Source Interlink Companies 10Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 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 001-13437

SOURCE INTERLINK COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-2428299
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

27500 Riverview Center Blvd., Suite 400 Bonita Springs, Florida		34134
(Address of principal executive offices)		(Zip Code)

(239) 949-4450

(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.

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerate filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer

x Accelerated filer

o Non-accelerated filer

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

o Yes x No

As of December 3, 2007, there were 52,320,837 shares of the Company’s common stock outstanding.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

INDEX OF FINANCIAL STATEMENTS

		Page

Consolidated Balance Sheets as of October 31, 2007 (unaudited) and January 31, 2007		4

Consolidated Statements of Operations for the three and nine months ended October 31, 2007 and 2006 (unaudited)		6

Consolidated Statement of Stockholders’ Equity for the nine months ended October 31, 2007 (unaudited)		7

Consolidated Statements of Cash Flows for the nine months ended October 31, 2007 and 2006 (unaudited)		8

Notes to Consolidated Financial Statements		9

SOURCE INTERLINK COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	October 31, 2007			January 31, 2007
	(unaudited)

Assets
Current assets
Cash	$	33,048		$	—
Trade receivables, net	218,103			102,658
Purchased claims receivable	11,151			16,983
Inventories	357,057			248,941
Income tax receivable	2,433			9,932
Deferred tax asset	29,855			29,531
Other	16,592			5,440

Total current assets	668,239			413,485

Property, plants and equipment	141,920			98,812
Less accumulated depreciation and amortization	(38,476		)	(30,897		)

Net property, plants and equipment	103,444			67,915

Other assets
Goodwill, net	1,072,826			395,902
Intangibles, net	705,018			118,971
Other	56,465			13,758

Total other assets	1,834,309			528,631

Total assets	$	2,605,992		$	1,010,031

See accompanying notes to Consolidated Financial Statements.

SOURCE INTERLINK COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS (CONCLUDED)

(in thousands, except per share amounts)

	October 31, 2007			January 31, 2007
	(unaudited)

Liabilities and Stockholders’ Equity
Current liabilities
Checks issued against future advances on revolving credit facility	$	—		$	1,465
Accounts payable (net of allowance for returns of $165,204 and $164,069 at October 31, 2007 and January 31, 2007, respectively)	490,273			308,184
Accrued expenses	92,362			62,838
Deferred revenue	78,969			2,630
Current portion of obligations under capital leases	1,438			995
Current maturities of debt	16,148			7,850

Total current liabilities	679,190			383,962

Deferred tax liability	32,389			32,500
Obligations under capital leases	2,177			1,069
Debt, less current maturities	1,362,361			146,534
Other	87,485			6,519

Total liabilities	2,163,602			570,584

Commitments and contingencies

Stockholders’ equity
Contributed capital:
Preferred stock, $0.01 par (2,000 shares authorized; none issued)	—			—
Common stock, $0.01 par (100,000 shares authorized; 52,321 and 52,064 shares issued and outstanding)	523			521
Additional paid-in-capital	476,078			474,796

Total contributed capital	476,601			475,317
Accumulated deficit	(38,181		)	(37,766		)
Accumulated other comprehensive income: Foreign currency translation	3,970			1,896

Total stockholders’ equity	442,390			439,447

Total liabilities and stockholders’ equity	$	2,605,992		$	1,010,031

See accompanying notes to Consolidated Financial Statements.

SOURCE INTERLINK COMPANIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three months ended October 31,						Nine months ended October 31,
	2007			2006			2007			2006

Revenues, net:
Distribution	$	500,974		$	451,288		$	1,380,619		$	1,302,132
Advertising	67,471			—			67,471			—
Circulation	32,132			—			32,132			—
Manufacturing	8,315			9,139			22,325			24,818
Claiming and information	3,429			3,264			10,542			11,696
Other	26,828			4,199			35,612			10,446
Total revenues, net	639,149			467,890			1,548,701			1,349,092
Cost of goods sold	436,034			364,050			1,152,602			1,062,171

Gross profit	203,115			103,840			396,099			286,921
Distribution, circulation and fulfillment	55,801			45,148			138,832			126,646
Selling, general and administrative expenses	96,194			39,039			176,755			112,712
Depreciation and amortization	20,354			6,171			34,176			17,986
Integration and relocation expense	590			2,582			674			3,297
Merger and acquisition costs	595			—			595			—
Disposal of land, building and equipment, net	94			152			347			681
Gain on sale of assets	—			—			(173		)	—

Operating income	29,487			10,748			44,893			25,599

Other expense:
Interest expense	(36,079		)	(3,560		)	(42,539		)	(8,694		)
Interest income	519			41			797			153
Write off of deferred financing fees	(1,313		)	—			(1,313		)	—
Other (expense) income:	(49		)	(8		)	150			67

Total other expense	(36,922		)	(3,527		)	(42,905		)	(8,474		)

(Loss) income from continuing operations, before income taxes	(7,435		)	7,221			1,988			17,125
Income tax (benefit) expense	(2,974		)	2,888			795			6,691
(Loss) income from continuing operations	(4,461		)	4,333			1,193			10,434
Income (loss) from discontinued operations, net of taxes	—			498			(1,608		)	1,750
Net (loss) income	$	(4,461	)	$	4,831		$	(415	)	$	12,184

(Loss) earnings per share – Basic
Continuing operations	$	(0.09	)	$	0.08		$	0.02		$	0.21
Discontinued operations	—			0.01			(0.03		)	0.03
Total	$	(0.09	)	$	0.09		$	(0.01	)	$	0.24

(Loss) earnings per share – Diluted
Continuing operations	$	(0.09	)	$	0.08		$	0.02		$	0.20
Discontinued operations	—			0.01			(0.03		)	0.03
Total	$	(0.09	)	$	0.09		$	(0.01	)	$	0.23

WAVG shares outstanding – Basic	52,321			51,914			52,261			51,812
WAVG shares outstanding – Diluted	52,321			53,120			52,261			53,190

See accompanying notes to Consolidated Financial Statements.

SOURCE INTERLINK COMPANIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock			Additional		Accumulated			Accumulated Other Comprehensive		Total Stockholders’
	Shares	Amount		Paid-in Capital		Deficit			Income		Equity

Balance, January 31, 2007	52,064	$	521	$	474,796	$	(37,766	)	$	1,896	$	439,447

Net loss	—	—		—		(415		)	—		(415		)
Foreign currency translation	—	—		—		—			2,074		2,074

Comprehensive income	—	—		—		—			—		1,659

Stock compensation expense	—	—		179		—			—		179
Exercise of stock options	257	2		714		—			—		716
Excess tax benefit from stock options exercised	—	—		389		—			—		389

Balance, October 31, 2007	52,321	$	523	$	476,078	$	(38,181	)	$	3,970	$	442,390

See accompanying notes to Consolidated Financial Statements.

SOURCE INTERLINK COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months ended October 31,
	2007			2006

Operating Activities
Net (loss) income	$	(415	)	$	12,184
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	38,566			19,179
Provision for losses on accounts receivable	2,035			3,143
Deferred revenue	1,164			(554		)
Stock compensation expense	179			422
Excess tax benefit from exercise of stock options	389			185
Loss on sale of discontinued operation	730			—
Impairment of land and building held for sale	—			529
Write off of deferred financing fees	1,313			—
Other	(2,699		)	(107		)
Changes in assets and liabilities (excluding business acquisitions):
Increase in accounts receivable	(26,171		)	(43,521		)
Increase in inventories	(104,429		)	(49,810		)
(Increase) decrease in other current and non-current assets	(1,991		)	785
Increase in accounts payable and other liabilities	148,731			22,379
Cash provided by (used in) operating activities	57,402			(35,186		)

Investment Activities
Capital expenditures	(20,486		)	(12,566		)
Purchase of claims	(76,752		)	(83,335		)
Payments received on purchased claims	82,584			80,793
Proceeds from sale of wood manufacturing division, net of cash transferred	9,828			—
Acquisition of Primedia Enthusiast Media, Inc., net of cash acquired	(1,195,017		)	—
Acquisition of Anderson Mid-Atlantic News, LLC, net of cash acquired	—			(13,652		)
Acquisition of Anderson SCN Services, LLC, net of cash acquired	—			(26,081		)
Other	170			1,271
Cash used in investing activities	(1,199,673		)	(53,570		)

Financing Activities
Decrease in checks issued against revolving credit facility	(11,952		)	—
(Repayments) borrowings under WFF credit facility	(116,459		)	83,867
Borrowings under Citicorp North America credit facilities	1,345,000			—
Payment of deferred purchase price liabilities	(2,662		)	—
Net payments on notes payable and capital leases	(5,092		)	(18,353		)
Proceeds from the issuance of common stock	716			1,203
Deferred Loan Costs	(33,581		)
Other	(651		)
Cash (used in) provided by financing activities	1,175,319			66,717

Increase (decrease) in cash	33,048			(22,039		)
Cash, beginning of period	—			23,239
Cash, end of period	$	33,048		$	1,200

See accompanying notes to Consolidated Financial Statements.

SOURCE INTERLINK COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Nature of Business and Basis of Presentation

Source Interlink Companies, Inc. (the “Company”) is a leading marketing, publishing, merchandising and fulfillment company of entertainment products including DVDs, music CDs, magazines, books and related items. The Company’s fully integrated businesses include:

• Publication of print and digital content to the enthusiast community in the United States via:

• 76 publications

• 90 websites, and

• over 65 events.

• Distribution and fulfillment of entertainment products to major retail chains throughout North America and directly to consumers of entertainment products ordered through the Internet;

• Import and export of periodicals sold in more than 100 markets worldwide;

• Produce and distribute content through magazines and via the internet to consumers in various niche and enthusiast markets. Trade, Retail and Consumer events further enhance customer continuity.

• Coordination of product selection and placement of impulse items sold at checkout counters at major retail chains throughout North America;

• Processing and collection of rebate claims as well as management of sales data obtained at the point-of-purchase; and

• Design, manufacture and installation of wire display fixtures in major retail chains throughout North America.

Source Interlink serves approximately 110,000 retail store locations throughout North America. Supply chain relationships include movie studios, record labels, magazine and newspaper publishers, confectionary companies and manufacturers of general merchandise.

Source Interlink’s Media business segment encompasses 76 magazines, 90 websites, over 65 events, two television programs, 400 branded products, and such well-known brands as Motor Trend magazine, Automobile magazine, Automotive.com, Equine.com, Power & Motoryacht magazine, Hot Rod magazine, Snowboarder magazine, Surfer magazine, and Wavewatch.com.

The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company’s management, all adjustments (consisting only of normal recurring adjustments and reclassifications) necessary to present fairly our results of operations and cash flows for the three and nine months ended October 31, 2007 and 2006 and our financial position as of October 31, 2007, respectively have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.

Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended January 31, 2007, as filed with the Securities and Exchange Commission (“SEC”) on April 25, 2007, as amended on May 31, 2007.

Other revenue includes waste paper revenues within our Magazine Distribution segment, and online revenues, licensing revenues, barter revenues and events revenues within our Media segment.

Adoption o f FIN-48

On February 1, 2007, the Company adopted FIN-48 – Accounting for uncertainty in income taxes – an interpretation of FASB statement No. 109. As a result of the adoption, the Company determined that it did not have any material uncertain tax positions which were required to be fully or partially de-recognized in its previously issued financial statements. Accrued interest and penalties on uncertain tax positions are classified as Income tax expense in the Company’s consolidated results of operations and are not material.

2. Business Combinations

PRIMEDIA ENTHUSIAST MEDIA ACQUISITION

On August 1, 2007, the Company completed its acquisition of Primedia Enthusiast Media, Inc. (“EM”) pursuant to the terms and conditions of the Stock Purchase Agreement dated May 13, 2007 (the “Agreement”). EM is one of the largest providers of print and digital content to the enthusiast community in the United States. EM’s business is comprised of 76 publications, 90 websites and over 65 events. In addition, its portfolio of strong brands has afforded EM several different licensing opportunities for consumer goods products, television and radio shows. EM’s print titles include Motor Trend, Automobile, Hot Rod, Lowrider, Power & Motoryacht, Surfer, Surfing, Snowboarder, Soap Opera Digest and Soap Opera Weekly. Its web properties include automotive.com, equine.com and motortrend.com.

The purchase price of $1,177.9 million consisted entirely of cash borrowed under the Company’s Term Loan B and Bridge Facility issued on August 1, 2007. In connection with the acquisition of EM, the Company paid a fee of $12.7 million to Yucaipa. See Note 6 – Debt and Revolving Credit Facility.

The total cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values in accordance with FAS 141 - Business Combinations. Goodwill and other intangible assets, which are deductible for tax purposes, recorded in connection with the transaction totaled $676.4 million and $600.5 million, respectively. These amounts will be tested at least annually for impairment in accordance with FAS No. 142, Goodwill and Other Intangible Assets.

The assets acquired and liabilities assumed in the acquisition were recorded in the quarter ended October 31, 2007, based on a preliminary valuation that is expected to be finalized during the fourth quarter of fiscal 2008. The acquisition was accounted for by the purchase method and, accordingly, the results of EM’s operations have been included in our consolidated statements of income since August 1, 2007.

The assets acquired and liabilities assumed in the acquisition are summarized below, based upon a preliminary valuation that is expected to be finalized in the fourth quarter of fiscal 2008:

(IN THOUSANDS)	Amount
Trade receivables, net	$	95,315
Inventories	9,392
Property and equipment	33,929
Goodwill	676,428
Intangible assets	600,464
Other assets	13,532
Cash overdraft	(11,203		)
Accounts payable and accrued liabilities	(62,389		)
Deferred revenue	(75,176		)
Other long-term liabilities	(85,274		)
Total consideration	$	1,195,018

PRO-FORMA OPERATING RESULTS (Unaudited)

The following table summarizes pro forma operating results as if the Company had completed the acquisition of EM on February 1, 2006:

	Three months ended October 31,				Nine months ended October 31,
	2007		2006		2007		2006

Revenues	639,149		577,463		1,678,707		1,813,090
Loss from continuing operations	(4,461	)	7,943		(22,228	)	(19,270	)
Loss per share:
Basic	(0.09	)	(0.15	)	(0.43	)	(0.37	)
Diluted	(0.09	)	(0.15	)	(0.43	)	(0.37	)

This information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on February 1, 2006 nor is it indicative of future results.

Acquisition charges related to the acquisition of EM recorded as expenses by the Company through October 31, 2007 totaled $0.6 million. These expenses represented severance and personnel-related charges. These expenses were not capitalized as they did not represent costs that provide future economic benefits to the Company.

3. Trade Receivables

Trade receivables consist of the following:

(in thousands)	October 31, 2007		January 31, 2007
	(unaudited)

Trade receivables	$	431,776	$	312,116
Less allowances for:
Sales returns and other	190,646		192,328
Doubtful accounts	23,027		17,130

Total allowances	213,673		209,458

Trade receivables, net	$	218,103	$	102,658

4. Inventories

Inventories consist of the following:

(in thousands)	October 31, 2007		January 31, 2007
	(unaudited)

Raw materials	$	8,585	$	3,048
Work-in-process	1,485		2,519
Finished goods:
Pre-recorded music and video	209,290		133,193
Magazines and books	136,595		107,449
Display fixtures	1,102		2,732

Inventories	$	357,057	$	248,941

In the event of non-sale, pre-recorded music and video, magazine and book inventories are generally returnable to the suppliers thereof for full credit.

5. Goodwill and intangibles

A summary of the company’s goodwill and intangibles consist of the following:

(in thousands)	October 31, 2007		January 31, 2007
	(unaudited)
Amortized intangible assets
Customer lists and relationships	$	338,228	$	122,406
Trade names	2,497		—
Content	20,700		—
Non-compete agreements	4,350		4,350
Software	20,840		16,340
Total intangibles	386,615		143,096
Accumulated amortization
Customer lists and relationships	35,412		17,564
Trade names	125		—
Content	518		—
Non-compete agreements	2,041		1,438
Software	6,301		5,123
Total accumulated amortization	44,397		24,125
Net amortized intangible assets	342,218		118,971
Unamortized trade names	362,800		—
Intangibles, net	$	705,018	$	118,971

Amortization of intangible assets was $14.2 million and $2.9 million for the three months ended October 31, 2007 and 2006, respectively and $21.4 million and $8.6 million for the nine months ended October 31, 2007 and 2006, respectively. Amortization expense is expected to approximate $56.8 million for each of the next five fiscal years.

A roll-forward of Goodwill is as follows:

(in thousands)	Media		Magazine Fulfillment		CD and DVD Fulfillment		In-Store Services		Consolidated
Balance, January 31, 2007	$	—	$	169,600	$	201,532	$	24,770	$	395,902
Additions	676,516		275		—		—		676,791
Foreign currency translation adjustments	—		—		—		133		133
Balance, October 31, 2007	$	676,516	$	169,875	$	201,532	$	24,903	$	1,072,826

6. Debt and Revolving Credit Facility

Debt consists of:

(in thousands)	October 31, 2007		January 31, 2007
	(unaudited)

Revolving credit facility – Wells Fargo Foothill	$	—	$	116,459
Revolving credit facility – Citicorp North America	—		—
Term Loan B – Citicorp North America	877,800		—
Bridge Facility – Citicorp North America	465,000		—
Note payable – Magazine import and export	1,412		3,500
Note payable – Former owner of Empire	—		233
Note payable – Arrangements with suppliers	8,689		10,180
Mortgage loan – Wachovia Bank	19,000		19,750
Equipment loans	6,608		4,262

Total debt	1,378,509		154,384
Less current maturities	16,148		7,850

Debt, less current maturities	$	1,362,361	$	146,534

Citicorp North America Credit Facilities

Revolving Credit Facility

On August 1, 2007, the Company entered into a new $300.0 million dollar asset-based revolving credit facility as a result of its acquisition of EM. Citicorp North America, Inc., as administrative agent for each of the parties that may become a participant in such arrangement and their successors (“Lenders”) will make revolving loans to us and our subsidiaries of up to $300.0 million including the issuance of letters of credit. The terms and conditions of the arrangement are governed primarily by the Revolving Credit Agreement dated August 1, 2007 by and among us, our subsidiaries, and Citigroup Global Markets, Inc. and J.P. Morgan Securities, Inc. as Joint Lead Arrangers and Joint Book Runners, Citicorp North America, Inc. as Administrative Agent and Collateral Agent, JPMorgan Chase Bank, N.A. as Syndication Agent, and Wachovia Bank, National Association and Wells Fargo Foothill, LLC as Co-Documentation Agents.

Outstanding borrowings bear interest at a variable annual rate equal to the prime rate announced by Citicorp North America, Inc., plus a margin of 0.50%. At October 31, 2007 the prime rate was 7.50%. We also have the option of selecting up to five traunches of at least $1 million each to bear interest at LIBOR plus a margin of 1.50%. The Company had no LIBOR contracts outstanding at October 31, 2007. To secure repayment of the borrowings and other obligations of ours to the Lenders, we and our subsidiaries granted a security interest in all of the personal property assets to Citicorp North America, Inc., for the benefit of the Lenders. These loans mature on August 1, 2013.

Under the credit agreement, the Company is limited in its ability to declare dividends or other distributions on capital stock or make payments in connection with the purchase, redemption, retirement or acquisition of capital stock.

Availability under the facility is limited by the Company’s borrowing base calculation, as defined in the agreement. The calculation resulted in excess availability, after consideration of outstanding letters of credit, of $280.0 million at October 31, 2007.

Term Loan B

On August 1, 2007, the Company entered into a new $880.0 million dollar Term Loan B as a result of its acquisition of EM. Citicorp North America, Inc., as administrative agent for each of the parties that may become a participant in such arrangement and their successors (“Lenders”) made loans to us and our subsidiaries of $880.0 million. The terms and conditions of the arrangement are governed primarily by the Term Loan Agreement dated August 1, 2007 by and among us, our subsidiaries, and Citigroup Global Markets, Inc. and J.P. Morgan Securities, Inc. as Joint Lead Arrangers and Joint Book Runners, Citicorp North America, Inc. as Administrative Agent and Collateral Agent and JPMorgan Chase Bank, N.A. as Syndication Agent.

Outstanding borrowings bear interest at a variable annual rate equal to the prime rate announced by Citicorp North America, Inc., plus a margin of 2.25%. At October 31, 2007 the prime rate was 7.50%. We also have the option of selecting up to five traunches of at least $1 million each to bear interest at LIBOR plus a margin of 3.25%. The Company had one LIBOR contract outstanding at October 31, 2007 in the amount of $877.8 million and maturing in November 2007. The Term Loan B requires the Company to make principal payments of $2.2 million on the last day of each fiscal quarter. The Company made a principal payment of $2.2 million on October 31, 2007. To secure repayment of the borrowings and other obligations of ours to the Lenders, we and our subsidiaries granted a security interest in all of the personal property assets to Citicorp North America, Inc., for the benefit of the Lenders. These loans mature on August 1, 2014.

Bridge Facility

On August 1, 2007, the Company issued a new $465.0 million dollar Bridge Facility as a result of its acquisition of EM.

Citicorp North America, Inc., as administrative agent for each of the parties that may become a participant in such arrangement and their successors (“Lenders”) made loans to us and our subsidiaries of $465.0 million. The terms and conditions of the arrangement are governed primarily by the Senior Subordinated Bridge Loan Agreement dated August 1, 2007 by and among us, our subsidiaries, and Citigroup Global Markets, Inc. and J.P. Morgan Securities, Inc. as Joint Lead Arrangers and Joint Book Runners, Citicorp North America, Inc. as Administrative Agent and JPMorgan Chase Bank, N.A. as Syndication Agent.

Outstanding borrowings bear interest at a variable annual rate equal to the prime rate announced by Citicorp North America, Inc., plus a margin of 3.75% at October 31, 2007, which increases by 0.50% upon the expiration of each of the first four 90 day periods following original issuance. At October 31, 2007 the prime rate was 7.50%. We also have the option of selecting up to five traunches of at least $1 million each to bear interest at LIBOR plus a margin of 4.75% at October 31, 2007, which increases by 0.50% upon the expiration of each of the first four 90 day periods following original issuance. The interest rate on either base-rate or LIBOR loans may not exceed 11.25%. The Company had one LIBOR contract outstanding at October 31, 2007 in the amount of $465.0 million and maturing in November 2007. These loans mature on August 1, 2008.

On or before August 1, 2008, the Company has the right to refinance the Bridge Facility by paying an exchange fee of $11.6 million to Citicorp North America, Inc. If the Company does not refinance the loans on or before August 1, 2008, Citicorp North America, Inc. is required to allow the facility to convert into a form of permanent financing. At that time, the Company must pay to Citicorp North America a conversion fee of $11.6 million. The extended maturity date of these loans would be August 1, 2017.

Wells Fargo Foothill Credit Facility

On August 1, 2007, the Company repaid all amounts due under the former revolving credit facility with proceeds from borrowings under the Citicorp North America Credit Facilities.

The aggregate amount of debt maturing through January 31, 2012 is as follows:

(in thousands)	Amount

Fiscal year:
Remainder of 2008	$	4,314
2009	15,289
2010	12,942
2011	11,400
2012	11,315
Thereafter	1,323,249

Total	$	1,378,509

At October 31, 2007 and January 31, 2007, unamortized deferred financing fees were approximately $32.3 million and $1.7 million, respectively. As a result of the payoff of all amounts due under the Well Fargo Foothill Credit Facility, we wrote off the remaining $1.3 million of deferred financing costs during the three and nine months ended October 31, 2007.

7. Earnings per Share

A reconciliation of the denominators of the basic and diluted earnings per share computations are as follows, in all periods that have net losses, there is no dilution:

	Three months ended October 31,		Nine months ended October 31,
	2007	2006	2007	2006

Weighted average common shares outstanding – basic	52,321	51,914	52,261	51,812
Dilutive effect of stock options and warrants outstanding	—	1,206	—	1,378

Weighted average common shares outstanding – diluted	52,321	53,120	52,261	53,190

The following were not included in weighted average common shares outstanding because they are antidilutive:

Stock options	2,830	903	2,108	521
Warrants	101	10	103	10

Total	2,931	913	2,211	531

8. Discontinued Operation

On April 30, 2007, the Company disposed of substantially all of the assets and liabilities of its Wood Manufacturing division. The Company sold the assets and liabilities of its Wood Manufacturing division to a purchaser in which S. Leslie Flegel, the Company’s former Chairman of the Board and Chief Executive Officer, has an interest. The Wood Manufacturing division was formerly reported as part of our In-Store Services segment. The book value of the net assets sold on the closing date was $11.6 million. The assets and liabilities of the Wood Manufacturing division were sold for $10.0 million cash, and the issuance of a note payable to the Company in the face amount of $3.5 million, which bears interest at the 3-month LIBOR plus a margin of 2.00%. The Company has determined that the note does not bear an interest rate equivalent to a market rate for the borrower. Therefore, the Company has discounted the note to fair value using its estimation of a market rate for the note. This discount was approximately $1.0 million. Based upon the final determination of working capital, the Company refunded to the buyer $1.9 million in cash during the third quarter of fiscal 2008. For the three and nine months ended October 31, 2007 and 2006, the summary results for the Wood Manufacturing division are as follows:

	Three months ended October 31,				Nine months ended October 31,
	2007		2006		2007			2006

Revenues	$	—	$	7,885	$	2,551		$	22,790
(Loss) income from discontinued operation, before income taxes	—		830		(1,463		)	2,916
Income tax (benefit) expense	—		332		(585		)	1,166

Loss (income) from discontinued operation	—		498		(878		)	1,750

Loss on sale of discontinued operation, before income taxes	—		—		(1,217		)	—
Income tax benefit	—		—		(487		)	—

Loss on sale of discontinued operation	—		—		(730		)	—

Discontinued operation, net	$	—	$	498	$	(1,608	)	$	1,750

9. Supplemental Cash Flow Information

Supplemental information on interest and income taxes paid is as follows:

	Nine months ended October 31,
(in thousands)	2007			2006

Interest	$	32,903		$	7,754
Income taxes (net of receipts of $10,272 in 2007)	$	(9,331	)	$	9,850

As discussed in Note 8, the Company disposed of its Wood Manufacturing division for the total consideration of $13.5 million, including $3.5 million in the form of a note receivable, of which the Company refunded $1.9 million to the buyer during the third quarter of fiscal 2008, based on a working capital adjustment.

10. Stock-Based Compensation

On February 1, 2006, the Company adopted FAS No. 123(R), Share-Based Payment, and chose to transition using the modified prospective method. On February 1, 2007, the Company granted approximately 0.1 million options to non-executive members of its board of directors. The Company recognized stock compensation expense of approximately $0.2 million associated with this grant. Also on February 1, 2006, the Company granted approximately 0.1 million options to non-executive members of its board of directors. The Company recognized stock compensation expense of approximately $0.3 million associated with this grant.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

	Nine months ended October 31,
	2007		2006

Weighted average dividend yield	0.0	%	0.0	%
Weighted average expected volatility	36.9	%	41.4	%
Weighted average expected life	3.1 years		3.1 years
Weighted average risk-free interest rate	4.8	%	4.5	%

11. Segment Financial Reporting

The Company’s segment reporting is based on the reporting of senior management to the chief operating decision maker. This reporting combines the Company’s business units in a logical way that identifies business concentrations and synergies.

The reportable segments of the Company are Media, Magazine Fulfillment, CD and DVD Fulfillment, In-Store Services, and Shared Services. The accounting policies of the segments are materially the same as those described in the Summary of Accounting Policies.

The Media segment derives revenues primarily from (1) selling print advertising space in its enthusiast publications, (2) selling enthusiast publications via newsstand and subscription, and (3) selling online advertising and lead generation services.

The Magazine Fulfillment segment derives revenues from (1) selling and distributing magazines, including domestic and foreign titles, to major specialty and mainstream retailers and wholesalers throughout the United States and Canada, (2) exporting domestic titles internationally to foreign wholesalers or through domestic brokers, (3) providing return processing services for major specialty retail book chains and (4) serving as an outsourced fulfillment agent.

The CD and DVD Fulfillment segment derives revenues from (1) selling and distributing pre-recorded music, videos, video games and related products to retailers, (2) providing product and commerce solutions to “brick-and-mortar” and e-commerce retailers, and (3) providing consumer-direct fulfillment and vendor managed inventory services to its customers.

The In-Store Services segment derives revenues from (1) providing claim filing services related to rebates owed retailers from publishers or their designated agent, (2) designing, manufacturing, shipping, installation and removal of front-end display fixtures, and (3) providing information and management services relating to retail magazine sales to U.S. and Canadian retailers and magazine publishers and national distributors.

Shared Services consists of overhead functions not allocated to individual operating segments.

The segment results are as follows:

Three months ended October 31, 2007 (in thousands)	Media		Magazine Fulfillment		CD and DVD Fulfillment		In-Store Services		Shared Services			Eliminations			Consolidated

Revenues, net:
Distribution	$	2,268	$	237,620	$	261,086	$	—	$	—		$	—		$	500,974
Advertising	67,471		—		—		—		—			—			67,471
Circulation	40,142		—		—		—		—			(8,010		)	32,132
Manufacturing	—		—		—		8,315		—			—			8,315
Claiming and information	—		—		—		3,429		—			—			3,429
Other	23,017		3,811		—		—		—			—			26,828
Total revenues, net	132,898		241,431		261,086		11,744		—			(8,010		)	639,149
Cost of goods sold	35,559		185,681		216,328		6,476		—			(8,010		)	436,034

Gross profit	97,339		55,750		44,758		5,268		—			—			203,115
Distribution, circulation and fulfillment	11,813		28,039		15,949		—		—			—			55,801
Selling, general and administrative expenses	56,562		18,560		15,357		1,848		3,867			—			96,194
Depreciation and amortization	13,261		2,191		4,270		124		508			—			20,354
Integration and relocation expenses	—		590		—		—		—			—			590
Merger and acquisition costs	152		—		—		—		443			—			595
Disposal of land, building and equipment, net	—		94		—		—		—			—			94

Operating income (loss)	$	15,551	$	6,276	$	9,182	$	3,296	$	(4,818	)	$	—		$	29,487

As of October 31, 2007 (in thousands)	Media		Magazine Fulfillment		CD and DVD Fulfillment		In-Store Services		Shared Services		Eliminations			Consolidated

Total assets	$	1,416,916	$	361,557	$	653,233	$	73,650	$	104,558	$	(3,922	)	$	2,605,992
Goodwill, net	$	676,516	$	169,875	$	201,532	$	24,903	$	—	$	—		$	1,072,826
Intangible assets, net	$	590,689	$	38,753	$	74,594	$	982	$	—	$	—		$	705,018

Three months ended October 31, 2006 (in thousands)	Media		Magazine Fulfillment			CD and DVD Fulfillment		In-Store Services			Shared Services			Eliminations		Consolidated

Revenues, net:
Distribution	$	—	$	218,038		$	233,250	$	—		$	—		$	—	$	451,288
Manufacturing	—		—			—		9,139			—			—		9,139
Claiming and information	—		—			—		3,264			—			—		3,264
Other	—		4,199			—		—			—			—		4,199
Total revenues, net	—		222,237			233,250		12,403			—			—		467,890
Cost of goods sold	—		168,495			189,079		6,476			—			—		364,050

Gross profit	—		53,742			44,171		5,927			—			—		103,840
Distribution, circulation and fulfillment	—		29,496			15,652		—			—			—		45,148
Selling, general and administrative expenses	—		16,901			14,843		1,760			5,535			—		39,039
Depreciation and amortization	—		1,855			3,682		136			498			—		6,171
Integration and relocation expenses	—		2,451			—		—			131			—		2,582
Disposal of land, building and equipment, net	—		(49		)	287		(86		)	—			—		152

Operating income (loss)	$	—	$	3,088		$	9,707	$	4,117		$	(6,164	)	$	—	$	10,748

As of January 31, 2007 (in thousands)	Media		Magazine Fulfillment		CD and DVD Fulfillment		In-Store Services		Shared Services		Eliminations		Consolidated

Total assets	$	—	$	342,733	$	541,122	$	89,524	$	36,652	$	—	$	1,010,031
Goodwill, net	$	—	$	169,600	$	201,532	$	24,770	$	—	$	—	$	395,902
Intangible assets, net	$	—	$	37,456	$	80,229	$	1,286	$	—	$	—	$	118,971

Nine months ended October 31, 2007 (in thousands)	Media			Magazine Fulfillment		CD and DVD Fulfillment		In-Store Services			Shared Services			Eliminations			Consolidated

Revenues, net:
Distribution	$	2,268		$	691,248	$	687,103	$	—		$	—		$	—		$	1,380,619
Advertising	67,471			—		—		—			—			—			67,471
Circulation	40,142			—		—		—			—			(8,010		)	32,132
Manufacturing	—			—		—		22,325			—			—			22,325
Claiming and information	—			—		—		10,542			—			—			10,542
Other	23,017			12,595		—		—			—			—			35,612
Total revenues, net	132,898			703,843		687,103		32,867			—			(8,010		)	1,548,701
Cost of goods sold	35,559			540,359		565,849		18,845			—			(8,010		)	1,152,602

Gross profit	97,339			163,484		121,254		14,022			—			—			396,099
Distribution, circulation and fulfillment	11,813			84,053		42,966		—			—			—			138,832
Selling, general and administrative expenses	56,562			56,605		46,169		5,770			11,649			—			176,755
Depreciation and amortization	13,261			6,430		12,485		367			1,633			—			34,176
Integration and relocation expenses	—			674		—		—			—			—			674
Merger and acquisition costs	152			—		—		—			443			—			595
Disposal of land, building and equipment, net	—			347		—		(173		)	—			—			174

Operating income (loss)	$		15,551	$	15,375	$	19,634	$	8,058		$	(13,725	)	$	—		$	44,893

Nine months ended October 31, 2006 (in thousands)	Media		Magazine Fulfillment			CD and DVD Fulfillment		In-Store Services			Shared Services			Eliminations		Consolidated

Revenues, net:
Distribution	$	—	$	630,010		$	672,122	$	—		$	—		$	—	$	1,302,132
Manufacturing	—		—			—		24,818			—			—		24,818
Claiming and information	—		—			—		11,696			—			—		11,696
Other	—		10,446			—		—			—			—		10,446
Total revenues, net	—		640,456			672,122		36,514			—			—		1,349,092
Cost of goods sold	—		492,795			549,070		20,306			—			—		1,062,171

Gross profit	—		147,661			123,052		16,208			—			—		286,921
Distribution, circulation and fulfillment	—		81,813			44,833		—			—			—		126,646
Selling, general and administrative expenses	—		46,116			43,319		5,774			17,503			—		112,712
Depreciation and amortization	—		5,234			10,756		424			1,572			—		17,986
Integration and relocation expenses	—		2,998			—		—			299			—		3,297
Disposal of land, building and equipment, net	—		(49		)	287		(86		)	529			—		681

Operating income (loss)	$	—	$	11,549		$	23,857	$	10,096		$	(19,903	)	$	—	$	25,599

Approximately $14.7 million and $8.7 million of the Company’s total revenues in the Magazine Fulfillment segment for the three months ended October 31, 2007 and 2006, respectively, and $40.7 million and $26.2 million of the Company’s total revenues in the Magazine Fulfillment segment for the nine months ended October 31, 2007 and 2006, respectively were derived from the export of U.S. publications to overseas markets. At October 31, 2007 and January 31, 2007, identifiable assets attributable to the export of U.S. publications were $35.3 million and $27.2 million.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

Some of the information contained in this Quarterly Report on Form 10-Q including, but not limited to, those contained in Item 2 of Part I “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” along with statements in other reports filed with the Securities and Exchange Commission (the “SEC”), external documents and oral presentations, which are not historical facts are considered to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, cash flow, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. These statements are only predictions and you should not unduly rely on them. Our actual results will differ, perhaps materially, from those anticipated in these forward-looking statements as a result of a number of factors, including the risks and uncertainties faced by us described below and those set forth below under “Risk Factors” in our Annual Report for the fiscal year ended January 31, 2007 on Form 10-K filed with the SEC on April 25, 2007, as amended on May 31, 2007:

• market acceptance of and continuing demand for magazines, DVDs, CDs and other home entertainment products;

• the impact of competitive products and technologies;

• the pricing and payment policies of magazine publishers, film studios, record labels and other key vendors;

• changing market conditions and opportunities;

• our ability to realize operating efficiencies, cost savings and other benefits from recent acquisitions; and

• retention of key management and employees.

We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The factors listed above provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you make an investment decision relating to our common stock, you should be aware that the occurrence of the events described in these risk factors and those set forth below under “Risk Factors” in our Annual Report for the fiscal year ended January 31, 2007 filed with the SEC on April 25, 2007, as amended on May 31, 2007 could have a material adverse effect on our business, operating results and financial condition. You should read and interpret any forward-looking statement in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and Item 2 of Part I “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Any forward-looking statement speaks only as of the date on which that statement is made. Unless required by U.S. federal securities laws, we will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We are a premier marketing, publishing, merchandising and fulfillment company of entertainment products including DVDs, music CDs, magazines, books and related items serving about 110,000 retail store locations throughout North America. Our fully integrated businesses include:

• Publication of print and digital content to the enthusiast community in the United States via:

• 76 publications

• 90 websites, and

• over 65 events;

• Distribution and fulfillment of entertainment products to major retail chains throughout North America and direct-to-consumers via the Internet;

• Import and export of periodicals sold in more than 100 markets worldwide;

• Produce and distribute content through magazines and via the internet to consumers in various niche and enthusiast markets. Trade, Retail and Consumer events further enhance customer continuity;

• Coordination of product selection and placement for impulse items sold at checkout counters;

• Processing and collection of rebate claims as well as management of sales data obtained at the point-of-purchase; and

• Design, manufacture and installation of wire display fixtures in major retail chains.

Our clients include:

• Major automobile manufacturers and part suppliers, as well as enthusiast product manufacturers, wholesalers and retailers;

• Major magazine national distributors such as Time Warner Retail Sales & Marketing, Inc. and Curtis Circulation Company, as well as a significant base of individual magazine subscribers;

• Mainstream retailers, such as Wal-Mart Stores, Inc., The Kroger Company, Target Corporation, Walgreen Company, Ahold USA, Inc., Sears Holdings Corporation., and Meijer, Inc.;

• Specialty retailers, such as Barnes & Noble, Inc., Borders Group, Inc., Hastings Entertainment, Inc., Fry’s Electronics, Inc. and Circuit City Stores, Inc.; and

• e-commerce retailers, such as amazon.com, barnesandnoble.com, circuitcity.com and bestbuy.com.

Our suppliers include:

• Major paper mills and printing press outsource providers;

• Record labels, such as Vivendi Universal S.A., Sony BMG Music Entertainment Company, WEA Distribution and Thorn-EMI;

• Film studios, such as The Walt Disney Company, Time Warner Inc., Sony Corp., The News Corporation, Viacom Inc. and General Electric Company; and

• Magazine Distributors, such as COMAG Marketing Group, LLC, Time Warner Retail Sales & Marketing, Inc., Curtis Circulation Company and Kable Distribution Services, Inc.

On August 1, 2007, we completed our acquisition of Primedia Enthusiast Media, Inc., a publishing and distribution company for magazines in various enthusiast markets. Following the merger, we organized the combined company into four operating business units:

• Media – The Media segment sells print advertising space in its enthusiast publications, sells enthusiast publications via newsstand and subscription, and sells online advertising and lead generation services.

• Magazine Fulfillment – The magazine fulfillment segment sells and distributes magazines to major retailers and wholesalers, imports foreign titles for domestic retailers and wholesalers, exports domestic titles to foreign wholesalers, provides return processing services, serves as an outsource fulfillment agent and provides customer-direct fulfillment.

• CD and DVD Fulfillment – The CD and DVD fulfillment segment sells and distributes pre-recorded music, videos, video games and related products to retailers, provides product and commerce solutions to retailers and provides customer-direct fulfillment and vendor managed inventory.

• In-Store Services – The in-store services segment designs, manufactures and invoices participants in front-end fixture programs, provides claim filing services for rebates owed retailers from publishers and their agents, designs, manufactures, ships, installs and removes front-end fixtures and provides information and management services relating to retail magazine sales to U.S. and Canadian retailers and magazine publishers.

Overview

Significant events that occurred during the nine months ended October 31, 2007 and 2006 include:

Acquisition of Primedia Enthusiast Media Inc.

The purchase price of $1,177.9 million consisted entirely of cash borrowed under the Company’s Term Loan B and Bridge Facility issued on August 1, 2007. See Note 6 – Debt and Revolving Credit Facility.

See Note 2 – Business Combinations.

Sale of Wood Manufacturing Division

On April 30, 2007, we sold substantially all of the assets of our Wood Manufacturing Division. This discontinued operation has been excluded from current and prior year results as presented herein. See Note 8 – Discontinued Operation.

Acquisition of Anderson Mid-Atlantic News, LLC

On March 30, 2006, we acquired all of the issued and outstanding membership interests of Anderson Mid-Atlantic News, LLC (“Mid-Atlantic”) from Anderson News, LLC for a purchase price of approximately $4.0 million, subject to adjustment based on the negative net worth as of the closing date of the transaction. In addition, we provided approximately $9.6 million on the date of acquisition to Mid-Atlantic to repay a portion of their outstanding intercompany debt. The remaining outstanding intercompany debt of Mid-Atlantic was satisfied by issuance of a promissory note totaling $4.1 million. The purchase price and the intercompany debt repayment were funded by borrowings against our revolving line of credit. Mid-Atlantic’s results of operations have been included in our Consolidated Financial Statements since the date of acquisition

Acquisition of Anderson-SCN Services, LLC

On March 30, 2006, we acquired all of the issued and outstanding membership interests of Anderson-SCN Services, LLC (“SCN”) from Anderson News, LLC for a purchase price of approximately $9.0 million, subject to adjustment based on the negative net worth as of the closing date of the transaction. In addition, we provided approximately $17.0 million on the date of acquisition to SCN to repay a portion of their outstanding intercompany debt. The remaining outstanding intercompany debt of SCN was satisfied by issuance of a promissory note totaling $10.2 million. The purchase price and the intercompany debt repayment were funded by borrowings against our revolving line of credit. SCN’s results of operations have been included in our Consolidated Financial Statements since the date of acquisition.

Results of operations

Please see our Annual Report on Form 10-K for the fiscal year ended January 31, 2007 and filed with the SEC on April 25, 2007, as amended on May 31, 2007, for more information on the types of revenues and expenses included within the specific line-items in our financial statements.

THREE MONTHS ENDED OCTOBER 31, 2007 AND 2006

Media

The following table sets forth, for the periods presented, information relating to our Media segment:

	Three months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Distribution	$	2,268		$	—		$	2,268		NM
Advertising	67,471			—			67,471			NM
Circulation	40,142			—			40,142			NM
Other	23,017			—			23,017			NM

Total revenues, net	132,898			—			132,898			NM
Cost of goods sold	35,559			—			35,559			NM

Gross profit	97,339			—			97,339			NM
Distribution, circulation and fulfillment	11,813			—			11,813			NM
Selling, general and administrative expenses	56,562			—			56,562			NM
Depreciation and amortization	13,261			—			13,261			NM
Merger and acquisition costs	152			—			152			NM

Operating income	$	15,551		$	—		$	15,551		NM

Key operating measures:
Gross profit margin	73.2		%	—		%	73.2		%
Operating income margin	11.7		%	—		%	11.7		%
Fulfillment freight as a percent of revenues	8.9		%	—		%	8.9		%
Selling, general and administrative expenses as a percent of revenues	42.6		%	—		%	42.6		%

On August 1, 2007 we acquired EM, which created our Media operating segment. All changes in income statement line items result from this acquisition.

Magazine Fulfillment

The following table sets forth, for the periods presented, information relating to our Magazine Fulfillment segment:

	Three months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Distribution	$	237,620		$	218,038		$	19,582		9.0	%
Other	3,811			4,199			(388		)	(9.2	)%

Total revenues, net	241,431			222,237			19,194			8.6	%
Cost of goods sold	185,681			168,495			17,186			10.2	%

Gross profit	55,750			53,742			2,008			3.7	%
Distribution, circulation and fulfillment	28,039			29,496			(1,457		)	(4.9	)%
Selling, general and administrative expenses	18,560			16,901			1,659			9.8	%
Depreciation and amortization	2,191			1,855			336			18.11	%
Integration and relocation expense	590			2,451			(1,861		)	(75.9	)%
Disposal of land, buildings and equipment, net	94			(49		)	143			291.8	%

Operating income	$	6,276		$	3,088		$	3,188		103.2	%

Key operating measures:
Gross profit margin	23.1		%	24.2		%	(1.1		)%
Operating income margin	2.6		%	1.4		%	1.2		%
Distribution, circulation and as a percent of revenues	11.6		%	13.2		%	(1.6		)%
Selling, general and administrative expenses as a percent of revenues	7.7		%	7.6		%	0.1		%
Revenues from:
Domestic	$	226,718		$	214,113		$	12,605		5.9	%
International	$	14,713		$	8,124		$	6,589		81.1	%

Revenues increased due to the impact of a new exclusive contract with a major bookstore, significant sales to new mainstream retailers and increased export distribution as a result of a new exclusive export contract with a major domestic national distributor, partially offset by approximately $6 million in lost sales due to the southern California wild fires.

Gross profit margin decreased primarily due to lower margins in the export distribution business as a result of a new exclusive export contract with a major domestic national distributor and a shift in mix during the quarter in southern California toward lower-priced, lower-margin titles as a result of the wild fires.

Distribution, circulation and fulfillment as a percent of revenues decreased partially due to synergies achieved related to our acquisition of Anderson Mid-Atlantic News, LLC and Anderson SCN Services, LLC as well as increased revenue from our export distribution business that does not carry freight costs.

Selling, general and administrative expenses as a percent of revenues increased due in part to increased expenses as a result of the addition of new customers and a change in the method of allocation of costs formerly accumulated in the Shared Services segment, partially offset by synergies achieved related to our acquisition of Anderson Mid-Atlantic News, LLC and Anderson SCN Services, LLC. Under the current methodology, approximately $1.3 million of additional Selling, general and administrative expenses would have been recorded in the same period of the prior year.

During the three months ended October 31, 2007, we incurred expenses associated with the integration of our Chicago, IL and Brainerd, MN distribution centers into our new McCook, IL distribution center. During the three months ended October 31, 2006, we incurred expenses associated with the integration of duplicative distribution centers in Southern California and the Mid-Atlantic regions.

CD and DVD Fulfillment

The following table sets forth, for the periods presented, information relating to our CD and DVD Fulfillment segment:

	Three months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Distribution	$	261,086		$	233,250		$	27,836		11.9	%

Total revenues, net	261,086			233,250			27,836			11.9	%
Cost of goods sold	216,328			189,079			27,249			14.4	%

Gross profit	44,758			44,171			587			1.3	%
Distribution, circulation and fulfillment	15,949			15,652			297			1.9	%
Selling, general and administrative expenses	15,357			14,843			514			3.5	%
Depreciation and amortization	4,270			3,682			588			16.0	%
Disposal of land, buildings and equipment, net	—			287			(287		)	(100.0	)%

Operating income	$	9,182		$	9,707		$	(525	)	(5.4	)%

Key operating measures:
Gross profit margin	17.1		%	18.9		%	(1.8		)%
Operating income margin	3.5		%	4.2		%	(0.7		)%
Distribution, circulation and fulfillment as a percent of revenues	6.1		%	6.7		%	(0.6		)%
Selling, general and administrative expenses as a percent of revenues	5.9		%	6.4		%	(0.5		)%

Revenues increased primarily due to the addition of a significant new customer and increased sales of DVDs in our large bookstore customers, partially offset by decreased revenues as a result of certain retailer programs in the prior year period not being renewed in the current year period.

Gross profit margin decreased primarily due to a shift in mix away from CDs toward lower-margin DVDs and the addition of a significant new customer that carries lower gross margins.

Fulfillment freight increased due in part to increased shipments. Fulfillment freight as a percent of revenues decreased primarily due to a shift of a larger portion of shipments to certain customers to less expensive ground versus air freight.

Selling, general and administrative expenses increased primarily due to new vendor managed inventory business, where we provide in-store product merchandising, and other new business ventures.

Depreciation and amortization increased primarily due to capital expenditures in the final quarter of fiscal 2007 and due to increased amortization of customer lists and other intangible assets over the prior year period.

Operating income decreased primarily due the factors listed above.

In-Store Services

The following table sets forth, for the periods presented, information relating to our In-Store Services segment (results for fiscal 2007 have been revised to eliminate the results of our Wood Manufacturing Division which was sold in April 2007):

	Three months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Manufacturing	$	8,315		$	9,139		$	(824	)	$	(9.0	)%
Claiming and information	3,429			3,264			165			5.1		%

Total revenues, net	11,744			12,403			(659		)	(5.3		)%
Cost of goods sold	6,476			6,476			—			0.0		%

Gross profit	5,268			5,927			(659		)	(11.1		)%
Selling, general and administrative expenses	1,848			1,760			88			5.0		%
Depreciation and amortization	124			136			(12		)	(8.8		)%
Disposal of land, buildings and equipment, net	—			(86		)	(86		)	(100.0		)%

Operating income	$	3,296		$	4,117		$	(821	)	(19.9		)%

Key operating measures:
Gross profit margin	45.0		%	47.8		%	(2.8		)%
Operating income margin	28.1		%	33.2		%	(5.1		)%
Selling, general and administrative expenses as a percent of revenues	15.7		%	14.2		%	1.5		%

Revenues from Claim filing and information increased primarily due to the timing of payments received on claims filed. Revenues from Display fixture manufacturing decreased primarily due to fewer jobs in the current quarter versus the same period of the prior year.

Gross profit decreased primarily due to lower revenue, while gross profit margin decreased primarily due to lower margin display fixture manufacturing jobs.

Selling, general and administrative expenses were in line with the same period of the prior year. In addition, we changed the method of allocating costs formerly accumulated in the Shared Services segment. Under the current methodology, approximately $0.2 million of additional Selling, general and administrative expenses would have been recorded in the same period of the prior year.

Shared Services

The following table sets forth, for the periods presented, information relating to our Shared Services segment:

	Three months ended October 31,						Change
	2007			2006			Amount			Percent

Selling, general and administrative expenses	$	3,867		$	5,535		$	(1,668	)	(30.1	)%
Depreciation and amortization	508			498			10			2.0	%
Integration and relocation expense	—			131			(131		)	(100.0	)%
Merger and acquisition costs	443			—			443			NM

Operating loss	$	(4,818	)	$	(6,164	)	$	1,346		21.8	%

Key operating measures:
Selling, general and administrative expenses as a percent of total revenues	0.6		%	1.2		%	(0.6		)%

Selling, general and administrative expenses decreased due in part to a change in the method of allocation of costs formerly accumulated in the Shared Services segment. Under the current methodology, approximately $1.5 million more Selling, general and administrative expenses would have been allocated to the operating segments in the same period of the prior year.

Interest Expense

Interest expense includes the interest and fees on our significant debt instruments and outstanding letters of credit. Interest expense increased from $3.6 million to $36.1 million for the three months ended October 31, 2007 and 2006, respectively. The increase relates to the significant increase in borrowings as a result of our acquisition of EM.

Other Income (Expense)

Other income (expense) consists of items outside the normal course of operations. Due to its nature, comparability between periods is not generally meaningful.

Income Tax Expense

The effective tax rates were 40.0% for the current quarter and the same quarter of the prior year. We anticipate our effective tax rate to approximate 40% for the remainder of the year.

NINE MONTHS ENDED OCTOBER 31, 2007 AND 2006

Media

The following table sets forth, for the periods presented, information relating to our Media segment:

	Nine months ended October 31,							Change
	2007				2006			Amount			Percent

Revenues, net
Distribution	$		2,268		$	—		$	2,268		$	NM
Advertising	67,471				—			67,471			NM
Circulation	40,142				—			40,142			NM
Other	23,017				—			23,017			NM

Total revenues, net	132,898				—			132,898			NM
Cost of goods sold	35,559				—			35,559			NM

Gross profit	97,339				—			97,339			NM
Distribution, circulation and fulfillment	11,813				—			11,813			NM
Selling, general and administrative expenses	56,562				—			56,562			NM
Depreciation and amortization	13,261				—			13,261			NM
Merger and acquisition costs	152				—			152			NM

Operating income	$	15,551			$	—		$	15,551		NM

Key operating measures:
Gross profit margin	73.2			%	—		%	73.2		%
Operating income margin	11.7			%	—		%	11.7		%
Fulfillment freight as a percent of revenues	8.9			%	—		%	8.9		%
Selling, general and administrative expenses as a percent of revenues	42.6			%	—		%	42.6		%

On August 1, 2007 we acquired EM, which created our Media operating segment. All changes in income statement line items result from this acquisition.

Magazine Fulfillment

The following table sets forth, for the periods presented, information relating to our Magazine Fulfillment segment:

	Nine months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Distribution	$	691,248		$	630,010		$	61,238		9.7	%
Other	12,595			10,446			2,149			20.6	%

Total revenues, net	703,843			640,456			63,387			9.9	%
Cost of goods sold	540,359			492,795			47,564			9.7	%

Gross profit	163,484			147,661			15,823			10.7	%
Distribution, circulation and fulfillment	84,053			81,813			2,240			2.7	%
Selling, general and administrative expenses	56,605			46,116			10,489			22.7	%
Depreciation and amortization	6,430			5,234			1,196			22.9	%
Integration and relocation expense	674			2,998			(2,324		)	(77.5	)%
Disposal of land, buildings and equipment, net	347			(49		)	396			NM

Operating income	$	15,375		$	11,549		$	3,826		33.1	%

Key operating measures:
Gross profit margin	23.2		%	23.1		%	0.1		%
Operating income margin	2.2		%	1.8		%	0.4		%
Distribution, circulation and fulfillment as a percent of revenues	11.9		%	12.8		%	(0.9		)%
Selling, general and administrative expenses as a percent of revenues	8.0		%	7.2		%	0.8		%
Revenues from:
Domestic distribution	$	663,193		$	615,812		$	47,381		7.7	%
International distribution	$	40,650		$	24,644		$	16,006		64.9	%

On March 30, 2006 we acquired Mid-Atlantic and SCN. Increases in individual income statement line items within our Magazine Fulfillment group are primarily related to the impact of the inclusion of nine months of results in the current year period versus seven in the same period of fiscal 2007.

Revenues increased primarily due the acquisition of Mid-Atlantic and SCN in addition to the impact of a new exclusive contract with a major bookstore, significant sales to new mainstream retailers and increased export distribution as a result of a new exclusive export contract with a major domestic national distributor, partially offset by approximately $6 million in lost sales due to the southern California wild fires.

Gross profit margin was consistent with the same period of the prior year.

Distribution, circulation and fulfillment as a percent of revenues decreased primarily due to synergies achieved related to our acquisition of Mid-Atlantic and SCN as well as increased revenue from our export distribution business that does not carry freight costs.

Selling, general and administrative expenses as a percent of revenues increased in part due to increased overhead related to the acquisition of Mid-Atlantic and SCN, increased expenses as a result of the addition of new customers and a change in the method of allocation of costs formerly accumulated in the Shared Services segment. Under the current methodology, approximately $4.1 million of additional Selling, general and administrative expenses would have been recorded in the same period of the prior year.

CD and DVD Fulfillment

The following table sets forth, for the periods presented, information relating to our CD and DVD Fulfillment segment:

	Nine months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Distribution	$	687,103		$	672,122		$	14,981		$	2.2	%

Total revenues, net	687,103			672,122			14,981			2.2		%
Cost of goods sold	565,849			549,070			16,779			3.1		%

Gross profit	121,254			123,052			(1,798		)	(1.5		)%
Distribution, circulation and fulfillment	42,966			44,833			(1,867		)	(4.2		)%
Selling, general and administrative expenses	46,169			43,319			2,850			6.6		%
Depreciation and amortization	12,485			10,756			1,729			16.1		%
Disposal of land, buildings and equipment, net	—			287			(287		)	(100.0		)%

Operating income	$	19,634		$	23,857		$	(4,223	)	(17.7		)%

Key operating measures:
Gross profit margin	17.6		%	18.3		%	(0.7		)%
Operating income margin	2.9		%	3.5		%	(0.6		)%
Distribution, circulation and fulfillment as a percent of revenues	6.3		%	6.7		%	(0.4		)%
Selling, general and administrative expenses as a percent of revenues	6.7		%	6.4		%	0.03		%

Revenues increased primarily due to the addition of a significant new customer during the third quarter of fiscal 2007 and increased sales of DVDs in our large bookstore customers, partially offset by decreased revenues as a result of certain retailer programs in the prior year period not being renewed in the current year and negative industry trends within the CD and recorded music industry.

Gross profit margin decreased primarily due to a shift in mix away from CDs toward lower-margin DVDs and the addition of a significant new customer that carries lower gross margins.

Distribution, circulation and fulfillment increased primarily due to increased shipments. Distribution, circulation and fulfillment as a percent of revenues decreased primarily due to a shift of a larger portion of shipments to certain customers to ground versus air.

Selling, general and administrative expenses increased primarily due to new vendor managed inventory, where we provide in-store product merchandising, business and other new business ventures.

Operating income decreased primarily due the factors listed above.

In-Store Services

	Nine months ended October 31,						Change
	2007			2006			Amount			Percent

Revenues, net
Manufacturing	$	22,325		$	24,818		$	(2,493	)	(10.0	)%
Claiming and information	10,542			11,696			(1,154		)	(9.9	)%

Total revenues, net	32,867			36,514			(3,647		)	(10.0	)%
Cost of goods sold	18,845			20,306			(1,461		)	(7.2	)%

Gross profit	14,022			16,208			(2,186		)	(13.5	)%
Selling, general and administrative expenses	5,770			5,774			(4		)	(0.7	)%
Depreciation and amortization	367			424			(57		)	(13.4	)%
Disposal of land, buildings and equipment, net	(173		)	(86		)	(97		)	(101.2	)%

Operating income	$	8,058		$	10,096		$	(2,038	)	(20.2	)%

Key operating measures:
Gross profit margin	42.7		%	44.4		%	(1.7		)%
Operating income margin	24.5		%	27.6		%	(3.1		)%
Selling, general and administrative expenses as a percent of revenues	17.6		%	15.8		%	1.8		%

Revenues from Claim filing and information decreased primarily due to the timing of payments received on claims filed. Revenues from Wire manufacturing decreased primarily due to fewer jobs in the current period versus the same period of the prior year.

Gross profit decreased primarily due to lower revenue, while gross profit margin decreased primarily due to lower gross profit margin jobs within the wire manufacturing, there was also a non-recurring higher cost of goods sold related to the recognition of previously deferred revenue and related costs on specific foreign claims collected that yield a lower gross profit margin than the traditional client base.

Selling, general and administrative expenses remained flat over the prior year period. Components of selling, general and administrative expenses increased due to changes in the method of allocating costs formerly accumulated in the Shared Services segment, offset by reductions in selling, general and administrative expenses due to cost cutting initiatives.

Shared Services

The following table sets forth, for the periods presented, information relating to our Shared Services segment:

	Nine months ended October 31,						Change
	2007			2006			Amount			Percent

Selling, general and administrative expenses	$	11,649		$	17,503		$	(5,854	)	(33.4	)%
Depreciation and amortization	1,633			1,572			61			3.9	%
Integration and relocation expense	—			299			(299		)	(100.0	)%
Merger and acquisition costs	443			529			(8.6		)	(16.3	)%

Operating loss	$	(13,725	)	$	(19,903	)	$	6,178		31.0	%

Key operating measures:
Selling, general and administrative expenses as a percent of total revenues	0.8		%	1.3		%	(0.5		)%

Selling, general and administrative expenses decreased primarily due to a change in the method of allocation of costs formerly accumulated in the Shared Services segment. Under the current methodology, approximately $4.3 million more Selling, general and administrative expenses would have been allocated to the operating segments in the same period of the prior year. Selling, general and administrative expenses also decreased $1.5 million due in part to cost cutting initiatives.

In the first quarter of fiscal 2007, we recorded an impairment related to land and building held for sale that was sold after the balance sheet date to record the assets at their sales price.

Interest Expense

Interest expense includes the interest and fees on our significant debt instruments and outstanding letters of credit. The increase of $33.8 million relates primarily to the significant increase in borrowings as a result of our acquisition of EM.

Other Income (Expense)

Other income (expense) consists of items outside the normal course of operations. Due to its nature, comparability between periods is not generally meaningful.

Income Tax Expense

The effective tax rates were 40.0% and 39.1% for the current period and the same period of the prior year, respectively. The increase in effective tax rates relates primarily to the treatment of certain taxable differences that occurred in the first quarter of fiscal 2007. We anticipate our effective tax rate to approximate 40% for the remainder of the year.

Liquidity and Capital Resources

Our primary sources of cash include receipts from our customers and borrowings under our credit facilities and from time to time the proceeds from the sale of common stock.

Our primary cash requirements for the Media group consist of raw materials and salaries.

Our primary cash requirements for the Magazine Fulfillment and CD and DVD Fulfillment groups consist of the cost of home entertainment products and the cost of freight, labor and facility expense associated with our distribution centers.

Our primary cash requirements for the In-Store Services group consist of the cost of raw materials, labor, and factory overhead incurred in the production of front-end wire displays, the cost of labor incurred in providing our claiming, design and information services and cash advances funding our Advance Pay program. Our Advance Pay program allows retailers to accelerate collections of their rebate claims through payments from us in exchange for the transfer to us of the right to collect the claim. We then collect the claims when paid by publishers for our own account.

Our primary cash requirements for the Shared Services group consist of salaries, professional fees and insurance not allocated to the operation groups.

The following table presents a summary of our significant obligations and commitments to make future payments under debt obligations and lease agreements due by period as of October 31, 2007:

	Payments due during the year ending January 31,
	Remainder of 2008		2009		2010		2011		2012 and thereafter		Total

Debt obligations	$	4,314	$	15,289	$	12,942	$	11,400	$	1,334,564	$	1,378,509
Deferred purchase price liability	2,407		4,251		75,334		—		—		81,992
Interest payments(a)	30,415		123,251		126,211		125,255		589,195		994,327
Capital leases	354		1,430		1,130		510		191		3,615
Operating leases	7,062		27,906		23,800		15,476		48,084		122,328

Total contractual cash obligations	$	44,552	$	172,127	$	239,417	$	152,641	$	1,972,034	$	2,580,771

(a) Interest is calculated using the prevailing weighted average rate on our outstanding debt at October 31, 2007, using the required payment schedule.

The following table presents a summary of our commercial commitments and the notional amount expiration by period:

	Notional amounts expiring during the year ending January 31,
(in thousands)	Remainder of 2008		2009		2010		2011		2012 and thereafter		Total

Financial standby letters of credit	$	16,475	$	3,565	$	—	$	—	$	—	$	20,040

Operating Cash Flow

Net cash provided by operating activities was $57.4 million for the nine months ended October 31, 2007 versus cash used in operating activities of $35.2 million for the nine months ended October 31, 2006.

Operating cash flows for the nine months ended October 31, 2007 were comprised of:

• Net loss of $0.4 million,

• Plus non-cash charges and positive changes in operating assets and liabilities including:

• Depreciation and amortization of $38.6 million,

• Provisions for losses on accounts receivable of $2.0 million,

• Write off of deferred financing fees of $1.3 million,

• Decreases in deferred revenue of $1.2 million,

• Loss on sale of discontinued operation of $0.7 million, and

• Increases in accounts payable and other liabilities of $148.7.

• Cash was used for:

• Increases in accounts receivable of $26.2 million,

• Increases in inventories of $104.4 million, and

• Increases in other current and non-current assets of $2.0 million.

The increase in accounts payable and other liabilities relates primarily to an increase in accounts payable within our CD and DVD Fulfillment group of $90.8 million primarily related to increased purchases of inventories in anticipation of shipments required for the holiday shopping season and extended payment terms associated with the holiday shopping season, an increase in accounts payable within our Magazine Fulfillment group of $49.6 million related to newly established payables terms with a major supplier and the timing of payments to other major suppliers, and an increase in accounts payable within our In-Store Services group of $9.6 million related to the timing of payments.

The increase in accounts receivable relates primarily to an increase in accounts receivable within our CD and DVD Fulfillment group of $49.5 million related to the increased shipments in anticipation of the holiday shopping season and the buildup of receivables from a recently obtained significant new customer, partially offset by a decrease of $18.7 within our Magazine Fulfillment group related primarily to the timing of customer payments related to improved customer collections processes and a decrease in accounts receivable within our In-Store Services group of $5.6 million related to the timing of collections.

The increase in inventories relates primarily to an increase in inventories within our CD and DVD Fulfillment group of $76.1 million related primarily to the build up of inventories in anticipation of the holiday shopping season, an increase in inventories of $27.8 million within our Magazine Fulfillment group related primarily to the timing of shipments and increased consignment inventory as a result of small customer conversions and increased in-store holdings due to special third quarter and holiday issues.

The increase in other current and non-current assets relates primarily to increases within our Shared Services, CD and DVD Fulfillment, Magazine Fulfillment and Media segments of $3.3 million, $3.5 million, $1.4 million and $1.7 million, respectively. These increases were partially offset by a decrease in income taxes receivable due to $10.0 million in income tax refunds received during the nine months ended October 31, 2007.

Operating cash flows for the nine months ended October 31, 2006 were comprised of:

• Net income of $12.2 million,

• Plus non-cash charges including:

• depreciation and amortization of $19.2 million,

• provisions for losses on accounts receivable of $3.1 million

• an increase in accounts payable of $22.4 million, and

• Cash was used for:

• an increase in accounts receivable of $43.5 million,

• an increase in inventories of $49.8 million.

The increase in accounts payable of $22.4 million was primarily attributable to an increase in accounts payable within our CD and DVD Fulfillment group of $56.9 million associated with the buildup of holiday season inventory under extended payment terms. This increase was partially offset by a decrease in accounts payable within our Magazine Fulfillment group of $34.8 million. $15.0 million of this decrease results from the timing of the acquisition of Mid-Atlantic and SCN, with the remainder attributable to the timing of vendor payments within the first nine months of fiscal 2007.

The increase in accounts receivable of $43.5 million results primarily from an increase in accounts receivable of $28.5 million within our CD and DVD Fulfillment group associated with sales to customers under extended payment terms in preparation for the holiday season and from an increase in accounts receivable within our Magazine Fulfillment group of $7.1 million. The increase within our Magazine Fulfillment group results primarily from the timing of the acquisition of Mid-Atlantic and SCN and new receivables as a result of adding new customers. Also, increased production with our In-Store Services group created an increase in accounts receivable of $8.4 million.

The increase in inventory of $49.8 million was due primarily to an increase in inventory within our CD and DVD Fulfillment group of $52.9 million associated with the buildup of holiday season inventory under extended payment terms. Th is increase was partially offset by a decrease in inventories within our Magazine Fulfillment group of $3.1 million resulting from the

reduction in inventory associated with aligning and streamlining the operations of Mid-Atlantic and SCN following their acquisition.

Investing Cash Flow

Net cash used by investing activities was $1.2 billion for the nine months ended October 31, 2007 versus cash used in investing activities of $53.6 million for the nine months ended October 31, 2006.

For the nine months ended October 31, 2007, cash used by investing activities consisted primarily of $20.5 million in capital expenditures and $1.2 billion paid for the acquisition of EM, partially offset by $9.8 million received from the sale of our Wood Manufacturing division and $5.8 million received from net advanced pay activity.

For the nine months ended October 31, 2006, cash used in investing activities was comprised of $12.6 million in capital expenditures and $2.5 million in net advanced pay expenditures and $39.7 million to acquire Mid-Atlantic and SCN during the nine months ended October 31, 2006.

Financing Cash Flow

Outstanding balances on our credit facility fluctuate partially due to the timing of the retailer rebate claiming process and our Advance Pay program, the seasonality of our front end wire and services business and the payment cycles of the CD and DVD and magazine distribution businesses. Because the magazine distribution business and Advance Pay program cash requirement usually peaks at our fiscal quarter ends, the reported bank debt levels usually are the maximum level outstanding during the quarter. Alliance has historically generated approximately 33% of its total net sales in the fourth calendar quarter coinciding with the holiday shopping season and therefore should have greater borrowings in the third quarter to finance the buildup of inventory.

Payments under our Advance Pay program generally occur just prior to our fiscal quarter end. The related claims are not generally collected by us until 30-60 days after the advance is made. As a result, our funding requirements peak at the time of the initial advances and decrease over this period as the cash is collected on the related claims.

The front end display fixture manufacturing and services business is seasonal because most retailers prefer initiating new programs before the holiday shopping season begins, which concentrates revenues in the second and third quarter. Receivables from these programs are generally collected from all participants within 180 days. We are usually required to tender payment on the costs o f these programs (raw material and labor) within a shorter period. As a result, our funding requirements peak in the second and third fiscal quarters when we manufacture the fixtures and decrease significantly in the fourth and first fiscal quarters as the related receivable are collected and significantly less manufacturing activity is occurring.

Net cash provided by financing activities was $1.2 billion for the nine months ended October 31, 2007 versus cash provided by financing activities of $66.7 million for the nine months ended October 31, 2006.

Finan cing activities in the nine months ended October 31, 2007 consisted primarily of a $12.0 million decrease in checks issued against future advances under our revolving credit facility, $116.5 million in repayments under our WFF Credit Facility, $2.7 million in payments of deferred purchase price liabilities and $5.1 million in net payments on notes payable and capital leases, more than offset by $1.3 billion in cash received at closing of our Citicorp North America credit facilities.

For the nine months ended October 31, 2006, cash provided by financing activities was comprised primarily of borrowings under our revolving credit facility of $83.9. This was partially offset by net payments on debt and capital leases of $18.4 million.

Debt

For a detailed description of the terms of our significant debt instruments, please see Note 6 to our Consolidated Financial Statements.

In connection with our acquisition of Primedia Enthusiast Media, Inc., we issued three new credit facilities on August 1, 2007. These facilities consist of a $300 million asset-based revolving facility that was undrawn at close of the transaction, a $880 million term loan facility that amortizes 1.0% per year, and a $465 million bridge loan that will convert to long-term

financing if it is not refinanced within one year. See Note 6 – Debt and Revolving Credit Facilities. We expect to pay interest on these facilities with cash flow generated from operations.

Significant debt transactions during the nine months ended October 31, 2007 and 2006 are as follows:

• In connection with the acquisition of EM, we issued our new Citicorp North America credit facilities. See Note 6 — Debt and Revolving Credit Facilities.

• In connection with the acquisition of Mid-Atlantic on March 30, 2006, we issued a promissory note to its former owner in the amount of $4.1 million. It was repaid during the remainder of fiscal 2007. The remainder of the purchase price, $13.6 million, was funded by borrowings on our revolving credit facility.

• In connection with the acquisition of SCN on March 30, 2006, we issued a promissory note to its former owner in the amount of $10.2 million. It was repaid during the remainder of fiscal 2007. The remainder of the purchase price, $26.0 million, was funded by borrowings on our revolving credit facility.

Off-Balance Sheet Arrangements

We do not engage in transactions or arrangements with unconsolidated or other special purpose entities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risks include fluctuations in interest rates and exchange rate variability.

Our debt primarily relates to credit facilities with Citicorp North America, Inc. See Note 6 to our Consolidated Financial Statements.

The revolving credit facility with Citicorp North America had no outstanding balance at October 31, 2007. Interest on the outstanding balance is charged based on a variable interest rate related to LIBOR (5.13% at October 31, 2007) plus a margin of 1.50%.

The Term Loan B with Citicorp North America had an outstanding balance of $877.8 million at October 31, 2007. Interest on the outstanding balance is charged based on a variable interest rate related to LIBOR (5.13% at October 31, 2007) plus a margin of 3.25%.

The Bridge facility with Citicorp North America had an outstanding balance of $465.0 million at October 31, 2007. Interest on the outstanding balance is charged based on a variable interest rate related to LIBOR (5.13% at October 31, 2007) plus a margin of 4.75% as of October 31, 2007. The margin increases 0.50% upon the expiration of each of the first four 90 day periods after issuance. The interest on the bridge facility is capped at 11.25%.

A 1.0% increase in the prevailing interest rate on our debt at October 31, 2007 is estimated to cause an increase of $3.4 million in interest expense for the remainder of the year ending January 31, 2008.

We do not perform any interest rate hedging activities related to these facilities.

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We have exposure to foreign currency fluctuation through our exporting of foreign magazines and the purchase of foreign magazines for domestic distribution.

Revenues derived from the export of domestic titles (or sales to domestic brokers who facilitate the export) totaled $14.7 million for the quarter ended October 31, 2007 or 2.3% of total revenues. For the most part, our export revenues are denominated in dollars, and the foreign wholesaler is subject to foreign currency risks. We have the availability to control foreign currency risk via increasing or decreasing the local cover price paid in the foreign markets. There is a risk that a substantial increase in local cover price, due to a decline in the local currency relative to the dollar, could decrease demand for these magazines at retail and negatively impact our results of operations.

Domestic distribution (gross) of imported titles totaled approximately $25.8 million (of a total $581.1 million or 4.4%). Foreign publications are purchased in both dollars and the local currency of the foreign publisher, primarily Euros and British pounds sterling. In the instances where we buy product in the foreign currency, we generally have the ability to set the domestic cover price, which allows us to control the foreign currency risk. Foreign titles generally have significantly higher cover prices than comparable domestic titles, are considered somewhat of a luxury item, are sold only at select retail locations, and sales do not appear to be highly impacted by cover price increases. However, a significant negative change in the relative strength of the dollar to these foreign currencies could result in higher domestic cover prices and result in lower sales of these titles at retail, which would negatively impact our results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”).

Attached as exhibits to this Quarterly Report are certifications of our principal executive officer and chief financial officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The information appearing below should be read in conjunction with the certifications for a more complete understanding of the topics presented.

About Disclosure Controls

Disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) are designed to provide assurance that the information concerning us and our consolidated subsidiaries, which is required to be included in our reports and statements filed or submitted under the Exchange Act, as amended, (i) is accumulated and communicated to our management, including our principal executive of ficer and principal financial officer, as appropriate to allow timely decisions required disclosure and (ii) is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC.

Limitations On The Effectiveness Of Controls

Our management, including our principal executive officer and chief financial officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all pote ntial future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope Of The Controls Evaluation

The evaluation of our disclosure controls and procedures included a review of the controls’ objectives and design, the company’s implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the chief executive officer and the chief financial officer, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures made in our Annual Report on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated on an ongoing basis by our Internal Audit Department and by other personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures, and to modify them as necessary. Our intent is to maintain the disclosu re controls and procedures as dynamic systems that change as conditions warrant.

Conclusions

Based on this evaluation, our principal executive officer and our chief financial officer, have concluded that, subject to the limitations noted above, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicate d to the Company’s management, including the Principal Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

Except as set forth in this paragraph, there were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15f of the Exchange Act that occurred during the fiscal quarter ended October 31, 2007 that have materially affected, or are reasonably likely to materially affect those controls.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are party to routine legal proceedings arising out of the normal course of business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions of the range of possible loss, we believe that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS.

In addition to our risk factors as presented in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2007 as filed with the SEC on April 25, 2007, as amended May 31, 2007, the following risk and uncertainties could cause actual results to differ materially from the results contemplated by the forward looking statements contained in this Quarterly Report on form 10-Q:

TRENDS IN ADVERTISING SPENDING MAY REDUCE OUR REVENUES.

Our advertising revenues are subject to the risks arising from possible shifting of advertising spending amongst media. A decline in the level of business activity of certain of our advertisers, particularly U.S. and non-U.S. automobile manufacturers, could have an adverse effect on our revenues and profit margins.

WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH WILL CONSUME A SIGNIFICANT PORTION OF THE CASH FLOW THAT WE GENERATE.

A significant portion of our cash flow will be dedicated to the payment of interest on indebtedness which will reduce funds available for capital expenditures and business opportunities and may limit our ability to respond to adverse developments in our business or in the economy.

OUR DEBT INSTRUMENTS LIMIT OUR BUSINESS FLEXIBILITY BY IMPOSING OPERATING AND FINANCIAL RESTRICTIONS ON OUR OPERATIONS.

The agreements governing our indebtedness impose specific operating and financial restrictions on us. These restrictions impose conditions or limitations on our ability to, among other things:

• change the nature of our business;

• incur additional indebtedness;

• create liens on our assets;

• sell assets;

• issue stock;

• engage in mergers, consolidations or transactions with our affiliates;

• make investments in or loans to specific subsidiaries; and

• declare or make dividend payments on our common stock.

Our failure to comply with the terms and covenants in our indebtedness could lead to a default under the terms of those documents, which would entitle the lenders to accelerate the indebtedness and declare all amounts owed due and payable. Moreover, the instruments governing almost all of our indebtedness contain cross-default provisions so that a default under any of our indebtedness may result in a default under our other indebtedness. If a cross-default occurs, the maturity of almost all of our indebtedness could be accelerated and become immediately due and payable. If that happens, we might not be able to satisfy our debt obligations, which could have a substantial adverse effect on our ability to continue as a going concern.

We may not be able to comply with these restrictions in the future or, in order to comply with these restrictions, we may have to forego opportunities that might otherwise be beneficial to us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable.

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

Not Applicable.

ITEM 5. OTHER INFORMATION.

Not Applicable.

ITEM 6. EXHIBITS.

See Exhibit Index.

SIGNATURES

Pusuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SOURCE INTERLINK COMPANIES, INC.

December 10, 2007	By:	/s/ Marc Fierman
		Marc Fierman
		Chief Financial Officer
		(principal financial officer)

EXHIBIT INDEX

Exhibit No.		Description

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

32.1*		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Source Interlink Companies (SORC) Inactive 10-Q2008 Q1 Quarterly report

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