Despite the challenges facing the economy as a whole, we are committed to licensing, acquisition of content and driving sales and efficiencies. We intend to monitor the current business environment in order to adjust our strategies appropriately.
Working Capital and Debt
Our business is working capital intensive and 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. In March 2007, we amended and restated our credit agreement with General Electric Capital Corporation ("GE") and entered into a four year Term Loan facility with Monroe Capital Advisors, LLC ("Monroe"). The GE agreement currently provides for a $65.0 million revolving credit facility and the Monroe agreement provided for a $15.0 million Term Loan facility, which was paid in full in connection with the Third Amendment of the GE revolving facility on June 12, 2008.
At June 30, 2009 and March 31, 2009 we had $23.2 million and $24.1 million, respectively, outstanding on the revolving facility and, based on the facility's borrowing base and other requirements, $9.3 million and $16.2 million, respectively, was available.
In association with the revolving credit facility, the Company also pays certain facility and agent fees. Weighted average interest under the revolving facility was at 5.1% and 5.6% at June 30, 2009 and March 31, 2009, respectively, and is payable monthly.
Forward-Looking Statements / 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 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; a continued deterioration in businesses of significant customers, due to weak economic conditions, could harm the Company's business; 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; further impairment in the carrying value of the Company's assets could negatively affect consolidated results of operations; 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 publishing and distribution, which are highly competitive industries; the Company's dependence on third-party shipping of its product; the Company's dependence on information systems; future acquisitions could disrupt business; 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; 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 agreement limits 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 Company may fail to meet the Nasdaq Global Market requirements and therefore its common stock could be delisted; 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, 2009 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 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, 2009. 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 that are not prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. 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 its financial results, develop budgets and manage expenditures. The method we use to produce non-GAAP results is not computed according to GAAP, 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
                                                             June 30,
                                                            (Unaudited)
        (In thousands)                                  2009          2008
        Net sales:
        Publishing                                    $  24,865     $  27,418
        Distribution                                    121,396       133,095

        Net sales before inter-company eliminations     146,261       160,513
        Inter-company sales                             (11,955 )     (18,488 )

        Net sales as reported                         $ 134,306     $ 142,025

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
                                                                    June 30,
                                                                   (Unaudited)

                                                                 2009          2008

 Net sales:
 Publishing                                                        18.5 %       19.4 %
 Distribution                                                      90.4         93.6
 Inter-company sales                                               (8.9 )      (13.0 )

 Total net sales                                                  100.0        100.0
 Cost of sales, exclusive of amortization and depreciation         82.5         84.4

 Gross profit                                                      17.5         15.6

 Operating expenses
 Selling and marketing                                              3.8          4.0
 Distribution and warehousing                                       1.5          2.0
 General and administrative                                         6.0          6.0
 Depreciation and amortization                                      1.3          1.6

 Total operating expenses                                          12.6         13.6

 Income from operations                                             4.9          2.0
 Interest expense                                                  (0.5 )       (1.1 )
 Other income (expense), net                                        0.3         (0.1 )

 Net income - before taxes                                          4.7          0.8
 Income tax expense                                                (1.6 )       (0.3 )

 Net income                                                         3.1 %        0.5 %

Publishing Segment
The publishing segment includes Encore, FUNimation and BCI. In fiscal 2009, BCI began winding down its licensing operations related to budget DVD video. Fiscal 2010 First Quarter Results Compared To Fiscal 2009 First Quarter Net Sales
Net sales for the publishing segment were $24.9 million (before inter-company eliminations) for the first quarter of fiscal 2010 compared to $27.4 million (before inter-company eliminations) for the first quarter of fiscal 2009. The 9.3% decrease in net sales over the prior year quarter was primarily due to the wind down of BCI in fiscal 2009 which generated $4.4 million in net sales during the first quarter of fiscal 2009 compared to $136,000 during the first quarter of fiscal 2010 and decreased sales due to the deteriorating economic conditions. These sales decreases were partially offset by an increase in sales of anime products of $4.1 million due to increased sales to a major retailer and an agent fee related to a new licensing agreement. The Company believes future net sales will be dependent upon the ability to continue to add new, appealing content and upon the strength of the retail environment and overall economic conditions. Gross Profit
Gross profit for the publishing segment was $11.8 million or 47.6% of net sales for the first quarter of fiscal 2010 compared to $10.3 million or 37.5% of net sales for the first quarter of fiscal 2009. The increase in gross profit was a result of product sales mix and reduced royalty rates payable to certain licensors. The increase in gross profit margin percentage from 37.5% to 47.6%, a total increase of 10.1%, was due to improved margins from product sales mix, reduced royalty rates payable to certain licensors and an agent fee related to a new licensing agreement. We expect gross profit rates to fluctuate depending principally upon the make-up of products sold and the amount, if any, of sublicensing or agency revenue.
Operating Expenses
Total operating expenses decreased $1.1 million for the publishing segment to $5.7 million or 22.8% of net sales, for the first quarter of fiscal 2010, from $6.8 million or 24.9% of net sales for the first quarter of fiscal 2009. Overall expenses decreased in all categories of operating expenses except general and administrative expense.
Selling and marketing expenses for the publishing segment were $2.1 million or 8.5% of net sales for the first quarter of fiscal 2010 compared to $2.8 million or 10.4% of net sales for the first quarter of fiscal 2009. The decrease was principally due to expense savings from the restructuring activities that we undertook during fiscal 2009.
General and administrative expenses for the publishing segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the publishing segment were $2.8 million or 11.4% of net sales for the first quarter of fiscal 2010 compared to $2.6 million or 9.5% of net sales for the first quarter of fiscal 2009. The increase was primarily due to the $648,000 performance based cash compensation accrual recorded during the first quarter of fiscal 2010 compared to a nominal bonus accrual recorded during the prior year quarter.
Depreciation and amortization expense for the publishing segment was $732,000 for the first quarter of fiscal 2010 compared to $1.4 million for the first quarter of fiscal 2009. The reduction in amortization expense was associated with the masters' cost basis reduction, which occurred as part of the restructuring activities that we undertook during fiscal 2009, as well as a decrease in the amortization of acquisition-related intangibles. Operating Income
The publishing segment had net operating income of $6.2 million for the first quarter of fiscal 2010 compared to $3.4 million for the first quarter of fiscal 2009.

Distribution Segment
The distribution segment distributes PC software, DVD video, video games and accessories.
Fiscal 2010 First Quarter Results Compared To Fiscal 2009 First Quarter Net Sales
Net sales for the distribution segment decreased 8.8% to $121.4 million (before inter-company eliminations) for the first quarter of fiscal 2010 compared to $133.1 million (before inter-company eliminations) for the first quarter of fiscal 2009. Net sales decreased in the software product group to $101.0 million during the first quarter of fiscal 2010 from $105.5 million for the same period last year due to loss of sales from a large retailer that filed for bankruptcy during fiscal 2009 and subsequently decided to liquidate. DVD video net sales decreased to $11.5 million in the first quarter of fiscal 2010 from $13.7 million in first quarter of fiscal 2009, due primarily to a decrease in sales resulting from the timing of new releases and the overall deteriorating economic conditions. Video games net sales decreased to $8.9 million in the first quarter of fiscal 2010 from $13.9 million for the same period last year, due to several new releases in the prior year. The Company believes future net sales results will be dependent upon the ability to continue to add new, appealing content and upon the strength of the retail environment and overall economic conditions.
Gross Profit
Gross profit for the distribution segment was $11.7 million or 9.7% of net sales for the first quarter of fiscal 2010 compared to $11.9 million or 8.9% of net sales for first quarter of fiscal 2009. The decrease in gross profit was primarily due to the sales volume decrease. The increase in gross profit margin percentage for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 was due to the increased sales of higher margin products. We expect gross profit rates to fluctuate depending principally upon the make-up of products sold.
Operating Expenses
Total operating expenses for the distribution segment were $11.4 million or 9.4% of net sales for the first quarter of fiscal 2010 compared to $12.5 million or 9.4% as a percent of net sales for the first quarter of fiscal 2009. Overall expenses for general and administrative and distribution and warehouse expenses decreased, which were partially offset by the increased selling and marketing and depreciation and amortization expenses.
Selling and marketing expenses for the distribution segment increased to $3.1 million or 2.5% of net sales for the first quarter of fiscal 2010 compared to $2.9 million or 2.2% of net sales for the first quarter of fiscal 2009 primarily due to an increase in commission expense driven by the payment of commissions to customer specific brokers who achieved increased sales.
Distribution and warehousing expenses for the distribution segment decreased to $2.1 million or 1.7% of net sales for the first quarter of fiscal 2010 compared to $2.9 million or 2.2% as a percent of net sales for the first quarter of fiscal 2009 due to the restructuring activities, a workforce reduction completed during fiscal 2009 and operational efficiencies.
General and administrative expenses for the distribution segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the distribution segment were $5.2 million or 4.3% of net sales for the first quarter of fiscal 2010 compared to $5.9 million or 4.4% of net sales for the first quarter of fiscal 2009. The decrease in the first quarter of fiscal 2010 was primarily a result of reduced expenses related to the fiscal 2009 ERP implementation of $1.0 million, a workforce reduction and a decrease in professional fees, which were offset by the $1.0 million performance based cash compensation accrual recorded during the first quarter of fiscal 2010 compared to a nominal bonus accrual recorded during the prior year quarter.
Depreciation and amortization for the distribution segment was $1.0 million for the first quarter of fiscal 2010 compared to $935,000 for the first quarter of fiscal 2009. This increase was primarily due to the depreciation of the ERP system, which was implemented during fiscal 2009.

Operating Income (Loss)
Net operating income for the distribution segment was $364,000 for the first quarter of fiscal 2010 compared to net operating loss of $691,000 for the first quarter of fiscal 2009.
Consolidated Other Income and Expense
Interest expense was $719,000 for first quarter of fiscal 2010 compared to $1.6 million for first quarter of fiscal 2009. The decrease in interest expense for the first quarter of fiscal 2010 was a result of a reduction in debt, a reduction of effective interest rates and a write-off of debt acquisition costs of $490,000 during the first quarter of fiscal 2009. Interest income, which primarily relates to interest on available cash balances, was $7,000 for the first quarter of fiscal 2010 compared to $15,000 for the same period last year. Other income (expense), net, for the three months ended June 30, 2009 was net income of $451,000, which amount consisted of foreign exchange gain. Other income (expense), net, for the three months ended June 30, 2008 was net expense of $98,000 and consisted of foreign exchange loss. Consolidated Income Tax Expense
We recorded consolidated income tax expense for the first quarter of fiscal 2010 of $2.1 million or an effective tax rate of 33.5% compared to $428,000 or an effective tax rate of 40.6% for first quarter of fiscal 2009. The decrease in our effective tax rate for the first quarter of fiscal 2010 was primarily due to a change in the effective state income tax rate as a result of our completed fiscal 2009 income tax returns.
Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income streams and the impact of tax planning strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined that it is more likely than not, based on the weight of available evidence, we would not be able to realize all or part of our deferred tax assets. An assessment is required of all available evidence, both positive and negative, to determine the amount of any required valuation allowance. . . .