Working Capital and Debt
Our business requires significant levels of working capital primarily to finance accounts receivable and inventories. We have relied on trade credit from vendors, amounts received on accounts receivable and our revolving credit facility for our working capital needs. At March 31, 2008, we were a party to a credit agreement (the "GE Facility") which provided for a senior secured three-year $95.0 million revolving credit facility. The revolving facility was available for working capital and general corporate needs and was subject to a borrowing base requirement. The revolving facility was secured by a first priority security interest in all of our assets, as well as the capital stock of its subsidiary companies. At March 31, 2008 we had $31.3 million outstanding under this facility.
At March 31, 2008, we were also a party to a credit agreement which provided for a four-year $15.0 million Term Loan facility which was to expire on March 22, 2011. The Term Loan facility called for monthly installments of $12,500, annual excess cash flow payments and final payment of $9.4 million on March 22, 2011. The facility was secured by a second priority security interest in all of our assets. At March 31, 2008 we had $9.7 million outstanding on the Term Loan facility which was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility.
On June 12, 2008, we entered into a Third Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the "Third Amendment") with GE. The Third Amendment, among other things, revised the terms of the GE Facility as follows:
(i) permitted us to pay off the remaining $9.7 million balance of the term loan facility with Monroe; (ii) created a $6.0 million tranche of borrowings subject to interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the interest rate payable in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR plus 2.0% to 3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv) extended the term of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5% during the first year following the date of the Third Amendment, 1% during the second year following the date of the Third Amendment, and 0.5% during the third year following the date of the Third Amendment; and (vi) modified certain financial covenants as of March 31, 2008. On October 30, 2008, the Company entered into a Fourth Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the "Fourth Amendment") with GE. The Fourth Amendment revised the terms of the Fourth Amended and Restated Credit Agreement (the "GE Facility") as follows: effective as of September 30, 2008, the Fourth Amendment (i) clarified that the calculation of "EBITDA" under the credit agreement to indicate that it will not be impacted by any non-cash charges to earnings related to goodwill impairment; and (ii) revised the definition of "Index Rate" to indicate that the interest rate for non-LIBOR borrowings will not be less than the LIBOR rate for an interest period of three months. At September 30, 2008 and March 31, 2008 we had $45.6 million and $31.3 million, respectively, outstanding on the revolving facility and, based on the facility's borrowing base and other requirements, approximately $20.0 million and $12.0 million, respectively, was available. At March 31, 2008 we had $9.7 million outstanding related to our Term Loan facility, which was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility. Interest under the revolving facility was at the index rate plus 1.5% and LIBOR plus 2.75% at September 30, 2008 (6.5% and 6.2%, respectively) and at the index rate plus .75% and LIBOR plus 2.00% at March 31, 2008 (6.0% and 4.6%, respectively) and is payable monthly. At March 31, 2008, interest under the Term Loan facility was at LIBOR plus 7.5% (10.6%). Overview
We are a publisher and distributor of physical and digital home entertainment and multimedia products, including PC software, DVD video, video games and accessories. Our business is divided into two business segments - publishing and distribution. We believe our established relationships throughout the supply chain, our broad product offering and our distribution facility permit us to offer industry-leading home entertainment and multimedia products to our retail customers and to provide access to attractive retail channels for the publishers of such products. Our broad base of customers includes: (i) wholesale clubs,
(ii) mass merchandisers, (iii) other third-party distributors, (iv) computer specialty stores, (v) discount retailers, (vi) book stores, (vii) office superstores, and (viii) electronic superstores. Through our publishing business, which generally has higher gross margins than our distribution business, we own or license various PC software, DVD video titles and other related merchandising and broadcasting rights. Our publishing segment packages, brands, markets and sells directly to retailers, third-party distributors and our distribution business. Our publishing segment currently consists of Encore, BCI and FUNimation. Encore licenses and publishes personal productivity, genealogy, utility, education and interactive gaming PC products. BCI is a provider of niche DVD video products. FUNimation is the leading provider of anime home video products in the United States.

Through our distribution business, we distribute and provide fulfillment services in connection with a variety of finished goods that are provided by our vendors, which include PC software, DVD video, video games, accessories and independent music labels (through May 2007). These vendors provide us with products which we, in turn, distribute to our retail customers. Our distribution business focuses on providing vendors and retailers with a range of value-added services including: vendor-managed inventory, Internet-based ordering, electronic data interchange services, fulfillment services and retailer-oriented marketing services.
Forward-Looking Statements / Important Risk Factors We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the SEC, including this Report on Form 10-Q, news releases, written or oral presentations made by officers or other representatives made by us to analysts, shareholders, investors, news organizations and others and discussions with management and other representatives of us. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. Our forward-looking statements are based on assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us. In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important factors, but not necessarily all important factors, include the following: the Company's revenues being derived from a small group of customers; the Company's dependence on significant vendors and manufacturers and the popularity of their products; pending litigation or regulatory investigation may subject the Company to significant costs; pending SEC investigation or litigation could subject the Company to significant costs, judgments or penalties and could divert management's attention; some revenues are dependent on consumer preferences and demand; the seasonality and variability in the Company's business and that decreased sales during peak season could adversely affect its results of operations; the Company's dependence on a small number of licensed property and licensors in the anime genre; some revenues are substantially dependent on television exposure; technological developments, particularly in the electronic downloading arena which could adversely impact sales, margins and results of operations; increased counterfeiting or piracy which could negatively affect demand for the Company's products; the Company may not be able to protect its intellectual property; the loss of key personnel could effect the depth, quality and effectiveness of the management team; the Company's ability to meet its significant working capital requirements or if working capital requirements change significantly; product returns or inventory obsolescence could reduce sales and profitability or negatively impact the Company's liquidity; the potential for inventory values to decline; adjustments to the recorded goodwill impairment charge or additional impairment in the carrying value of goodwill or other assets could negatively affect our consolidated results of operations and net worth; future performance of our businesses could result in impairment to our other tangible and intangible assets; the Company's credit exposure due to reseller arrangements or negative trends which could cause credit loss; the Company's ability to adequately and timely adjust cost structure for decreased demand; the Company's ability to compete effectively in distribution and publishing, which are highly competitive industries; the Company's dependence on third-party shipping of its product; the Company's dependence on information systems; the acquisition strategy of the Company could disrupt other business segments and/or management; interruption of the Company's business or catastrophic loss at a facility which could curtail or shutdown its business; the potential for future terrorist activities to disrupt operations or harm assets; increased costs related to legislative actions, insurance costs and new accounting pronouncements could impact results of operations; the level of indebtedness could adversely affect the Company' s financial condition; a change in interest rates on our variable rate debt could adversely impact the Company's operations; the Company may be unable to generate sufficient cash flow to service debt obligations; the Company may incur additional debt, which could exacerbate the risks associated with current debt levels; the Company's debt agreements limit our operating and financial flexibility; fluctuations in stock price could adversely affect the Company's ability to raise capital or make our securities undesirable; the exercise of outstanding warrants and options adversely affecting stock price; the Company's anti-takeover provisions,

its ability to issue preferred stock and its staggered board may discourage take-over attempts beneficial to shareholders; the Company does not plan to pay dividends on common stock, thus shareholders should not expect a return on investment through dividend payments; and the Company's directors may not be personally liable for certain actions which may discourage shareholder suits against them.
A detailed statement of risks and uncertainties is contained in our reports to the SEC, including, in particular, our Annual Report on Form 10-K for the year ended March 31, 2008 and other public filings and disclosures. Investors and shareholders are urged to read these documents carefully. Critical Accounting Policies
We consider our critical accounting policies to be those related to revenue recognition, production costs and license fees, allowance for doubtful accounts, goodwill and intangible assets, impairment of long-lived assets, inventory valuation, share-based compensation, income taxes, and contingencies and litigation. There have been no material changes to these critical accounting policies since March 31, 2008, as discussed in greater detail under this heading in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended March 31, 2008.
As described in our financial statements, the Company reviews goodwill for potential impairment annually for each reporting unit, or when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. As described above, during the quarter ended September 30, 2008, the Company determined that the fair value of two of its reporting units was less than their fair values, and accordingly, an impairment of goodwill was recorded. In determining the amount of impairment, SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), requires the Company to perform an analysis in which the fair values of the assets and liabilities of the reporting units are determined as if the reporting units had been acquired in a current business combination. This analysis has not been finalized as of the filing date of the September 30, 2008 financial statements, and as allowed by SFAS 142, the Company has recorded an estimate of impairment in the September 30, 2008 financial statements. This analysis will be finalized during the quarter ended December 31, 2008, and any change in the estimate of impairment will be recorded in the December 31, 2008 financial statements.
Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations In evaluating our financial performance and operating trends, management considers information concerning net sales before inter-company eliminations of sales. Management believes these non-GAAP measures are useful because they provide supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses these non-GAAP measures to evaluate financial results, develop budgets and manage expenditures. The method we use to produce non-GAAP results is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Net sales before inter-company eliminations has limitations as a supplemental measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table represents a reconciliation of GAAP net sales to net sales before inter-company eliminations:

                                                     Three Months Ended                 Six Months Ended
                                                       September 30,                     September 30,
                                                        (Unaudited)                       (Unaudited)
(In thousands)                                     2008             2007             2008             2007
Net sales:
Publishing                                       $  28,794        $  27,043        $  56,212        $  56,666
Distribution                                       158,458          133,391          291,553          257,281

Net sales before inter-company eliminations        187,252          160,434          347,765          313,947
Inter-company sales                                (16,956 )        (16,719 )        (35,444 )        (33,210 )

Net sales as reported                            $ 170,296        $ 143,715        $ 312,321        $ 280,737

Results of Operations
   The following table sets forth for the periods indicated the percentage of
net sales represented by certain items included in our "Consolidated Statements
of Operations."

                                                    Three Months Ended                 Six Months Ended
                                                      September 30,                     September 30,
                                                       (Unaudited)                       (Unaudited)
                                                  2008             2007             2008             2007
Net sales:
Publishing                                         16.9 %           18.8 %           18.0 %           20.2 %
Distribution                                       93.1             92.8             93.4             91.6
Inter-company sales                               (10.0 )          (11.6 )          (11.4 )          (11.8 )

Total net sales                                   100.0            100.0            100.0            100.0
Cost of sales, exclusive of amortization
and depreciation                                   85.8             84.6             85.2             83.6

Gross profit                                       14.2             15.4             14.8             16.4

Operating expenses
Selling and marketing                               4.2              4.7              4.1              4.9
Distribution and warehousing                        1.8              2.4              1.9              2.2
General and administrative                          4.8              5.6              5.3              5.5
. . .