			6,522
Other (a)		(1,014	)		(818	)		(1,646	)		(1,559	)
Total	$	10,060			9,554			21,811			21,849
EBITDA Margin:
Print		8.7	%		7.5	%		9.4	%		8.9	%
Premedia Services		22.3	%		24.2	%		21.9	%		23.5	%
Total		9.5	%		9.0	%		10.2	%		10.0	%

(a) Other operations include corporate general and administrative expenses.

EBITDA is presented and discussed because management believes that investors regard EBITDA as a key measure of a leveraged company’s operating performance as it removes the non-operating components of interest, taxes, depreciation and amortization from the managed operational results of our business. “EBITDA” is defined as earnings before net interest expense, income tax expense, depreciation and amortization. “EBITDA Margin” is defined as EBITDA as a percentage of net sales. EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles and should not be considered an alternative to net income (loss) (or any other measure of performance under U.S. generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Certain covenants in the indenture governing the 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) and the 2005 Revolving Credit Facility are based on, or include EBITDA, subject to certain adjustments.

21

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

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

				Premedia
	Print			Services			Other			Total
Three Months Ended September 30, 2005
EBITDA	$	7,997			3,077			(1,014	)		10,060
Depreciation and amortization		(4,227	)		(656	)		—			(4,883	)
Interest expense, net		—			—			(9,476	)		(9,476	)
Income tax benefit		—			—			101			101
Net income (loss)	$	3,770			2,421			(10,389	)		(4,198	)
Three Months Ended September 30, 2004
EBITDA	$	6,943			3,429			(818	)		9,554
Depreciation and amortization		(5,004	)		(799	)		—			(5,803	)
Interest expense, net		—			—			(8,519	)		(8,519	)
Income tax benefit		—			—			1,305			1,305
Net income (loss)	$	1,939			2,630			(8,032	)		(3,463	)
Six Months Ended September 30, 2005
EBITDA	$	17,438			6,019			(1,646	)		21,811
Depreciation and amortization		(8,509	)		(1,352	)		—			(9,861	)
Interest expense, net		—			—			(18,500	)		(18,500	)
Income tax expense		—			—			(38	)		(38	)
Net income (loss)	$	8,929			4,667			(20,184	)		(6,588	)
Six Months Ended September 30, 2004
EBITDA	$	16,886			6,522			(1,559	)		21,849
Depreciation and amortization		(10,085	)		(1,583	)		—			(11,668	)
Interest expense, net		—			—			(16,857	)		(16,857	)
Income tax benefit		—			—			1,025			1,025
Net income (loss)	$	6,801			4,939			(17,391	)		(5,651	)

Print

Sales. In the 2005 Six-Month Period, print sales decreased $3.4 million to $186.2 million from $189.6 million in the 2004 Six-Month Period. The decrease in the 2005 Six-Month Period includes the continued impact of competitive industry pricing, an increase in the level of customer supplied paper and a decrease in print production volume of 0.3%. These decreases were offset in part by increased paper prices. See “–Value Added Revenue and Print Impressions for the Print Segment” below.

22

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

In the 2005 Three-Month Period, print sales decreased $0.7 million to $91.7 million from $92.4 million in the 2004 Three-Month Period. The decrease in the 2005 Three-Month Period includes the continued impact of competitive industry pricing and an increase in the level of customer supplied paper. These decreases were offset in part by an increase in print production volume of approximately 6% and increased paper prices. See “–Value Added Revenue and Print Impressions for the Print Segment” below.

Gross Profit. In the 2005 Six-Month Period, print gross profit increased $1.1 million to $16.7 million from $15.6 million in the 2004 Six-Month Period. In the 2005 Six-Month Period, print gross margin increased to 9.0% from 8.2% in the 2004 Six-Month Period. The increase in gross profit includes net benefits from productivity improvements and various cost reduction programs at our facilities, offset in part by the impact of competitive pricing pressures. The increase in gross margin includes these items and the impact of increases in the level of customer supplied paper, offset in part by increased paper prices reflected in sales. Our gross margin may not be comparable from period to period because of 1) the impact of changes in paper prices included in sales and 2) changes in the level of customer supplied paper.

In the 2005 Three-Month Period, print gross profit increased $1.3 million to $7.8 million from $6.5 million in the 2004 Three-Month Period. In the 2005 Three-Month Period, print gross margin increased to 8.5% from 7.0% in the 2004 Three-Month Period. The increase in gross profit includes net benefits from productivity improvements and various cost reduction programs at our facilities and the impact of increased print production volume. These increases were offset in part by the impact of competitive pricing pressures. The increase in gross margin includes these items and the impact of increases in the level of customer supplied paper, offset in part by increased paper prices reflected in sales. Our gross margin may not be comparable from period to period because of 1) the impact of changes in paper prices included in sales and 2) changes in the level of customer supplied paper.

Selling, General and Administrative Expenses. In the 2005 Six-Month Period, print selling, general and administrative expenses decreased $1.5 million, or 16.6%, to $7.4 million, or 4.0% of print sales, from $8.9 million, or 4.7% of print sales, in the 2004 Six-Month Period. The decrease in the 2005 Six-Month Period includes benefits associated with numerous ongoing cost containment initiatives in this area.

In the 2005 Three-Month Period, print selling, general and administrative expenses decreased $0.7 million, or 15.7%, to $3.9 million, or 4.2% of print sales, from $4.6 million, or 5.0% of print sales, in the 2004 Three-Month Period. The decrease in the 2005 Three-Month Period includes benefits associated with numerous ongoing cost containment initiatives in this area.

Other Expense (Income). In the 2005 Six-Month Period, print other expense (income) increased to expense of $0.4 million from income of $0.1 million in the 2004 Six-Month Period. This was primarily due to $0.4 million of non-recurring costs related to final closure expenses of the Pittsburg, California print facility, incurred during the 2005 Six-Month Period, which we were unable to accrue as part of restructuring costs in the fiscal year ended March 31, 2005.

In the 2005 Three-Month Period, print other expense (income) increased to expense of $0.1 million from income of $0.1 million in the 2004 Three-Month Period.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business increased to approximately $17.4 million in the 2005 Six-Month Period from $16.9 million in the 2004 Six-Month Period and increased to $8.0 million in the 2005 Three-Month Period from $6.9 million in the 2004 Three-Month Period.

23

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

Premedia Services

Sales. In the 2005 Six-Month Period, premedia services’ sales decreased approximately $0.3 million to $27.5 million from $27.8 million in the 2004 Six-Month Period. The decrease in the 2005 Six-Month Period includes the impact of continued competitive pricing pressures in this segment, offset in part by increased premedia production volume.

In the 2005 Three-Month Period, premedia services’ sales decreased approximately $0.4 million to $13.8 million from $14.2 million in the 2004 Three-Month Period. The decrease in the 2005 Three-Month Period includes the impact of continued competitive pricing pressures in this segment, offset in part by increased premedia production volume.

Gross Profit. In the 2005 Six-Month Period, premedia services’ gross profit decreased $0.2 million to $7.7 million from $7.9 million in 2004 Six-Month Period. In the 2005 Six-Month Period, premedia services’ gross margin decreased slightly to 28.0% from 28.4% in the 2004 Six-Month Period. The decreases in gross profit and gross margin include the impact of continued competitive pricing pressures, offset in part by increased premedia production volume and reduced manufacturing costs as a result of various cost containment initiatives.

In the 2005 Three-Month Period, premedia services’ gross profit decreased $0.1 million to $4.0 million from $4.1 million in the 2004 Three-Month Period. This decrease includes the impact of competitive pricing pressures, offset in part by increased premedia production volume and reduced manufacturing costs as a result of various cost containment initiatives. In both the 2005 Three-Month Period and the 2004 Three-Month Period, premedia services’ gross margin was 29.2%.

Selling, General and Administrative Expenses. In the 2005 Six-Month Period, premedia services’ selling, general and administrative expenses decreased $0.1 million, to $2.9 million, or 10.7% of premedia services’ sales, from $3.0 million, or 11.0% of premedia services’ sales in the 2004 Six-Month Period.

In the 2005 Three-Month Period, premedia services’ selling, general and administrative expenses remained relatively unchanged at $1.5 million, or approximately 11% of premedia services’ sales, from the 2004 Three-Month Period.

Other Expense (Income). In the 2005 Six-Month Period, premedia services’ other expense (income) increased to expense of $0.1 million from income of $0.1 million in the 2004 Six-Month Period. In the 2005 Three-Month Period, premedia services’ other expense (income) increased to expense of $0.1 million from income of less than $0.1 million in the 2004 Three-Month Period.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, premedia services’ EBITDA decreased to $6.0 million in the 2005 Six-Month Period from $6.5 million in the 2004 Six-Month Period and decreased to $3.1 million in the 2005 Three-Month Period from $3.4 million in the 2004 Three-Month Period.

Other Operations

Other operations consist primarily of corporate general and administrative expenses. In the 2005 Six-Month Period, EBITDA from other operations remained relatively unchanged at a loss of $1.6 million from the 2004 Six-Month Period. In the 2005 Three-Month Period, EBITDA from other operations increased to an EBITDA loss of $1.0 million from a loss of $0.8 million in the 2004 Three-Month Period.

24

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

Interest Expense, Net

In the 2005 Six-Month Period, interest expense, net increased to $18.5 million from $16.9 million in the 2004 Six-Month Period. In the 2005 Three-Month Period, interest expense, net increased to $9.5 million from $8.5 million in the 2004 Three-Month Period. The increases in both the 2005 Six-Month Period and the 2005 Three-Month Period were the result of both higher levels of indebtedness and increased borrowing costs.

Income Taxes

In the 2005 Six-Month Period, income taxes decreased to expense of less than $0.1 million from benefit of $1.0 million in the 2004 Six-Month Period. In the 2005 Three-Month Period, income taxes decreased to benefit of $0.1 million from benefit of $1.3 million in the 2004 Three-Month Period.

Income tax benefit from U.S. losses in the 2005 Six and Three-Month Periods was primarily offset by an increase in the valuation allowance. The income tax benefit recorded in the 2005 Three-Month Period relates primarily to tax benefit in foreign jurisdictions.

The income tax benefit recorded in the 2004 Six-Month Period and in the 2004 Three-Month Period relates primarily to tax benefit in foreign jurisdictions. Income tax benefit from U.S. losses in the 2004 Six and Three-Month Periods was primarily offset by an increase in the valuation allowance.

Net Income (Loss)

As a result of the factors discussed above, our net loss increased to $6.6 million in the 2005 Six-Month Period from a net loss of $5.7 million in the 2004 Six-Month Period and in the 2005 Three-Month Period our net loss increased to $4.2 million from a net loss of $3.5 million in the 2004 Three-Month Period.

Liquidity and Capital Resources

On May 5, 2005, we entered into the 2005 Credit Agreement which resulted in the refinancing of the Revolving Credit Facility and significantly improved our liquidity position. The 2005 Credit Agreement is a $90 million secured facility comprised of a:

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

• $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, plus agreed upon margin levels. In addition, Graphics is obligated to pay specified commitment and letter of credit 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, issuance of equity and incurrence of indebtedness.

25

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

Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics’ assets. In addition, Holdings has guaranteed all such indebtedness under the 2005 Credit Agreement, which guarantee is secured by a pledge of all of Graphics’ capital stock.

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

• change the nature of our business;

• pay dividends or make other distributions;

• make capital expenditures, other investments or acquisitions;

• enter into transactions with affiliates;

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

• incur or guarantee additional debt;

• repay debt or repurchase or redeem equity interests and debt;

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

• create or permit to exist certain liens, and

• pledge assets or engage in sale-leaseback transactions.

As of April 30, 2005, we had approximately $2.8 million of unamortized deferred financing costs associated with the Revolving Credit Facility. These costs will be amortized over the term of the 2005 Credit Agreement in accordance with the guidance set forth in EITF 98-14.

Our primary sources of liquidity are cash provided by operating activities and borrowings under the 2005 Revolving Credit Facility. At September 30, 2005, we had no borrowings outstanding under the 2005 Revolving Credit Facility and letters of credit outstanding of approximately $26.9 million. As a result, we had additional borrowing availability under the 2005 Revolving Credit Facility of approximately $28.1 million. In addition to this borrowing availability, we had overnight cash investments on September 30, 2005 of approximately $3.1 million.

During the quarter ended June 30, 2005, we used proceeds from the 2005 Term Loan Facility to repay borrowings outstanding under the Revolving Credit Facility (of which balance was $16.0 million as of March 31, 2005) and settle certain other obligations. Payments due on existing capital lease obligations during the remainder of our fiscal year ending March 31, 2006 are approximately $1.8 million.

During the 2005 Six-Month Period, we used net borrowings from financing activities of $19.0 million and $7.0 million in proceeds from the sale of fixed assets primarily to fund the following:

• $15.2 million of operating activities (see our condensed consolidated statements of cash flows appearing elsewhere in this Report),

• $4.3 million in cash capital expenditures; and

• $6.4 million to service other indebtedness (including repayment of capital lease obligations of $1.9 million, buyout of capital lease obligations associated with assets sold from the Pittsburg facility of $1.0 million and the payment of deferred financing fees of $3.5 million).

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

Our cash-on-hand of approximately $5.9 million, which includes approximately $3.1 million of overnight cash investments, is presented net of outstanding checks within trade accounts payable at September 30, 2005. Accordingly, cash is presented at a balance of $0 million in the September 30, 2005 condensed consolidated balance sheet.

We anticipate that our primary needs for liquidity will be to conduct our business, meet our debt service requirements and make capital expenditures. We believe that we have sufficient liquidity to meet our requirements over the next 12 months.

At September 30, 2005, we had total indebtedness of $326.0 million, including borrowings under the 2005 Term Loan Facility of $35.0 million, capital lease obligations of $11.0 million and $280.0 million of our 10% Notes. We have no off-balance sheet financial instruments other than operating leases. We are currently in compliance with the covenant requirements set forth in the 2005 Credit Agreement.

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

Value Added Revenue and Print Impressions for the Print Segment

We have included value-added revenue (“VAR”) information to provide a better understanding of sales activity within our print segment. VAR is a non-GAAP measure and is defined as sales less the cost of paper, ink and subcontract services. We generally pass these expenses through to our customers. We have also included print impressions because we use this as an internal measure of production throughput. Although we believe print impressions to be indicative of overall production volume, total impressions may not be fully comparable period to period due to (1) differences in the type, performance and width of press equipment utilized and (2) product mix produced.

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Print segment VAR (in thousands)	$	44,257		44,986		89,685		93,607
Print segment impressions (in millions)		2,760		2,605		5,448		5,466

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

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
				(In thousands)
Print segment sales	$	91,671			92,447			186,213			189,648
Paper, ink and subcontract services		(47,414	)		(47,461	)		(96,528	)		(96,041	)
Print segment VAR	$	44,257			44,986			89,685			93,607

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

New Accounting Pronouncements

In January 2003, the FASB issued FIN 46, which was later revised in December 2003, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Historically, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46, as revised and interpreted, changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 applied immediately to variable interest entities created after December 31, 2003 and to existing entities created before December 31, 2003 in the first fiscal year beginning after December 15, 2004. We have no variable interest entities created after December 31, 2003. The adoption of FIN 46 as of April 1, 2005 has had no effect on our condensed consolidated financial statements as a whole.

In December 2004, the FASB issued SFAS 123R. We account for share-based payments using the fair value based method described in SFAS 123. The requirements of SFAS 123R generally are the same as SFAS 123, except that SFAS 123R provides significant additional guidance regarding the valuation of employee stock options. We currently use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and expect to continue to use this acceptable option valuation model upon the required adoption of SFAS 123R on April 1, 2006. 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 as required under current guidance. For the six months ended September 30, 2005 and 2004, as well as for the fiscal year ended March 31, 2005, we recognized no operating cash flows for such excess tax deductions. We do not anticipate the adoption of SFAS 123R will have a material impact on our condensed consolidated financial statements as a whole.

Contractual Obligations

There have been no material changes in our contractual obligations from those disclosed in our Form 10-K for the fiscal year ended March 31, 2005 except for the addition of the 2005 Term Loan Facility (see “–Liquidity and Capital Resources” above).

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ACG HOLDINGS, INC.
PART I – FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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

Quantitative Information. At September 30, 2005, we had fixed and variable rate debt (both excluding capital lease obligations) of approximately $280.0 million and $35.0 million, respectively. At March 31, 2005, we had fixed and variable rate debt (both excluding capital lease obligations) of approximately $280.0 million and $16.0 million, respectively. The estimated fair value of our debt instruments, excluding capital lease obligations, at September 30, 2005 was $245.0 million, or $70.0 million less than the carrying value, and at March 31, 2005 was $200.8 million, or $95.2 million less than the carrying value. At our September 30, 2005 and March 31, 2005 borrowing levels, a 1% adverse change in interest rates would result in an approximate $15 million reduction in the fair value of our fixed rate debt and would have resulted in additional annual interest expense and related payments of approximately $0.4 million at September 30, 2005 and approximately $0.2 million at March 31, 2005 on our variable rate debt.

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

Item 4. Controls and Procedures.

As of September 30, 2005 an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2005. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2005. There have not been any changes in our internal controls over financial reporting during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

29

ACG HOLDINGS, INC.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no significant changes since March 31, 2005. Reference is made to “Business – Legal Proceedings” disclosure in our Form 10-K filed for the fiscal year ended March 31, 2005.

Item 6. Exhibits.

Exhibit No.	Description
12.1	Statement Re: Computation of Ratio of Earnings to Fixed Charges
31.1	Rule 13a – 14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a – 14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

30

SIGNATURES

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

	ACG Holdings, Inc.
	American Color Graphics, Inc.
Date: November 8, 2005	By	/s/ Stephen M. Dyott
	Stephen M. Dyott
	Chairman, President and Chief Executive Officer
	(Authorized Officer)
Date: November 8, 2005	By	/s/ Patrick W. Kellick
	Patrick W. Kellick
	Senior Vice President/Chief Financial Officer
	and Assistant Secretary
	(Authorized Officer and
	Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Description	Page
12.1	Statement Re: Computation of Ratio of Earnings to Fixed Charges		33
31.1	Rule 13a – 14(a)/15d-14(a) Certification of Chief Executive Officer		34
31.2	Rule 13a – 14(a)/15d-14(a) Certification of Chief Financial Officer		35
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350		36

32