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 September 30, 2010




OR




 ̈
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  ̈  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 November 15, 2010 the registrant had 7,214,784 shares of Common Stock outstanding.





MERISEL, INC. AND SUBSIDIARIES




TABLE OF CONTENTS




ReferencePART I.    FINANCIAL INFORMATIONItem 1.
Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)
2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
3Notes to Condensed Consolidated Financial Statements (Unaudited)
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14Item 4.
Controls and Procedures
20PART II.    OTHER INFORMATIONItem 1.
Legal Proceedings
21Item 6.
Exhibits
22SIGNATURES
26


i
  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.




ii





PART I.  FINANCIAL INFORMATION


Item 1.             Financial Statements





MERISEL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share data)





September 30, 2010


December 31, 2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
6,919


$
10,581Accounts receivable, net of allowance of $201 and $262, respectively


14,890



12,456Inventories


2,319



1,706Prepaid expenses and other current assets


1,320



919Total current assets


25,448



25,662Property, plant and equipment, net


5,348



7,599Restricted cash


2,232



2,232Trademarks


6,190



6,190Other intangible assets, net


3,096



3,648Other assets


237



94Total assets

$
42,551


$
45,425LIABILITIES, TEMPORARY EQUITY, AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable

$
4,898


$
5,374Accrued liabilities


5,067



5,100Capital lease obligations, current maturities


284



269Revolving credit agreement


7,321



8,715Total current liabilities


17,570



19,458Capital lease obligations, less current maturities


577



749Other liabilities


541



670Total liabilities


18,688



20,877Commitments and ContingenciesTemporary equity:Convertible preferred stock, $.01 par value, authorized  600,000 shares; 332,721 and 313,531 shares issued and outstanding, respectively


33,937



31,980Stockholders' deficit:Common stock, $.01 par value, authorized 30,000,000 shares; 8,453,671 issued and 7,214,784 outstanding


84



84Additional paid-in capital


266,515



268,468Accumulated deficit


(274,729
)


(274,040
)Treasury stock, at cost, 1,238,887 shares repurchased


(1,944
)


(1,944
)Total stockholders' deficit


(10,074
)


(7,432
)Total liabilities, temporary equity, and stockholders' deficit

$
42,551


$
45,425





See accompanying notes to unaudited condensed consolidated financial statements.


1


MERISEL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)


(Unaudited)





Three Months Ended September 30,


Nine Months EndedSeptember 30,2010


2009


2010


2009Net sales

$
18,302


$
14,921


$
50,057


$
44,400Cost of sales


11,234



10,321



30,220



30,159Gross profit


7,068



4,600



19,837



14,241Selling, general & administrative expenses


6,885



7,918



20,409



22,092Operating income (loss)


183



(3,318
)


(572
)


(7,851
)Interest expense, net


145



105



374



194Income (loss) before benefit for income tax


38



(3,423
)


(946
)


(8,045
)Income tax benefit


-



(1,465
)


(257
)


(3,443
)Net income (loss)


38



(1,958
)


(689
)


(4,602
)Preferred stock dividends


665



615



1,957



1,809Loss available to common stockholders

$
(627
)

$
(2,573
)

$
(2,646
)

$
(6,411
)Loss per share (basic and diluted):Net loss available to common stockholders

$
(0.09
)

$
(0.36
)

$
(0.37
)

$
(0.89
)Weighted average number of sharesBasic


7,214



7,186



7,213



7,205Diluted


7,214



7,186



7,213



7,205





See accompanying notes to unaudited condensed consolidated financial statements.


2


MERISEL, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)


Nine Months Ended September 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(689
)

$
(4,602
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Stock-based compensation expense


4



154Deferred occupancy costs


(129
)


(5
)Bad debt provision


88



356Deferred income taxes


-



(3,443
)Gain on sale of equipment


(139
)


(26
)Depreciation and amortization


2,930



3,725Changes in operating assets and liabilities:Accounts receivable


(2,522
)


5,249Inventories


(613
)


1,188Prepaid expenses and other assets


(544
)


237Restricted cash


-



729Accounts payable


(476
)


(1,273
)Accrued liabilities


617



268Net cash (used in) provided by operating activities


(1,473
)


2,557CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition earnout payments


-



(275
)Capital expenditures


(593
)


(1,364
)Net cash used in investing activities


(593
)


(1,639
)CASH FLOWS FROM FINANCING ACTIVITIES:Capital lease payments


(202
)


(114
)Installment note repayments


-



(500
)Revolving credit agreement repayments


(8,715
)


(1,515
)Borrowings on new credit agreement


7,321



-Purchase of treasury stock


-



(119
)Net cash used in financing activities


(1,596
)


(2,248
)NET DECREASE IN CASH AND CASH EQUIVALENTS


(3,662
)


(1,330
)CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


10,581



9,752CASH AND CASH EQUIVALENTS, END OF PERIOD

$
6,919


$
8,422Cash paid during the period for:Interest expense

$
334


$
294Non-cash investing and financing activities:Preferred dividends accumulated


1,957



1,809Increase in accrued purchases of equipment and lease acquisitions


45



2,085





See accompanying notes to unaudited condensed consolidated financial statements.


3


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 September 30, 2010, and for the three and nine months ended September 30, 2010 and 2009, 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 September 30, 2010, and the consolidated results of operations and cash flows for the interim periods ended September 30, 2010 and 2009. 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, 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2010 and amended on October 6, 2010. The condensed consolidated balance sheet at December 31, 2009, 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.


4


MERISEL, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(UNAUDITED)





3.
New and Recently Adopted Accounting Standards





In January 2010, the FASB published FASB Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. This update requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require: (a) a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (b) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures: for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities and should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. As ASU 2010-06 relates specifically to disclosures, it will not have an impact on the Company’s consolidated financial statements.





4.
Inventories





Inventories consist of the following:




September 30, 2010


December 31, 2009Raw materials

$
1,332


$
1,199Work-in-progress


990



510Reserve for obsolescence


(3
)


(3
)Inventory, net

$
2,319


$
1,706





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:




September 30, 2010


December 31, 2009Customer relationships

$
2,497


$
2,681Non-compete agreements


25



268Trade know-how


574



699Total

$
3,096


$
3,648


5





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 $136 and $381 for the three months ended September 30, 2010 and 2009, and $552 and $1,171 for the nine months ended September 30, 2010 and 2009, respectively.




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




For the Twelve-Month Period Ended September 30,Amount2011

$
4382012


4132013


3992014


3292015


245Thereafter


1,272Total

$
3,096





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.


6


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





7.
Accrued Liabilities





Accrued liabilities consist of the following:




September 30, 2010


December 31, 2009Accrued liabilities:Compensation and other benefit accruals


3,223



2,403Other accruals


1,844



2,697Total accrued liabilities

$
5,067


$
5,100





8.
Income Taxes





At December 31, 2009, 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 two 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 placed a full valuation allowance on its net deferred tax assets as of September 30, 2010 and December 31, 2009.


7


MERISEL, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(UNAUDITED)





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 future period income will offset such reserve.. The valuation allowance decreased $34 in the three months ended September 30, 2010 and increased $241 in the nine months ended September 30, 2010, compared to no change to the valuation allowance for the three and nine months ended September 30, 2009. The net decrease in the valuation allowance for the three months ended September 30, 2010 primarily consists of a $73 increase in the federal net operating loss, and an increase of $39 related to other temporary differences. The net increase in the valuation allowance for the nine months ended September 30, 2010 primarily consists of a $567 increase in the federal net operating loss generated in the period offset by a decrease of $326 related to other temporary differences for the nine months ended September 30, 2010.





During the second quarter of 2010, the Company filed amended federal income tax returns for the taxable years 2006 to 2008 and received a refund of $257 related to AMT tax paid during those years. For the nine months ended September 30, 2010, the Company recorded an income tax benefit of $257 related to those income tax refunds.




9.
Debt




In connection with the Company's financing of the Comp 24 and Color Edge acquisitions, the Company entered into two credit agreements with Amalgamated Bank (“Amalgamated”) dated March 1, 2005. The credit agreements provided for two three-year revolving credit facilities and two term loans.  The credit agreement was amended several times, the most recent of which was on September 30, 2009 (the “Amalgamated Agreement”).  The Amalgamated Agreement was for a single $12,000 revolving credit facility. As of December 31, 2009, the Company had $8,715 outstanding on the Amalgamated Facility.





On August 13, 2010, the Company terminated the Amalgamated Agreement prior to its stated termination date of August 31, 2011. The Company incurred no early termination penalty as a result of the termination. On the same day, 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 under the 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.   The revolver is subject to a 0.75% fee per annum payable quarterly on the undrawn amount.  As of September 30, 2010, the Base Rate plus 3% is 6.25%. As of September 30, 2010, the Company had borrowings of $7,321 under the PNC revolver.


8


MERISEL, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(UNAUDITED)





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.





The Company must comply with financial covenants with respect to a fixed charge coverage ratio (defined as EBITDA less unfinanced capital expenditures, less taxes over all debt service) of not less than 1.1 to 1.0 beginning with the quarter ending December 31, 2011, and maintain positive EBIDTA for each quarter beginning with the quarter ending September 30, 2011.





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 its sales employee, Edwin Sturmer.  The plaintiffs allege that Sturmer breached a confidentiality and non-solicitation agreement by soliciting plaintiffs’ customers, Banana Republic and the Gap, 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).  ImageKing has not taken any steps to prosecute the Nomad case since its bankruptcy filing. The Company has not accrued for payment because the likelihood of an adverse ruling is not currently probable.





On March 30, 2009, Merisel and TU Holdings, Inc. and TU Merger, Inc., both subsidiaries of American Capital Strategies, Ltd. (collectively, “ACAS”) executed a settlement agreement under which ACAS agreed to pay Merisel the total amount of $2,000 and the parties agreed to dismiss with prejudice their claims against one another. The Company recorded this income in the first quarter of 2009. The Company recorded expenses related to legal and investment banking fees related to the sale of the Company to ACAS of $13 and $90 for the three and nine months ended September 30, 2009, respectively. These income and expenses are recorded in selling, general, and administrative expenses in the Company’s Statements of Operations. There was no comparable income or expense for the three and nine months ended September 30, 2010.


9


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 the 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 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.  The Company has not accrued for payment because the likelihood of an adverse ruling is not currently probable.





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, and a hearing date has not yet been scheduled for the arbitration. The Company has not accrued for payment because the likelihood of an adverse ruling is not currently probable.





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 September 30, 2010, 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.


10


MERISEL, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(UNAUDITED)





Stock Option Grants





As of September 30, 2010, 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 PriceOutstanding atDecember 31, 2009


300,000


$
8.33Granted


-



N/AExercised


-



N/ACanceled


-



N/AOutstanding atSeptember 30, 2010


300,000


$
8.33Options exercisable at September 30, 2010


300,000


$
8.33Weighted 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 September 30, 2010:





Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedNumber


Remaining


Average


Number


AverageRange of


Outstanding


Life


Exercise


Exercisable


ExerciseExercise Prices


At 6/30/10


In Years


Price


At 6/30/10


Price$5.00


100,000


4.1


$
5.00



100,000


$
5.00$8.00


100,000


4.1


$
8.00



100,000


$
8.00$12.00


100,000


4.1


$
12.00



100,000


$
12.00$5.00 to $12.00


300,000





$
8.33



300,000


$
8.33





As of September 30, 2010, all stock options were fully vested. There is no total intrinsic value of options outstanding or exercisable at September 30, 2010.





As of September 30, 2010, there was no unrecognized compensation cost related to stock options.


11


MERISEL, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(UNAUDITED)





Restricted Stock Grants





On December 13, 2006, the Company awarded 185,500 shares of restricted stock to key officers and employees under the 1997 Plan. Compensation expense, measured by the fair value of the restricted stock at the grant date, is recorded over the related three-year vesting period starting in December 2006. Compensation expense was $42 and $146 for the three and nine months ended September 30, 2009, respectively. There was no expense for the three and nine months ended September 30, 2010.





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, is recorded over the related three-year vesting period. Compensation expense was $2 and $2 for the three months ended September 30, 2010 and 2009, respectively and $4 and $8 for the nine months ended September 30, 2010 and 2009, respectively.





A summary of the status of the Company’s nonvested restricted shares as of September 30, 2010, and changes during the nine months ended September 30, 2010, is as follows:




Shares


Weighted Average Grant-Date Fair ValueNonvested shares at December 31, 2009


2,000


$
4.98Granted


-



N/AVested


2,000


$
4.98Cancelled


-



N/ANonvested shares at September 30, 2010


-



N/A




As of September 30, 2010, there was no unrecognized compensation cost related to nonvested restricted share-based compensation arrangements.




12.
Temporary Equity





In June 2000, an affiliate of Stonington Partners, Inc., a majority shareholder, 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 quarterly 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 September 30, 2010, 189,376 shares of Convertible Preferred have been accrued as dividends and 182,722 shares have been issued to Stonington Partners, Inc. in payment of that accrual. The remaining 6,654 shares were issued on October 1, 2010. Additionally, cumulative accrued dividends of $18,937 and $16,980 were recorded as temporary equity at September 30, 2010 and December 31, 2009, respectively. At the option of the holder, the Convertible Preferred is convertible into the Company’s common stock at a per share conversion price of $17.50. At the option of the Company, the Convertible Preferred can be converted into Common Stock when the average closing price of the Common Stock for any 20 consecutive trading days is at least $37.50. At the Company’s option, after September 30, 2008, the Company may redeem outstanding shares of the Convertible Preferred at $100 per share plus accrued and unpaid dividends. In the event of a defined change of control, holders of the Convertible Preferred have the right to require the redemption of the Convertible Preferred at $101 per share plus accrued and unpaid dividends.


12


MERISEL, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except share and per share data)


(UNAUDITED)





In accordance with FASB ASC 480-10 (EITF Abstracts, Topic D-98 “Classification and Measurement of Redeemable Securities”), the Company has determined that the Convertible Preferred should be treated 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. During the first quarter of 2009, Stonington Partner’s ownership percentage of the Company’s common stock increased such that, according to the Company’s bylaws, it now has sufficient votes to change the size and composition of the board of directors. As such, the Company believes the Convertible Preferred is redeemable at the option of the holder and the Company has re-classified the Convertible Preferred outside of permanent equity. Prior to 2009, in no case were the convertible preferred mandatorily redeemable or was redemption outside of the Company’s control and as such the Convertible Preferred was classified at permanent equity. The Company will continue to accrue dividends on the Convertible Preferred, which will increase temporary equity and continue to decrease net income available to common shareholders.





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 September 30, 2010, 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 repurchased 133,206 shares for an aggregated cost of $119 during the nine months ended September 30, 2009. The Company did not repurchase any shares during the third quarter of 2009. The Company did not repurchase any shares during the three and nine months ended September 30, 2010. According to the terms of the PNC Agreement, dated August 13, 2010, the Company may not repurchase its own stock.


13


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.


14
  RESULTS OF OPERATIONS(amounts in thousands except as noted or for per share data)




The Company reported a loss available to common shareholders of $(627) or $(0.09) per share and $(2,646) or $(0.37) per share for the three and nine months ended September 30, 2010, respectively, as compared to a loss of $(2,573) or $(0.36) and $(6,411) or $(0.89) per share for the three and nine months ended September 30, 2009, respectively.





Three Months Ended September 30, 2010, as Compared to the Three Months Ended September 30, 2009





Net Sales - Net sales were $18,302 for the three months ended September 30, 2010, compared to $14,921 for the three months ended September 30, 2009. The increase of $3,381 or 22.7% was due primarily to increased demand for our services from our existing customer base, specifically in the retail market, which represents a significant portion of our customer base, coupled with new client business.





Gross Profit – Total gross profit was $7,068 for the three months ended September 30, 2010, compared to $4,600 for the three months ended September 30, 2009. The increase in total gross profit of $2,468 or 53.7% was due to the 22.7% increase in net sales combined with an increase in gross profit percentage. Gross profit percentage increased to 38.6% for the three months ended September 30, 2010, from 30.8% for the three months ended September 30, 2009. The increase is primarily attributable to a decrease in production salaries as a percentage of sales. Production salaries decreased $91 or 3.1% for the three months ended September 30, 2010 when compared to the same period for 2009.





Selling, General and Administrative – Total Selling, General and Administrative expenses decreased to $6,885 for the three months ended September 30, 2010, from $7,918 for the three months ended September 30, 2009. The decrease of $1,033 or 13.0% was due primarily to decreases in compensation costs of $516, depreciation and amortization of $250, bad debt expense of $130, and professional fees of $113. Total Selling, General and Administrative expenses as a percentage of net sales decreased to 37.6% for the three months ended September 30, 2010, compared to 53.1% for the three months ended September 30, 2009.





Interest Expense, Net - Interest expense, net increased to $145 for the three months ended September 30, 2010, from $105 for the three months ended September 30, 2009. The increase was primarily due to an increase in interest expense of $22 primarily resulting from the write-off of the balance of the loan origination fee from the Amalgamated Facility combined with a decrease in interest income of $18 due to lower rates of return on lower balances in short-term interest-bearing investments classified as cash and cash equivalents.





Income Taxes – As of September 30, 2010 and December 31, 2009, 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 expense on its income of $38 for the quarter ended September 30, 2010. The Company recorded income tax benefit of $1,465 on a loss of $3,423 for the three months ended September 30, 2009. Income tax for that quarter was recorded at an effective tax rate of 42.8%.





Net Income - As a result of the above items, the Company had net income of $38 for the three months ended September 30, 2010, compared to a loss of $(1,958) for the three months ended September 30, 2009.


15


Nine Months Ended September 30, 2010, as Compared to the Nine Months Ended September 30, 2009





Net Sales - Net sales were $50,057 for the nine months ended September 30, 2010, compared to $44,400 for the nine months ended September 30, 2009. The increase of $5,657 or 12.7% was due primarily to increased demand for our services from our existing customer base, specifically in the retail market, which represents a significant portion of our customer base, coupled with new client business.





Gross Profit – Total gross profit was $19,837 for the nine months ended September 30, 2010, compared to $14,241 for the nine months ended September 30, 2009. The increase in total gross profit of $5,596 or 39.3% was due to the 12.7% increase in net sales combined with an increase in gross profit percentage. Gross profit percentage increased to 39.6% for the nine months ended September 30, 2010, from 32.1% for the nine months ended September 30, 2009. The increase is primarily attributable to a decrease in production salaries as a percentage of sales. Production salaries decreased $1,050 or 11.1%.





Selling, General and Administrative – Total Selling, General and Administrative expenses decreased by $1,683 or 7.6% to $20,409 for the nine months ended September 30, 2010, from $22,092 for the nine months ended September 30, 2009. In 2009, the Company recorded a $2,000 legal settlement, net of expenses, with ACAS, as a credit against selling, general, and administrative expense.  Excluding the net settlement of $1,910 in the 2009 period, total Selling, General and Administrative expenses decreased by $3,593 during the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The decrease was due primarily to decreases in sales salaries and commission expense of $1,208, other compensation costs of $1,319, and depreciation and amortization of $634. Excluding the net settlement with ACAS, total Selling, General and Administrative expenses as a percentage of net sales decreased to 40.8% for the nine months ended September 30, 2010, compared to 54.1% for the nine months ended September 30, 2009.





Interest Expense, Net - Interest expense, net increased to $374 for the nine months ended September 30, 2010, from $194 for the nine months ended September 30, 2009. The increase was primarily due to an increase in interest expense of $136 resulting from increased rates on the revolving line of credit and additional interest from two new capital leases and interest income decreased by $44 due to lower rates of return on lower balances in short-term interest-bearing investments classified as cash and cash equivalents.





Income Taxes – As of September 30, 2010 and December 31, 2009, 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. The Company recorded an income tax benefit of $257 for the nine months ended September 30, 2010 related to federal income tax refunds of AMT tax paid during 2006 to 2008.  The Company recorded an income tax benefit of $3,443 on a loss of $8,045 for the nine months ended September 30, 2009. Income tax for that period was recorded at an effective tax rate of 42.8%.





Net Loss - As a result of the above items, the Company had net loss of $(689) for the nine months ended September 30, 2010, compared to a loss of $(4,602) for the nine months ended September 30, 2009.


16
  LIQUIDITY AND CAPITAL RESOURCES





Cash Flow Activity





Net cash used by operating activities was $1,473 during the nine months ended September 30, 2010.  The primary use of cash was an increase of $2,522 in accounts receivable, a decrease in accounts payable of $477, an increase in inventories of $613, and an increase in prepaid expenses and other assets of $544 partially offset by an depreciation and amortization of $2,930.





Net cash provided by operating activities was $2,557 during the nine months ended September 30, 2009.  The primary source of cash was a decrease of $5,249 in accounts receivable, depreciation and amortization of $3,725, a decrease in inventories of $1,188, and $729 reclassification of restricted cash to unrestricted, partially offset by the net loss of $4,602, deferred taxes of $3,443.  The net loss was reduced by the ACAS settlement of $2,000 ($1,144 after tax benefit).





For the nine months ended September 30, 2010, net cash used in investing activities was $593 used for capital expenditures.





For the nine months ended September 30, 2009, net cash used in investing activities was $1,639 which consisted of $275 used for acquisition related expenditures and $1,364 used for capital expenditures.





For the nine months ended September 30, 2010, net cash used in financing activities was $1,596 of which $8,715 was related to repayments on the Amalgamated revolving line of credit and $202 was related to capital lease payments, partially offset by borrowing on the PNC revolving line of credit of $7,321.





For the nine months ended September 30, 2009, net cash used for financing activities was $2,248, consisting of $2,015 related to repayments of bank debt, $114 related to repayments of capital leases, and $119 used to repurchase treasury stock.





Financing Sources and Capital Expenditures





In June 2000, an affiliate of Stonington Partners, Inc., which currently owns approximately 69% of the Company’s outstanding common stock, 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 quarterly 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 September 30, 2010, 189,376 shares of Convertible Preferred have been accrued as dividends and 182,722 shares have been issued to Stonington Partners, Inc. in payment of that accrual. The remaining 6,654 shares were issued on October 1, 2010. Additionally, cumulative accrued dividends of $18,937 and $16,980 were recorded as temporary equity at September 30, 2010 and December 31, 2009, respectively. At the option of the holder, the Convertible Preferred is convertible into the Company’s common stock at a per share conversion price of $17.50. At the option of the Company, the Convertible Preferred can be converted into Common Stock when the average closing price of the Common Stock for any 20 consecutive trading days is at least $37.50. At the Company’s option, after September 30, 2008, the Company may redeem outstanding shares of the Convertible Preferred at $100 per share plus accrued and unpaid dividends. In the event of a defined change of control, holders of the Convertible Preferred have the right to require the redemption of the Convertible Preferred at $101 per share plus accrued and unpaid dividends.





On August 13, 2010, the Company 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.





17





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 1⁄2 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 August 13, 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) a fixed charge coverage ratio (defined as EBITDA less unfinanced capital expenditures, less taxes over all debt service) of not less than 1.1 to 1.0 beginning in the quarter ending December 31, 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 is scheduled to be reduced in increments of $500 to $1,500 based upon the Company’s achievement of EBITDA targets for the year ending December 31, 2010, the twelve months ending September 30, 2011 and the year ending December 31, 2011. Provided that the Company is not otherwise in default, if the Availability Reserve has not been reduced to zero based on the above, the Availability Reserve will be reduced to zero if the fixed charge coverage ratio is at 1.1 to 1.0, or better for any trailing twelve month period as of March 31, 2012 or later.  The Facility must be prepaid when, and to the extent of, the amount of the borrowings exceed 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.





Through August 13, 2010, the Company financed its acquisitions and operations through two credit agreements with Amalgamated Bank (“Amalgamated”) originally dated March 1, 2005, at which date the Company paid off the facility in full and terminated the agreement.  The original Amalgamated credit agreements provided for two separate three-year revolving credit facilities and two term loans.  The Amalgamated credit agreement was amended several times, the most recent of which was the Amended and Restated Credit Agreement dated September 30, 2009 (the “Amalgamated Agreement”).  The Amalgamated Agreement provided for a single $12,000 revolving credit facility (the “Amalgamated Facility”) and included two financial covenants requiring the Company to maintain a minimum tangible net worth of $15,500 at all times, and no EBITDA losses on a consolidated basis in any quarterly period beginning with the quarter ending December 31, 2009.  The maturity date of the Amalgamated Facility was August 31, 2011, and the interest rate was at a “Base Rate,” which is a floating rate equal to the greater of (a) Amalgamated’s prime rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day, plus 2.5%.





As of September 30, 2010, the Company had $7,321 outstanding on the new PNC Facility. As of December 31, 2009, the Company had $8,715 outstanding on the Amalgamated facility. On August 13, 2010, the Company used the proceeds from the PNC revolver to repay the indebtedness owed to Amalgamated under the predecessor credit facility and the facility was terminated.





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.





18





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 ANDESTIMATES





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, 2009.


19
  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 September 30, 2010 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 September 30, 2010, based on the criteria established inInternal Control — Integrated Framework and additional guidance provided byInternal 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 September 30, 2010.


20
  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 our Annual Report on Form 10-K for the year ended December 31, 2009.


21
  Item 6. Exhibits





Index of Exhibits




Exhibit

Description

Method of Filing2.1

Asset Purchase Agreement dated as of December 24, 2004, as amended, by and among Merisel, Inc., MCEV, LLC, Color Edge Visual, Inc. (“CEV”), Photobition New York, Inc. (“PBNY”) and the direct or indirect shareholders or members of CEV and PBNY signatories thereto.

Filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2005. **2.2

Asset Purchase Agreement dated as of December 24, 2004, as amended, by and among Merisel, Inc., MC24, LLC, Comp 24, LLC (“Comp 24”) and the direct and indirect shareholders or members of Comp 24 signatories thereto.

Filed as Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2005. **2.3

Amendment and Waiver to Asset Purchase Agreement dated as of March 1, 2005 by and among MCEI, LLC, Merisel, Inc. and Color Edge, Inc. and the direct and indirect shareholders set forth on the signature pages thereto.

Filed as Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2005. **2.4

Amendment and Waiver to Asset Purchase Agreement dated as of March 1, 2005 by and among MCEV, LLC, Merisel, Inc. and Color Edge Visual, Inc. and the direct and indirect shareholders set forth on the signature pages thereto.

Filed as Exhibit 2.5 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2005. **2.5

Amendment and Waiver to Asset Purchase Agreement dated as of March 1, 2005 by and among MC24, LLC, Merisel, Inc. and Comp 24, LLC and the direct and indirect shareholders set forth on the signature pages thereto.

Filed as Exhibit 2.6 to the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2005. **2.6

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. **  22
  2.7

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. **2.8

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.

Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated June 9, 2000. ***10.1

Merisel, Inc. 1997 Stock Award and Incentive Plan.

Filed as Annex II to the Company’s Schedule 14A dated October 6, 1997. ***10.2

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. **10.3

Stock Subscription Agreement by and between Merisel, Inc. and Phoenix Acquisition Company II, L.L.C. dated as of June 2, 2000.

Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, dated June 9, 2000. **10.4

Amended and Restated Registration Rights Agreement dated June 9, 2000 (executed November 7, 2002) between Merisel, Inc. and Phoenix Acquisition Company II, L.L.C.

Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. ***10.5

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. ***10.6

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.***10.7

Form of Indemnity Agreement entered into between Merisel, Inc. and each of its Directors and certain Officers.

Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 9, 2006.**10.8

Amendment No. 2 to Asset Purchase Agreement and Amendment to Confidentiality and Non-Competition Agreement (MCEI).

Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2006. **  23
  10.9

Amendment No. 2 to Asset Purchase Agreement and Amendment to Confidentiality and Non-Competition Agreement (MCEV).

Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on May 1, 2006. ***10.10

1997 Merisel Inc. Stock Award and Incentive Plan Form of Restricted Stock Agreement for Executives and Key Employees.

Filed as Exhibit 10.1to the Company’s Current Report on Form 8-K filed with the SEC on December 19, 2006. ***10.11

Amendment to 1997 Merisel Inc. Stock Award and Incentive Plan Form of Restricted Stock Agreement forDirectors.

Filed as Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. ***10.12

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. ***10.13

Merisel, Inc. 2009 Stock Award and Incentive Plan.

Filed as Annex A to the Company’s Schedule 14A dated November 7, 2009. **10.14

Amendment No. 3 to Credit Agreement, dated March 26, 2009, among Color Edge LLC, Color Edge Visual LLC and Crush Creative LLC, as borrowers, the Company, Merisel Americas, Inc., Comp 24 LLC, Fuel Digital, LLC, Dennis Curtin Studios, LLC, MADP, LLC and Advertising Props, Inc., as guarantors, and Amalgamated Bank, as lender.

Filed as Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.***10.15

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.***10.16

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.**10.17

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.**  24
  10.18

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.**10.19

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.**10.20

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.**14.1

Code of Business Conduct.

Filed as exhibit 99.2 to the Company’sAnnual Report on Form 10-K for the yearended 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 November 15, 2010

Filed herewith.





*   Management contract or executive compensation plan or arrangement.


** Incorporated by reference.


25


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.





Date:   November 15, 2010







Merisel, Inc.By:
/s/ Donald R. UzziDonald R. UzziChairman, Chief Executive Officer, and PresidentBy:
/s/ Victor L. CisarioVictor L. CisarioChief Financial Officer