MERISEL INC /DE/ - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - MERISEL INC /DE/	Financial_Report.xls
EX-32 - EXHIBIT 32 - MERISEL INC /DE/	ex_32.htm
EX-99.1 - EXHIBIT 99.1 - MERISEL INC /DE/	ex_99-1.htm
EX-31.1 - EXHIBIT 31-1 - MERISEL INC /DE/	ex_31-1.htm
EX-31.2 - EXHIBIT 31-2 - MERISEL INC /DE/	ex_31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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 01-17156

MERISEL, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4172359
(State or Other Jurisdiction of Incorporation or Organization)	(I. R. S. Employer Identification No.)

127 West 30th Street, 5th Floor New York, NY	10001
(Address of Principal Executive Offices)	(Zip Code)

1 (212) 594-4800
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). YES x NO ¨

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

¨ LARGE ACCELERATED FILER, ¨ ACCELERATED FILER ¨ NON-ACCELERATED FILER x SMALLER REPORTING COMPANY

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YES ¨ NO x

As of August 15, 2011 the registrant had 7,214,784 shares of Common Stock outstanding.

MERISEL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Reference
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 4.	Controls and Procedures	22
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
	SIGNATURES	28

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “expects,” “will,” “estimates,” “plans,” “intends,” and similar expressions constitute “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. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and they are included for purposes of complying with these safe harbor provisions. These forward-looking statements reflect current views about the plans, strategies and prospects of Merisel, Inc. (the “Company”), and are based upon information currently available to the Company and on current assumptions. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

In evaluating these forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in the Company’s other reports and documents filed with the Securities and Exchange Commission (“SEC”). You are cautioned not to place undue reliance on these forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MERISEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


	June 30, 2011			December 31, 2010
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	2,121		$	12,390
Accounts receivable, net of allowance of $235 and $201, respectively		12,792			14,033
Inventories		2,617			1,853
Prepaid expenses and other current assets		2,134			1,025
Total current assets		19,664			29,301

Property, plant and equipment, net		5,037			5,711
Restricted cash		2,232			2,232
Trademarks		6,190			6,190
Other intangible assets, net		2,761			2,982
Other assets		1,162			408
Total assets	$	37,046		$	46,824
LIABILITIES, TEMPORARY EQUITY, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	4,405		$	4,440
Accrued liabilities		5,673			7,374
Capital lease obligations, current maturities		436			286
Revolving credit agreement		4,143			8,016
Total current liabilities		14,657			20,116

Capital lease obligations, less current maturities		958			503
Mandatorily redeemable series A preferred stock, $.01 par value, authorized 360,000 shares; 140,000 and 0 shares issued and outstanding, respectively		11,846			-
Other liabilities		384			492
Total liabilities		27,845			21,111

Commitments and Contingencies

Temporary equity:
Convertible preferred stock, $.01 par value, authorized 600,000 shares; 0 and 339,375 shares issued and outstanding, respectively		-			34,616

Stockholders' equity (deficit):
Common stock, $.01 par value, authorized 30,000,000 shares; 8,453,671 issued and 7,214,784 outstanding		84			84
Additional paid-in capital		285,202			265,836
Accumulated deficit		(274,141	)		(272,879	)
Treasury stock, at cost, 1,238,887 shares repurchased		(1,944	)		(1,944	)

Total stockholders' equity (deficit)		9,201			(8,903	)
Total liabilities, temporary equity, and stockholders' equity (deficit)	$	37,046		$	46,824

See accompanying notes to unaudited condensed consolidated financial statements.

MERISEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net sales	$	15,285		$	16,749		$	32,640		$	31,755

Cost of sales		9,227			9,675			19,174			18,986

Gross profit		6,058			7,074			13,466			12,769

Selling, general & administrative expenses		6,587			6,839			13,769			13,524

Operating income (loss)		(529	)		235			(303	)		(755	)

Interest expense, net		571			98			990			229

Income (loss) before benefit for income tax		(1,100	)		137			(1,293	)		(984	)

Income tax benefit		-			(257	)		(31	)		(257	)

Net income (loss)		(1,100	)		394			(1,262	)		(727	)
Preferred stock dividends		-			652			-			1,292
Loss available to common stockholders	$	(1,100	)	$	(258	)	$	(1,262	)	$	(2,019	)

Loss per share (basic and diluted):
Net loss available to common stockholders	$	(0.15	)	$	(0.04	)	$	(0.17	)	$	(0.28	)
Weighted average number of shares
Basic		7,215			7,213			7,215			7,213
Diluted		7,215			7,213			7,215			7,213

See accompanying notes to unaudited condensed consolidated financial statements.

MERISEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,262	)	$	(727	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		-			3
Deferred occupancy costs		(108	)		(81	)
Bad debt provision		-			88
Amortization of discount on preferred stock		96			-
Depreciation and amortization		1,472			2,093
Changes in operating assets and liabilities:
Accounts receivable		1,241			(1,534	)
Inventories		(764	)		(308	)
Prepaid expenses and other assets		(1,863	)		(337	)
Accounts payable		(35	)		(1,535	)
Accrued liabilities		(991	)		1,200
Net cash used in operating activities		(2,214	)		(1,138	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(577	)		(357	)
Net cash used in investing activities		(577	)		(357	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments		(105	)		(131	)
Revolving credit agreement repayments		(3,873	)		(2,050	)
Redemption of preferred stock		(3,500	)		-
Net cash used in financing activities		(7,478	)		(2,181	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(10,269	)		(3,676	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		12,390			10,581
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,121			6,905

Cash paid during the period for:
Interest expense	$	601		$	262
Non-cash investing and financing activities:
Preferred dividends accumulated		-			1,292
Extinguishment of convertible preferred stock	$	19,366			-

See accompanying notes to unaudited condensed consolidated financial statements.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

1. Description of Business

Merisel, Inc. and Subsidiaries (the “Company” or “Merisel”) operate in a single reporting segment, the visual communications services business. It entered that business beginning March 2005, through a series of acquisitions, which continued through 2006. These acquisitions include Color Edge, Inc. and Color Edge Visual, Inc. (together “Color Edge”); Comp 24, LLC (“Comp 24”); Crush Creative, Inc. (“Crush”); Dennis Curtin Studios, Inc. (“DCS”); Advertising Props, Inc. (“AdProps”); and Fuel Digital, Inc. (“Fuel”). The acquisitions of the Company’s seven operating entities are referred to below as “Acquisitions.”

2. Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2011, and for the three and six months ended June 30, 2011 and 2010 are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments consisting of normal recurring adjustments necessary to present fairly the consolidated financial position of Merisel as of June 30, 2011, and the consolidated results of operations and cash flows for the interim periods ended June 30, 2011 and 2010. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results of operations for any interim period are not necessarily indicative of the results of operations for any other future interim period or for a full fiscal year.

Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2011 and amended on May 2, 2011. The condensed consolidated balance sheet at December 31, 2010, has been derived from audited consolidated financial statements at that date. The Company has evaluated subsequent events through the date of issuance of the Company’s condensed financial statements.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

3.	Recently Issued Accounting Standards

In May 2011, The FASB has issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

4.	Inventories

Inventories consist of the following:

	June 30, 2011			December 31, 2010

Raw materials	$	1,482		$	1,319
Work-in-progress		1,138			537
Reserve for obsolescence		(3	)		(3	)
Inventory, net	$	2,617		$	1,853

5.	Intangibles

Intangible assets, net of accumulated amortization, resulting primarily from the Acquisitions accounted for under the purchase method of accounting, consist of the following:

	June 30, 2011		December 31, 2010
Customer relationships	$	2,313	$	2,436
Non-compete agreements		-		15
Trade know-how		448		531
Total	$	2,761	$	2,982

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

Amortization expense relating to intangible assets was $107 and $157 for the three months ended June 30, 2011 and 2010, and $221 and $416 for the six months ended June 30, 2011 and 2010, respectively.

Estimated amortization expense on an annual basis for the succeeding five years is as follows:

For the Twelve-Month Period Ended June 30,
	Amount
2012	$	413

2013		413

2014		336

2015		266

2016		245

Thereafter		1,088

Total	$	2,761

6.	Fair Value Measurements

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under FASB ASC 820 (FAS No. 157, “Fair Value Measurements”) are described as follows:

Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3- Inputs that are unobservable for the asset or liability.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses an income approach and inputs that constitute level 3. During the fourth quarter of each year and earlier if necessary, the Company evaluates indefinite-lived and definite-lived intangibles for impairment at the reporting unit level.

Financial instruments include cash and cash equivalents. The carrying values of cash and cash equivalents, accounts receivable, security deposits, and accounts payable approximate their estimated fair because of their short-term nature. The revolving credit carrying value approximates fair values due to the variable nature of the interest rate.

7.	Accrued Liabilities

Accrued liabilities consist of the following:

	June 30, 2011		December 31, 2010

Accrued liabilities:
Compensation and other benefit accruals	$	2,809	$	4,241
Other accruals		2,864		3,133
Total accrued liabilities	$	5,673	$	7,374

8.	Income Taxes

At December 31, 2010, after weighing both the positive and negative evidence of realizing the deferred tax asset, management determined that, based on the weight of all available evidence, it was more likely than not that the Company would not realize its deferred tax assets. The most influential weighted negative evidence considered was three consecutive years of current taxable losses and uncertainty as to when taxable profit can be predicated in the future due to current economic environment. As such, the Company kept a full valuation allowance on its net deferred tax assets as of June 30, 2011 and December 31, 2010.

The valuation allowance on the Company’s net deferred tax assets is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of all or a portion of the valuation allowance. In addition, until such time that the Company determines it is more likely than not that it will generate sufficient taxable income to realize all or a portion of its deferred tax assets, income tax benefits associated with future period losses, if any, will be fully reserved and income taxes associated with future period income will offset such reserve.

During 2010, the Company filed amended New York State and City returns. During the first quarter of 2011, the Company received a refund of $31 from New York and recorded an income tax benefit in that amount.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

On March 21, 2011, Phoenix Acquisition Company II, L.L.C. (“Phoenix”), the holder of 5,000,000 shares or 69.3% of the Company’s outstanding common stock along with its parent entity Stonington Capital Appreciation 1994 Fund, L.P. (the “Fund”), and certain of their affiliates (collectively, “Stonington”) completed the transfer of all 5,000,000 shares of common stock to Saints Capital VI, L.P. (“Saints”). The Company believes this transaction constitutes a change of control and anticipates that its ability to utilize its net operating loss carryforward will be reduced materially on an annual basis. Accordingly, if in the future the Company believes that it is more likely than not to utilize a portion of its deferred tax assets, the reduction in the 100% reserve on these assets may be materially affected by this annual limitation. Additionally, if the Company recognizes taxable income in the future the amount of cash paid for taxes may be materially affected by this annual limitation.

Debt

Debt is classified on the balance sheet as follows:

	June 30, 2011		December 31, 2010
Current:
Capital lease obligations	$	436	$	286
Revolving credit agreement		4,143		8,016
		4,579		8,302
Non-current:
Capital lease obligations		958		503
Mandatorily redeemable preferred stock		11,846		-
		12,804		503

Total	$	17,383	$	8,805

Mandatorily Redeemable Preferred Stock

On February 4, 2011, the Company issued 140,000 shares of a Series A Preferred Stock, par value $.01 per share, at an original issue price of $100 per share. The Series A Preferred was issued to Stonington as part of the consideration given in the redemption of all 346,163 outstanding shares of the Company’s Convertible Preferred Stock (see Note 12). On March 21, 2011, Stonington completed the sale of all Series A Preferred to Saints in conjunction with the Stock Purchase Agreement dated February 18, 2011.

The Series A Preferred earns cumulative cash or stock dividends at the rate of 12% per annum, payable quarterly in arrears and accruing regardless of whether they are declared by the Board of Directors of the Company or funds are legally available to pay them. Any dividends accrued and not paid by the Company in cash shall be paid in additional shares of Series A Preferred valued at $100 per share. For the three months ended June 30, 2011, dividends of $420 were accrued as interest expense as the Series A Preferred is treated as debt for accounting purposes.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

The Series A Preferred must be redeemed by the Company on or before February 4, 2017 and may be redeemed by the Company, in whole or in part, at any time after February 4, 2013, in each case at a price of $100 per share, plus any accrued but unpaid dividends. Based on the guidance in ASC 480, “Distinguishing Liabilities from Equity,” the Company has classified the Series A Preferred as a liability because it is mandatorily redeemable on February 4, 2017.

The Company used the March 21, 2011 Stonington and Saints sale transaction (see Note 8) as the basis for measuring fair value. Stonington sold its 5,000,000 common shares and all 140,000 shares of the Series A Preferred to Saints for $14,500. The Company determined the fair value of the Series A Preferred Stock of $11,750 using the difference between the total transaction price and the fair value of the common stock as of the date of the Stock Purchase Agreement on February 18, 2011. The unamortized discount of $2,250 on the preferred stock will be amortized using the interest method over the 72 month term of the Series A Preferred. For the three and six months ended June 30, 2011, the amortization of the discount of $63 and $96 was recorded as interest expense. The Company also incurred $1,061 of costs in relation to this transaction, which were recorded as deferred financing cost to be amortized over the term of the Series A Preferred.

The Series A Preferred has no conversion rights and will have no voting rights except (i) the right to elect a single additional member to the Company’s Board of Directors upon the Company’s failure for at least four consecutive quarters to pay at least an 8% cash dividend per annum; and (ii) to separately vote or consent to alter the terms of the Series A Preferred, create or increase the number or terms of shares of any class that is senior to or in parity with the Series A Preferred or to incur debt securities senior to the Series A Preferred, other than the Company’s existing credit facility or any replacement thereof if the incurrence of debt pursuant to such debt securities would cause the ratio of the Company’s total indebtedness to EBITDA to be greater than 3.5:1 excluding the Series A Preferred. The Certificate of Designation limits the ability of the Company to pay dividends on its common stock.

Revolving Credit Agreement

During the second quarter of 2010, the Company entered into a Revolving Credit and Security Agreement (the “PNC Agreement”) with PNC Bank (“PNC”). The PNC credit facility (the “Facility”) consists of a $14,000 revolving loan, or revolver, including up to $3,000 in letters of credit secured by separate cash collateral. Proceeds from the revolver were used to repay the indebtedness owed to Amalgamated Bank under a predecessor credit facility.

The maturity date of the Facility is August 13, 2013. The interest rate of the Facility is 3% over a “Base Rate,” which is a floating rate equal to the highest of (a) PNC’s publicly announced prime rate then in effect, (b) the Federal Funds Open Rate plus 0.5%, or (c) the LIBOR Rate plus 1%; or, at the advance election of the Company, 4% over PNC’s 30, 60 or 90 day Eurodollar Rate. As of June 30, 2011 the Base Rate plus 3% is 6.25%. The revolver is also subject to a 0.75% fee per annum payable quarterly on the undrawn amount.

The PNC Agreement requires that all customer receivables collected shall be deposited by the Company into a lockbox account controlled by PNC. All funds deposited into the lockbox will immediately be used to pay down the Facility. Additionally, the PNC agreement contains provisions that allow PNC to accelerate the scheduled maturities of the Facility for conditions that are not objectively determinable. As such, the Company has classified the PNC balance as a current liability.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

On February 3, 2011, the Company entered into a Consent, Waiver and Amendment No. 1 (the “PNC Amendment”) to the PNC Agreement. The PNC Amendment consents to the transactions described in the Redemption Agreement between the Company and Stonington (see Note 12), waives certain covenants in order to permit the transactions, amends certain definitions and covenants contained in the Credit Agreement to account for the Series A Preferred and imposes financial covenants which must be satisfied prior to each cash dividend payment in respect of the Series A Preferred. The Facility includes two financial covenants requiring that the Company maintain (i) no EBIDTA losses on a consolidated basis in any quarterly period beginning with the quarter ending September 30, 2011 and (ii) pursuant to the PNC Amendment a fixed charge coverage ratio (defined as EBITDA less unfinanced capital expenditures, less cash dividends, less cash paid for taxes over all debt service) of not less than 1.1 to 1.0 beginning in the quarter ending March 31, 2011, going forward. The Company was in compliance with all covenants as of June 30, 2011.

On March 21, 2011, the Company entered into a Consent, Waiver and Amendment No. 2 (the “PNC Amendment No. 2”) to the PNC agreement. Pursuant to the PNC Amendment No. 2, PNC consents to the transactions described in the Stock Purchase Agreement entered into on February 18, 2011, between Stonington and Saints and amends certain definitions and covenants to replace references to Stonington with references to Saints. It further amends certain definitions and covenants which treat changes in a majority of the members of the Company’s Board of Directors as a change of control to exempt changes in the Company’s Board during the period between March 21, 2011 and June 22, 2011, which are approved either by the existing directors or by Saints.

Capital Leases

During the second quarter of 2011, the Company entered into a new capital lease agreement totaling $781. The proceeds from the lease were used to finance the acquisition of production equipment. The lease has a 60-month term expiring in March 2016 and has a fixed rate of 6.75%.

As of June 30, 2011 and December 31, 2010, the balance of all capital leases was $1,394 and $789, respectively, of which $436 and $286 is current, respectively.

10.	Commitments and Contingencies

In September 2007, Nomad Worldwide, LLC and ImageKing Visual Solutions, Inc. (“ImageKing”) filed a civil complaint in the Supreme Court of the State of New York, New York County naming as defendants Color Edge Visual and one of the Company’s sales employees. The plaintiffs allege that the employee breached a confidentiality and non-solicitation agreement by soliciting certain customers of the plaintiffs’ while employed by Color Edge Visual. The plaintiffs allege causes of action for breach of contract, breach of fiduciary duty, conversion, tortious interference with contractual relations, tortious interference with prospective business relations, misappropriation of trade secrets, unfair competition and unjust enrichment. The plaintiffs seek compensatory and punitive damages totaling $5,000. The defendants have answered the complaint, asserting various affirmative defenses, and denied liability. The parties were previously engaged in discovery. On May 1, 2008, ImageKing filed for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (Docket Number 08-11654-AJG). On March 22, 2011, the Court converted the cases to those under Chapter 7 of the Bankruptcy Code. ImageKing has not taken any steps to prosecute the Nomad case since its bankruptcy filing.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

In connection with the Asset Purchase Agreement among Crush Creative, Inc., its shareholders and MCRU, LLC dated July 6, 2005 (the “Crush APA”), Merisel informed the former shareholders of Crush Creative, Inc. (the “Crush Sellers”) in April 2009 that Crush Creative’s continuing business had not met the performance criteria that would entitle the Crush Sellers to an earnout payment for the one-year period ended December 31, 2008. On April 29, 2009 and September 14, 2009, Merisel received notice from the Crush Sellers that they contest the calculations Merisel used to reach this conclusion. The parties are following the process set forth in the Crush APA for resolving such disputes through appointment of a third-party accounting firm (the “Arbitration Firm”), which will arbitrate the dispute. If the Arbitration Firm finds that Crush Creative has met the performance criteria set forth in the Crush APA, the Crush Sellers will be entitled to a payment of up to $750. Under the Crush APA, the Arbitration Firm’s determination is final, conclusive and binding.

On May 19, 2009, the President of Crush Creative provided the Company with a letter of resignation, claiming that he was resigning for "Good Reason," as defined by his employment agreement. In particular, he claimed that the Company had breached his employment agreement by reducing his base salary and materially reducing his responsibilities, and that the Company had defamed him. The Company responded by letter dated June 5, 2009, in which it denied the employee’s allegations, provided 60-day notice of non-renewal of the employee’s employment agreement (as required by that agreement), and offered to work with the employee to address, for the remainder of his tenure, the concerns he had raised in his letter. On July 2, 2009, the employee departed the Company.

On June 19, 2009, the Company received a letter from the American Arbitration Association (“AAA”) advising that the employee had filed a Demand for Arbitration with the AAA, asserting a $2,500 claim for alleged unpaid bonuses, base salary, loss of future earnings, damages, and punitive damages. Merisel filed an answer to this claim, in which it denied the substantive allegations, denied that the employee is entitled to the relief demanded, and asserted various affirmative defenses. The parties are currently engaged in discovery. A hearing date is scheduled for October 2011.

In February 2011, the Company filed an order to show cause, request for a temporary restraining order and civil complaint in the Supreme Court of the State of New York, New York County naming as defendants the former President of Fuel, a former executive of Merisel, Splash (New York) Inc. and Splash (Northwest), Inc. (the “defendants”). The complaint alleges, among other things, that the former President of Fuel violated various provisions of his employment agreement with Merisel dated October 4, 2006 (the “Employment Agreement”) and that the defendants worked in concert to deprive the Company of the benefit of the good will of Fuel in connection with the Asset Purchase Agreement between Merisel FD, LLC and Fuel dated October 4, 2006 (the "APA"). The Company alleges causes of action for recovery of chattel/replevin, conversion, unjust enrichment/rescission, trespass, breach of contract, fraudulent inducement, breach of fiduciary duty, tortious interference with contract and interference with prospective advantage. The Company seeks injunctive relief and unspecified compensatory and punitive damages. The Court denied the Company’s application for a temporary restraining order; however, the Court ordered the former President of Fuel to produce certain materials in his possession or control, if any. The defendants have answered the complaint, asserting various affirmative defenses, and denied liability. The parties are currently engaged in discovery.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

In March 2011, the former President of Fuel Digital filed a civil complaint against the Company and two of its officers in the Supreme Court of the State of New York, New York. The plaintiff alleges causes of action for breach of the Employment Agreement, breach of the APA, defamation, tortious interference with prospective business relations, violation of New York Labor Law § 191(3), abuse of process and prima facie tort. The plaintiff seeks compensatory damages of at least $3,000, plus unspecified punitive damages. The defendants have answered the complaint, asserting various affirmative defenses, and denied liability. The parties are currently engaged in discovery.

The Company is involved in certain legal proceedings arising in the ordinary course of business. None of these proceedings is expected to have a material impact on the Company’s financial condition or results of operations. The Company has evaluated its potential exposure and has established reserves for potential losses arising out of such proceedings, if necessary. There can be no assurance that the Company’s accruals will fully cover any possible exposure. For each of the above cases, the Company has not accrued for payment because the amount of loss is not currently probable and/or estimable..

The Company leases certain of its facilities and equipment under non-cancelable operating leases with various expiration dates through 2021. On June 20, 2011, the Company entered into a lease for 77,000 square feet of industrial and graphic production space, with use of outside loading and parking facilities, in Carlstadt, New Jersey. The lease has a 126-month term expiring in December 2021, with an annual base rent obligation ranging from approximately $650 to $700 per year through the lease term, exclusive of real estate tax and operating expense pass throughs estimated at $141 per year in year one. The lease grants the Company an option, exercisable in 2012, to lease an additional 24,000 square feet of adjacent industrial and warehouse space on the same terms per square foot.

11.	Stock-Based Compensation

On December 19, 1997, the Company’s stockholders approved the Merisel Inc. 1997 Stock Award and Incentive Plan (the “1997 Plan”). On December 3, 2008, the Company’s stockholders approved the Merisel, Inc. 2008 Stock Award and Incentive Plan (the “2008 Plan”). Under both the 1997 Plan and the 2008 Plan, incentive stock options and nonqualified stock options as well as other stock-based awards may be granted to employees, directors, and consultants. The 1997 Plan authorized the issuance of an aggregate of 800,000 shares of Common Stock less the number of shares of Common Stock that remain subject to outstanding option grants under any of the Company’s other stock-based incentive plans for employees after December 19, 1997 and are not either canceled in exchange for options granted under the 1997 Plan or forfeited. The 2008 Plan authorized the issuance of an aggregate of 500,000 shares of Common Stock, less the same limit for outstanding options. At June 30, 2011, 51,839 shares were available for grant under the 1997 Plan, and 500,000 shares were available for grant under the 2008 Plan. The grantees, terms of the grant (including option prices and vesting provisions), dates of grant and number of shares granted under the plans are determined primarily by the Board of Directors or the committee authorized by the Board of Directors to administer such plans, although incentive stock options are granted at prices which are no less than the fair market value of the Company's Common Stock at the date of grant.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

Stock Option Grants

As of June 30, 2011, 300,000 options remain outstanding under the 1997 Plan. A summary of the Company’s stock option activity and weighted average exercise price is as follows:

	Options		Weighted Average Exercise Price
Outstanding at December 31, 2010		300,000	$	8.33
Granted		-		N/A
Exercised		-		N/A
Canceled		-		N/A
Outstanding at June 30, 2011		300,000	$	8.33
Options exercisable at June 30, 2011		300,000	$	8.33
Weighted average fair value at date of grant of options granted during the quarter		N/A		N/A

The following table summarizes information about stock options outstanding and exercisable at June 30, 2011:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
	Number		Remaining		Average		Number		Average
Range of	Outstanding		Life		Exercise		Exercisable		Exercise
Exercise Prices	At 6/30/11		In Years		Price		At 6/30/11		Price
$5.00		100,000		3.3	$	5.00		100,000	$	5.00
$8.00		100,000		3.3	$	8.00		100,000	$	8.00
$12.00		100,000		3.3	$	12.00		100,000	$	12.00
$5.00 to $12.00		300,000			$	8.33		300,000	$	8.33

As of June 30, 2011, all stock options were fully vested. There is no total intrinsic value of options outstanding or exercisable at June 30, 2011.

As of June 30, 2011, there was no unrecognized compensation cost related to stock options.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

Restricted Stock Grants

During 2007, the Company awarded 17,500 shares of restricted stock to key officers and employees under the 1997 Plan. Compensation expense, measured by the fair value at the grant date of the Company’s common stock issuable in respect of the units, was recorded over the related three-year vesting period. Compensation expense was $1 and $3 for the three and six months ended June 30, 2010 respectively. There was no compensation expense for the three and six months ended June 30, 2011.

The Company has not awarded any restricted stock grants since August 2007. As of June 30, 2011, all restricted stock grants were fully vested. As of June 30, 2011, there was no unrecognized compensation cost related to nonvested restricted share-based compensation arrangements.

12.	Temporary Equity

In June 2000, Stonington, through its affiliate, Phoenix, purchased 150,000 shares of convertible preferred stock (the “Convertible Preferred”) issued by the Company for an aggregate purchase price of $15,000. The Convertible Preferred provided for an 8% annual dividend payable quarterly in additional shares of Convertible Preferred. Dividends were cumulative and accrued from the original issue date whether or not declared by the Board of Directors. As of December 31, 2010, 196,163 shares of Convertible Preferred had been accrued as dividends and 189,375 shares had been issued in payment of that accrual. The remaining 6,788 shares were issued on January 19, 2011.

On February 4, 2011, pursuant to the Redemption Agreement entered into on January 19, 2011, the Company redeemed all 346,163 outstanding shares of the Company’s Convertible Preferred Stock for consideration of $17,500, consisting of $3,500 paid out of the cash balance at December 31, 2010, plus the issuance of 140,000 shares of a Series A Preferred Stock. The Series A Preferred is classified as debt (see Note 9). The Convertible Preferred Stock redeemed had a value of $34,616 and any difference between the consideration paid out and issued was recorded against additional paid in capital.

As of December 31, 2010, the balance of the Convertible Preferred was $34,616 and, in accordance with FASB ASC 480-10 (EITF Abstracts, Topic D-98 “Classification and Measurement of Redeemable Securities”), the Convertible Preferred was classified outside of permanent equity. Regulation S-X requires preferred securities that are redeemable for cash to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the issuer. The SEC staff believes that if the preferred security holders control a majority of the votes of the board of directors through direct representation on the board of directors or through other rights, the preferred security is redeemable at the option of the holder and its classification outside of permanent equity is required. At December 31, 2010, Stonington’s ownership percentage of the Company’s common stock gave them sufficient votes to change the size and composition of the board of directors. As such, the Company believed the Convertible Preferred was redeemable at the option of the holder and should have been classified outside of permanent equity.

MERISEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(UNAUDITED)

13.	Earnings Per Share and Stockholders Equity

Basic earnings per share are calculated using the average number of common shares outstanding. Diluted earnings per share is computed on the basis of the average number of common shares outstanding plus the effect of dilutive outstanding stock options using the “treasury stock” method.

The Company has announced various Board of Directors’ authorizations to repurchase shares of the Company’s common stock from time to time in the open market or otherwise. On August 14, 2006, the Company announced that its Board of Directors had authorized the expenditure of up to an additional $2,000 for repurchasing the Company’s common stock at a maximum share price to be determined by the Board of Directors from time to time. As of June 30, 2011, the Company had repurchased 1,238,887 shares, for an aggregate cost of $1,944; the repurchased shares are reflected as treasury stock in the accompanying condensed consolidated balance sheets. The Company did not repurchase any shares during the three and six months ended June 30, 2011 and 2010. According to the terms of the PNC Agreement, dated August 13, 2010, the Company may not repurchase its own stock.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the Company’s consolidated historical results of operations and financial condition should be read in conjunction with its unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report.

Merisel is a leading supplier of visual communication solutions. Until August 2004, the Company’s primary operations consisted of a software licensing solutions business. Thereafter, between March 2005 and October 2006, the Company, which conducts its operations through its main operating subsidiary, Merisel Americas, Inc. (“Americas”), acquired its current businesses:

On March 1, 2005, the Company acquired its New York-based graphics solutions, premedia and retouching services businesses, Color Edge, Inc. (“Color Edge”) and Color Edge Visual, Inc. (“Color Edge Visual”), and its New York-based prototype services provider, Comp 24, LLC (“Comp 24”);

On August 8, 2005, the Company acquired its California-based graphics solutions business, Crush Creative, Inc. (“Crush”);

On May 5, 2006, the Company acquired its California-based prototypes business, Dennis Curtin Studios, Inc. (“DCS”);

On May 10, 2006, the Company acquired its Georgia-based prototypes business, Advertising Props, Inc. (“AdProps”); and

On October 1, 2006, the Company acquired its New York-based premedia and retouching services business, Fuel Digital, Inc. (“Fuel”).

All of the acquired businesses operate as a single reportable segment in the graphic imaging industry, and the Company is subject to the risks inherent in that industry.

RESULTS OF OPERATIONS (amounts in thousands except as noted or for per share data)

The Company reported a loss available to common shareholders of $(1,100) or $(0.15) per share and $(1,262) or $(0.17) per share for the three and six months ended June 30, 2011, respectively, as compared to a loss of $(258) or $(0.04) and $(2,019) or $(0.28) per share for the three and six months ended June 30, 2010, respectively.

Three Months Ended June 30, 2011, as Compared to the Three Months Ended June 30, 2010

Net Sales - Net sales decreased $1,464 or 8.7% to $15,285 for the three months ended June 30, 2011, compared to $16,749 for the three months ended June 30, 2010. During 2010, the Company had one major customer whose sales constituted 26% of sales in 2010. During the three months ended June 30, 2011, sales to that customer decreased 33.7% compared to the three months ended June 30, 2010. Demand for our services from that customer can fluctuate from quarter to quarter based on the timing of its marketing campaigns. Sales to that customer were up 13.3% in the first quarter of 2011 compared to the first quarter of 2010. Sales from all other customers remained flat during the three months ended June 30, 2011 compared to the same period in 2010 and increased 16.1% for the three months ended June 30, 2011 compared to the same period in 2010.

Gross Profit – Total gross profit was $6,058 for the three months ended June 30, 2011, compared to $7,074 for the three months ended June 30, 2010. The decrease in total gross profit of $1,016 or 14.4% was due to the 8.7% decrease in net sales combined with a decrease in gross profit percentage. Gross profit percentage decreased to 39.6% for the three months ended June 30, 2011, from 42.2% for the three months ended June 30, 2010. The decrease is primarily attributable to an increase in production labor as a percentage of sales.

Selling, General and Administrative – Total Selling, General and Administrative expenses decreased to $6,587 for the three months ended June 30, 2011, from $6,839 for the three months ended June 30, 2010. The decrease of $252 or 3.7% was due primarily to decreases in compensation costs of $186. Total Selling, General and Administrative expenses as a percentage of net sales increased to 43.1% for the three months ended June 30, 2011, compared to 40.8% for the three months ended June 30, 2010.

Interest Expense, Net - Interest expense, net increased to $571 for the three months ended June 30, 2011, from $98 for the three months ended June 30, 2010. The increase was primarily due to an increase in interest expense of $470 of which $478 was related to interest accrued on the Series A Preferred Stock.

Income Taxes – As of June 30, 2011 and December 31, 2010, the Company has placed a full valuation allowance on its net deferred tax assets. The valuation allowance on the Company’s net deferred tax assets is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of all or a portion of the valuation allowance. In addition, until such time that the Company determines it is more likely than not that it will generate sufficient taxable income to realize all or a portion of its deferred tax assets, income tax benefits associated with future period losses, if any, will be fully reserved and income taxes associated with future period income will offset such reserve. As such, the Company did not record any income tax benefit on its loss for the three months ended June 30, 2011. During 2010, the Company filed amended New York State and City returns. During the first quarter of 2011, the Company received a refund of $31 from New York and recorded an income tax benefit in that amount.

Net Loss - As a result of the above items, the Company had a loss of $(1,100) for the three months ended June 30, 2011, compared to net income of $394 for the three months ended June 30, 2010.

Six Months Ended June 30, 2011, as Compared to the Six Months Ended June 30, 2010

Net Sales - Net sales increased $885 or 2.8% to $32,640 for the six months ended June 30, 2011, compared to $31,755 for the six months ended June 30, 2010. During 2010, the Company had one major customer whose sales constituted 26 % of sales in 2010. During six months ended June 30, 2010, sales to that major customer decreased 16.2% compared to the six months ended June 30, 2010. Demand for our services from that customer can fluctuate from quarter to quarter based on the timing of its marketing campaigns. Sales to that customer increased 13.3% in the first quarter of 2011 compared to the first quarter of 2010 and decreased 33.7% in the second quarter of 2011 compared to the second quarter of 2010. Sales to all other customers increased 8.0% during the six months ended June 30, 2011 compared to the same period in 2010. Sales to all other customers increased 16.1% in the first quarter of 2011 compared to the first quarter of 2010 and remained flat in the second quarter of 2011 compared to the second quarter of 2010.

Gross Profit – Total gross profit was $13,466 for the six months ended June 30, 2011, compared to $12,769 for the six months ended June 30, 2010. The increase in total gross profit of $697 or 5.5% was due to the 2.8% increase in net sales combined with an increase in gross profit percentage. Gross profit percentage increased to 41.3% for the six months ended June 30, 2011 from 40.2% for the six months ended June 30, 2010. The increase is primarily attributable to a decrease in production salaries and shipping costs as a percentage of sales.

Selling, General and Administrative – Total Selling, General and Administrative expenses increased by $245 or 1.8% to $13,769 for the six months ended June 30, 2011, from $13,524 for the six months ended June 30, 2010. The increase was due primarily to increases in legal fees related to the sale of Series A Preferred Stock of $220. Total Selling, General and Administrative expenses as a percentage of net sales decreased to 42.2% for the six months ended June 30, 2011, compared to 42.6% for the three months ended June 30, 2010.

Interest Expense, Net - Interest expense, net increased to $990 for the six months ended June 30, 2011, from $229 for the six months ended June 30, 2010. The increase was primarily due to an increase in interest expense of $761 of which $777 was related to interest accrued on the Series A Preferred Stock.

Income Taxes – As of June 30, 2011 and December 31, 2010, the Company has placed a full valuation allowance on its net deferred tax assets. The valuation allowance on the Company’s net deferred tax assets is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of all or a portion of the valuation allowance. In addition, until such time that the Company determines it is more likely than not that it will generate sufficient taxable income to realize all or a portion of its deferred tax assets, income tax benefits associated with future period losses, if any, will be fully reserved and income taxes associated with future period income will offset such reserve. As such, the Company did not record any income tax benefit on its loss of for the six months ended June 30, 2011. During 2010, the Company filed amended New York State and City returns. During the first quarter of 2011, the Company received a refund of $31 from New York and recorded an income tax benefit in that amount. The Company recorded an income tax benefit of $257 for the six months ended June 30, 2010 related to federal income tax refunds of AMT tax paid during 2006 to 2008.

Net Loss - As a result of the above items, the Company had net loss of $(1,262) for the six months ended June 30, 2011, compared to a loss of $(727) for the six months ended June 30, 2010.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Activity

Net cash used by operating activities was $2,214 during the six months ended June 30, 2011. The primary use of cash was an increase of $1,863 in prepaid and other assets and increase of $764 in inventories and a decrease in accounts payable of $991 partially offset by a decrease in accounts receivable of $1,241.

Net cash used by operating activities was $1,138 during the six months ended June 30, 2010. The primary use of cash was an increase of $1,534 in accounts receivable, a decrease in accounts payable of $1,535, an increase in inventories of $308, and an increase in prepaid expenses and other assets of $337 partially offset by an increase in accrued liabilities of $1,200 and depreciation and amortization of $2,093.

Net cash used in investing activities for capital expenditures was $577 and $357 for the six months ended June 30, 2011 and 2010, respectively.

For the six months ended June 30, 2011, net cash used in financing activities was $7,478 primarily due to $3,873 in repayments on the revolving line of credit and $3,500 used in the redemption of Convertible Preferred Stock.

For the six months ended June 30, 2010, net cash used in financing activities was $2,181 of which $2,050 was related to repayments on the revolving line of credit and $131 was related to capital lease payments.

Financing Sources and Capital Expenditures

In June 2000, Phoenix Acquisition Company II, L.L.C. (“Phoenix”), a wholly owned subsidiary of Stonington Capital Appreciation 1994 Fund, L.P. (the “Fund”), a majority shareholder (together “Stonington”), purchased 150,000 shares of convertible preferred stock (the “Convertible Preferred”) issued by the Company for an aggregate purchase price of $15,000. The Convertible Preferred provides for an 8% annual dividend payable in additional shares of Convertible Preferred. Dividends are cumulative and will accrue from the original issue date whether or not declared by the Board of Directors. As of December 31, 2010, 196,162 shares of Convertible Preferred had been accrued as dividends and 189,375 shares had been issued to Stonington Partners, Inc. in payment of that accrual. The remaining 6,787 shares were issued on January 19, 2011.

On January 19, 2011, the Company entered into a Redemption Agreement (the “Redemption Agreement”) with Phoenix, which was completed on February 4, 2011, pursuant to which it redeemed all 346,163 outstanding shares of the Company’s Convertible Preferred Stock for $17,500, consisting of $3,500 in cash plus the issuance of 140,000 shares of a new Series A Preferred Stock, at an original issue price of $100 per share (the “Series A Preferred”). On March 21, 2011, Stonington completed the sale of all Series A Preferred to Saints Capital VI, L.P. in conjunction with the Sale Purchase Agreement dated February 18, 2011. Saints Capital VI, L.P. transferred the Series A Preferred to its affiliate Saints Capital Granite, L.P. effective March 12, 2011.

The Series A Preferred provides for a cumulative 12% annual dividend payable in cash or additional shares of Series A Preferred, valued at $100 per share, payable quarterly in arrears and accruing regardless of whether or not declared by the Board of Directors of the Company or funds are legally available to pay them. If the Company does not pay dividends in cash equal to at least 8% per share per annum, the rate of the dividend shall increase by 4% per annum to 16% per annum, which additional dividend shall be paid or accrue in additional shares of Series A Preferred.

The Series A Preferred has no conversion rights. The Series A Preferred must be redeemed by the Company on or prior to the sixth anniversary of issuance and may be redeemed by the Company, in whole or in part, at any time after the second anniversary, in each case at a price of $100 per share, plus any accrued but unpaid dividends. If there is a change in control of the Company as a result of a sale of at least 75% of the fair market value of the Company’s assets, or as a result of the sale of a majority of the common stock by any holder other than Phoenix or a holder of the Series A Preferred, the holder(s) may redeem the Series A Preferred, upon notice, at a price of $101 per share plus any accrued but unpaid dividends.

On August 13, 2010, the Company and each of its operating subsidiaries, as Borrowers, entered into a Revolving Credit and Security Agreement (the “PNC Agreement”) with PNC Bank (“PNC”). The PNC Agreement provides for a three-year revolving credit facility (the “Facility”) of up to $14,000 including a letter of credit facility of up to $3,000. On February 3, 2011 and March 21, 2011, the Company and PNC entered into Consent, Waiver and Amendment Nos. 1 and 2 (the “PNC Amendment”) to the PNC Agreement. The PNC Amendments consent to the transactions described in the Redemption Agreement, waive certain covenants in order to permit the transactions, amend certain definitions and covenants contained in the Credit Agreement to account for the Series A Preferred and impose financial covenants which must be satisfied prior to each cash dividend payment in respect of the Series A Preferred. They also replace all references to Stonington with references to Saints and exempt certain changes in the Board of Directors between March 21, 2011 and June 30, 2011 from the definition of change of control.

The maturity date of the Facility is August 13, 2013. The interest rate of the Facility is 3% over a “Base Rate,” which is a floating rate equal to the highest of (i) PNC’s prime rate in effect on such day, (ii) the Federal Funds Open Rate plus ½ of 1%, or (iii) the Daily Libor Rate plus 100 basis points (1%) or, at the advance election of the Company, 4% over PNC’s 30, 60 or 90 day Eurodollar Rate. As of June 30, 2011 and December 31, 2010, the Base Rate plus 3% was 6.25%. The Facility is subject to a .75% fee per annum payable quarterly on the undrawn amount.

The Facility includes two financial covenants requiring that the Company maintain (i) no EBIDTA losses on a consolidated basis in any quarterly period beginning with the quarter ending September 30, 2011 and (ii) pursuant to the PNC Amendment a fixed charge coverage ratio (defined as EBITDA less unfinanced capital expenditures, less cash dividends, less cash paid for taxes over all debt service) of not less than 1.1 to 1.0 beginning in the quarter ending June 30, 2011, going forward.

The Company’s borrowing base under the Facility is the sum of (i) 85% of its eligible accounts receivable, including up to $500 of unbilled accounts receivable for work performed within the previous 30 days plus (ii) 50% of eligible raw material inventory up to $1,000. The borrowing base is reduced by $2,000 Availability Reserve which was reduced to $1,000 at February 3, 2011 pursuant to the PNC Amendment. The Facility must be prepaid when, and to the extent that, the amount of the borrowings exceeds the borrowing base. In addition, borrowings under the Facility must be prepaid with net cash proceeds of certain insurance recoveries, at the option of PNC. Early voluntary termination and prepayment will incur a fee of $180 through August 12, 2011, of $90 from August 13, 2011 through August 12, 2012 and $30 from August 13, 2012 through August 12, 2013.

The Company had $4,143 and $8,016 outstanding on the PNC Facility as of June 30, 2011 and December 31, 2010, respectively.

Management believes that, with the Company’s cash balances, anticipated cash balances and PNC Facility, it has sufficient liquidity for the next twelve months. However, the Company’s operating cash flow can be impacted by macroeconomic factors outside of its control.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require the Company to make estimates and assumptions about future events and their impact on amounts reported in the Company’s condensed consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from the Company’s estimates. Such differences could be material to the condensed consolidated financial statements.

The Company believes the application of its accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change.

There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control — Integrated Framework and additional guidance provided by Internal Control over Financial Reporting – Guidance for Smaller Public Companies as issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the results of this evaluation, we concluded that our internal control over financial reporting was effective as of June 30, 2011.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments in the Company’s legal proceedings from those disclosed in Item 3 of the Company’s Annual Report on Form 10-K for the year end December 31, 2010 and the Quarterly Report on Form 10-Q for the period ended March 31, 2011.

Item 5. Other Information.

Change of Control

Effective May 12, 2011, Saints Capital VI, L.P. (“Saints”) transferred all of its 140,000 shares of preferred stock and 5,000,000 shares of common stock of Merisel to its affiliate, Saints Capital Granite, L.P. (“Saints Granite”), in accordance with the terms of a Subscription Agreement entered into by and between Saints and Saints Granite. The transferred shares constitute 100% of the outstanding preferred stock and approximately 69% of the outstanding common stock of Merisel. This transfer may be deemed to be a “change of control” under SEC regulations.

Item 6. Exhibits

Index of Exhibits

Exhibit	Description	Method of Filing
2.1	Asset Purchase Agreement dated as of July 6, 2005 by and among Merisel, Inc., MCRU, LLC, Crush Creative, Inc. (“Crush”) and the shareholders of Crush signatories thereto, as amended by that certain Amendment and Waiver to Asset Purchase Agreement, dated as of August 8, 2005 by and among Merisel, MCRU, Crush and Guy Claudy as Shareholders Representative.	Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 9, 2005. **
2.2	Amendment and Waiver to Asset Purchase Agreement, dated as of August 8, 2005 by and among Merisel, Inc., MCRU, LLC, Crush Creative, Inc. and Guy Claudy as Shareholders Representative.	Filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 9, 2005. **
2.3	Asset Purchase Agreement, dated as of October 4, 2006 by and among Merisel, Inc., Merisel FD, LLC, Fuel Digital, Inc. and the shareholders of Fuel signatories thereto.	Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on October 6, 2006. **
3.1	Restated Certificate of Incorporation of Merisel, Inc., as amended.	Filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. **
3.2	Bylaws of Merisel, Inc., as amended.	Filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. **
4.1	Certificate of Designation of Convertible Preferred Stock of Merisel, Inc., dated June 9, 2000.	Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated June 9, 2000. **
4.2	Certificate of Designation of Series A Preferred Stock, dated February 4, 2011.	Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 7, 2011. **
10.1	Assignment and Assumption Agreement, between Merisel and Saints, dated March 21, 2011.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 28, 2011. **
10.2	Agreement and Waiver, between Merisel and Saints, dated March 21, 2011.	Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 28, 2011. **
10.3	Consent, Waiver and Amendment No. 2 to Revolving Credit and Security Agreement, between Merisel and each of its subsidiaries as Borrowers and PNC, dated March 21, 2011.	Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 28, 2011. **

Exhibit	Description	Method of Filing
*10.4	Merisel, Inc. 1997 Stock Award and Incentive Plan.	Filed as Annex II to the Company’s Schedule 14A dated October 6, 1997. **
*10.5	Form of Nonqualified Stock Option Agreement under the Merisel, Inc. 1997 Stock Award and Incentive Plan.	Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997. **
*10.6	Employment Agreement dated November 22, 2004 between Merisel, Inc. and Donald R. Uzzi.	Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2004. **
*10.7	Amendment to Employment Agreement dated November 22, 2004 between Merisel, Inc. and Donald R. Uzzi.	Filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on March 9, 2006.**
*10.8	Form of Indemnity Agreement entered into between Merisel, Inc. and each of its Directors and certain Officers.	Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 28, 2011.**
*10.9	Amendment to 1997 Merisel Inc. Stock Award and Incentive Plan Form of Restricted Stock Agreement for Directors.	Filed as Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. **
*10.10	Amendment No. 2 to Employment Agreement, dated January 18, 2009, between Merisel, Inc. and Donald R. Uzzi.	Filed as Exhibit 10.51 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. **
*10.11	Merisel, Inc. 2009 Stock Award and Incentive Plan.	Filed as Annex A to the Company’s Schedule 14A dated November 7, 2009. **
*10.12	Employment Agreement dated May 6, 2009 by and between Merisel, Inc. and Victor L. Cisario.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 12, 2009.**
*10.13	Amendment #3 to Employment Agreement, dated June 29, 2009 by and between Merisel, Inc. and Donald R. Uzzi.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 30, 2009.**
10.14	Amended and Restated Credit Agreement dated September 30, 2009, among Color Edge LLC, Color Edge Visual LLC and Crush Creative LLC, as borrowers, the Company, Merisel Americas, Inc. and certain other affiliates of borrowers, as corporate guarantors, and Amalgamated Bank, as lender.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2009.**

Exhibit	Description	Method of Filing
10.15	Second Reaffirmation and Confirmation Agreement (Security Documents) dated September 30, 2009, among Color Edge LLC, Color Edge Visual LLC and Crush Creative LLC, as borrowers, the Company, Merisel Americas, Inc. and certain other affiliates of borrowers, as corporate guarantors, in favor of Amalgamated Bank.	Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2009.**
*10.16	Employment Agreement, dated January 8, 2010 by and between Merisel, Inc. and Raymond E. Powers.	Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
10.17	Revolving Credit and Security Agreement dated as of August 13, 2010 by and among Merisel, Inc., Merisel Americas, Inc., Color Edge LLC, Color Edge Visual LLC, Comp 24 LLC, Crush Creative LLC, Dennis Curtin Studios, LLC, MADP, LLC, Advertising Props, Inc., Fuel Digital, LLC, and PNC Bank, National Association.	Filed as Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. **
10.18	Pledge Agreement dated as of August 13, 2010 by and between and PNC Bank, National Association.	Filed as Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. **
*10.19	Employment Agreement, dated as of December 17, 2010, by and between Merisel, Inc. and Michael A. Berman.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2010. **
*10.20	Amendment #4 to Employment Agreement, dated as of December 22, 2010, by and between Merisel, Inc. and Donald R. Uzzi.	Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2010. **
*10.21	Amendment to Employment Agreement, dated as of December 22, 2010, by and between Merisel, Inc. and Victor L. Cisario.	Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2010. **
10.22	Redemption Agreement, between Merisel, Inc. and Phoenix Acquisition Company II, L.L.C., dated as of January 19, 2011.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 19, 2011. **
10.23	Consent, Waiver and Amendment No. 1 to Revolving Credit and Security Agreement, between Merisel, Inc. and each of its subsidiaries as Borrowers and PNC Bank, National Association, as Lender, dated February 3, 2011.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 7, 2011. **

Exhibit	Description	Method of Filing
10.24	Registration Rights Agreement, between Merisel, Inc. and Phoenix Acquisition Company II, L.L.C., dated February 4, 2011.	Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 7, 2011. **
10.25	Amendment No. 2 to Stock and Note Purchase Agreement, dated February 4, 2011.	Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 7, 2011. **
10.26	Merisel, Inc. Board of Directors Compensation Plan, dated April 27, 2011	Filed as Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 16, 2011
14.1	Code of Business Conduct.	Filed as exhibit 99.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.**
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.	Filed herewith.

99.1	Press release dated August 15, 2011	Filed herewith.

101.INS***	XBRL Instance	Filed herewith.

101.SCH***	XBRL Taxonomy Extension Schema	Filed herewith.

101.CAL***	XBRL Taxonomy Extension Calculation	Filed herewith.

101.DEF***	XBRL Taxonomy Extension Definition	Filed herewith.

101.LAB***	XBRL Taxonomy Extension Labels	Filed herewith.

101.PRE***	XBRL Taxonomy Extension Presentation	Filed herewith.

* Management contract or executive compensation plan or arrangement.

** Incorporated by reference.

*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURE

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

	Merisel, Inc.


Date: August 15, 2011	By:	/s/Donald R. Uzzi
		Donald R. Uzzi
		Chairman, Chief Executive Officer, and President

	By:	/s/Victor L. Cisario
		Victor L. Cisario
		Chief Financial Officer

MERISEL INC /DE/ - FORM 10-Q - August 15, 2011

Attached files

MERISEL INC /DE/ Reports