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Article by DailyStocks_admin    (06-23-08 09:20 AM)

Filed with the SEC from Jun 5 to Jun 11:

Merisel (MSEL)
Buyout firm American Capital Strategies ' (ACAS) said that it has ended its merger agreement with Merisel because the visual-communications company has undergone a "material adverse effect," and is therefore unable to satisfy the closing conditions of their pact. Merisel previously disputed this characterization and said it is in compliance with all of its merger obligations. As a result, it said last week that the agreement remains "in full force and effect," and that it expects American Capital to consummate the deal.
On May 30, American Capital sent a letter to Merisel's counsel, saying that Merisel has experienced a "company material adverse effect" to its business because its actual first-quarter results were worse than those earlier disclosed.
It suggested the two renegotiate the terms of its $5.75 a share buyout offer.
American said that it considers the termination effective, but that it reserves the right to evaluate a revised transaction with Merisel.
BUSINESS OVERVIEW

Overview - Merisel, Inc. (together, with its subsidiaries, “Merisel,” “Successor” or the “Company”) 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:

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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. (“Visual”), and its New York-based prototype services provider, Comp 24, LLC (“Comp 24”);

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

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

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

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

As a result of these acquisitions, Merisel has offices and production facilities in New York, New York; Edison, New Jersey; Burbank, California; Atlanta, Georgia; Portland, and Oregon, which total more than 200,000 square feet.

The ongoing business operations of the Company’s subsidiaries are referred to by the above-described names, and (other than AdProps) are currently operated through separate Delaware limited liability companies owned by Americas. Color Edge and Visual are considered to be a “predecessor” company for financial-reporting purposes.

The Company’s business is organized along two primary service lines – imaging and prototypes. The Company’s imaging business includes graphic solutions and premedia and retouching services. In connection with graphic solutions, the Company provides graphic arts consulting and production services, including design consulting, large format digital photographic output services, inkjet and digital output services, photo finishing, and exhibit and display solutions. These services are provided in connection with the production of visual communications media used primarily in the design and production of consumer product packaging, advertising products used in retail stores, and large format outdoor and event displays. In connection with premedia and retouching services, the Company provides various premedia services, such as scanning, type setting, high-resolution file preparation for printing, and retouching services for commercial or high art clients. These services help modify or improve the appearance and functionality of photographic images used in publishing, advertising or package applications.

The Company’s prototype business involves the creation of prototypes and mockups used in a variety of applications, including new product development, market testing and focus groups, as sales samples, as props for print and television advertising, and, as samples for use in corporate presentations, point-of-sale displays, and packaging applications.

The Company also provides services complementary to these two primary service lines, including image database management and archiving, workflow management and consulting services, and various related outsourcing and graphic arts consulting services.

The Company produces high-profile visual communications products that are experienced daily by millions of consumers. Since these products play a critical role in communicating brand image, Merisel’s clients are often prepared to pay a premium for Merisel’s ability to deliver high-quality, custom-made products within tight production schedules. The Company believes that its clients choose to outsource visual communication needs to the Company for the following reasons:

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Production Expertise: Consulting and production services are provided by the Company’s highly-skilled employees;


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Technological Capabilities: The Company uses technologically-advanced equipment and processes, enabling it to work with multiple file formats for virtually any size output device;


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Proven Quality Standards: The Company consistently delivers customized imaging products of superior quality;


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Rapid Turnaround and Delivery Times: The Company accommodates clients’ tight schedules, often turning around projects, from start to finish, in less than 24 hours, by coordinating the New York and Los Angeles facilities, and taking advantage of Company resources permitting timely shipment to up to 500 locations; and


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Broad Scope of Services: The Company has up-to-date knowledge of printing press specifications for converters and printers located throughout the country, on-site resources embedded in clients’ advertising and creative departments, and an array of value-added graphic art production consulting services, such as digital imaging asset management and workflow management.

The combination of product quality, resources, and market share positions the Company to benefit from positive industry trends.

Recent Events

On of the date hereof, the Company has entered into a definitive agreement pursuant to which Merisel will be acquired by TU Holdings, Inc., an affiliate of American Capital Strategies, Ltd. (Nasdaq: ACAS). The transaction has been unanimously approved by Merisel’s Board of Directors, which will recommend that Merisel's stockholders approve the transaction. Affiliates of Stonington Partners, L.P., Merisel’s largest stockholder, who collectively own approximately 60% of the company’s outstanding common stock, have entered into an agreement to vote in favor of the transaction. Approval of the transaction requires the affirmative vote of a majority of the outstanding Merisel shares and is subject to certain other customary closing conditions. The transaction is expected to close during the second quarter of 2008. The exact timing of the closing of the transaction is dependent on the review and clearance of necessary filings with the Securities and Exchange Commission and satisfaction of other customary closing conditions.


The Visual Communication Solutions and Graphic Services Industry

“Graphic services” encompass the tasks (art production, digital photography, retouching, color separation and plate making) involved in preparing images and text for reproduction to exact specifications in a variety of media, including packaging for consumer products, point-of-sale displays and other promotional or advertising material. Graphic services, such as color separation (preparing color images, text and layout for the printing process), were previously performed by hand. Recent technological advances have, however, in large part eliminated the production step of preparing photographic film and exposing the film on a plate. Instead, plates are now often produced directly from digital files – in “direct-to-plate” (“DTP”) or “computer-to-plate” (“CTP”) technology.

The Company has the capability of performing CTP production, and often receives digitized input from clients on a variety of forms of digitally-generated media. The current market trend is, however, for printers and converters to provide this service as part of the bundle of services provided to their clients.


Merisel’s Market

Merisel’s target market is brand-conscious consumer-oriented companies in the retail, fashion/apparel, cosmetic/fragrance, consumer goods, sports/entertainment, advertising and publishing industries, which use high-end packaging for their consumer products and sophisticated advertising and promotional applications. The Company markets target companies directly and through the companies’ advertising agencies, art directors and creative professionals, and converters and printers.

The Company estimates that, with respect to graphic services for packaging for the consumer products industry, the North American market is approximately $2.0 billion and the worldwide market is as high as $6.0 billion.

The Company believes that the number of companies offering these services to the large, multinational consumer-oriented companies that constitute Merisel’s client base in the North American market will decline: the ongoing demand for technological improvements in systems and equipment, the need to hire, train and retain highly-skilled personnel, and clients’ increasing demands that companies offer a spectrum of global services will likely result in attrition and consolidation among such companies, a trend likely to favor Merisel, in light of its superior capabilities, resources and scale.

Additional industry trends include:

•

Shorter turnaround- and delivery-time requirements;

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An increasing number of products and packages competing for shelf space and market share;

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The increased importance of package appearance and in-store advertising promotions, due to empirical data demonstrating that most purchasing decisions are made in-store, immediately prior to purchase;

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The increased use of out-of-home advertising, such as billboards and outdoor displays, as technology has improved image quality and durability, and its demonstrated ability to reach larger audiences; and

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The increasing demand for worldwide consistency and quality in packaging, as companies work to build global brand-name recognition.

The Company’s Growth Strategy

The following are key aspects of the Company’s business strategy for enhancing its leadership position in the visual communication solutions market:

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Organic Growth: As market conditions have created growth opportunities, the Company relies upon its highly-skilled sales force as the Company’s primary growth driver, both in terms of new client acquisition and the expansion of services provided to existing clients. The Company relies upon its superior product quality, technology, service scale and scope to both acquire clients and migrate clients from using individual services to using a suite of products and services, ranging from initial consultation to production and distribution.

•

Strategic Acquisitions: The Company completed three acquisitions in 2005 and three acquisitions in 2006, and will continue to seek additional strategic acquisition opportunities.

•

Initiatives to Increase Penetration to Key Markets and Introduce New Service Lines: The Company has adopted initiatives to market to “key” players, such as agencies and intermediaries, and to develop new, complementary services, such as digital asset management, premium retouching and digital media.

•

Geographic Expansion: The Company’s operations are currently centered in the New York/New Jersey and Los Angeles markets. With its new facilities in Atlanta, and Portland, the Company will look to broaden its geographic footprint to other key United States markets, and to follow key clients into other global markets.


Services

The Company provides comprehensive, high-quality digital-imaging graphic services, including production of conventional, electronic and desktop color separations, electronic production design, film preparation, plate making and press proofs for lithography, flexography and gravure. The Company also provides digital- and analog-image database archival management, creative design, 3-D imaging, art production, large format printing, and various related outsourcing and graphics-arts consulting services. The Company also provides a series of best practices-driven advisory, implementation and management services, including workflow architecture, print management, color management and printer evaluation.

The Company’s management believes that, to capitalize on market trends, the Company must continue to offer its clients the ability to make numerous changes and enhancements with ever shortening turnaround times. The Company has, accordingly, focused on improving response time and has continued investing in emerging technologies.

The Company is dedicated to keeping abreast of technological developments in consumer products packaging applications. The Company is actively involved in evaluating various computer systems and software, and independently pursues the development of software for its operating facilities. The Company also customizes off-the-shelf products to meet a variety of internal and client requirements.


Marketing and Distribution

The Company aggressively markets its products and services, through promotional materials, industry publications, trade shows and other channels, to decision makers at companies that fit its target market profile. The Company also uses independent marketing companies to present the Company’s products and services. A significant portion of the Company’s marketing is directed toward existing clients with additional needs that can be serviced by the Company. The Company also educates its clients about state-of-the-art equipment and software available through the Company.

The Company’s 61 experienced sales representatives are divided into two service lines, one for imaging and one for prototypes, permitting them to understand clients’ technical needs and articulate Merisel’s capacity to meet those needs. The Company also has 61 client service technicians. The Company’s sales staff is further divided on a geographical basis.

The salespeople and the client service technicians share responsibility for marketing the Company’s services to existing and prospective clients, thereby fostering long-term institutional client relationships.

The Company has a primarily special-order and special-product business, with products being delivered directly to individual clients, their advertising agencies, converters or printers. Specialized advertising products produced by the Company are distributed on a case-by-case basis, as specified by the clients. The Company has no general distribution.

Clients

Merisel serves many of the world’s most prominent and highly-regarded brands in the retail, fashion/apparel, cosmetic/fragrance, consumer goods, sports/entertainment, advertising and publishing industries. These clients are diversified by size, industry and channel and the Company is not dependent upon a single customer or small group of customers. The Company has a long-standing relationship with Apple, Inc., which, along with other major customers, is considered to be important to the Company’s operating results. While, during 2007, sales to Apple, Inc. constituted approximately 11% of Company sales on a consolidated basis, over 2,500 clients used Merisel’s services during that year.

Many of the Company’s clients use domestic and international converters. Merisel maintains up-to-date client and converter equipment specifications, and thereby plays a pivotal role in insuring that these clients receive the consistency and quality across various media that their multinational businesses require. Management believes that this role has permitted the Company to establish closer and more stable relationships with these clients.

Many of the Company’s clients place orders on a daily or weekly basis, and work closely with the Company on a year-round basis, as they redesign their product packaging or introduce new products requiring new packaging. Yet, shorter, technology-driven graphic cycle time has permitted manufacturers to tie their promotional activities to regional or current events, such as sporting events or the release of a movie, resulting in manufacturers redesigning packaging more frequently. This has resulted in a correspondingly higher number of packaging-redesign assignments for the Company, offsetting the seasonal fluctuations in the volume of the Company’s business, which the Company previously experienced.

When it comes to a particular product line, consumer product manufacturers tend to single-source their visual communication solutions to insure continuity in product image. This has resulted in the Company developing a roster of steady clients in the food and beverage, health and beauty, and home care industries. In fact, Merisel’s clients have demonstrated a high degree of loyalty: Merisel’s top 20 clients in 2007 had relationships with Merisel averaging more than eight years in duration, and 100% of the Company’s top 20 clients in 2007 were Merisel’s clients in 2006.


Management

Donald R. Uzzi, 55, has served as Chairman of the Board of Directors since April 2005 and as Chief Executive Officer and President since November 2004. Between December 2002 and November 2004, Mr. Uzzi provided consulting services to various companies in the areas of marketing, corporate strategy and communications. Between July 1999 and December 2002, Mr. Uzzi was the Senior Vice President of Electronic Data Systems Corporation. Between July 1998 and July 1999, Mr. Uzzi was a principal officer of Lighthouse Investment Group. Between August 1996 and April 1998, Mr. Uzzi was the Executive Vice President of Sunbeam Corporation. Prior to 1996, Mr. Uzzi was the President of the Gatorade North America division of Quaker Oats.

Jon H. Peterson, 61, joined Merisel as Executive Vice President and Chief Financial Officer on March 1, 2006. Between 2001 and March 1, 2006, Mr. Peterson served as Vice President of the Jacob Group, a boutique executive search firm, where he headed the finance, accounting and consumer package goods search practice. Mr. Peterson has previously held positions as Vice President of Finance, Treasurer and General Manager with consumer package goods organizations, such as Pepsico and Cott Beverages.

John Sheehan, 53, has served as Merisel’s Executive Vice President of Sales and Marketing, Imaging since July 2006. Mr. Sheehan joined Merisel in March 2005 as the President of Color Edge. Between December 2002 and April 2005, Mr. Sheehan served as Managing Partner and Chief Operating Officer of Color Edge. Between March 1999 and December 2002, he served as Managing Director of the New York City office of the London-based Photobition Group from which Color Edge was formed.

Guy Claudy, 58, has served as Merisel’s Executive Vice President, Operations since July 2006. On August 8, 2005, Mr. Claudy joined Merisel as President of Crush. Prior to that, he was Managing Director of Photobition Los Angeles, a part of the London-based Photobition Group.

Kenneth Wasserman, 48, has served as Merisel’s Executive Vice President, Prototypes since June 2006. Mr. Wasserman previously served as the President of Comp24 since it was acquired by Merisel on March 1, 2005. Mr. Wasserman was the founder and, since 1986, President of the predecessor entity to Comp24.

Domenick Propati, 49, has served as Merisel's Executive Vice President of Operations since January 2007. Mr. Propati joined Merisel in October 2006 as part of the acquisition of Fuel Digital, where he served as president since April of 2005. From 2000 until 2005, Mr. Propati was CEO of Photobition USA, which was part of London-based Photobition, PLC. In addition, Mr. Propati has been an adjunct professor at Parsons The New School for Design from 2006 to the present.


Competition

Merisel believes that the highly-fragmented North American visual communication solutions industry has over 1,000 market participants. Merisel is one among a small number of companies in the independent color separator/graphic services provider segment of the industry that has annual revenues exceeding $20 million.

Merisel competes with other independent color separators, converters and printers with graphic service capabilities. The Company believes that approximately half of its target market is served by converters and printers, and half of its target market is served by independent color separators. The Company also competes, on a limited basis, with clients, such as advertising agencies and trade-show exhibitors, who produce products in-house.

Converters with graphic service capabilities compete with the Company when they perform graphic services in connection with printing work. Independent color separators, such as Merisel, may offer greater technical capability, image quality control and speed of delivery. Indeed, converters often employ Merisel’s services, due to the rigorous demands being placed on them by their clients, who are requiring faster and faster turnaround times. Converters are being required to invest in improving speed and technology in the printing process, and have avoided investing in graphic services technology.

As speed requirements continue to increase and the need to focus on core competencies becomes more widely acknowledged, clients have increasingly recognized the efficiency and cost-effectiveness that can be achieved through outsourcing to the Company.

CEO BACKGROUND

Donald R. Uzzi, 55, has served as Chief Executive Officer and President since November 2004 and as a member of the Board of Directors since December 2004. He was elected Chairman of the Board of Directors in April 2005. From December 2002 to November 2004, Mr. Uzzi provided consulting services for various companies on marketing, corporate strategy and communications. From July 1999 to December 2002, Mr. Uzzi was Senior Vice President of Electronic Data Systems Corporation. From July 1998 to July 1999, Mr. Uzzi was a principal officer of Lighthouse Investment Group. From August 1996 to April 1998, Mr. Uzzi served as Executive Vice President at Sunbeam Corporation. Prior to 1996, Mr. Uzzi held the position of President of the Gatorade North America division of Quaker Oats.

Albert J. Fitzgibbons III, 62, has been a member of the Board of Directors since December 1997. Mr. Fitzgibbons is a Partner and Director of Stonington Partners, Inc. and a Partner and Director of Stonington Partners, Inc. II, positions that he has held since 1994. He served as a Director of Merrill Lynch Capital Partners, Inc., a private investment firm associated with Merrill Lynch & Co., from 1988 to 1994 and as a Consultant to Merrill Lynch Capital Partners from 1994 to December 2000. He was a Partner of Merrill Lynch Capital Partners from 1993 to 1994 and Executive Vice President of Merrill Lynch Capital Partners from 1988 to 1993. Mr. Fitzgibbons was also a Managing Director of the Investment Banking Division of Merrill Lynch & Co. from 1978 to July 1994. Mr. Fitzgibbons is also currently a Director of Obagi Medical Products, Inc.

Ronald P. Badie, 64, has been a member of the Board of Directors since October 2004. In March 2002, Mr. Badie retired from Deutsche Bank after 35 years of service. At the time of his retirement, he was Vice Chairman of Deutsche Bank Alex. Brown (now Deutsche Bank Securities), the firm’s investment banking subsidiary. Over the years, Mr. Badie has held a variety of management positions with the firm and its predecessor, Bankers Trust Company, in both New York and Los Angeles. Mr. Badie is also currently a Director of Amphenol Corporation, Nautilus, Inc., and Obagi Medical Products, Inc.

Bradley J. Hoecker, 45, has been a member of the Board of Directors since December 1997. Mr. Hoecker has been a Partner and Director of Stonington Partners and a Partner and Director of Stonington Partners, Inc. II since 1997. Prior to being named partner in 1997, Mr. Hoecker was a Principal of Stonington Partners since 1993. He was a Consultant to Merrill Lynch Capital Partners from 1994 to December 2000 and was an Associate in the Investment Banking Division of Merrill Lynch Capital Partners from 1989 to 1993. Mr. Hoecker is also currently a Director of Obagi Medical Products, Inc.

Lawrence J. Schoenberg, 75, has been a member of the Board of Directors since 1990. From 1967 through 1990, Mr. Schoenberg served as Chairman of the Board and Chief Executive Officer of AGS Computers, Inc., a computer software company. From January to December 1991, Mr. Schoenberg served as Chairman and as a member of the executive committee of the Board of Directors of AGS. Mr. Schoenberg retired from AGS in 1992. Mr. Schoenberg is also a Director of Government Technology Services, Inc., a reseller and integrator of information systems for the federal government, and a Director of Cellular Technology Services, Inc., a software company.

Edward A. Grant, 57, has been a member of the Board of Directors since May 2006. Mr. Grant is a principal and practice director at Arthur Andersen LLP. He has been a professional at Andersen for more than thirty years. He was an audit partner with the firm for sixteen years, serving as the auditor on numerous public companies. Mr. Grant is a Director of Obagi Medical Products, Inc. and is the Chair of its Audit Committee. Mr. Grant has a bachelor’s and two master’s degrees from the University of Wisconsin-Madison and became a Certified Public Accountant in 1976. He is a past member of the American Institute of Certified Public Accountants and the Illinois Certified Public Accountants Society and has served on several civic boards.

Mr. Hoecker and Mr. Fitzgibbons serve as Directors as a result of their nomination by Stonington Partners, which, through its affiliates, is the owner of the Company’s Preferred Stock and more than 50% of the common stock and holds the contractual right to nominate three Directors. No other arrangement or understanding exists between any Director or nominee and any other persons pursuant to which any individual was or is to be selected or serve as a Director. No Director has any family relationship with any other Director or with any of the Company’s executive officers. Mr. Uzzi is an executive officer of the Company.

MANAGEMENT DISCUSSION FROM LATEST 10K

The Company is a leading supplier of visual communications solutions. The Company was founded in 1980 as Softsel Computer Products, Inc. [incorporated in Delaware in 1987 under the same name] and in connection with the acquisition of Microamerica, Inc. changed its name to Merisel, Inc. in 1990. The Company operated as a full-line international computer distributor until December 2000. Merisel’s only business from July 2001 through August 2004 was its software licensing business, which was sold in August 2004. See discussion below for further information.

Merisel’s only business from July 2001 through August 2004 was its software licensing business, which was sold in August 2004. See discussion below for further information.

The Company had no operations from August 2004 until March 1, 2005. On March 1, 2005, the Company acquired ColorEdge, Inc., Color Edge Visual, Inc., Photobition New York, Inc., and the Comp 24, LLC. In August 2005, the Company acquired Crush Creative. In May 2006, the Company acquired Dennis Curtin Studios, Inc. and Advertising Props, Inc. In October 2006, the Company acquired Fuel Digital, Inc. (collectively, the “Acquisitions”). These Acquisitions are described in detail below.

The Company conducts its operations through its main operating subsidiary Merisel Americas, Inc.

Management Overview of 2007 Operations and Key Events

Effective March 1, 2005, the Company acquired substantially all of the operating assets of ColorEdge, Inc., ColorEdge Visual, Inc. ("Visual"), and its wholly-owned subsidiary, Photobition New York, Inc. (collectively “ColorEdge”). ColorEdge is a New York-based commercial graphic communication and imaging company that provides digital retouching services, large format digital photographic output, inkjet and digital printing services, photo-finishing and exhibits and display solutions. The purchase price for these two companies was $19,835; the purchase price consisted of $20,498 paid in cash at closing and $1,689 paid in acquisition-related professional fees, with $2,352 in purchase-price adjustments related primarily to the return of escrow funds during the third quarter of 2005.

It has been determined that ColorEdge represents the predecessor company (the “Predecessor”) for financial reporting purposes.

Effective March 1, 2005, the Company also acquired substantially all of the assets of Comp 24, LLC ("Comp 24"). Comp 24 is a New York-based commercial prototype company that provides consumer-products companies with prototypes, samples, props and color-corrected packaging, and end-to-end services. The purchase price of $11,812 consisted of $10,884 paid in cash at closing and $1,091 paid in acquisition-related professional fees, with $163 in purchase-price adjustments related primarily to the return of escrow funds during the third quarter of 2005.

Effective August 8, 2005, the Company acquired substantially all of the assets of Crush Creative Inc. (“Crush”), a California-based commercial graphic communication and imaging company that provides digital retouching services, large format digital photographic output, inkjet and digital printing services, photo-finishing and exhibits and display solutions. The purchase price of $8,272 consisted of $6,991 paid in cash at closing and $563 paid in acquisition-related professional fees, adjusted for contingent payments totaling $718 ($298 in contingent payments were made during the second quarter of 2006 and $420 in contingent payments were made during the second quarter of 2007). The asset purchase agreement provides for contingent payments of up to approximately $2,500 in cash, provided that EBITDA, net of excess capital expenditures, exceeds certain agreed-upon annual and cumulative thresholds for the four years commencing on August 8, 2005.

Effective May 5, 2006, the Company acquired substantially all of the assets of Dennis Curtin Studios, Inc. (“DCS”), a Los Angeles-based commercial prototype company providing consumer products companies and advertising agencies with prototypes, sales samples, props and color corrected T.V. packaging. The purchase price of $1,030 consisted of $1,008 in cash ($750 was paid at closing and $58 was paid within 60 days of closing), $100 to be paid on each of the first and second anniversaries of the closing, and $22 paid in acquisition-related professional fees. As a result of the litigation between the parties, the first of the two payments has not been made. See Item 3, “Legal Proceedings.”

Effective May 10, 2006, the Company acquired all of the stock of Advertising Props, Inc. (“AdProps”), an Atlanta-based commercial prototype company providing consumer products companies and advertising agencies with prototypes, sales samples, props and color corrected T.V. packaging. It also provides clients with other end-to-end complementary services for file editing, film separation, printing, airbrushing, dye cutting, and foil stamping, embossing and laminating. The purchase price of $2,485 consisted of $1,980 paid in cash at closing and $105 of acquisition related professional fees with $400 in purchase price adjustments made during the second quarter of 2007. The asset purchase agreement provides for contingent payments of up to approximately $400 in cash, provided that EBITDA exceeds certain agreed-upon thresholds each year over a two-year period commencing on May 10, 2006.

Effective October 1, 2006, the Company acquired substantially all of the assets of Fuel Digital, Inc (“Fuel”), a New York-based communication solutions company that provides digital retouching services, large format digital photographic output, inkjet and digital printing services, photo-finishing, and exhibits and display solutions. The purchase price of $8,198 consisted of $5,934 paid in cash at closing and $551 paid in acquisition-related professional fees, with a $938 holdback amount held in escrow on the purchase price, which was released to the former shareholders during 2007, $417 in contingent payments made in the fourth quarter of 2007, and $311 in relocation costs. The asset purchase agreement provides for contingent payments of up to approximately $1,250 in cash, provided that EBITDA exceeds certain agreed-upon annual and cumulative thresholds for the three years period commencing on October 1, 2006.

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. For a discussion of these risks, see Item 1A. “Risk Factors.”

Discontinued Operations

The Company operated its software licensing distribution business until August 2004, when the Company completed the sale of the majority of its software licensing business to D&H Services, LLC (“D&H”). The net operating results and net cash flows of this software licensing distribution business have been reported as “Discontinued Operations” in the accompanying consolidated statements of income and cash flows.

In November 2004, the Audit Committee of the Company initiated an investigation into the sale of its software licensing business, including the sale of its assets. In the same month, Timothy N. Jenson resigned as the Company’s President and Chief Executive Officer and the Board of Directors named Donald R. Uzzi as his replacement.

The Company subsequently filed a lawsuit against Mr. Jenson, as well as Tina Wurtz, Craig Wurtz, John Low, D&H, and TDH Enterprises, LLC (“TDH”). The lawsuit alleged, among other things, that the defendants defrauded the Company through the sale of the Company’s software licensing business, including its notes and real property assets, to D&H, in exchange for the assumption of certain liabilities and a nominal amount of cash. The Company sought rescission of the sale, as well as, compensatory and punitive damages.

In February 2005, the sale was rescinded. On February 28, 2005, the Company settled the lawsuit. Under the settlement, Mr. Jenson received certain cash payments, and D&H transferred to Merisel Americas, Inc. cash and certain assets and liabilities related to the August 2004 asset purchase agreement.

On March 4, 2008, the SEC filed a civil complaint against Jenson and TDH in the federal district court in Santa Ana, California. In its complaint, the SEC alleges that Jenson made numerous material misrepresentations and omissions in Merisel’s SEC filings and in Company press releases as part of a scheme to loot company assets in two separate but similar self-dealing transactions, and that TDH, a Jenson-controlled entity, was used to carry out these transactions.

Without admitting or denying these allegations, Jenson and TDH consented to the entry of final judgments permanently enjoining them from violating the anti-fraud and other provisions of the federal securities laws. In addition, Jenson consented to the entry of a final judgment barring him from serving as an officer or director of a public company and ordering that he pay a $275,000 civil penalty.

Results of Operations

For the purposes of the above table and the following discussion, “Existing Operations” refers to the Company’s businesses acquired during the fiscal year ended December 31, 2005, and “Expanded Operations” refers to the Company’s businesses acquired during the fiscal year ended December 31, 2006, specifically DCS and AdProps which were acquired in May 2006, and Fuel, which was acquired in October 2006. The above table represents the key financial statement areas of operations.

The Company reported net income to common stockholders of $33,848 for 2007 compared with $5,135 for 2006, and $9,061 for 2005. These results include a gain on the sale of discontinued operations of $145, $748 and $5,016 for 2007, 2006 and 2005, respectively. Additionally, these results include a tax benefit of $30,594 and $3,280 for 2007 and 2006, respectively from the reduction of a deferred tax asset reserve.


Comparison of Fiscal Years Ended December 31, 2007 and December 31, 2006

Net Sales - Net sales increased by $8,461, or 10.0%, from $84,720 for the year ended December 31, 2006, to $93,181 for the year ended December 31, 2007. Net sales from Existing Operations increased $1,261, or 1.6%, from $78,452 for the year ended December 31, 2006, to $79,713 for the year ended December 31, 2007.

Gross Profit – Gross profit increased $6,891, or 18.6%, from $36,999 for the year ended December 31, 2006, to $43,890 for the year ended December 31, 2007. Gross profit from Existing Operations increased $3,122, or 9.2%, from $34,061 for the year ended December 31, 2006, to $37,183 for the year ended December 31, 2007. Gross profit as a percentage of sales, or gross margin, increased 3.4% from 43.7% for the year ended December 31, 2006 to 47.1% for the year ended December 31, 2007... The increase in gross margin is attributable a reduction in labor expenses at Color Edge and Crush Creative, and a reduction in raw material costs and productions supplies driven by centralized procurement.

Selling, General and Administrative - Selling, general and administrative expenses increased $5,653, or 17.3%, from $32,663 for the year ended December 31, 2006, to $38,316 for the year ended December 31, 2007... Selling, general and administrative expenses from Existing Operations increased $2,657 or 8.7% from $30,484 for the year ended December 31, 2006 to $33,141 for the year ended December 31, 2007. Part of the increase in selling, general, and administrative expenses from Existing Operations is attributed to $1,827 incurred in connection with the Company’s decision to explore strategic alternatives.

Restructuring Costs - The Company recorded a restructuring charge of $724 related to the restructuring of the wet processing film business for the year ended December 31, 2006. There was no restructuring charge for the year ended December 31, 2007.

Interest Expense - Interest expense for the Company decreased by $207, or 19.4%, from $1,066 for the year ended December 31, 2006 to $859 for the year ended December 31, 2007. The change primarily reflects a decrease in loan balances due to payments of principal on capital leases and installment notes.

Interest Income - Interest income for the Company decreased by $8, or 1.6%, from $481 for the year ended December 31, 2006, to $473 for the year ended December 31, 2007.

Income Taxes – The Company recorded an income tax benefit of $3,280 in the year ended December 31, 2006 and an income tax benefit of $30,594 for the year ended December 31, 2007... The Company further reduced its valuation allowance and recorded a deferred tax benefit in the amount of $34,972 for the year ended December 31, 2007.

Discontinued Operations – Income On April 17, 2006, the Company was notified that a deed for real property securing a note receivable had been transferred back to the Company in settlement of the note receivable. The underlying real property was valued at $914 and recorded as assets held for sale at December 31, 2006. On March 28, 2007, the Company sold the real property for $1,192, net of expenses. The Company recorded income from discontinued operations of $145 for the year ended December 31, 2007. This figure consists of the sale price of $1,192, net of its cost basis of $914, taxes of $112, and other expenses of $21.

Income from discontinued operations for the year ended December 31, 2006 was $748. On June 19, 2006, the Company recorded a gain of $748 on the sale of an unsecured claim, which is net of other expenses of $342 and tax of $160.

Net Income - As a result of the above items, the Company reported net income available to common stockholders of $5,135 in the year ended December 31, 2006 and reported net income available to common stockholders of $33,848 for the year ended December 31, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

The Company reported a loss of $(1,186) or $(0.15) per share for the three months ended March 31, 2008 as compared to net income of $652 or $0.08 per share for the three months ended March 31, 2007. The loss this quarter includes $4 of expense or $0.00 per share from discontinued operations as compared to income of $150 or $0.02 per share from discontinued operations for the three months ended March 31, 2007.

Three Months Ended March 31, 2008 as Compared to the Three Months Ended March 31, 2007

Net Sales - Net sales were $21,352 for the three months ended March 31, 2008 compared to $23,934 for the three months ended March 31, 2007. The decrease of $2,582 or 10.8% was due to weakening demand for our client services due to softer economic conditions throughout the United States.

Gross Profit – Total gross profit was $9,387 for the three months ended March 31, 2008 compared to $10,729 for the three months ended March 31, 2007. The decrease in total gross profit of $1,342 or 12.5% was primarily due to the 10.8% decline in net sales. Gross margin percentage decreased to 44.0% for the three months ended March 31, 2008 from 44.8% for the three months ended March 31, 2007 due to an unfavorable shift in business mix from higher margin prototype and retouching to lower margin wide format.

Selling, General and Administrative – Total Selling, General and Administrative expenses increased to $10,481 for the three months ended March 31, 2008 from $8,806 for the three months ended March 31, 2007. The increase of $1,675 or 19.0% was due to $742 of legal costs and investment banking fees associated with the Company’s decision to enter into a merger agreement with TU Holdings, Inc with the balance of the increase attributable to higher expenses for professional fees, bad debts, depreciation/amortization , and maintenance. Total Selling, General and Administrative expenses as a percentage of sales increased to 49.1% for the three months ended March 31, 2008 compared to 36.8% for the three months ended March 31, 2007.

Interest Expense, Net - Interest expense decreased to $1 in the three months ended March 31, 2008 from $164 in the three months ended March 31, 2007. The decrease was due to a $62 reduction in interest expense resulting from lower installment note balances coupled with a $101 increase in interest income due to higher balances in short-term interest-bearing investments classified as cash.

Income Taxes – The Company recorded an income tax benefit of $460 for the three months ended March 31, 2008 compared to a provision of $753 for the three months ended March 31, 2007. Income tax expense in the current quarter is recorded at an effective tax rate of 42.0% which compares to a 42.8% tax rate in the first quarter of 2007.

Discontinued Operations – Loss from discontinued operations for the three months ended March 31, 2008 was $4 attributable to related professional fees. Income from discontinued operations for the three months ended March 31, 2007 was $150 related to the sale of real property for a purchase price of $1,192 net of cost basis of $914 and taxes and other expenses of $128.

Net Income - As a result of the above items, the Company had net loss of $639 for the three months ended March 31, 2008 compared to income of $1,156 for the three months ended March 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Activity

Net cash used by operating activities was $880 during the three months ended March 31, 2008. The primary uses of cash were a decrease in accrued liabilities of $2,218 offset by an increase in accounts payable of $1,326.

Net cash provided by operating activities was $3,309 during the three months ended March 31, 2007. The primary sources of cash were net income from continuing operations of $1,006 increased by depreciation and amortization expense of $1,008 and a decrease in deferred taxes of $565 and a decrease of $2,378 in accounts receivables. A decrease in accrued expenses offset the increase in cash by $1,840.

For the three months ended March 31, 2008, net cash used in investing activities was $455 used for capital expenditures.

For the three months ended March 31, 2007, net cash used in investing activities was $1,268 which consisted of $639 used for acquisition related expenditures and $629 of capital expenditures.

For the three months ended March 31, 2008 and 2007, net cash used in financing activities was $251 and $258, respectively, related to repayments of installment notes and capital lease payments.

Financing Sources and Capital Expenditures

In June 2000, an affiliate of Stonington Partners, Inc., which owns approximately 62.1% 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 in additional shares of Convertible Preferred. Dividends are cumulative and accrue from the original stock issue date, irrespective of whether dividends are declared by the Board of Directors. Cumulative accrued dividends were $12,841 and $12,294 at March 31, 2008 and December 31, 2007, respectively. At the option of the holder, the Convertible Preferred is convertible into the Company’s Common Stock at a conversion price of $17.50 per share. At the Company’s option, the Convertible Preferred can be converted into the Company’s Common Stock when the average closing price of the Common Stock for any 20 consecutive trading days is at least $37.50. Beginning on June 30, 2003, the Company could, at its option, redeem outstanding shares of the Convertible Preferred at $105 per share initially, and at $100 per share on or after June 30, 2008, in both instances, with accrued, unpaid dividends. In the event of a defined “change of control,” the holder of the Convertible Preferred has the right to require the redemption of the Convertible Preferred at $101 per share plus accrued and unpaid dividends. As of March 31, 2008, no Convertible Preferred has been redeemed.

The Company entered into two Credit Agreements dated March 1, 2005 (as amended by Amendment No. 1 dated August 8, 2005) with Amalgamated Bank (the “Lender”). Under these agreements, the Company had term loans and a revolving line of credit, under which the Company’s Color Edge, Visual, Crush, and Comp24 subsidiaries are the borrowers (the “Borrowers”). On February 27, 2008, the Company entered into an amendment and extension (the “Amendment”) of these Credit Agreements (the “Facility”). As amended, the Facility consists of a $15,500 revolving credit facility (the “revolver”) and an $800 term loan (the “term loan”), and the Amendment extends the Facility through February 26, 2011. The term loan requires scheduled principal repayments of $100 per quarter due on each March 31, June 30, September 30 and December 31 between March 31, 2008 and December 31, 2009. The revolver requires that all principal be repaid in full on or before February 26, 2011. As of March 31, 2007, the outstanding balance on the term loan was $700 and the outstanding balance on the revolver was $8,630.

The Facility is guaranteed by the Company, Americas, by each of their operating subsidiaries, and must be guaranteed by all future subsidiaries.

The Facility is secured by a first-priority lien on (with certain exceptions) substantially all of the Borrowers’ and corporate guarantors’ properties and assets, and the properties and assets of their existing and future subsidiaries.

The interest rate on the Facility is equal to the greater of: (a) the Lender’s publicly announced prime rate then in effect; or (b) the Federal Reserve’s Federal Funds Effective Rate then in effect plus 0.5%. Interest on the Facility is payable in arrears on the last business day of each March, June, September and December. Voluntary prepayments, in whole or part, are permitted, at the Company’s option, in minimum principal amounts of $100, without premium or penalty.

The Company’s borrowings under the Facility are limited to 85% of its eligible accounts receivable. In the event that borrowings under the Facility were to exceed this limit, the Company would be required to pay Lender outstanding principal and interest to bring the Company’s borrowings back within this limit. Borrowings under the Facility must be repaid with the net cash proceeds resulting from certain sales or issuances of stock or capital contributions.

The Facility addresses customary events of default, including non-payment defaults, covenant defaults and cross-defaults to the other material indebtedness of the Borrowers, the corporate guarantors or any of their existing or future subsidiaries.

The Borrowers and the corporate guarantors must comply with financial covenants with respect to a maximum leverage ratio, a minimum debt service coverage ratio, a minimum tangible net worth amount, and a maximum indebtedness to net worth ratio.

In connection with the AdProps acquisition, the Company assumed certain installment notes at fixed interest rates with a balance of $26 outstanding at March 31, 2008

As of March 31, 2008, the Company has $9,330 outstanding debt at variable interest rates. As of March 31, 2008, the Company has available borrowing capacity under its revolver.

Management believes that, with its cash balances and anticipated cash balances after discontinued-operations-r elated expenditures, the Company has sufficient liquidity. However, the Company’s operating cash flow can be impacted by macroeconomic factors beyond the Company’s control. In addition, the Company may need to use additional amounts of cash to fund future acquisitions, resulting in lower levels of liquidity to meet the Company’s working capital needs.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

The Company has various contractual obligations which are recorded as liabilities in the condensed consolidated financial statements. Additionally, the Company assumed certain off-balance sheet real estate leases in connection with the Acquisitions.

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