Note 6. Long-Term Debt.

Distribution Services and License Agreement and Related Advance

On August 23, 2010, we signed a three-year Distribution Services and License Agreement with Sony Pictures Home Entertainment Inc. (SPHE), to act as exclusive manufacturer to meet Image's DVD requirements, including Blu-ray Disc high-definition format, and to provide related distribution and other logistics services in exchange for certain fees. SPHE acts as our vendor of record for shipments of physical product to North American retailers and wholesalers. However, under our relationship with SPHE, Image is responsible for the credit risk from the end customer with respect to accounts receivable and risk of inventory loss. On September 8, 2010, an interest-free $2.5 million advance against future replication from SPHE, to be repaid at $0.15 per disc manufactured until the advance was repaid, of which approximately $601,000 was repaid at March 31, 2011, and repaid the remainder at March 31, 2012, and a $750,000 non-recoupable advance were received from SPHE and were used to reduce then-outstanding borrowings under our previous revolving credit facility with Wells Fargo Capital Finance (or Wells Fargo). The non-recoupable advance was used to pay the fee incurred for terminating our arrangement with our former replicator resulting in a net zero effect to cost of sales. After the first year, the unrecouped portion of the recoupable advance is refundable, but the unrecoupable advance is nonrefundable. Until the recoupable advance was repaid, SPHE had a security interest in all Image's assets in second position behind PNC.

As the SPHE $2.5 million recoupable advance, or deferred manufacturing credit, was non-interest bearing, we imputed and recorded a debt discount of $218,000 based upon a three-year loan interest rate of 5.5%. Amortization of the debt discount was a noncash interest expense and totaled $149,000 and $69,000 in fiscal 2012 and 2011, respectively. The deferred manufacturing credit was classified in long-term debt, net of current portion, after manufacturing commenced in October 2010. We amortized the deferred manufacturing credit as a reduction to inventory purchase cost based upon actual discs manufactured by SPHE. Amortization of the deferred manufacturing credit, included as a component of cost of sales, totaled $178,000 and $40,000 for SPHE in fiscal 2012 and 2011, respectively.

Effective August 31, 2010, we entered into an amendment to the Replication Services Agreement and Security Agreement between Sony DADC US Inc. (Sony DADC) and Madacy Entertainment LP, which included execution of the Guarantee Agreement dated August 31, 2010 by Image in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement. The obligations under the Replication Services Agreement include, without limitation, the repayment of a $2 million advance to Sony DADC pursuant to the terms and conditions of such agreement. The $2 million advance is to be repaid at $0.10 per IMHE disc manufactured until the advance is repaid, of which approximately $554,000 and $392,000 has been repaid at March 31, 2012, and 2011, respectively. At March 31, 2012 and 2011, $1.1 million and $1.6 million, respectively, of this advance remains outstanding. As the obligation is non-interest bearing, we have imputed and recorded a debt discount of $174,000 to the $2 million advance based upon a three-year loan interest rate of 5.5%. Amortization of the debt discount related to Sony DADC was a noncash interest expense and totaled $78,000 and $54,000 for fiscal 2012 and 2011, respectively.

Long-term debt at March 31, 2012 and 2011, consisted of the following:

(In thousands)	March 31, 2012		March 31, 2011
Subordinated manufacturing advance obligation, less debt discount of $42-March 31, 2012; $269-March 31, 2011	$	1,013	$	3,238
Current portion of long-term debt, less debt discount of $40-March 31, 2012; $175-March 31, 2011		664		1,795
Long-term debt less current portion, less debt discount	$	349	$	1,443

Prior Disc Replication Agreement and Related Advance

Prior to August 23, 2010, Arvato Digital Services LLC (or Arvato) manufactured our DVDs and the majority of our CDs. On June 30, 2006, we received an interest-free $10.0 million advance against future manufacturing from Arvato, to be repaid at $0.20 per disc manufactured, plus payment of a $0.04 administrative fee per disc manufactured until the advance is repaid. On January 25, 2010, we repaid the remaining $1.8 million manufacturing advance. There was no amount remaining under the previous advance from Arvato at March 31, 2011.

Arvato had a security interest in all of our assets in second position behind Wells Fargo. As the obligation was non-interest bearing, we initially imputed and recorded a debt discount of $1,945,000 to the $10.0 million face amount of the advance based upon our then-borrowing rate with our bank and recorded a deferred manufacturing credit, classified in other long-term liabilities. We were amortizing the debt discount, using the effective interest method, to interest expense. We were amortizing the deferred manufacturing credit as a reduction to the disc purchase cost based upon actual discs manufactured by Arvato. The $0.04 administrative fee per disc manufactured was being recorded as an additional inventory manufacturing cost.