**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 itscharter)

 

| **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 areacode)

 

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

x Yes      o No

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerate filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):
| o Large accelerated filer |   | x Accelerated filer |   | o Non-accelerated filer |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act. (Checkone)

o Yes      x No

 

As of December 3, 2007, there were52,320,837 shares of the Company’s common stock outstanding.

 

 

----

 

**TABLE OFCONTENTS**

 
| ** **                                   | ** **                                                                                  | **Page** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                         |                                                                                        |     |
| **PART I – FINANCIAL INFORMATION** | ** **                                                                                  |
|                                         |                                                                                        |     |
| ITEM 1.                                      | FINANCIAL STATEMENTS                                                                        | 4        |
|                                         |                                                                                        |     |
| ITEM 2.                                      | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 22       |
|                                         |                                                                                        |     |
| ITEM 3.                                      | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 | 39       |
|                                         |                                                                                        |     |
| ITEM 4.                                      | CONTROLS AND PROCEDURES                                                                     | 40       |
|                                         |                                                                                        |     |
| **PART II – OTHER INFORMATION**    | ** **                                                                                  |
|                                         |                                                                                        |     |
| ITEM 1.                                      | LEGAL PROCEEDINGS                                                                           | 42       |
|                                         |                                                                                        |     |
| ITEM 1A.                                     | RISK FACTORS                                                                                | 42       |
|                                         |                                                                                        |     |
| ITEM 2.                                      | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                | 43       |
|                                         |                                                                                        |     |
| ITEM 3.                                      | DEFAULTS UPON SENIOR SECURITIES                                                             | 43       |
|                                         |                                                                                        |     |
| ITEM 4.                                      | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                        | 43       |
|                                         |                                                                                        |     |
| ITEM 5.                                      | OTHER INFORMATION                                                                           | 43       |
|                                         |                                                                                        |     |
| ITEM 6.                                      | EXHIBITS                                                                                    | 43       |
|                                              |                                                                                             |          |  |

 

----

 

**PART I— FINANCIAL INFORMATION**

 

ITEM 1. FINANCIAL STATEMENTS.

 

**INDEX OFFINANCIAL 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        |

 

3

----

 

**SOURCEINTERLINK COMPANIES, INC.**

**CONSOLIDATEDBALANCE 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.*

 

4

----

 

**SOURCE INTERLINKCOMPANIES, INC.**

**CONSOLIDATEDBALANCE SHEETS (CONCLUDED)**

**(in thousands, except per shareamounts)**

 
| ** **                                                                                                                                  | ** ** | **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.*

 

5

----

 

**SOURCEINTERLINK COMPANIES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per shareamounts)**

**(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.*

 

6

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**SOURCEINTERLINK COMPANIES, INC.**

**CONSOLIDATEDSTATEMENT 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.*

 

7

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**SOURCEINTERLINK COMPANIES, INC.**

**CONSOLIDATEDSTATEMENTS 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.*

 

8

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**SOURCEINTERLINK COMPANIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Nature of Business and Basis ofPresentation**

 

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 statementsincluded herein have been prepared by the Company, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission. Inthe opinion of the Company’s management, all adjustments (consisting only ofnormal recurring adjustments and reclassifications) necessary to present fairlyour results of operations and cash flows for the three and nine months ended October 31, 2007 and 2006 and ourfinancial position as of October 31,2007, respectively have been made. The results of operations for such interimperiods are not necessarily indicative of the operating results to be expectedfor the full year.

 

Certain information and disclosures normallyincluded in the notes to the annual consolidated financial statements have beencondensed or omitted from these interim consolidated financial statements.Accordingly, these interim consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K (the “Annual Report”) for thefiscal year ended January 31, 2007, as filed with the Securities andExchange Commission (“SEC”) on April 25, 2007, as amended on May 31,2007.

 

9

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

 

***Adoption o f FIN-48***

 

On February 1, 2007, the Company adoptedFIN-48 – *Accounting for uncertainty in income taxes – aninterpretation of FASB statement No. 109*. As a result of the adoption,the Company determined that it did not have any material uncertain taxpositions which were required to be fully or partially de-recognized in itspreviously issued financial statements. Accrued interest and penalties onuncertain tax positions are classified as Income tax expense in the Company’sconsolidated results of operations and are not material.

 

**2.Business Combinations**

 

PRIMEDIAENTHUSIAST 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 Agreementdated May 13, 2007 (the “Agreement”). EM is one of the largest providersof print and digital content to the enthusiast community in the UnitedStates.  EM’s business is comprised of 76 publications, 90 websites andover 65 events.  In addition, its portfolio of strong brands has affordedEM 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 propertiesinclude automotive.com, equine.com and motortrend.com.

 

The purchaseprice of $1,177.9 million consisted entirely of cash borrowed under the Company’sTerm Loan B and Bridge Facility issued on August 1, 2007. In connectionwith 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 costof the acquisition was allocated to the assets acquired and liabilities assumedbased 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 thetransaction totaled $676.4 million and $600.5 million, respectively. Theseamounts will be tested at least annually for impairment in accordance with FAS No. 142,Goodwill and Other Intangible Assets.

 

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

 

10

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The assetsacquired and liabilities assumed in the acquisition are summarized below, basedupon a preliminary valuation that is expected to be finalized in the fourthquarter 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 OPERATINGRESULTS (Unaudited)

 

The followingtable summarizes pro forma operating results as if the Company had completedthe 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 | ) |

 

Thisinformation has been prepared for comparative purposes only and does notpurport to be indicative of the results of operations which actually would haveresulted had the acquisitions occurred on February 1, 2006 nor is itindicative of future results.

 

Acquisitioncharges related to the acquisition of EM recorded as expenses by the Companythrough October 31, 2007 totaled $0.6 million. These expenses representedseverance and personnel-related charges. These expenses were not capitalized asthey did not represent costs that provide future economic benefits to theCompany.

 

11

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**3. Trade Receivables**

 

Tradereceivables 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 andbook inventories are generally returnable to the suppliers thereof for fullcredit.

 

**5. Goodwill and intangibles**

 

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

 
| **(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 |   |

 

12

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Amortization of intangible assets was $14.2 million and $2.9 millionfor 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, 2007and 2006, respectively. Amortization expense is expected to approximate $56.8million 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 |   |

 

13

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***Citicorp North America Credit Facilities***

 

RevolvingCredit Facility

 

On August 1,2007, the Company entered into a new $300.0 million dollar asset-basedrevolving credit facility as a result of its acquisition of EM. Citicorp NorthAmerica, Inc., as administrative agent for each of the parties that maybecome a participant in such arrangement and their successors (“Lenders”) willmake revolving loans to us and our subsidiaries of up to $300.0 millionincluding the issuance of letters of credit. The terms and conditions of thearrangement 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 BookRunners, Citicorp North America, Inc. as Administrative Agent andCollateral Agent, JPMorgan Chase Bank, N.A. as Syndication Agent, and WachoviaBank, National Association and Wells Fargo Foothill, LLC as Co-DocumentationAgents.

 

Outstandingborrowings bear interest at a variable annual rate equal to the prime rateannounced 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 fivetraunches of at least $1 million each to bear interest at LIBOR plus a marginof 1.50%. The Company had no LIBOR contracts outstanding at October 31,2007. To secure repayment of the borrowings and other obligations of ours tothe Lenders, we and our subsidiaries granted a security interest in all of thepersonal property assets to Citicorp North America, Inc., for the benefitof the Lenders. These loans mature on August 1, 2013.

 

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

 

Availabilityunder the facility is limited by the Company’s borrowing base calculation, asdefined 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 aresult of its acquisition of EM. Citicorp North America, Inc., asadministrative agent for each of the parties that may become a participant insuch arrangement and their successors (“Lenders”) made loans to us and oursubsidiaries of $880.0 million. The terms and conditions of the arrangement aregoverned primarily by the Term Loan Agreement dated August 1, 2007 by andamong 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 Agentand JPMorgan Chase Bank, N.A. as Syndication Agent.

 

Outstandingborrowings bear interest at a variable annual rate equal to the prime rateannounced 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 fivetraunches of at least $1 million each to bear interest at LIBOR plus a marginof 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. TheTerm Loan B requires the Company to make principal payments of $2.2 million onthe 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 borrowingsand other obligations of ours to the Lenders, we and our subsidiaries granted asecurity interest in all of the personal property assets to Citicorp NorthAmerica, Inc., for the benefit of the Lenders. These loans mature on August 1,2014.

 

Under thecredit agreement, the Company is limited in its ability to declare dividends orother distributions on capital stock or make payments in connection with thepurchase, redemption, retirement or acquisition of capital stock. The Companyis also required to maintain a certain financial ratio.

 

BridgeFacility

 

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

 

14

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

 

Outstandingborrowings bear interest at a variable annual rate equal to the prime rateannounced 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 90day periods following original issuance. At October 31, 2007 the primerate was 7.50%. We also have the option of selecting up to five traunches of atleast $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 90day periods following original issuance. The interest rate on either base-rateor LIBOR loans may not exceed 11.25%. The Company had one LIBOR contractoutstanding at October 31, 2007 in the amount of $465.0 million andmaturing 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 anexchange fee of $11.6 million to Citicorp North America, Inc. If theCompany does not refinance the loans on or before August 1, 2008, CiticorpNorth America, Inc. is required to allow the facility to convert into aform of permanent financing. At that time, the Company must pay to CiticorpNorth America a conversion fee of $11.6 million. The extended maturity date ofthese loans would be August 1, 2017.

 

Under thecredit agreement, the Company is limited in its ability to declare dividends orother distributions on capital stock or make payments in connection with thepurchase, redemption, retirement or acquisition of capital stock. The Companyis also required to maintain a certain financial ratio

 

***Wells Fargo Foothill Credit Facility***

 

On August 1,2007, the Company repaid all amounts due under the former revolving creditfacility with proceeds from borrowings under the Citicorp North America CreditFacilities.

 

The aggregateamount 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 |   |

 

15

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At October 31,2007 and January 31, 2007, unamortized deferred financing fees wereapproximately $32.3 million and $1.7 million, respectively. As a result of thepayoff of all amounts due under the Well Fargo Foothill Credit Facility, wewrote off the remaining $1.3 million of deferred financing costs during thethree and nine months ended October 31, 2007.

 

**7. Earnings per Share**

 

A reconciliation of the denominators of the basic and diluted earningsper 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 ofthe assets and liabilities of its Wood Manufacturing division. The Company soldthe assets and liabilities of its Wood Manufacturing division to a purchaser inwhich S. Leslie Flegel, the Company’s former Chairman of the Board and ChiefExecutive Officer, has an interest. The Wood Manufacturing division wasformerly reported as part of our In-Store Services segment. The book value ofthe net assets sold on the closing date was $11.6 million. The assets andliabilities of the Wood Manufacturing division were sold for $10.0 millioncash, 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 rateequivalent to a market rate for the borrower. Therefore, the Company hasdiscounted the note to fair value using its estimation of a market rate for thenote. This discount was approximately $1.0 million. Based upon the finaldetermination of working capital, the Company refunded to the buyer $1.9million in cash during the third quarter of fiscal 2008. For the three and ninemonths ended October 31, 2007 and 2006, the summary results for the WoodManufacturing 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 |   |

 

16

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**9. Supplemental Cash Flow Information**

 

Supplemental information on interest and income taxes paid is asfollows:

 
| ** **                                         | ** ** | **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 Manufacturingdivision for the total consideration of $13.5 million, including $3.5 millionin the form of a note receivable, of which the Company refunded $1.9 million tothe buyer during the third quarter of fiscal 2008, based on a working capitaladjustment.

 

**10. Stock-Based Compensation**

 

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

 

The fair value of each option grant is estimated on the grant dateusing 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’ssegment reporting is based on the reporting of senior management to the chiefoperating decision maker. This reporting combines the Company’s business unitsin a logical way that identifies business concentrations and synergies.

 

17

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

 

The Mediasegment derives revenues primarily from (1) selling print advertisingspace in its enthusiast publications, (2) selling enthusiast publicationsvia newsstand and subscription, and (3) selling online advertising andlead generation services.

 

The MagazineFulfillment segment derives revenues from (1) selling and distributingmagazines, including domestic and foreign titles, to major specialty andmainstream retailers and wholesalers throughout the United States and Canada, (2) exportingdomestic titles internationally to foreign wholesalers or through domesticbrokers, (3) providing return processing services for major specialtyretail book chains and (4) serving as an outsourced fulfillment agent.

 

The CD and DVDFulfillment segment derives revenues from (1) selling and distributingpre-recorded music, videos, video games and related products to retailers, (2) providingproduct and commerce solutions to “brick-and-mortar” and e-commerce retailers,and (3) providing consumer-direct fulfillment and vendor managed inventoryservices to its customers.

 

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

 

SharedServices consists of overhead functions not allocated to individual operatingsegments.

 

Thesegment 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 |   |

 

18

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| **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 |   |
|                                                             |            |           |            |                           |            |                             |            |                       |            |                     |            |                  |            |                  |            |  |  |  |  |  |  |  |  |

 

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

 

20

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**CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFEHARBOR” PROVISIONS OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

 

Some of theinformation contained in this Quarterly Report on Form 10-Q including, butnot limited to, those contained in Item 2 of Part I “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”along with statements in other reports filed with the Securities and ExchangeCommission (the “SEC”), external documents and oral presentations, which arenot historical facts are considered to be “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. The words “believe,” “expect,”“anticipate,” “estimate,” “project,” and similar expressions often characterizeforward-looking statements. These statements may include, but are not limitedto, projections of collections, revenues, income or loss, cash flow, estimatesof capital expenditures, plans for future operations, products or services, andfinancing 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 inthese forward-looking statements as a result of a number of factors, includingthe risks and uncertainties faced by us described below and those set forthbelow 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 onMay 31, 2007:

 

•                  marketacceptance of and continuing demand for magazines, DVDs, CDs and other homeentertainment products;

 

•                  the impact ofcompetitive products and technologies;

 

•                  the pricing andpayment policies of magazine publishers, film studios, record labels and otherkey vendors;

 

•                  changing marketconditions and opportunities;

 

•                  our ability torealize operating efficiencies, cost savings and other benefits from recentacquisitions; and

 

•                  retention of keymanagement and employees.

 

We believe itis important to communicate our expectations to our investors. However, theremay be events in the future that we are not able to predict accurately or overwhich we have no control. The factors listed above provide examples of risks,uncertainties and events that may cause our actual results to differ materiallyfrom the expectations we describe in our forward-looking statements. Before youmake an investment decision relating to our common stock, you should be awarethat the occurrence of the events described in these risk factors and those setforth below under “Risk Factors” in our Annual Report for the fiscal year endedJanuary 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 resultsand financial condition. You should read and interpret any forward-lookingstatement in conjunction with our consolidated financial statements, the notesto our consolidated financial statements and Item 2 of Part I “Management’sDiscussion and Analysis of Financial Condition and Results of Operation.” Anyforward-looking statement speaks only as of the date on which that statement ismade. Unless required by U.S. federal securities laws, we will not update anyforward-looking statement to reflect events or circumstances that occur afterthe date on which the statement is made.

 

21

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

 

We are apremier marketing, publishing, merchandising and fulfillment company ofentertainment products including DVDs, music CDs, magazines, books and relateditems 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 andfulfillment of entertainment products to major retail chains throughout NorthAmerica and direct-to-consumers via the Internet;

 

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

 

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

 

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

 

•                  Processing andcollection of rebate claims as well as management of sales data obtained at thepoint-of-purchase; and

 

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

 

Our clientsinclude:

 

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

 

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

 

•                  Mainstreamretailers, such as Wal-Mart Stores, Inc., The Kroger Company, TargetCorporation, Walgreen Company, Ahold USA, Inc., Sears HoldingsCorporation., and Meijer, Inc.;

 

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

 

•                  e-commerceretailers, such as amazon.com, barnesandnoble.com, circuitcity.com andbestbuy.com.

 

Our suppliersinclude:

 

•                  Major papermills and printing press outsource providers;

 

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

 

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

 

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•                  MagazineDistributors, such as COMAG Marketing Group, LLC, Time Warner Retail Sales &Marketing, Inc., Curtis Circulation Company and Kable DistributionServices, Inc.

 

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

 

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

 

•                  MagazineFulfillment – The magazine fulfillment segment sells and distributes magazinesto major retailers and wholesalers, imports foreign titles for domesticretailers and wholesalers, exports domestic titles to foreign wholesalers, providesreturn processing services, serves as an outsource fulfillment agent andprovides customer-direct fulfillment.

 

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

 

•                  In-StoreServices – The in-store services segment designs, manufactures and invoicesparticipants in front-end fixture programs, provides claim filing services forrebates owed retailers from publishers and their agents, designs, manufactures,ships, installs and removes front-end fixtures and provides information andmanagement services relating to retail magazine sales to U.S. and Canadianretailers 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.***

 

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 Agreementdated May 13, 2007 (the “Agreement”). EM is one of the largest providersof print and digital content to the enthusiast community in the UnitedStates.  EM’s business is comprised of 76 publications, 90 websites andover 65 events.  In addition, its portfolio of strong brands has affordedEM 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 propertiesinclude automotive.com, equine.com and motortrend.com.

 

The purchaseprice of $1,177.9 million consisted entirely of cash borrowed under the Company’sTerm Loan B and Bridge Facility issued on August 1, 2007.  See Note 6 – *Debt andRevolving Credit Facility*.

 

See Note 2 – *Business Combinations*.

 

***Sale of Wood Manufacturing Division***

 

On April 30, 2007, we sold substantially all of the assets of ourWood Manufacturing Division.  Thisdiscontinued operation has been excluded from current and prior year results aspresented herein.  See Note 8 – *Discontinued Operation*.

 

***Acquisition of Anderson Mid-Atlantic News, LLC***

 

On March 30, 2006, we acquired all ofthe issued and outstanding membership interests of Anderson Mid-Atlantic News,LLC (“Mid-Atlantic”) from Anderson News, LLC for a purchase price ofapproximately $4.0 million, subject to adjustment based on the negative networth as of the closing date of the transaction. In addition, we providedapproximately $9.6 million on the date of acquisition to Mid-Atlantic to repaya portion of their outstanding intercompany debt. The remaining outstandingintercompany debt of Mid-Atlantic was satisfied by issuance of a promissorynote totaling $4.1 million.  The purchaseprice and the intercompany debt repayment were funded by borrowings against ourrevolving line of credit.  Mid-Atlantic’sresults of operations have been included in our Consolidated FinancialStatements since the date of acquisition

 

23

----

 

***Acquisition of Anderson-SCNServices, LLC***

 

On March 30, 2006, we acquired all ofthe 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 ofthe transaction. In addition, we provided approximately $17.0 million on thedate of acquisition to SCN to repay a portion of their outstanding intercompanydebt. The remaining outstanding intercompany debt of SCN was satisfied byissuance of a promissory note totaling $10.2 million. The purchase price andthe intercompany debt repayment were funded by borrowings against our revolvingline of credit.  SCN’s results ofoperations have been included in our Consolidated Financial Statements sincethe date of acquisition.

 

24

----

 

**Resultsof operations**

 

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

 

**THREEMONTHS ENDED OCTOBER 31, 2007 AND 2006**

 

***Media***

 

The following table sets forth, for the periods presented, informationrelating 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 Mediaoperating segment.  All changes in incomestatement line items result from this acquisition.

 

25

----

 

***Magazine Fulfillment***

 

The following table sets forth, for the periods presented, informationrelating 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 amajor bookstore, significant sales to new mainstream retailers and increasedexport distribution as a result of a new exclusive export contract with a majordomestic national distributor, partially offset by approximately $6 million inlost sales due to the southern California wild fires.

 

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

 

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

 

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

 

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

 

26

----

 

***CD and DVD Fulfillment***

 

The following table sets forth, for the periods presented, informationrelating 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 newcustomer and increased sales of DVDs in our large bookstore customers,partially offset by decreased revenues as a result of certain retailer programsin the prior year period not being renewed in the current year period.

 

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

 

Fulfillment freight increased due in part to increased shipments.  Fulfillment freight as a percent of revenuesdecreased primarily due to a shift of a larger portion of shipments to certaincustomers to less expensive ground versus air freight.

 

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

 

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

 

Operating income decreased primarily due the factors listed above.

 

27

----

 

***In-Store Services***

 

The following table sets forth, for the periods presented, informationrelating to our In-Store Services segment (results for fiscal 2007 have beenrevised to eliminate the results of our Wood Manufacturing Division which wassold 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 tothe timing of payments received on claims filed.  Revenues from Display fixture manufacturingdecreased primarily due to fewer jobs in the current quarter versus the sameperiod of the prior year.

 

Gross profit decreased primarily due to lower revenue, while grossprofit margin decreased primarily due to lower margin display fixturemanufacturing jobs.

 

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

 

28

----

 

***Shared Services***

 

The following table sets forth, for the periods presented, informationrelating 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 achange in the method of allocation of costs formerly accumulated in the SharedServices segment.  Under the currentmethodology, approximately $1.5 million more Selling, general and administrativeexpenses would have been allocated to the operating segments in the same periodof the prior year.

 

***Interest Expense***

 

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

 

***Other Income (Expense)***

 

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

 

***Income Tax Expense***

 

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

 

29

----

 

**NINEMONTHS ENDED OCTOBER 31, 2007 AND 2006**

 

***Media***

 

The following table sets forth, for the periods presented, informationrelating 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 Mediaoperating segment.  All changes in incomestatement line items result from this acquisition.

 

30

----

 

***Magazine Fulfillment***

 

The following table sets forth, for the periods presented, informationrelating 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 lineitems within our Magazine Fulfillment group are primarily related to the impactof the inclusion of nine months of results in the current year period versus sevenin the same period of fiscal 2007.

 

Revenues increased primarily due the acquisition of Mid-Atlantic andSCN in addition to the impact of a new exclusive contract with a majorbookstore, significant sales to new mainstream retailers and increased exportdistribution as a result of a new exclusive export contract with a majordomestic national distributor, partially offset by approximately $6 million inlost sales due to the southern California wild fires.

 

Gross profit margin was consistent with the same period of the prioryear.

 

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

 

Selling, general and administrative expenses as a percent of revenuesincreased in part due to increased overhead related to the acquisition ofMid-Atlantic and SCN, increased expenses as a result of the addition of newcustomers and a change in the method of allocation of costs formerlyaccumulated in the Shared Services segment. Under the current methodology, approximately $4.1 million of additionalSelling, general and administrative expenses would have been recorded in thesame period of the prior year.

 

31

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***CD and DVD Fulfillment***

 

The following table sets forth, for the periods presented, informationrelating 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 newcustomer during the third quarter of fiscal 2007 and increased sales of DVDs inour large bookstore customers, partially offset by decreased revenues as aresult of certain retailer programs in the prior year period not being renewedin the current year and negative industry trends within the CD and recordedmusic industry.

 

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

 

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

 

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

 

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

 

Operating income decreased primarily due the factors listed above.

 

32

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***In-Store Services***

 

The following table sets forth, for the periods presented, informationrelating to our In-Store Services segment (results for fiscal 2007 have beenrevised to eliminate the results of our Wood Manufacturing Division which wassold in April 2007):

 
| ** **                                                             | ** ** | **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 tothe timing of payments received on claims filed.  Revenues from Wire manufacturing decreasedprimarily due to fewer jobs in the current period versus the same period of theprior year.

 

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

 

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

 

33

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***Shared Services***

 

The following table sets forth, for the periods presented, informationrelating 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 toa change in the method of allocation of costs formerly accumulated in the SharedServices segment.  Under the currentmethodology, approximately $4.3 million more Selling, general andadministrative expenses would have been allocated to the operating segments inthe same period of the prior year. Selling, general and administrative expenses also decreased $1.5 milliondue in part to cost cutting initiatives.

 

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

 

***Interest Expense***

 

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

 

***Other Income (Expense)***

 

Other income (expense) consists of items outside the normal course ofoperations.  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 effectivetax rates relates primarily to the treatment of certain taxable differencesthat occurred in the first quarter of fiscal 2007.  We anticipate our effective taxrate to approximate 40% for the remainder of the year.

 

**Liquidityand Capital Resources**

 

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

 

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

 

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

 

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

 

Our primary cash requirements for the Shared Services group consist ofsalaries, professional fees and insurance not allocated to the operationgroups.

 

The following table presents a summary of our significant obligationsand commitments to make future payments under debt obligations and leaseagreements 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 calculatedusing 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 commitmentsand 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 ninemonths ended October 31, 2007 versus cash used in operating activities of $35.2million for the nine months ended October 31, 2006.

 

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

 

•                  Net loss of $0.4 million,

 

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

 

•                  Depreciation and amortization of $38.6million,

•                  Provisions for losses on accounts receivableof $2.0 million,

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

•                  Decreases in deferred revenue of $1.2million,

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

•                  Increases in accounts payable and otherliabilities of $148.7.

 

•                  Cash was used for:

 

•                  Increases in accounts receivable of $26.2million,

•                  Increases in inventories of $104.4 million,and

 

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

 

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

 

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

 

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

 

The increase in other current and non-current assets relates primarilyto increases within our Shared Services, CD and DVD Fulfillment, MagazineFulfillment and Media segments of $3.3 million, $3.5 million, $1.4 million and$1.7 million, respectively.  Theseincreases 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, 2006were comprised of:

 

•                  Net income of $12.2 million,

 

•                  Plus non-cash charges including:

 

•                  depreciation and amortization of $19.2million,

•                  provisions for losses on accounts receivableof $3.1 million

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

 

•                  Cash was used for:

 

•                  an increase in accounts receivable of $43.5million,

•                  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. This increase was partially offset by a decrease in inventories within our Magazine Fulfillment group of $3.1 million resulting from the

 

36

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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 ninemonths 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 investingactivities consisted primarily of $20.5 million in capital expenditures and $1.2billion paid for the acquisition of EM, partially offset by $9.8 millionreceived from the sale of our Wood Manufacturing division and $5.8 millionreceived 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 of 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.

 

Financing 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 debtinstruments, 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 millionasset-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 $465million bridge loan that will convert to long-term

 

37

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financing if it is not refinanced within one year.  See Note 6 – Debt and Revolving CreditFacilities.  We expect to pay interest onthese 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, weissued our new Citicorp North America credit facilities.  See Note 6 — Debt and Revolving CreditFacilities.

 

•                  In connection with the acquisition ofMid-Atlantic on March 30, 2006, we issued a promissory note to its formerowner in the amount of $4.1 million.  Itwas repaid during the remainder of fiscal 2007. The remainder of the purchase price, $13.6 million, was funded by borrowingson 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 $10.2million.  It was repaid during theremainder of fiscal 2007.  The remainder ofthe purchase price, $26.0 million, was funded by borrowings on our revolvingcredit facility.

 

***Off-Balance Sheet Arrangements***

 

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

 

38

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

Our debt primarily relates to credit facilities with Citicorp NorthAmerica, Inc.  See Note 6 to ourConsolidated Financial Statements.

 

The revolving credit facility with Citicorp North America had nooutstanding balance at October 31, 2007. Interest on the outstanding balance is charged based on a variable interestrate 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 balanceof $877.8 million at October 31, 2007. Interest on the outstanding balance is charged based on a variableinterest rate related to LIBOR (5.13% at October 31, 2007) plus a marginof 3.25%.

 

The Bridge facility with Citicorp North America had an outstandingbalance of $465.0 million at October 31, 2007.  Interest on the outstanding balance ischarged 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 theexpiration of each of the first four 90 day periods after issuance.  The interest on the bridge facility is cappedat 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 forthe remainder of the year ending January 31, 2008.

 

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

 

We have exposure to foreign currency fluctuation through our exportingof foreign magazines and the purchase of foreign magazines for domesticdistribution.

 

Revenues derived from the export of domestic titles (or sales todomestic brokers who facilitate the export) totaled $14.7 million for thequarter ended October 31,2007 or 2.3% of total revenues.  For themost part, our export revenues are denominated in dollars, and the foreignwholesaler is subject to foreign currency risks.  We have the availability to control foreigncurrency risk via increasing or decreasing the local cover price paid in theforeign markets.  There is a risk that asubstantial increase in local cover price, due to a decline in the localcurrency relative to the dollar, could decrease demand for these magazines atretail 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 bothdollars and the local currency of the foreign publisher, primarily Euros andBritish pounds sterling.  In the instanceswhere we buy product in the foreign currency, we generally have the ability toset the domestic cover price, which allows us to control the foreign currencyrisk.  Foreign titles generally havesignificantly higher cover prices than comparable domestic titles, areconsidered 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 therelative strength of the dollar to these foreign currencies could result inhigher domestic cover prices and result in lower sales of these titles atretail, which would negatively impact our results of operations.

 

39

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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 officer 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 potential 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 disclosure controls and procedures as dynamic systems that change as conditions warrant.

 

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***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 communicated 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 theCompany’s internal controls over financial reporting (as defined in Rule 13a-15fof the Exchange Act that occurred during the fiscal quarter ended October 31,2007 that have materially affected, or are reasonably likely to materiallyaffect those controls.

 

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**PART II – OTHERINFORMATION**

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are party to routine legal proceedings arising out of the normalcourse of business.  Although it is notpossible to predict with certainty the outcome of these unresolved legalactions 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 ourfinancial 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 differmaterially from the results contemplated by the forward looking statementscontained in this Quarterly Report on form 10-Q:

 

**TRENDS INADVERTISING SPENDING MAY REDUCE OUR REVENUES.**

 

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

 

**WE HAVESUBSTANTIAL INDEBTEDNESS, WHICH WILL CONSUME A SIGNIFICANT PORTION OF THE CASHFLOW THAT WE GENERATE.**

 

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

 

**OUR DEBTINSTRUMENTS LIMIT OUR BUSINESS FLEXIBILITY BY IMPOSING OPERATING AND FINANCIALRESTRICTIONS ON OUR OPERATIONS.**

 

The agreements governing our indebtedness impose specific operating andfinancial restrictions on us. These restrictions impose conditions orlimitations on our ability to, among other things:

 

• change the nature of our business;

 

• incur additional indebtedness;

 

• create liens on our assets;

 

• sell assets;

 

• issuestock;

 

• engage in mergers, consolidations ortransactions with our affiliates;

 

• make investments in or loans tospecific subsidiaries; and

 

• declare or make dividend payments onour common stock.

 

Our failure to comply with the terms and covenants in our indebtednesscould lead to a default under the terms of those documents, which would entitlethe lenders to accelerate the indebtedness and declare all amounts owed due andpayable. Moreover, the instruments governing almost all of our indebtednesscontain cross-default provisions so that a default under any of ourindebtedness may result in a default under our other indebtedness. If across-default occurs, the maturity of almost all of our indebtedness could beaccelerated and become immediately due and payable. If that happens, we mightnot be able to satisfy our debt obligations, which could have a substantialadverse effect on our ability to continue as a going concern. 

 

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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 opportunitiesthat might otherwise be beneficial to us.

 

ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS.

 

Not Applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

Not Applicable.

 

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

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION.

 

Not Applicable.

 

ITEM 6. EXHIBITS.

 

See Exhibit Index.

 

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**SIGNATURES**

 

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

 
| ** **             | **SOURCE INTERLINK COMPANIES, INC.** |
|------------------------|--------------------------------------|
|                   |                                 |   |
| December 10, 2007 | By:                                  | /s/ Marc Fierman |
|                   |                                 | Marc Fierman |
| * *               | * *                             | *Chief Financial Officer* |
| * *               | * *                             | *(principal financial officer)* |

 

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**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. |

 

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