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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

Amendment No. 2

 

x

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

 

For the quarterly period ended February 28, 2009

 

OR

 

o

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

 

For the transition period from               to               

 

Commission File Number 0-22972

 

CLST HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

75-2479727

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

17304 Preston Road, Dominion Plaza, Suite 420

 

 

Dallas, Texas

 

75252

(Address of principal executive offices)

 

(Zip Code)

 

(972) 267-0500

(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 o  No x

 

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 the registrant was required to submit and post such files).*  Yes o  No o

 


* The registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer o

Smaller reporting company x

(Do not check if a 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 o  No x

 

On April 13, 2009, there were 23,949,282 outstanding shares of common stock, $0.01 par value per share.

 

 

 


 


Table of Contents

 

EXPLANATORY NOTE

 

We are filing this Amendment No. 2 on Form 10-Q/A (“Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2009 originally filed with the Securities and Exchange Commission (the “SEC”) on April 14, 2009 (the “Original Form 10-Q”), as amended by Amendment No. 1 on Form 10-Q/A filed with the SEC on November 5, 2009, in response to comments we have received from the SEC.  For convenience, we have repeated the Original Form 10-Q in its entirety.

 

This amendment does not reflect events occurring after the filing of the Original Form 10-Q, and does not modify or update the disclosures therein in any way other than as required to reflect the matters described above.

 

CLST HOLDINGS, INC.

 

INDEX TO FORM 10-Q/A

 

 

 

 

Page

 

 

 

 

PART I— FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

FINANCIAL STATEMENTS

 

 

 

CONSOLIDATED BALANCE SHEETS as of February 28, 2009 (unaudited) and November 30, 2008

 

3

 

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) for the three months ended February 28, 2009 and February 29, 2008

 

4

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (unaudited) for the three months ended February 28, 2009 and February 29, 2008

 

5

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) for the three months ended February 28, 2009 and February 29, 2008

 

6

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

7

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

15

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

28

Item 4T.

CONTROLS AND PROCEDURES

 

28

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

LEGAL PROCEEDINGS

 

29

Item 1A.

RISK FACTORS

 

32

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

32

Item 3.

DEFAULTS UPON SENIOR SECURITIES

 

33

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

33

Item 5.

OTHER INFORMATION

 

33

Item 6.

EXHIBITS

 

33

 

SIGNATURES

 

35

 

2



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CLST HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)

 

 

 

February 28,

 

November 30,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,434

 

$

9,754

 

Notes receivable, net - current

 

9,528

 

8,698

 

Accounts receivable - other

 

1,015

 

893

 

Prepaid expenses and other current assets

 

177

 

177

 

Total current assets

 

17,154

 

19,522

 

 

 

 

 

 

 

Notes receivable, net - long term

 

36,854

 

31,547

 

Property and equipment, net

 

11

 

12

 

Deferred income taxes

 

4,786

 

4,786

 

Other assets

 

810

 

863

 

 

 

$

59,615

 

$

56,730

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Loans payable - current

 

$

7,835

 

$

7,436

 

Notes payable - related parties

 

319

 

 

Accounts payable

 

14,250

 

14,512

 

Income taxes payable

 

77

 

207

 

Accrued expenses

 

454

 

473

 

Total current liabilities

 

22,935

 

22,628

 

 

 

 

 

 

 

Loans payable - long term

 

28,421

 

26,902

 

Notes payable - related parties - long term

 

558

 

 

Total liabilities

 

51,914

 

49,530

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued

 

 

 

Common stock, $.01 par value, 200,000,000 shares authorized; 24,283,306 and 21,187,229 shares issued, respectively, and 23,649,282 and 20,553,205 shares outstanding, respectively

 

243

 

212

 

Additional paid-in capital

 

126,957

 

126,034

 

Accumulated other comprehensive income—foreign currency translation adjustments

 

217

 

217

 

Accumulated deficit

 

(118,069

)

(117,616

)

 

 

9,348

 

8,847

 

Less: Treasury stock (634,024 shares at cost)

 

(1,647

)

(1,647

)

 

 

7,701

 

7,200

 

 

 

 

 

 

 

 

 

$

59,615

 

$

56,730

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

 

Three months ended February 28, 2009 and February 29, 2008

 

(unaudited)

 

(In thousands, except per share data)

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Interest income

 

$

1,530

 

$

 

Other

 

91

 

 

Total revenues

 

1,621

 

 

 

 

 

 

 

 

Loan servicing fees

 

306

 

 

Trust administrative fees

 

1

 

 

Provision for doubtful accounts

 

703

 

 

Interest expense

 

536

 

 

General and administrative expenses

 

661

 

458

 

Operating loss

 

(586

)

(458

)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Other, net

 

3

 

133

 

Total other income

 

3

 

133

 

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

(583

)

(325

)

 

 

 

 

 

 

Income tax benefit

 

(130

)

(5

)

 

 

 

 

 

 

Loss from continuing operations, net of taxes

 

(453

)

(320

)

 

 

 

 

 

 

Discontinued operations, net of taxes of $5 for 2008

 

 

10

 

 

 

 

 

 

 

Net loss

 

$

(453

)

$

(310

)

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations, net of taxes

 

$

(0.02

)

$

(0.02

)

Discontinued operations, net of taxes

 

 

 

 

 

 

 

 

 

Net loss per share

 

$

(0.02

)

$

(0.02

)

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

21,261

 

20,553

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Three months ended February 28, 2009 and February 29, 2008

 

(Unaudited)

 

(In thousands)

 

 

 

 

 

 

 

 

 

Accumulated
other

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

paid-in capital

 

income

 

deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at November 30, 2008

 

21,187

 

$

212

 

(634

)

$

(1,647

)

$

126,034

 

$

217

 

$

(117,616

)

$

7,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

(453

)

(453

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(453

)

Grant of restricted stock

 

900

 

9

 

 

 

(9

)

 

 

 

Cancellation of restricted stock

 

(300

)

(3

)

 

 

 

 

3

 

 

 

 

Amortization of restricted stock

 

 

 

 

 

55

 

 

 

55

 

Stock issuance for notes receivable

 

2,496

 

25

 

 

 

874

 

 

 

 

 

899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2009

 

24,283

 

$

243

 

(634

)

$

(1,647

)

$

126,957

 

$

217

 

$

(118,069

)

$

7,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at November 30, 2007

 

21,187

 

$

212

 

(634

)

$

(1,647

)

$

126,034

 

$

217

 

$

(115,953

)

$

8,863

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

(310

)

(310

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(310

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 29, 2008

 

21,187

 

$

212

 

(634

)

$

(1,647

)

$

126,034

 

$

217

 

$

(116,263

)

$

8,553

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Three months ended February 28, 2009 and February 29, 2008

 

(Unaudited)

 

(In thousands)

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(453

)

$

(310

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Stock based compensation

 

55

 

 

Provision for doubtful accounts

 

703

 

 

Depreciation

 

1

 

 

Non-cash interest expense

 

10

 

 

Amortization of notes receivable acquisition costs

 

22

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable - other

 

(458

)

4,532

 

Prepaid expenses and other current assets

 

 

322

 

Other assets

 

43

 

120

 

Accounts payable

 

(262

)

29

 

Income taxes payable

 

(130

)

 

Accrued expenses

 

(19

)

4

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(488

)

4,697

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

 

(2

)

Notes receivable collections

 

2,298

 

 

Acquisition of notes receivable

 

(2,865

)

 

Additions to notes receivable acquisition costs

 

(173

)

 

 

 

 

 

 

 

Net cash used in investing activities

 

(740

)

(2

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on loans payable

 

(2,092

)

 

 

 

 

 

 

 

Net cash used in financing activities

 

(2,092

)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(3,320

)

4,695

 

Cash and cash equivalents at beginning of period

 

9,754

 

11,799

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

6,434

 

$

16,494

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition of notes receivable for common stock

 

$

899

 

$

 

 

 

 

 

 

 

Acquisition of notes receivable for debt

 

$

4,909

 

$

 

 

 

 

 

 

 

Acquisition of notes receivable for accounts receivable, other

 

$

336

 

$

 

 

 

 

 

 

 

Returned notes receivable in exchange for reduction of debt

 

$

23

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

CLST HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

(1) Summary of Significant Accounting Policies

 

(a)         Basis for Presentation

 

Although the interim consolidated financial statements of CLST Holdings, Inc., formerly CellStar Corporation, and subsidiaries (the “Company”) are unaudited, Company management is of the opinion that all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results have been reflected therein. Net income (loss) for any interim period is not necessarily indicative of results that may be expected for any other interim period or for the entire year.

 

On November 10, 2008, we purchased all of the outstanding equity interests of FCC Investment Trust I (“Trust I”), and on December 12, 2008 we purchased certain receivables, installment sales contracts and related assets owned by SSPE Investment Trust I and SSPE, LLC. Subsequently, on February 13, 2009, we purchased assets owned by Fair Finance Company, an Ohio corporation (“Fair”), James F. Cochran, Chairman and Director of Fair, and by Timothy S. Durham, Chief Executive Officer and Director of Fair and an officer, director and stockholder of our Company. Messrs. Durham and Cochran own all of the outstanding equity of Fair. The Board believes that each of these acquisitions will be a better investment return for our stockholders when compared to the recent changes to interest rates and other investment alternatives. Although we are now engaged in the business of holding and collecting consumer notes receivable, we have not abandoned our plan of liquidation and dissolution. We believe that should we decide that continuing with the plan of liquidation and dissolution is in the best interest of our stockholders, we will be able to dispose of these assets on favorable terms prior to the time that we would be in a position to make a final distribution to stockholders and terminate our corporate existence.

 

The Company has reclassified to discontinued operations, for all periods presented, the results and related charges for the North American and Latin American Regions. (See footnote 2.)

 

(b)         Notes Receivable

 

Notes receivable are recorded at the historical cost paid at the date of acquisition net of any purchase discounts. Subsequent to the date of acquisition, notes receivable are reduced by any principal payments made by the customer. Purchase discounts are recorded based on the negotiated difference between the face value and the amount paid for the notes receivable. Purchase discounts are recognized as revenue, using the effective interest method, as principal payments are collected.

 

The Company establishes an allowance for doubtful accounts for receivables where the customer has not made a payment for the most recent 120 day period. The Company specifically analyzes notes receivable using historical activity, current economic trends, changes in its customer payment terms, recoveries of previously reserved notes and collection trends when evaluating the adequacy of its allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific note receivable may result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs. The Company may from time to time make additional increases to the allowance based on the foregoing factors. Once a note receivable has been reserved due to nonpayment, the Company will no longer accrue, for financial reporting purposes, interest earned on the note receivable. Should the note receivable return to a performing status, then the Company will resume accruing interest on the note receivable. The majority of the notes receivable have collateral in various forms, which may include a second lien position on the borrower’s home or property. Actual results could differ from those estimates. Recoveries are recorded against the allowance when payments are received. Recoveries of notes receivable, which were previously charged off, are recorded to income when payments are received. Notes receivable are charged off against the allowance after all means of collection have been exhausted and a legal determination has been rendered that less than the full amount of the note receivable will be collected.

 

7



Table of Contents

 

The following table details the activity in the allowance for doubtful accounts for the three months ended February 28, 2009:

 

 

 

Three Months
Ended
February 28,
2009

 

 

 

 

 

Beginning balance

 

$

144,000

 

Additions to allow for doubtful accounts

 

703,000

 

Recoveries

 

 

Charge offs

 

 

 

 

 

 

Ending balance

 

$

847,000

 

 

(c) Revenue Recognition

 

Revenues consist of interest earned, late fees and other miscellaneous charges. Revenues are not accrued on accounts over 120 days without payment activity, unless payment activity resumes.

 

(d)  Deferred Costs

 

We have recorded acquisition costs related to the purchase of certain notes receivables and deferred loan costs associated with certain Company obligations. The acquisition costs are amortized over the remaining principal balance of the notes receivable and are recorded as contra revenue. The deferred loan costs are amortized over the remaining outstanding balance of the Company obligation and are recorded in operating interest expense. Any impact of prepayment of the balances by either the Company or our customers would be recognized in the period of prepayment.

 

(2) Discontinued Operations

 

During fiscal year 2007 we sold all of our U.S. operations, including our Miami-based Latin American operations, Mexico operations and Chile operations. For more information on these transactions, please see the Company’s Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008.

 

The results of discontinued operations for U.S., Miami, Mexico and Chile for the three months ended February 28, 2009 and February 29, 2008, are as follows (in thousands):

 

 

 

February 28,

 

February 29,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Revenues

 

$

 

$

 

Cost of sales

 

 

 

Gross profit

 

 

 

Selling, general and administrative expenses

 

 

 

Operating income

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

 

 

Loss on sale of accounts receivable

 

 

 

Minority Interest

 

 

 

Gain on transactions

 

 

 

Other, net

 

 

15

 

Total other income (expense)

 

 

15

 

 

 

 

 

 

 

Income before income taxes

 

 

15

 

 

 

 

 

 

 

Provision for income taxes

 

 

5

 

 

 

 

 

 

 

Total discontinued operations

 

$

 

$

10

 

 

8



Table of Contents

 

(3) Stock-Based Compensation

 

We have granted stock options to directors, officers and key employees of the Company for purchase of the Company’s common stock pursuant to the CellStar Corporation 2003 Long-Term Incentive Plan (the “2003 Plan”), the CellStar Corporation 1993 Amended and Restated Long-Term Incentive Plan and our 1994 Amended and Restated Director Non-Qualified Stock Option Plan. Options granted generally vest ratably over four year periods.

 

We are currently using the Black-Scholes option pricing model to determine the fair value of all option grants. We did not grant any options during the three months ended February 28, 2009 and February 29, 2008.

 

On December 1, 2008, our Board of Directors (the “Board”) approved the Company’s 2008 Long Term Incentive Plan. The following is a brief description of the material terms of the 2008 Long Term Incentive Plan:

 

·                  The plan is administered by the Board of the Company.

 

·                  The plan permits the grant of restricted stock, stock options and other stock-based awards to employees, officer, directors, consultants and advisors of the Company and its subsidiaries.

 

·                  The aggregate number of shares of Common Stock of the Company that may be issued under the plan is 20,000,000 shares.

 

·                  The plan provides that the administrator of the plan may determine the terms and conditions applicable to each award and each award will be evidenced by a stock option agreement or restricted stock agreement.

 

·                  The plan will terminate on December 1, 2018.

 

In addition, on December 1, 2008 the Board approved the grant of 300,000 shares of restricted stock to each of Timothy S. Durham, Robert A. Kaiser and Manoj Rajegowda. On February 24, 2009, Mr. Rajegowda forfeited all stock issuances provided to him during the course of his Board membership in connection with his resignation from the Board. Subsequently on March 5, 2009, our Board approved the grant of 300,000 shares of restricted stock to David Tornek. Of each restricted stock grant, 100,000 shares vested on the date of grant and the remaining 200,000 of the shares vest in two equal annual installments on each anniversary of the date of grant. The restricted stock grants will be evidenced by restricted stock agreements to be approved by the Board. The total value of the awards using a grant date price of $0.22 per share is $198,000 and will be expensed over the vesting period.

 

For the quarter ended February 28, 2009, the Company recognized $55,000 of expense related to the restricted stock grants.

 

(4) Acquisition of new business

 

(a)         CLST Asset I

 

On November 10, 2008, we, through CLST Asset I, LLC (“CLST Asset I”), a wholly owned subsidiary of CLST Financo, Inc. (“Financo”), which is one of our direct, wholly owned subsidiaries, entered into a purchase agreement to acquire all of the outstanding equity interests of Trust I from a third party for approximately $41.0 million (the “Trust I Purchase Agreement”). Our Board unanimously approved the transaction. Our acquisition of Trust I was financed by approximately $6.1 million of cash on hand and by a non-recourse, term loan of approximately $34.9 million by an affiliate of the seller of Trust I, pursuant to the terms and conditions set forth in the credit agreement, dated November 10, 2008, among Trust I, the lender, FCC Finance, LLC (“FCC”), as the initial servicer, the backup servicer, and the collateral custodian (the “Trust I Credit Agreement”). The Company is now responsible for the collection of the receivables included in the trust through its wholly owned subsidiary Financo.

 

The repayment terms on the accounts are standardized, but are dependent on the form of agreement used by the originator. Customers are required to make monthly payments until the loans are paid in full. At the time of purchase of the CLST Asset I portfolio, the remaining time to maturity was in a range of 8-10 years, not including prepayments, if any.

 

Financo has historically conducted our financing business, including ownership of receivables generated by our businesses and providing internal financing to our other operating subsidiaries. Substantially all of the assets acquired by Trust I consisted of a portfolio of home improvement consumer receivables, some of which are collateralized or otherwise secured by interests in real estate. We are engaging in the business of holding and collecting the receivables with the intention of generating a higher rate of return on our assets than we currently receive on our cash and cash equivalents balances. At the same time, we will continue to review the relative benefits to our stockholders of continuing to wind down our business pursuant to our plan of dissolution or continuing to do business in one or more of our historic lines of business or related businesses or in a new line of business. Although we are now engaged in the business of holding and collecting consumer notes receivable, we have not abandoned our plan of dissolution. We believe that should we decide that continuing with the plan of dissolution is in the best interest of our stockholders, we will be able to dispose of Trust I, if properly marketed, whether through the use of reputable brokers or investment bankers, through an auction

 

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process or other strategies for maximizing proceeds from an asset disposition, within the timeframe necessary to complete the winding down of the Company prior to final dissolution of the Company.

 

The cut-off date for the receivables acquired was October 31, 2008, with all collections subsequent to that date inuring to our benefit. As of October 31, 2008, the portfolio consisted of approximately 6,000 accounts with an aggregate outstanding balance of approximately $41.5 million and an average outstanding balance per account of approximately $6,900. These loans are all home improvement, repair and other home related loans to homeowners of which approximately 63% were secured with a second lien on the property, with the remainder being unsecured. Approximately 89% of the loans are in the Northeast with the remainder in Texas, Georgia and Missouri. As of October 31, 2008, the weighted average interest rate of the portfolio was 14.4%. We have the right to require the seller to repurchase any accounts, for the original purchase price applicable to such account, that do not satisfy certain specified eligibility requirements set out in the Trust I Purchase Agreement as of the October 31, 2008 cut-off date. If it is discovered by a party that a receivable account was not an “Eligible Receivable” as of the cut-off date of October 31, 2008, the seller is required to repurchase such receivable account unless such breach is remedied within thirty business days of notice of such breach. An account is not an Eligible Receivable if, as of October 31, 2008, such receivable account is, among other things, a defaulted receivable, subject to litigation, dispute or rights of rescission, setoff or counterclaim, or is not subject to a duly recorded and perfected lien, the seller must repurchase the account. For the quarterly period ended February 28, 2009, there had not been a determination that any receivables failed to meet the eligibility requirements set out in the Trust I Purchase Agreement.

 

When we purchased Trust I, the historical default rate for the previous three years for the portfolio was approximately 4%, which was the basis for assessing the creditworthiness of the assets included in CLST Asset I.

 

The Trust I Credit Agreement provides for a non-recourse, term loan of approximately $34.9 million, maturing on November 10, 2013. The term loan bears interest at an annual rate of 5.0% over the LIBOR Rate (as defined in the Trust I Credit Agreement). The obligations under the Trust I Credit Agreement are secured by a first priority security interest in substantially all of the assets of Trust I, including portfolio collections.

 

The Trust I Credit Agreement provides the material terms and conditions for the services to be performed by the servicer. In return, Trust I pays the servicer a monthly servicing fee equal to 1.5%, per annum of the then aggregate outstanding principal balance of the receivables.

 

Portfolio collections are distributed on a monthly basis. Absent an event of default, after payment of the servicing fee and other fees and expenses due under the Trust I Credit Agreement and the required principal and interest payments to the lender under the Trust I Credit Agreement, all remaining amounts from portfolio collections are paid to Trust I and are available for distribution to CLST Asset I and subsequently to Financo.

 

Principal payments on the term loan are due monthly to the extent that the aggregate principal amount of the term loan outstanding exceeds the sum of (a) the sum for each outstanding receivable of the product of (1) 85%, (2) the then-current aggregate unpaid principal balance of such receivable and (3) a percentage specified in the Trust I Credit Agreement based upon the aging of such receivable, and (b) amounts on deposit in the collection account for the receivables net of any accrued and unpaid interest on the loan and fees due to the servicer, the backup servicer, the collateral custodian and the owner trustee (the “Maximum Advance Amount”).

 

Principal payments are also due within five business days of any time that the aggregate principal amount of the term loan outstanding exceeds the Maximum Advance Amount. The remaining outstanding principal amount of the loan plus all accrued interest, fees and expenses are due on the maturity date. Interest payments on the term loan are due monthly.

 

The Trust I Credit Agreement contains customary covenants for facilities of its type, including among other things covenants that restrict Trust I’s ability to incur indebtedness, grant liens, dispose of property, pay dividends, make certain acquisitions or to take actions that would negatively affect Trust I’s special purpose vehicle status. Generally, these covenants do not impact the activities that may be undertaken by the Company. The Trust I Credit Agreement contains various events of default, including failure to pay principal and interest when due, breach of covenants, materially incorrect representations, default under certain other agreements of Trust I, bankruptcy or insolvency of Trust I, the occurrence of an event which causes a material adverse effect on Trust I, the occurrence of certain defaults by the servicer, entry of certain material judgments against Trust I, and the occurrence of a change of control or certain material events and the issuance of a qualified audit opinion with respect to Trust I’s financials.

 

In addition, an event of default occurs if the three-month rolling average delinquent accounts rate exceeds 10.0% or the three-month rolling average annualized default rate exceeds 7.0%. If an event of default occurs, all of Trust I’s obligations under the Trust I Credit Agreement could be accelerated by the lender, causing the entire remaining outstanding principal balance plus accrued and unpaid interest and fees to be declared immediately due and payable.

 

The purchase price of $41 million consisted of the following:

 

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·                  cash paid to the sellers in the amount of $6.1 million; and

·                  debt financing of $34.9 million.

 

The following unaudited pro forma information presents for the quarter ended February 28, 2008, combined results of operations of Trust I and the Company as if the acquisition had occurred on December 1, 2007. The unaudited pro forma results are for informational purposes and are not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results. The unaudited proforma information was prepared from the historical financial information of Trust I and the Company.

 

(unaudited, in thousands)

 

 

 

 

 

Proforma
February 28,
2008

 

 

 

 

 

Revenues

 

 

 

Interest income

 

$

2,111

 

Other

 

7

 

Total revenues

 

2,118

 

 

 

 

 

Loan servicing fees

 

21

 

Management fees

 

249

 

Interest expense

 

1,237

 

General and administrative expenses

 

589

 

Operating income

 

22

 

 

 

 

 

Other expense:

 

 

 

Realized loss on sale of assets

 

(1,071

)

Other, net

 

133

 

 

 

 

 

Total other expenses

 

(938

)

 

 

 

 

Loss from continuing operations before income taxes

 

(916

)

 

 

 

 

Income tax expense (benefit)

 

(5

)

 

 

 

 

Loss from continuing operations, net of taxes

 

(911

)

 

 

 

 

Discontinued operations, net of taxes of $5

 

10

 

 

 

 

 

Net income (loss)

 

$

(901

)

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

Net income (loss) per share

 

$

(0.04

)

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

Basic and diluted

 

20,553

 

 

(b)   CLST Asset II

 

On December 12, 2008, we, through CLST Asset Trust II (the “Trust II”), a newly formed trust wholly owned by CLST Asset II, LLC (“CLST Asset II”), a wholly owned subsidiary of Financo, which is one of our direct, wholly owned subsidiaries, entered into a purchase agreement, effective as of December 10, 2008, to acquire from time to time certain receivables, installment sales contracts and related assets owned by third parties (the “Trust II Purchase Agreement”). Our Board unanimously approved the transaction. We have fulfilled our original commitment to purchase from the sellers receivables of at least $2 million pursuant to the Trust II Purchase Agreement. We or the sellers under the Trust II Purchase Agreement can terminate the Trust II Purchase Agreement at any time (with notice) after March 29, 2009. Also, pursuant to the second amended and restated revolving credit agreement, effective as of December 10, 2008, among the Trust II, the originator, the co-borrowers (who are the sellers under the Trust II Purchase Agreement), the lender, the initial servicer, the backup servicer, the guarantor, and the collateral custodian (the “Trust II Credit Agreement”), we have the right to require the sellers to repurchase any accounts, for the original purchase price applicable to

 

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such account plus interest accrued thereon, that do not satisfy certain specified eligibility requirements set out in the Trust II Credit Agreement as of the purchase date. If it is discovered by a party that a receivable account was not an “Eligible Receivable” as of the purchase date, the seller is required to repurchase such receivable account. An account is not an Eligible Receivable if, as of the purchase date, such receivable account is, among other things, a defaulted receivable, subject to litigation, dispute or rights of rescission, setoff or counterclaim, or is not subject to a duly recorded and perfected lien, the seller must repurchase the account. For the quarterly period ended February 28, 2009, there had not been a determination that any receivables failed to meet the eligibility requirements set out in the Trust II Credit Agreement.

 

The purchases of receivables by the Trust II from the sellers under the Trust II Purchase Agreement and other approved sellers or dealers will be financed by cash on hand and by advances under a non-recourse, revolving facility provided by a third party lender. The revolving facility was initially established by an affiliate of the sellers under the Trust II Purchase Agreement. The Trust II has become a co-borrower under that facility and has pledged its assets to secure performance by the borrowers thereunder. The revolving facility permits an aggregate borrowing of all co-borrowers thereunder of up to $50,000,000. Financo has the ability to direct that not less than $15 million to be borrowed under the revolving facility be utilized by the Trust II to purchase receivables, installment sales contracts and related assets for the Trust II. With the consent of its co-borrowers, the Trust II may utilize more than $15,000,000 of the aggregate availability under the revolving facility. Receivables purchased by the Trust II will be owned by the Trust II, and the Trust II will receive the benefits of collecting them, subject to the third party lender’s rights in those assets as collateral under the revolving facility. The terms and conditions of the revolver are set forth in the Trust II Credit Agreement and the letter agreement, effective as of December 10, 2008, among the Trust II, Financo, the originator, the co-borrowers, the initial servicer, and the guarantor (the “Letter Agreement”). Advances under the revolver are limited to an amount equal to, net of certain concentration limitations set forth in the Trust II Credit Agreement, (a) the lesser of (1) the product of 85% and the purchase price being paid for eligible receivables with a credit score greater than or equal to 650 (“Class A Receivables”) or (2) the product of 80% and the then-current aggregate balance of principal and accrued and unpaid interest outstanding for Class A Receivables plus (b) the lesser of (1) the product of 75% and the purchase price being paid for eligible receivables with a credit score less than 650 (“Class B Receivables”) or (2) the product of 50% and the then-current aggregate balance of principal and accrued and unpaid interest outstanding for Class B Receivables (“Maximum Advance”).

 

The revolver matures on September 28, 2010. The revolver bears interest at an annual rate of 4.5% over the LIBOR Rate (as defined in the Trust II Credit Agreement). The Trust II pays an additional fee to the co-borrowers equal to an annual rate of 0.5% for loans attributable to the Trust II equal to or below $10 million and an annual rate of 1.5% for loans attributable to the Trust II in excess of $10 million. In addition, a commitment fee is due to the lender equal to an annual rate of 0.25% of the unused portion of the maximum committed amount. The obligations under the Trust II Credit Agreement are secured by a first priority security interest in substantially all of the assets of the Trust II and the co-borrowers, including portfolio collections.

 

The Trust II Credit Agreement provides the material terms and conditions for the services to be performed by the servicer. In return, the Trust II pays the servicer a monthly servicing fee equal to an annual rate of 1.5% of the then aggregate outstanding principal balance of the receivables and a 2% loan origination fee on each new loan originated.

 

Portfolio collections are distributed on a monthly basis. Absent an event of default, after payment of the servicing fee and other amounts, fees and expenses due under the Trust II Credit Agreement and the required principal, interest, unused commitment fee payments to the lenders under the Trust II Credit Agreement and fees due to the co-borrowers under the Letter Agreement, all remaining amounts from portfolio collections are paid to the Trust II and are available for distribution to CLST Asset II and subsequently to Financo.

 

Principal payments on the revolver are due monthly to the extent that the aggregate principal amount of the loan outstanding exceeds the lesser of (1) $50 million or (2) the Maximum Advance plus the amount on deposit in the collection account net of any accrued and unpaid interest on the loan and fees due to the lenders, the servicer, the backup servicer, the collateral custodian and the owner trustee (the “Maximum Outstanding Loan Amount”). The borrowers are also required to either make principal payments or add additional eligible receivables as collateral within 5 business days of any time that the aggregate principal amount of the revolver exceeds the Maximum Outstanding Loan Amount. The remaining outstanding principal amount of the loan plus all accrued interest, fees and expenses is due on the maturity date. The Trust II may, at its option, repay in whole or in part borrowings under the revolver but prepayments made before September 28, 2010 are subject to a prepayment premium equal to 2.0%. Interest payments on the term loan are due monthly.

 

The Trust II Credit Agreement contains customary covenants for facilities of its type, including among other things maintenance of the Trust II’s special purpose vehicle status and covenants that restrict the Trust II’s ability to incur indebtedness, grant liens, dispose of property, pay dividends, and make certain acquisitions. Generally, these covenants do not impact the activities that may be undertaken by the Company. The Trust II Credit Agreement contains various events of default, including failure to pay principal and interest when due, breach of covenants, materially incorrect representations, default under certain other agreements of

 

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the Trust II, bankruptcy or insolvency of the Trust II, the occurrence of an event which causes a material adverse effect on the Trust II, the occurrence of certain defaults by the servicer, entry of certain material judgments against the Trust II, and the occurrence of a change of control or certain material events and the issuance of a qualified audit opinion with respect to the Trust II’s financials. In addition, an event of default occurs if the three-month rolling average delinquent accounts rate exceeds 15.0% for Class A Receivables or 30.0% for Class B Receivables, or the three-month rolling average annualized default rate exceeds 5.0% for Class A Receivables or 12.0% for Class B Receivables. If an event of default occurs, all of the Trust II’s obligations under the Trust II Credit Agreement could be accelerated by the lender, causing the entire remaining outstanding principal balance plus accrued and unpaid interest and fees to be declared immediately due and payable.

 

During the first quarter 2009, Trust II purchased $5.8 million of receivables with an aggregate purchase discount of $0.5 million. These receivables represent primarily home improvement loans originated through First Consumer Credit, LLC (“FCC”), the service provider of CLST Asset I. Trust II borrowed $3.7 million utilizing the revolving facility.

 

Approximately 54% of these loans were secured through a second lien on the property, with the remainder being unsecured. The loans are through the 48 mainland states with the top five concentration as follows:

 

State

 

Percentage

 

 

 

 

 

Michigan

 

24

%

Ohio

 

21

%

Massachusetts

 

6

%

Florida

 

6

%

New York

 

4

%

 

(c)          CLST Asset III

 

Effective February 13, 2009, we, through CLST Asset III, LLC (“CLST Asset III”), a newly formed, wholly owned subsidiary of Financo, which is one of our direct, wholly owned subsidiaries, purchased certain receivables, installment sales contracts and related assets owned by Fair, James F. Cochran, Chairman and Director of Fair, and by Timothy S. Durham, Chief Executive Officer and Director of Fair and an officer, director and stockholder of our Company (the “Trust III Purchase Agreement”). Messrs. Durham and Cochran own all of the outstanding equity of Fair. In return for assets acquired under the Trust III Purchase Agreement, CLST Asset III paid the sellers total consideration of $3,594,354 as follows:

 

(1)             cash in the amount of $1,797,178 of which $1,417,737 was paid to Fair, $325,440 was paid to Mr. Durham and $54,000 was paid to Mr. Cochran,

 

(2)             2,496,077 newly issued shares of our common stock, par value $.01 per share (“Common Stock”) at a price of $0.36 per share, of which 1,969,077 shares of Common Stock were issued to Fair, 452,000 shares of Common Stock were issued to Mr. Durham and 75,000 shares of Common Stock were issued to Mr. Cochran and

 

(3)             six promissory notes (the “Notes”) issued by CLST Asset III in an aggregate original stated principal amount of $898,588, of which two promissory notes in an aggregate original principal amount of $708,868 were issued to Fair, two promissory notes in an aggregate original principal amount of $162,720 were issued to Mr. Durham and two promissory notes in an aggregate original principal amount of $27,000 were issued to Mr. Cochran.

 

We received a fairness opinion of Business Valuation Advisors (“BVA”) stating that BVA is of the opinion that the consideration paid by us pursuant to the Trust III Purchase Agreement is fair, from a financial point of view, to our nonaffiliated stockholders.  A copy of the fairness opinion was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 20, 2009.  The shares of Common Stock were issued by us in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.  As additional inducement for CLST Asset III to enter into the Trust III Purchase Agreement, Fair agreed to use its best efforts to facilitate negotiations to add CLST Asset III or one of its affiliates as a co-borrower under one of Fair’s existing lines of credit with access to at least $15,000,000 of credit for our own purposes. To date we have not been added as a co-borrower.

 

Substantially all of the assets acquired by CLST Asset III are in one of two portfolios. Portfolio A is a mixed pool of receivables from several asset classes, including health and fitness club memberships, membership resort memberships, receivables associated with campgrounds and timeshares, in-home food sales and services, buyers clubs, delivered products and home improvement and tuitions.  Portfolio B is made up entirely of receivables related to the sale of tanning bed products.  Only 2% of these portfolios are home improvement loans and none of the loans are secured. The loans are through the 48 mainland states with the top five concentration as follows:

 

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State

 

Percentage

 

 

 

 

 

Ohio

 

17

%

Florida

 

8

%

Colorado

 

8

%

Texas

 

6

%

Pennsylvania

 

6

%

 

At least initially, Fair will continue to act as servicer for these receivables.  Fair will receive no additional consideration for acting as servicer.

 

As of February 13, 2009, the portfolios of receivables acquired pursuant to the Trust III Purchase Agreement collectively consisted of approximately 3,000 accounts with an aggregate outstanding balance of approximately $3,709,500 and an average outstanding balance per account of approximately $1,015 for Portfolio A and approximately $5,740 for Portfolio B.  As of February 13, 2009, the weighted average interest rate of the portfolios exceeded 18%. We have the right to require the seller to repurchase any accounts, for the original purchase price applicable to such account, that do not satisfy certain specified eligibility requirements set out in the Trust III Purchase Agreement as of February 13, 2009. If it is discovered by a party that a receivable account was not an “Eligible Receivable” as of February 13, 2009, the closing date of the acquisition, the seller is required to repurchase such receivable account. An account is not an Eligible Receivable if, as of February 13, 2009, such receivable account is a delinquent receivable, a defaulted receivable subject to litigation, dispute or rights of rescission, setoff or counterclaim, or is not subject to a duly recorded and perfected lien, the seller must repurchase the account. For the quarterly period ended February 28, 2009, there had not been a determination that any receivables failed to meet the eligibility requirements set out in the Trust III Purchase Agreement.

 

Additionally, the Trust III Purchase Agreement provides that each of the sellers jointly and severally guarantee to CLST Asset III, up to the aggregate stated principal amount of the Notes issued to such seller, that the outstanding receivable balance of each receivable as of the closing date will be collectible in full. For each receivable that becomes a defaulted receivable following the closing date, the sellers are obligated to pay to CLST Asset III an amount equal to the outstanding receivable balance of such receivable and CLST Asset III has the right to offset such amount against the amount due to the seller under the promissory notes issued to the sellers on the closing date. The aggregate amount of each seller’s guarantee obligation is limited to the aggregate stated principal amount of the promissory note issued to such seller representing approximately 25% of the total purchase price of the portfolio of approximately $3.6 million. Since the principal balance of the notes declines over time as payments are made by the Company to the sellers, future defaulted receivables can be offset only against the then remaining balance of the notes issued to the sellers. Any future defaults of receivables will be offset against any remaining amounts owed the sellers pursuant to these notes. Defaults of $23,250 during the quarterly period ended February 28, 2009 were applied to the notes payable to the sellers.

 

The Notes issued by CLST Asset III in favor of the sellers are full-recourse with respect to CLST Asset III and are unsecured.  The three Notes relating to Portfolio A (the “Portfolio A Notes”) are payable in 11 quarterly installments, each consisting of equal principal payments, plus all interest accrued through such payment date at a rate of 4.0% plus the LIBOR Rate (as defined in the Portfolio A Notes).  The three Notes relating to Portfolio B (the “Portfolio B Notes”) are payable in 21 quarterly installments, each consisting of equal principal payments, plus all interest accrued through such payment date at a rate of 4.0% plus the LIBOR Rate (as defined in the Portfolio B Notes).

 

(5) Net Loss Per Share

 

Options to purchase 0.1 million shares of Common Stock for the three months ended February 28, 2009 and February 29, 2008, were not included in the computation of diluted earnings per share because the exercise price was higher than the average market price. Restricted stock of 0.6 million shares were not included in the computation of diluted earnings per share for the three months ended February 28, 2009, because their inclusion would have been anti-dilutive as the Company had a net loss.

 

(6) Commitments and Contingencies

 

We have an agreement with one employee to assist with the final wind down of our business. Under the agreement the employee is to receive her base salary as well as a bonus upon the completion of certain objectives during the liquidation process. The estimated commitment remaining under the agreement at February 28, 2009 is $68,000.

 

We have been informed of the existence of an investigation that may relate to our Company or our South American operations. Specifically, we understand that authorities are reviewing allegations from unknown parties that remittances were made from South America to Company accounts in the United States in 1999. We do not know the nature or subject of the investigation, or the potential involvement, if any, of our Company or our former subsidiaries. We do not know if allegations of wrongdoing have been made against our Company, our former subsidiaries or any current or former Company personnel or if any of them are subjects of the investigation. However, the fact that the investigators are aware of an allegation of transfers of money from South America to the United States and that authorities may have questioned witnesses about such alleged transfers means that we can not predict whether

 

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or not the investigation will result in a material adverse effect on the consolidated financial condition or results of operations of our Company.

 

On February 13, 2009, we filed a lawsuit in the United States District Court for the Northern District of Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandberg. Our Original Complaint and Application for Injunctive Relief alleges that Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandberg have engaged in numerous violations of federal securities laws in making recent purchases of our Common Stock and sought to enjoin any future unlawful purchases of our stock by the defendants, their agents, and persons or entities acting in concert with them. According to a Schedule 13D filed by David Sandberg, Red Oak Partners, LLC and certain other reporting persons on February 18, 2009, it beneficially owned 4,561,554 shares of the Company’s Common Stock representing approximately 19.0% of the Company’s outstanding Common Stock.

 

On March 2, 2009, Red Oak Partners, LLC, Pinnacle Fund, LLP, Bear Market Opportunity Fund, L.P., and Jeffrey S. Jones filed a derivative lawsuit against Robert A. Kaiser, Timothy S. Durham and David Tornek on March 2, 2009 in the 134th District Court of Dallas County, Texas. The complaint alleges that Messrs. Kaiser, Durham, and Tornek entered into self-dealing transactions at the expense of the Company and its stockholders and violated their fiduciary duties of loyalty, independence, due care, good faith, and fair dealing. The complaint asks the Court to order, among other things, a rescission of the alleged self-interested transactions by Messrs. Kaiser, Durham, and Tornek; award compensatory and punitive damages; remove Messrs. Kaiser, Durham and Tornek from the Board; and hold an Annual Meeting of stockholders, or to appoint a conservator to oversee and implement the dissolution plan approved by stockholders in 2007.

 

On April 6, 2009, we filed our First Amended Complaint and Application for Injunctive Relief in the United States District Court for the Northern District of Texas against defendants Red Oak Fund, L.P., Red Oak Partners, LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund LLLP, and Bear Market Opportunity Fund, L.P. alleging the same and other violations of federal securities laws. Through this lawsuit, we seek to obtain various declaratory judgments that the defendants have failed to comply with federal securities laws and to enjoin the defendants from, among other things, further violating federal securities laws and from voting any and all shares or proxies acquired in violation of such laws. Also on April 6, 2009, because, among other reasons, we do not expect the litigation, which bears directly upon our annual meeting of stockholders, to be resolved for some months, our Board has determined to delay the annual meeting of stockholders previously scheduled for May 22, 2009 until September 25, 2009.

 

(7) New Accounting Pronouncements

 

Accounting Pronouncements Not Yet Adopted

 

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice. The requirements of SFAS 157 became effective for us December 1, 2008. However, in February 2008 the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard on December 1, 2008 was limited to financial assets and liabilities and did not have a material effect on our financial condition or results of operations. We are still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption.

 

In December 2007, the FASB released Statement No. 141 R, “Business Combinations” (“SFAS 141R”), which establishes principles for how the acquirer shall recognize acquired assets, assumed liabilities and any non-controlling interest in the acquiree, recognize and measure the acquired goodwill in the business combination, or gain from a bargain purchase, and determines disclosures associated with financial statements. This statement replaces SFAS 141 but retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The requirements of SFAS 141R apply to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted.

 

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies which we adopt as of the specified effective date. Unless otherwise discussed, our management believes the impact of recently issued standards which are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

 

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

 

The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto

 

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included in our Annual Report on Form 10-K/A filed with the SEC for the fiscal year ended November 30, 2008, and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q/A.

 

Cautionary Statement Regarding Forward-Looking Statements

 

Certain of the matters discussed in this Quarterly Report on Form 10-Q/A may constitute “forward-looking” statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of CLST Holdings, Inc., formerly CellStar Corporation, and subsidiaries (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “anticipates,” “estimates,” “believes,” “continues,” “expects,” “intends,” “may,” “might,” “could,” “should,” “likely,” and similar expressions are intended to be among the statements that identify forward-looking statements. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these forward-looking statements are subject to risks, uncertainties and assumptions. Statements of various factors that could cause the actual results, performance or achievements of the Company to differ materially from the Company’s expectations (“Cautionary Statements”) are disclosed in this report, including, without limitation, those statements discussed in the “Item 1A, Risk Factors” of our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008, those statements made in conjunction with the forward-looking statements and otherwise herein. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the Cautionary Statements. We have no intention, and disclaim any obligation, to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise.

 

Overview

 

Sales Transactions

 

On December 18, 2006, we entered into a definitive agreement (the “U.S. Sale Agreement”) with a wholly owned subsidiary of Brightpoint, Inc., an Indiana corporation (“Brightpoint”), providing for the sale of substantially all of our United States and Miami-based Latin American operations (the “U.S. Sale”) and for the buyer to assume certain liabilities related to those operations. Our operations in Mexico and Chile and other businesses or obligations of the Company were excluded from the transaction.

 

Our Board of Directors (the “Board”) and Brightpoint unanimously approved the proposed transaction set forth in the U.S. Sale Agreement. The purchase price was $88 million in cash, subject to adjustment based on changes in net assets from December 18, 2006 to the closing date. The U.S. Sale Agreement also required the buyers to deposit $8.8 million of the purchase price into an escrow account for a period of six months from the closing date.

 

Also on December 18, 2006, we entered a definitive agreement (the “Mexico Sale Agreement”) with Soluciones Inalámbricas, S.A. de C.V. (“Wireless Solutions”) and Prestadora de Servicios en Administración y Recursos Humanos, S.A. de C.V. (“Prestadora”), two affiliated Mexican companies, providing for the sale of all of the Company’s Mexico operations (the “Mexico Sale”). The Mexico Sale was a stock acquisition of all of the outstanding shares of our Mexican subsidiaries, and includes our interest in Comunicación Inalámbrica Inteligente, S.A. de C.V. (“CII”), our joint venture with Wireless Solutions. Under the terms of the transaction, we received $20 million in cash, and were entitled to receive our pro rata share of CII profits from January 1, 2007, up to the consummation of the transaction, within 150 days from the closing date. Our Board unanimously approved the proposed transaction set forth in the Mexico Sale Agreement. We have not received any pro-rata share of the CII profits and other terms required as of 150 days from the closing date. A demand for payment of up to $1.7 million and other required terms of the agreement was sent to the purchasers on September 11, 2007. While we believe that CII was profitable and therefore the purchasers owe the Company its pro rata share, the purchasers are disputing this claim. We continue to pursue the amounts we believe we are due, but at this time the purchasers are not responding to or cooperating with our demands. Currently we cannot make any estimates regarding future amounts we may be able to collect or the timing of any collections on this matter.

 

We filed a proxy statement with the SEC on February 20, 2007, which more fully describes the U.S. and Mexico Sale transactions. Both of the transactions were subject to customary closing conditions and the approval of our stockholders, and the transactions were not dependent upon each other. The proxy statement also included a plan of dissolution, which provides for the complete liquidation and dissolution of the Company after the completion of the U.S. Sale, and a proposal to change the name of the Company from CellStar Corporation to CLST Holdings, Inc.

 

On March 28, 2007, our stockholders approved the U.S. Sale, the Mexico Sale, the plan of dissolution, and a name change from CellStar Corporation to CLST Holdings, Inc. We continue to follow the plan of dissolution. Consistent with the plan of dissolution and its fiduciary duties, our Board will continue to consider the proper implementation of the plan of dissolution and the exercise of the authority granted to it thereunder, including the authority to abandon the plan of dissolution.

 

The U.S. Sale closed on March 30, 2007. At closing, $53.6 million was received and $4.5 million is included in accounts receivable—other in the accompanying balance sheet for November 30, 2007. We recorded a pre-tax gain of $52.7 million on the

 

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transaction during the twelve months ended November 30, 2007. The buyer of our U.S. business previously asserted total claims for indemnity against the escrow of approximately $1.4 million, and the remainder, approximately $7.6 million, including accrued interest, was distributed to the Company on October 4, 2007. On December 21, 2007, the Company and Brightpoint entered into a Letter Agreement which settled the dispute concerning the additional escrow amount. All currently outstanding disputes between the parties regarding the determination of the purchase price under the U.S. Sale Agreement have been resolved, and payments of funds have been made in accordance with the terms described in the Letter Agreement. In January 2008 the Company received approximately $3.2 million from Brightpoint plus accrued interest and less transition expenses, and approximately $1.4 million from the escrow agent. These are the final amounts to be received under the U.S. Sale Agreement.

 

The Mexico Sale closed on April 12, 2007, and we recorded a loss on the transaction of $7.0 million primarily due to accumulated foreign currency translation adjustments as well as expenses related to the transaction. We had approximately $9.1 million of accumulated foreign currency translation adjustments related to Mexico. As the proposed sale did not meet the criteria to classify the operations as held for sale under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, as of February 28, 2007, we recognized the $9.1 million as a charge upon the closing of the Mexico Sale. We have not received any pro-rata share of profits and other terms required as of 150 days from the closing date under the Mexico Sale. A demand for payment of up to $1.7 million and other required terms of the agreement was sent to the purchasers, and if such amounts are received an additional gain will be recognized.

 

On March 22, 2007, we signed a letter of intent to sell our operations in Chile (the “Chile Sale”) to a group that included local management for approximately book value. On June 11, 2007, we completed the Chile Sale. The purchase price and cash transferred from the operations in Chile prior to closing totaled $2.5 million, and we recorded a gain of pre-tax $0.6 million on the transaction during the quarter ending August 31, 2007. With the completion of the Chile Sale, we no longer have any operating locations outside of the U.S. Currently only a small administrative staff remained to wind up our business.

 

Plan of Dissolution

 

As we have previously disclosed, the proxy statement we filed with the SEC on February 20, 2007 describes a proposal for a plan of dissolution, which provides for the complete liquidation and dissolution of the Company after the completion of the U.S. Sale (subject to abandonment by the Board in the exercise of their fiduciary duties).  On March 28, 2007, our stockholders approved the plan of dissolution in addition to the U.S. Sale and the Mexico Sale.  In the plan of dissolution approved by our stockholders, we stated that no distribution of proceeds from the U.S. Sale and Mexico Sale would be made until the investigation by the SEC was resolved. On June 26, 2007, we received a letter from the staff of the SEC giving notice of the completion of their investigation with no enforcement action recommended to the SEC. Therefore, on June 27, 2007, our Board declared a cash distribution of $1.50 per share on Common Stock to stockholders of record as of July 9, 2007. On July 19, 2007, we issued the $1.50 per share dividend in the total amount of $30.8 million. Then, on November 1, 2007 we paid an additional $0.60 per share dividend to stockholders which brings the cumulative dividends paid to stockholders to $2.10 per share or approximately $43.2 million. The amount and timing of any additional distributions paid to stockholders in connection with the liquidation and dissolution of the Company are subject to uncertainties and depend on the resolution of certain contingencies more fully described in this quarterly report on Form 10-Q/A, in the proxy statement and elsewhere in our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008.

 

We have continued to wind down aspects of our businesses, including dissolving some of our subsidiaries and continuing to try to collect our remaining non-cash assets.  In addition, we have continued to review our liabilities and seek to satisfy or resolve those that we can in a favorable manner.  See “Recent Developments” below and “Item 1 Business — 2008 Business” of our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008 for further discussion with respect to our activities in this regard.  We expect that it will take several years to implement the plan of dissolution because of the lengthy process of obtaining sufficient information regarding all of our liabilities to pay and appropriately provide for them as required under the plan of dissolution.  Given this and the time necessary to complete the governmental requirements for dissolution, our Board focused on ways to generate higher returns on the Company’s cash and other assets in order to better offset the Company expenses and to take advantage of the favorable tax treatment provided by our net operating losses (“NOLs”).  Section 3 of the plan of dissolution states that we may not engage in any business activities except to the extent necessary to preserve the value of the Company’s assets, wind up the Company’s affairs, and distribute the Company’s assets.  As further described below under “Recent Developments,” our Board determined to acquire several portfolios of receivables with the intention of generating a higher rate of return on our assets than we were receiving on our cash and cash equivalents balances which were held in money market accounts or short term certificates of deposit, earning approximately 1% (current interest rates are now close to 0%).  Our Board believed that each of these acquisitions would provide a better investment return for our stockholders when compared to the low interest rates available on our cash investments and other investment alternatives although the acquisition would involve a higher risk profile than traditional cash deposits and other cash equivalents positions.  At the time we began looking at purchasing these portfolios during the second and third quarters of 2008, the credit markets became significantly impaired, and the viability of many banks and other financial institutions was in question.  The Company’s cash was held in one bank subject to the limited protection of FDIC coverage.  The Board considered, among other things, spreading the Company’s cash among over a dozen financial institutions.  However, the Board did not believe spreading the Company’s cash among many different banks to be practical or cost efficient.  In addition, the Board considered various cash strategies including investing in a “ladder” of U.S. Treasury securities (securities of varying maturities) which would have resulted in higher yields than cash deposits,

 

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but would have required the Company to hold those securities in a brokerage firm and pay that firm a fee to arrange the transactions.  The Board did not believe that the increased yield provided by a ladder of U.S. Treasury securities, after associated fees and administrative costs, was likely to be significantly better than that of cash deposits, and did not believe that interest from U.S. Treasury securities would allow the Company to use its NOLs to shield income from taxes.  Finally, the Board was unsure how to assess the brokerage and custody risks associated with holding a ladder of U.S. Treasury securities through third parties, and felt that the risk was similar to that associated with commercial banks at the time.

 

Our Board understood that to obtain higher returns on its investments, the Company would have to assume a higher risk of loss.  The Board believed that the opportunity offered by these purchases to earn higher returns than offered by cash and demand deposits, would offset the increased risks, and offer the Board a way of maximizing the value of the Company for the stockholders.  In addition, these investments offered the Company an opportunity to utilize its NOLs if the returns resulted in positive income for the Company.  The purchases the Company made utilized borrowed money.  Using borrowed money to purchase an income generating asset increases the return on investment, but increases the risk of loss on that investment.  The Board carefully considered the amount of leverage in each of its purchases, believing each investment would be able to generate sufficient income to pay interest and principal on the debt, and still produce an attractive return for the Company and its stockholders.  In considering the risk associated with leverage, the Board considered a number of different scenarios for performance of the investments, including the risk associated with increased default rates.  The Board did not expect default rates to increase to current levels, but did consider that and other possibilities.  In addition, the Board considered the costs associated with investments in our portfolios, including the ongoing costs of paying a servicer to service the portfolio, as part of its consideration of the overall potential return associated with those investments.

 

When we purchased FCC Investment Trust I (“Trust I”), the historical default rate for the previous three years for the portfolio was approximately 4%, which was the basis for assessing the creditworthiness of the assets included in CLST Asset I, LLC (“CLST Asset I”).

 

Upon examination of CLST Asset Trust II (“Trust II”) and CLST Asset III, LLC (“CLST Asset III”), we believe that the circumstances of these portfolios are different from those of Trust I.  As of the date we acquired Trust I, approximately 39% of the receivables in the Trust I portfolio had credit scores higher than 676.  Trust II contains new originations with higher credit requirements than the requirements for the Trust I portfolio.  Since Trust II is comprised of new loans, the Company has managed the originations such that almost 65% of the new loans have credit scores higher than 680.  Further, we acquired the Trust I portfolio at a discount of approximately 3% and acquired the Trust II portfolio at a discount of approximately 10%.  Therefore the Trust II portfolio has a very different risk profile when compared to Trust I, and we anticipate that as a result of holding receivables from borrowers with higher credit scores, Trust II will experience lower rates of default.  The sellers of the CLST Asset III portfolio bear a portion of the default risk for receivables in that portfolio, and that risk is secured by our ability to offset against amounts we owe the sellers on the purchase price.  Since the principal balance of the notes declines over time as payments are made by the Company to the sellers, future defaulted receivables can be offset only against the then remaining balance of the notes issued to the sellers.  Any future defaults of receivables will be offset against any remaining amounts owed the sellers pursuant to these notes.  The difference in the purchase discounts between CLST Asset I and CLST Asset II, LLC (“CLST Asset II”) was impacted by the tightening of the credit markets between the time of these two acquisitions.

 

The Company has not performed a market check and, as a result, cannot give any assurance that the portfolios can be sold on favorable terms or within any particular time frame given the risk and uncertainties associated with current economic conditions.  Our Board believes that a quick sale of our portfolio assets at the current time is unlikely to yield the same value to the Company as a sale in an orderly course in the future.  Among other things, our Board believes economic conditions will improve over the next few years, along with credit market conditions and conditions affecting consumer default rates.  Because the Company’s winding up will take several years, the Company has the ability to wait until economic conditions improve before it sells its portfolio assets.  For the same reason, the Company has the ability to market those assets, in the future, in an orderly fashion designed to enhance any sales proceeds over what could be received in a quicker sale at the current time.  While the Company continues its winding up activities, it will receive collections on the portfolios, and its overall book investment in the portfolios will decline.  At the same time, the size of the portfolios and the debt associated with them will also decline as the assets and related indebtedness liquidate themselves.  For those reasons, the Board believes that, based upon the assumptions above, a sale of the Company’s portfolio assets in the future will likely result in greater value to the Company than a rapid sale at the current time.

 

Consistent with the plan of dissolution and their fiduciary duties, our Board and Executive Committee continue to consider both the timing of a filing of a certificate of dissolution and whether amending, modifying or abandoning the plan of dissolution and continuing to do business in one or more of our historical lines of business or related businesses or in a new line of business is in the best interests of the Company and its stockholders. Our Board has been reviewing potential acquisitions and the value of the Company’s tax assets. It is possible that our Board will, in the exercise of its fiduciary duties, elect to abandon the plan of dissolution for a strategic alternative that it believes will maximize stockholder value. If our Board determines that it is in the best interest of the Company to pursue an acquisition, it will likely pursue a debt financing or equity issuance in order to finance such acquisition. It is unlikely our Board will make any further distributions to the Company’s stockholders under the plan of dissolution while it considers the strategic alternatives available to the Company.

 

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Discussion of Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting policies that are described in the Notes to the Consolidated Financial Statements. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determination of our financial condition and operating results. Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments. The most critical accounting policies and estimates are described below.

 

Revenue Recognition

 

Revenues are recorded as earned from notes receivable.  Revenues consist of interest earned, late fees and other miscellaneous charges.  Revenues are not accrued on accounts over 120 days without payment activity, unless payment activity resumes.

 

Notes Receivable

 

Notes receivable are recorded at the historical cost paid at the date of acquisition net of any purchase discounts. Subsequent to the date of acquisition, notes receivable are reduced by any principal payments made by the customer. Purchase discounts are recorded based on the negotiated difference between the face value and the amount paid for the notes receivable. Purchase discounts are recognized as revenue, using the effective interest method, as principal payments are collected.

 

The Company establishes an allowance for doubtful accounts for receivables where the customer has not made a payment for the most recent 120 day period. The Company specifically analyzes notes receivable using historical activity, current economic trends, changes in its customer payment terms, recoveries of previously reserved notes and collection trends when evaluating the adequacy of its allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific note receivable may result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs.  The Company may from time to time make additional increases to the allowance based on the foregoing factors.  Once a note receivable has been reserved due to nonpayment, the Company will no longer accrue, for financial reporting purposes, interest earned on the note receivable. Should the note receivable return to a performing status, then the Company will resume accruing interest on the note receivable. The majority of the notes receivable have collateral in various forms, which may include a second lien position on the borrower’s home or property.  Actual results could differ from those estimates. Recoveries are recorded against the allowance when payments are received.  Recoveries of notes receivable, which were previously charged off, are recorded to income when payments are received. Notes receivable are charged off against the allowance after all means of collection have been exhausted and a legal determination has been rendered that less than the full amount of the note receivable will be collected.

 

Stock-Based Compensation

 

Prior to fiscal 2006, the Company accounted for its stock options under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Effective December 1, 2005, the Company adopted the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payments” (SFAS 123(R)), and selected the modified prospective method to initially report stock-based compensation amounts in the consolidated financial statements. The Company used the Black-Scholes option pricing model to determine the fair value of all option grants. The Company did not grant any options during the quarters ended February 28, 2009 and February 29, 2008.

 

On December 1, 2008, our Board approved the Company’s 2008 Long Term Incentive Plan (the “2008 Plan”).  The 2008 Plan, which is administered by the Board, permits the grant of restricted stock, stock options and other stock-based awards to employees, officers, directors, consultants and advisors of the Company and its subsidiaries. The 2008 Plan provides that the administrator of the plan may determine the terms and conditions applicable to each award, and each award will be evidenced by a stock option agreement or restricted stock agreement. The aggregate number of shares of Common Stock of the Company that may be issued under the 2008 Plan is 20,000,000 shares. The 2008 Plan will terminate on December 1, 2018.

 

In addition, on December 1, 2008 our Board approved the grant of 300,000 shares of restricted stock to each of Timothy S. Durham, Robert A. Kaiser and Manoj Rajegowda.  On February 24, 2009, Mr. Rajegowda forfeited all stock issuances provided to him during the course of his Board membership in connection with his resignation from the Board. Subsequently on March 5, 2009, our Board approved the grant of 300,000 shares of restricted stock to David Tornek. Of each restricted stock grant, 100,000 shares

 

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vested on the date of grant, and the remaining 200,000 of the shares vest in two equal annual installments on each anniversary of the date of grant.  The restricted stock becomes 100% vested if any of the following occurs: (i) the participant’s death or (ii) the disability of the participant while employed or engaged as a director or consultant by the Company. The total value of the awards using a grant date price of $0.22 per share is $198,000, of which $55,000 was expensed in the first quarter ended February 28, 2009 and the rest is being expensed over a two year vesting period. The 2008 Plan permits withholding of shares by the Company upon vesting to pay withholding tax. These withheld shares are considered as treasury stock and are available to be re-issued under the 2008 Plan.

 

Recent Developments

 

CLST Asset I

 

On November 10, 2008, our Board unanimously approved the acquisition of all of the outstanding equity interest of Trust I from Drawbridge Special Opportunities Fund LP through CLST Asset I, a wholly owned subsidiary of CLST Financo, Inc. (“Financo”), which is one of our direct, wholly owned subsidiaries through entry into a purchase agreement to acquire all of the outstanding equity interests of Trust I from a third party (the “Trust I Purchase Agreement”).  The purchase price was approximately $41.0 million, which was financed by $6.1 million of cash on hand and by a non-recourse, term loan of approximately $34.9 million to Trust I by an affiliate of the seller of Trust I, pursuant to the terms and conditions set forth in the credit agreement, dated November 10, 2008, among Trust I, the lender, FCC Finance, LLC (“FCC”), as the initial servicer, the backup servicer, and the collateral custodian (the “Trust I Credit Agreement”). The primary business of Trust I is to hold and collect certain receivables.

 

The approximate 6,000 receivables included in CLST Asset I are all home improvement, repair and other home related loans to homeowners. All loans represent loans to single family dwellings. As of the purchase date, a approximately 63% of the loans were secured through a second lien on the property, with the remainder being unsecured. Approximately 89% of the loans are in the Northeastern part of the United States with the remainder in Texas, Georgia and Missouri, and at the time of purchase of the portfolio, the remaining time to maturity was in a range of 8-10 years, not including prepayments, if any.

 

The following table reflects the loan origination year as of the purchase date:

 

Year of origination

 

% of CLST Asset I

 

2000 – 2004

 

8.4

%

2005

 

8.1

%

2006

 

17.3

%

2007

 

36.4

%

2008

 

29.8

%

Total

 

100.0

%

 

CLST Asset II

 

On December 12, 2008, we, through Trust II, a newly formed trust wholly owned by CLST Asset II, a wholly owned subsidiary of Financo, entered into a purchase agreement, effective as of December 10, 2008 (the “Trust II Purchase Agreement”), to acquire from time to time certain receivables, installment sales contracts and related assets owned by SSPE Investment Trust I (the “SSPE Trust”) and SSPE, LLC (“SSPE”)The Board unanimously approved the establishment of the Trust II and the Trust II Purchase Agreement. Under the terms of a non-recourse, revolving loan, which Trust II entered into with Summit Consumer Receivables Fund, L.P. (“Summit”), as originator, and SSPE and SSPE Trust, as co-borrowers, Summit and Eric J. Gangloff, as Guarantors, Fortress Credit Corp. (“Fortress Corp.”), as the lender, Summit Alternative Investments, LLC, as the initial servicer, and various other parties (“Trust II Credit Agreement”), Trust II committed to purchase receivables of at least $2.0 million.  In conjunction with this agreement, Trust II became a co-borrower under a $50 million credit agreement that permits Trust II to utilize more than $15 million of the aggregate availability under the revolving facility.  Trust II’s commitment to purchase $2.0 million of receivables was fulfilled in the first quarter 2009, when Trust II purchased $5.8 million of receivables with an aggregate purchase discount of $0.5 million. These receivables represent primarily home improvement loans originated through FCC, the service provider of CLST Asset I.  Trust II borrowed $3.7 million utilizing the revolving facility.  Approximately 54% of these loans were secured through a second lien on the property, with the remainder being unsecured.  The loans are through the 48 mainland states with the top five concentration as follows:

 

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State

 

Percentage

 

 

 

 

 

Michigan

 

24

%

Ohio

 

21

%

Massachusetts

 

6

%

Florida

 

6

%

New York

 

4

%

 

CLST Asset III

 

Effective February 13, 2009, we, through CLST Asset III, a newly formed, wholly owned subsidiary of Financo, purchased certain receivables, installment sales contracts and related assets owned by Fair Finance Company, an Ohio corporation (“Fair”), James F. Cochran, Chairman and Director of Fair, and Timothy S. Durham, Chief Executive Officer and Director of Fair and an officer, director and stockholder of our Company (the “Trust III Purchase Agreement”).  Messrs. Durham and Cochran own all of the outstanding equity of Fair. Additionally, Fair agreed to use its best efforts to facilitate negotiations to add CLST Asset III or one of its affiliates as a co-borrower under one of Fair’s existing lines of credit with access to at least $15,000,000 of credit for our own purposes. To date we have not been added as a co-borrower. Substantially all of the assets acquired by CLST Asset III are in one of two portfolios. Portfolio A is a mixed pool of receivables from several asset classes, including health and fitness club memberships, resort memberships, receivables associated with campgrounds and timeshares, in-home food sales and services, buyers clubs, delivered products and home improvement and tuitions.  Portfolio B is made up entirely of receivables related to the sale of tanning bed products.  Only 2% of these portfolios are home improvement loans and none of the loans are secured.  The loans are through the 48 mainland states with the top five concentration as follows:

 

State

 

Percentage

 

 

 

 

 

Ohio

 

17

%

Florida

 

8

%

Colorado

 

8

%

Texas

 

6

%

Pennsylvania

 

6

%

 

Now that the Company has acquired these receivable portfolios, most of the activities of the Company with respect to the portfolios are conducted on its behalf by the servicers of these portfolios.  The servicers, on behalf of the Company, receive payments from account debtors and pursue other collection activities with respect to the receivables, monitor collection disputes with individual account debtors, prepare and submit claims to the account debtors, maintain servicing documents, books and records relating to the receivables and prepare and provide reports to the lenders and the Company with respect to the receivables and related activity, maintain the security interest of the lenders in the receivables, and direct the collateral custodian to make payments out of the proceeds of the portfolios to, among others, the Company, the lenders, the servicers and/or backup servicers, and the collateral custodians pursuant to the terms of the relevant servicing agreements.

 

Subsidiaries

 

We are working steadily to complete a long list of actions necessary to complete the wind down of our historical business in an orderly fashion.  Completing the wind down is a cumbersome task that requires many steps and may take a significant amount of time. These steps include dissolving numerous subsidiaries, resolving pending litigation and completing various regulatory filings and other requirements. We cannot predict how long, how time-consuming or how costly resolution of the litigation matters will be. To date, we have completed and filed final sales tax returns and franchise tax returns for most of our entities. We have also completed the requirements to withdraw most of our entities from doing business in multiple state jurisdictions in the U.S. Furthermore, we are continuing to dissolve our foreign and domestic subsidiaries pursuant to the plan of dissolution. However, in order to protect the Company’s cash and other assets from any actual or potential liabilities of the Company’s direct and indirect subsidiaries, we will not dissolve our inactive direct or indirect domestic or foreign subsidiaries until the actual and contingent liabilities of each such subsidiary have been resolved or contingency reserves have been set aside sufficient to pay or make reasonable provision to pay all such subsidiary’s claims and obligations in accordance with applicable law. Specifically, we will not dissolve Audiomex Export Corp., National Auto Center, Inc. and CLST-NAC, Ltd., which are direct parties to, and NAC Holdings, Inc., which is an indirect party to, the arbitration proceeding for our claim in Mexico against the purchasers of the Mexico Sale until resolution of that claim.  In addition, in certain jurisdictions, the dissolution process is an extended one.

 

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We completed the dissolution of our subsidiaries in the United Kingdom and Guatemala in February 2008 and March 2009, respectively, and of CLST-NAC Fulfillment, Ltd., a Texas limited partnership and indirect subsidiary of the Company, in September 2009.  Furthermore, we completed the merger of CLST Fulfillment, Inc., a Delaware corporation, into its parent, National Auto Center, Inc., a Delaware corporation and our wholly owned subsidiary, effective September 10, 2009. In addition we have made demands on the purchaser of our former Colombian subsidiary for the documents needed to divest our remaining minority interest in that subsidiary.  Further, we have submitted documents to several governmental authorities in El Salvador as required to dissolve our dormant entity in El Salvador. For our Netherlands subsidiary, we have collected VAT tax refunds and are in the process of preparing tax returns that are required to complete the dissolution process.

 

There are a number of actions required by governmental regulations in order to dissolve our Philippines subsidiary, and we have made substantial progress toward its dissolution. We obtained a Formal Entry of Judgment in two longstanding lawsuits.  We have also settled a claim for 1999 withholding tax and obtained a determination from the Bureau of Internal Revenue that no taxes are owed on a 2004 transaction.  We are now completing audits that are required to be submitted for regulatory approval prior to dissolution, and have taken various other actions required by the Bureau of Internal Revenue and the Philippines Securities and Exchange Commission.

 

Results of Operations

 

The Company reported a net loss of $0.5 million or $0.02 per diluted share, for the first quarter of 2009 compared to a net loss of $0.3 million, or $0.02 per diluted share for the same quarter last year. The increase is primarily attributable to the costs of the portfolio acquisitions and related start up costs and the cost incurred in connection with the litigation.

 

The following table shows certain information as of or for the three months ended February 28, 2009 for each of CLST Asset I, CLST Asset II and CLST Asset III. A more detailed description of the results for each of these entities is provided below.

 

 

 

CLST Asset I

 

CLST Asset II

 

CLST Asset III

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Outstanding Principal Balance of Receivables

 

$

39.3

 

million

 

$

5.4

 

million

 

$

3.4

 

million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves/Chargebacks

 

$

0.8

 

million

 

$

 

million

 

$

 

million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized Purchase Discounts

 

$

0.6

 

million

 

$

0.5

 

million

 

$

0.1

 

million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Acquisition Costs

 

$

0.2

 

million

 

$

0.1

 

million

 

$

 

million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Receivables

 

$

38.1

 

million

 

$

5.0

 

million

 

$

3.3

 

million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes Payable and Loans Outstanding

 

$

32.5

 

million

 

$

3.7

 

million

 

$

0.9

 

million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate Number of Customer Accounts

 

5,582

 

 

 

719

 

 

 

2,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Outstanding Principal Balance per Account

 

$

6,900

 

 

 

$

7,681

 

 

 

$

1,156

 

 

 

 

Three Months Ended February 28, 2009, Compared to Three Months Ended February 29, 2008

 

Revenues.   Our revenues for the first quarter of 2009 were $1.6 million compared to zero in 2008, and such increase is primarily due to interest and other charges collected in CLST Asset I of $1.5 million and CLST Asset II of $0.1 million.

 

Loan Servicing Fees. Loan servicing fees for the three months ended February 28, 2009 were $306,000, $177,000 of which was attributable to CLST Asset I and $14,000 of which was attributable to CLST Asset II.  We also incurred $115,000 of loan servicing commissions during the quarter related to CLST Asset II. We do not incur additional servicing fees with respect to CLST Asset III other than the initial cost of acquiring the portfolio.

 

Provision for Doubtful Accounts. Provision for doubtful accounts for the three months ended February 28, 2009 were $703,000, all of which was attributable to CLST Asset I.

 

Interest Expense. Interest expense for the three months ended February 28, 2009 was $536,000 under the credit facilities of CLST Asset I and CLST Asset II and the notes issued in connection with the CLST Asset III acquisition.

 

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General and Administrative Expenses.   Our general and administrative expenses were $0.7 million for the first quarter 2009 compared to $0.5 million for the first quarter 2008. The increase in expenses in 2009 is primarily due to increases in professional fees.

 

Total Other Income.  Our total other income for the first quarter 2009 was $3,000, compared to $133,000 for the first quarter 2008. Virtually all of our other income is interest earned on our cash balance, and the decrease is a result of lower interest rates due to the current U.S. economic crisis.

 

Income taxes.  The Company had accrued $0.1 million of Delaware franchise tax at year ended November 30, 2008.  Upon further review it was determined that this accrual was overstated and the Company adjusted the accrual, and therefore has recorded tax benefit of $0.1 million for the first quarter of 2009 compared to zero for 2008, which includes the impact of continuing and discontinued operations.

 

Discontinued Operations. We had no income from discontinued operations for the first quarter 2009 and $10,000, net of taxes, in 2008.  As discussed in Note 2 to the Consolidated Financial Statements and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview,” we sold our operations in the U.S., Miami, Mexico and Chile.

 

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Table of Contents

 

CLST Asset I

 

The Trust I collections from customers for the first quarter of 2009 were approximately $3.1 million, representing $1.6 million of principal payments and $1.5 million of interest and other charges. As of February 28, 2009, the aggregate outstanding principal balance of the notes receivables net of reserves was $38.5 million, which represents 94.0% of the original purchase price of $41.0 million. The ending balance consists of approximately 5,582 customer accounts, with an average outstanding principal balance per account of approximately $6,900 and an average FICO score of 655. The average interest rate for these accounts was 14.4%. Total assets of Trust I at the end of the quarter net of reserves were $40.0 million, excluding certain accrued interest and deferred cost.

 

Total revenues for the quarter were $1.5 million and primarily consisted of interest income collected from the notes receivable.  Operating expenses for the quarter were $1.4 million, which included $0.7 million provision for doubtful accounts, $0.5 million of interest expense to Fortress, our lender, and $0.2 million of servicing expense to FCC.

 

When we purchased Trust I, the historical default rate for the previous three years for the portfolio was approximately 4%, which was the basis for assessing the creditworthiness of the assets included in CLST Asset I.

 

CLST Asset II

 

Since the Trust II began purchasing receivables, we have modified the approval standards increasing the interest rate, increasing the purchase discount and requiring higher credit scores.  As a result, of these measures the average interest rate is 14.8%, when the purchase discount is taken into consideration, the computed effective yield would be 17%.  The average FICO score was 672 for the borrowers.

 

As of February 28, 2009, the aggregate outstanding principal balance of Trust II’s account receivable was $5.4 million.  Since these receivables represent new origination, consistent with our accounting policy, we did not need a provision for doubtful account as none of our receivables were 120 days past due.  Other current assets were $0.2 million and consisted of notes receivable from Summit and deferred costs.

 

During the first quarter 2009, Trust II had collections from customers of $0.5 million, representing $0.4 million of principal payments and $0.1 million of interest and other charges.  Principal payments were particularly high as a significant amount of the loans we originated were paid in full. We do not expect this trend to continue long term. Also for the first quarter 2009, Trust II recorded revenues of $110,000 and operating expenses of $140,000, representing up front origination fees and servicing costs from FCC.  Interest expense was $30,000 for the quarter.

 

CLST Asset III

 

The results of CLST Asset III for the first quarter only reflect the activity for the partial month as we acquired these assets effective February 13, 2009. Collections for the quarter were $300,000 with the majority of the payment being applied to principal.  We recorded $27,000 of revenue reflecting interest and other fees collected from customers and per our agreement, we did not incur any servicing expenses.  Defaults of $23,250 during the quarter were applied to the notes payable to the seller per our purchase agreement.

 

As of February 28, 2009, our ending balance of receivables was $3.4 million.  The receivables represent approximately 2,829 accounts with an average outstanding principal balance per account of $1,156.

 

Liquidity and Capital Resources

 

Subsequent to the sale of our discontinued operations in March 2007 and prior to the acquisition of Trust I in November 2008, we met our cash needs with existing funds and interest and investment income generated by our cash and cash equivalents. At February 28, 2009, we had cash and cash equivalents of approximately $6.4 million, down from $9.8 million at November 30, 2008. Historically we have invested our cash and cash equivalents in either money market accounts or short term Certificate of Deposits with our primary bank, Texas Capital Bank.  To date, we have financed our acquisitions of our receivables portfolios with cash, non-recourse debt, and the issuance of shares of our Common Stock, and we expect that any future portfolio acquisition would be financed with cash on hand and cash from operations, non-recourse debt and additional issuance of our Common Stock.

 

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Table of Contents

 

Operating Activities. The net cash used in operating activities for the three months ended February 28, 2009 was $0.5 million compared to cash received of $4.7 million for the same period in 2008. The primary reason for this decrease was the collection of $4.7 million of accounts receivable from Brightpoint (the purchaser of our U.S. and Miami operations) in 2008 and increased operating expenses in 2009 related to the new business offset in part by portfolio interest collections during 2009.

 

Investing Activities. The net cash used in investing activities for the three months ended February 28, 2009 and February 29, 2008 was $0.7 million and $2,000, respectively. The increase from 2008 to 2009 is primarily a result of cash of $2.9 million used to fund the acquisitions of CLST Asset II and CLST Asset III portfolios, $0.2 million for the payment of acquisition costs and offset in part by collection of portfolio principal of $2.3 million during the three months ended February 28, 2009.

 

Financing Activities. The net cash used in financing activities for the three months ended February 28, 2009 was $2.1 million compared to zero for the same period in 2008.  The cash used in financing activities in 2009 was used to reduce the outstanding debt principal balance.

 

Liquidity Sources.

 

CLST Asset I.  As of February 28, 2009, the outstanding balance of our term loan was $32.5 million, representing 93.0% of our original balance. We have retired approximately $2.3 million of our obligation to Fortress, and we have paid $495,000 in interest expense, all from customer collections.

 

Also, we have the right to require the seller to repurchase any accounts, for the original purchase price applicable to such account, that do not satisfy certain specified eligibility requirements set out in the Trust I Purchase Agreement as of the October 31, 2008 cut-off date. If it is discovered by a party that a receivable account was not an “Eligible Receivable” as of the cut-off date of October 31, 2008, the seller is required to repurchase such receivable account unless such breach is remedied within thirty business days of notice of such breach. An account is not an Eligible Receivable if, as of October 31, 2008, such receivable account is, among other things, a defaulted receivable, subject to litigation, dispute or rights of rescission, setoff or counterclaim, or is not subject to a duly recorded and perfected lien, the seller must repurchase the account.  For the quarterly period ended February 28, 2009, there had not been a determination that any receivables failed to meet the eligibility requirements set out in the Trust I Purchase Agreement.

 

CLST Asset II. In conjunction with the loan entered into between Trust II, Summit and various other parties, Trust II has become a co-borrower under a $50 million credit agreement that permits Trust II to utilize more than $15 million of the aggregate availability under the revolving facility.

 

Also, pursuant to the Trust II Credit Agreement, we have the right to require the sellers to repurchase any accounts, for the original purchase price applicable to such account plus interest accrued thereon, that do not satisfy certain specified eligibility requirements set out in the Trust II Credit Agreement as of the purchase date. If it is discovered by a party that a receivable account was not an “Eligible Receivable” as of the purchase date, the seller is required to repurchase such receivable account. An account is not an Eligible Receivable if, as of the purchase date, such receivable account is, among other things, a defaulted receivable, a delinquent receivable, subject to litigation, dispute or rights of rescission, setoff or counterclaim, or is not subject to a duly recorded and perfected lien, the seller must repurchase the account.  For the quarterly period ended February 28, 2009, there had not been a determination that any receivables failed to meet the eligibility requirements set out in the Trust II Credit Agreement.

 

CLST Asset III. During the first quarter of 2009 we did not make any cash payments of principal or interest under the Notes issued by CLST Asset III to Fair, Mr. Durham and Mr. Cochran. Instead, we applied $23,500 of delinquent receivables towards the principal and interest of the Notes.

 

Also, we have the right to require the seller to repurchase any accounts, for the original purchase price applicable to such account, that do not satisfy certain specified eligibility requirements set out in the Trust III Purchase Agreement as of February 13, 2009. If it is discovered by a party that a receivable account was not an “Eligible Receivable” as of February 13, 2009, the closing date of the acquisition, the seller is required to repurchase such receivable account. An account is not an Eligible Receivable if, as of February 13, 2009, such receivable account is a delinquent receivable, a defaulted receivable subject to litigation, dispute or rights of rescission, setoff or counterclaim, or is not subject to a duly recorded and perfected lien, the seller must repurchase the account.  For the quarterly period ended February 28, 2009, there had not been a determination that any receivables failed to meet the eligibility requirements set out in the Trust III Purchase Agreement.

 

Additionally, the Trust III Purchase Agreement provides that each of the sellers jointly and severally guarantee to CLST Asset III, up to the aggregate stated principal amount of the Notes issued to such seller, that the outstanding receivable balance of each receivable as of the closing date will be collectible in full.  For each receivable that becomes a defaulted receivable following the closing date, the sellers are obligated to pay to CLST Asset III an amount equal to the outstanding receivable balance of such

 

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Table of Contents

 

receivable and CLST Asset III has the right to offset such amount against the amount due to the seller under the promissory notes issued to the sellers on the closing date.  The aggregate amount of each seller’s guarantee obligation is limited to the aggregate stated principal amount of the promissory note issued to such seller representing approximately 25% of the total purchase price of the portfolio of approximately $3.6 million.  Since the principal balance of the notes declines over time as payments are made by the Company to the sellers, future defaulted receivables can be offset only against the then remaining balance of the notes issued to the sellers.  Any future defaults of receivables will be offset against any remaining amounts owed the sellers pursuant to these notes.  Defaults of $23,250 during the quarterly period ended February 28, 2009 were applied to the notes payable to the sellers.

 

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Table of Contents

 

Asset Quality. Our delinquency rates reflect, among other factors, the credit risk of our receivables, the average age of our receivables, the success of our collection and recovery efforts, and general economic conditions.  The average age of our receivables affects the stability of delinquency and loss rates of the portfolio. The table below contains performance information for the receivables as of and for the quarter ended February 28, 2009.  The composition of the portfolios is expected to change over time.  The future performance of the receivables in the portfolios may be different from the historical performance set forth below.  The table below also sets forth our aging and the aggregate delinquency and loss experience for the accounts in the portfolios as of and for the quarter ended February 28, 2009.  The global and economic crisis has had and could continue to have an adverse effect on the portfolio.  The current deep economic recession and rising unemployment have contributed to the significant increases in delinquencies for 2009 compared to historical performance.  Our net losses and delinquencies may continue to correlate with declines in the general economy and increases in unemployment. Increases in net losses and delinquencies could continue, particularly if conditions in the general economy further deteriorate.  We cannot assure you that the future delinquency and loss experience for the receivables will be similar to the historical experience set forth below.

 

 

 

CLST Asset I

 

CLST Asset II

 

CLST Asset III

 

 

 

Principal
Balance

 

% of
Total

 

Principal
Balance

 

% of
Total

 

Principal
Balance

 

% of
Total

 

Receivables Aging (Principal)

 

 

 

 

 

 

 

 

 

 

 

 

 

Current 0-30 Days

 

$

36,907,616

 

97.1

%

$

5,383,321

 

106.9

%

$

3,049,980

 

91.1

%

31 - 60 Days

 

669,470

 

1.8

%

 

0.0

%

131,499

 

3.9

%

61 - 90 Days

 

490,057

 

1.3

%

 

0.0

%

143,143

 

4.3

%

91 + 120

 

378,729

 

1.0

%

 

0.0

%

93,021

 

2.8

%

120+

 

846,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized Purchase Discounts

 

(648,494

)

-1.7

%

(444,137

)

-8.8

%

(106,107

)

-3.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Fees

 

200,889

 

0.5

%

97,314

 

1.9

%

35,553

 

1.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Doubtful Accounts

 

(846,766

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

37,998,267

 

100.0

%

$

5,036,498

 

100.0

%

$

3,347,089

 

100.0

%

 

An account is contractually delinquent if we do not receive the monthly payment by the specified due date. After accounts are delinquent for 120 days, a provision (reserve) is made for the account balance.  As of February 28, 2009, the allowance for doubtful accounts recorded for CLST Asset I is $0.8 million.  The allowance for CLST Asset I is expensed in provision for doubtful accounts.  For CLST Asset III, delinquent receivables are contractually charged against the Company’s debt incurred to acquire CLST Asset III.  Defaults of $23,250 during the quarterly period ended February 28, 2009, were applied to the notes payable to the sellers.

 

Contractual Obligations. We have an agreement with one employee to assist with the final wind down of our historic business. Under the agreement, the employee is to receive base salary as well as a bonus upon the completion of certain objectives during the liquidation process. The maximum payment remaining under this agreement at February 28, 2009 is $68,000, and we expect to pay this amount out of our available cash.  If we abandon our plan of liquidation and dissolution, our obligations to this employee will continue.

 

Included in accounts payable at February 28, 2009, is approximately $14.2 million associated with liabilities which accrued in periods 2002 and earlier. The Company now believes it has a variety of defenses to some or all these liabilities, including defenses based upon the running of statutes of limitations. The Company is reviewing these liabilities, and considering appropriate steps to resolve them. The Company expects that the liabilities may be resolved at less than the book value thereof, but can not provide assurances as to the amount or timing of any adjustments.

 

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Table of Contents

 

New Accounting Pronouncements

 

Footnote 1 of the Notes to the Consolidated Financial Statements, included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008, includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. There were no changes during the year ended November 30, 2008, to the significant accounting policies used in the preparation of our Consolidated Financial Statements.

 

Accounting Pronouncements Not Yet Adopted

 

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice. The requirements of SFAS 157 became effective for us December 1, 2008. However, in February 2008 the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard on December 1, 2008 was limited to financial assets and liabilities and did not have a material effect on our financial condition or results of operations. We are still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption.

 

In December 2007, the FASB released Statement No. 141 R, “Business Combinations” (“SFAS 141R”), which establishes principles for how the acquirer shall recognize acquired assets, assumed liabilities and any non-controlling interest in the acquiree, recognize and measure the acquired goodwill in the business combination, or gain from a bargain purchase, and determines disclosures associated with financial statements. This statement replaces SFAS 141 but retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The requirements of SFAS 141R apply to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted.

 

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies which we adopt as of the specified effective date. Unless otherwise discussed, our management believes the impact of recently issued standards which are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

This information has been omitted as our Company qualifies as a smaller reporting company.

 

Item 4T.    Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q/A. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q/A, our disclosure controls and procedures are not effective because we failed to include a clear conclusion with respect to the effectiveness of the Company’s internal control over financial reporting in the Management’s Report on Internal Control Over Financial Reporting in our Original Form 10-Q. We remedied this failure in the effectiveness of our disclosure controls and procedures by amending our Original Form 10-Q to include a clear conclusion regarding the effectiveness of the Company’s internal control over financial reporting. We have implemented additional controls and procedures designed to ensure that the disclosure provided by the Company meets the then current requirements of the applicable filing made under the Exchange Act.

 

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Table of Contents

 

Changes in Internal Control over Financial Reporting

 

To address the Company’s lack of adequate segregation of duties around check writing, the Company hired an accountant beginning in January 2009. The new accountant participates in the duties around check writing and the review of financial reports for reasonableness.  To address the Company’s lack of sufficient accounting technical expertise, during 2009 the Company brought in additional accounting technical expertise as needed.  There have been no other changes in our internal control over financial reporting during the three months ended February 28, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The significant deficiencies reported in our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008 continue to exist.

 

PART II — OTHER INFORMATION

 

Item 1.       Legal Proceedings

 

In December 2008, the Red Oak Group, by a telephone call from David Sandberg to Robert Kaiser, approached our Board about its interest in making a minority investment in the Company and obtaining control of the Company. Our Board responded by suggesting that the Red Oak Group and the Company discuss the Red Oak Group’s desire to make a minority investment and obtain control after the Company had filed its annual report with the SEC and made its results of operations available to stockholders.  On January 15, 2009, the Red Oak Group acquired 5,000 shares of our common stock in secondary market and privately negotiated transactions.  On or about January 30, 2009, the Red Oak Group requested that the Company provide a stockholder list and security position listings which it said it would use to make a tender offer.  On February 3, 2009, the Red Oak Group announced its plan to commence a tender offer to acquire up to 70% of our outstanding shares of common stock at $0.25 per share.  On February 5, 2009, we adopted a stockholder rights plan which became effective on February 16, 2009.  Stating as its reason the Company’s Rights Plan, the Red Oak Group announced on February 9, 2009 that it had abandoned its intention to make a tender offer.  Nevertheless, the Red Oak Group continued through February 13, 2009 to acquire shares of our common stock in the secondary market and privately negotiated transactions resulting in its beneficial ownership of 4,561,554 shares of our common stock, according to the Red Oak Group’s Schedule 13D filed with the SEC, representing approximately 19.05% of our outstanding common stock as of the record date. The Red Oak Group made its purchases of our common stock in open-market and privately negotiated transactions, and not by means of tender offer materials filed with the SEC. The Company alleges in the Federal Court Action discussed below that by doing so, the Red Oak Group unlawfully deprived our stockholders of the benefits of federal law regulating tender offers and such accumulations of common stock.  Among the consequences of this course of action is that the Company and third parties were unable to make competing, superior proposals to stockholders, and stockholders were deprived of the information that complying with federal tender offer rules requires they receive.

 

On February 13, 2009, we filed a lawsuit in the United States District Court for the Northern District of Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandberg (the “Federal Court Action”).  Our Original Complaint and Application for Injunctive Relief alleges that Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandberg have engaged in numerous violations of federal securities laws in making purchases of our common stock and sought to enjoin any future unlawful purchases of our stock by them, their agents, and persons or entities acting in concert with them. We believe the Red Oak Group violated federal securities laws as follows:

 

(i)

violating Rule 14(e)-5 of the Exchange Act by not truly abandoning its tender offer and instead directly or indirectly purchasing or arranging to purchase shares not in connection with its tender offer and without complying with the procedural, disclosure and anti-fraud requirements applicable to tender offers regulated under Section 14 of the Exchange Act;

 

 

(ii)

violating Exchange Act Rule 14d-5(f) by failing to return the Company’s stockholder list, which we provided to Red Oak upon its request, and by using such list for a purpose other than in connection with the dissemination of tender offer materials in connection with its tender offer;

 

 

(iii)

violating Exchange Act Rule 14(d)-10 by purchasing shares pursuant to its tender offer at varying prices rather than paying consideration for securities tendered in the tender offer at the highest consideration paid to any stockholder for securities tendered; and

 

 

(iv)

violating Section 13(d) of the Exchange Act by not timely filing a Schedule 13D and disclosing the information required therein.

 

On March 2, 2009, certain members of the Red Oak Group and Jeffrey S. Jones (“Jones”) filed a derivative lawsuit against Robert A. Kaiser, Timothy S. Durham, and David Tornek in the 134th District Court of Dallas County, Texas (the “State Court

 

29



Table of Contents

 

Action”). The petition alleges that Messrs. Kaiser, Durham, and Tornek entered into self-dealing transactions at the expense of the Company and its stockholders and violated their fiduciary duties of loyalty, independence, due care, good faith, and fair dealing. The petition asks the Court to order, among other things, a rescission of the alleged self-interested transactions by Messrs. Kaiser, Durham, and Tornek; an award of compensatory and punitive damages; the removal of Messrs. Kaiser, Durham, and Tornek from the Board; and that the Company hold an Annual Meeting of stockholders, or that the Company appoint a conservator to oversee and implement the dissolution plan approved by stockholders in 2007.

 

On March 13, 2009, we announced that we would hold our Annual Meeting of Stockholders on May 22, 2009 in Dallas, Texas, and that the close of business on April 2, 2009 would be the record date for the determination of stockholders entitled to receive notice of, and to vote at, the Annual Meeting or any adjournments or postponements thereof.

 

On March 18, 2009, the Red Oak Group sent a letter to us demanding to inspect and copy certain of our books and records.  We have taken the position that the Red Oak Group has not complied with state law requirements applicable to stockholders seeking such information.

 

On March 19, 2009, the Red Oak Group sent a letter to us stating its intention to put forth several precatory proposals including stockholder votes for: approval to proceed with the 2007 shareholder-approved plan of dissolution; approval of the November 10, 2008 transaction whereby CLST Asset I, a wholly owned subsidiary of Financo, which is one of CLST’s direct, wholly owned subsidiaries, entered into a purchase agreement to acquire all of the outstanding equity interests of Trust I from a third party for approximately $41.0 million; approval of the 2008 Long Term Incentive Plan pursuant to which the Board approved the new issuance to themselves of up to 20 million shares of common stock, or just over 97% of the common stock outstanding at the time this plan was approved; approval of the December 12, 2008 transaction whereby Trust II, a newly formed trust wholly owned by CLST Asset II, a wholly owned subsidiary of Financo entered into a purchase agreement, effective as of December 10, 2008, to acquire (i) on or before February 28, 2009 receivables of at least $2 million, subject to certain limitations and (ii) from time to time certain other receivables, installment sales contracts and related assets; and approval of the February 13, 2009 transaction whereby CLST Asset III, a newly formed, wholly owned subsidiary of Financo, which is one of CLST’s direct, wholly owned subsidiaries, purchased certain receivables, installment sales contracts and related assets owned by Fair, which is partly owned by Timothy S. Durham, an officer and director of CLST. On the same day, the Red Oak Group sent a letter to us stating its intention to nominate a slate of directors to our Board.

 

On April 6, 2009, we notified the Red Oak Group that our Board rejected the Red Oak Group’s nominations for Class I and Class II seats, as the nominations were not in accordance with our certificate of incorporation.  In addition, we also rejected the Red Oak Group’s proposals because they were not proper in form or substance under federal and state law to come before an Annual Meeting.  We offered to discuss the Red Oak Group’s concerns, director nominations, and stockholder proposals provided that (1) the Red Oak Group and the Company enter into a confidentiality and standstill agreement, (2) the Red Oak Group appropriately make publicly available disclosures regarding its rapid accumulation of the Company’s shares and its intentions to acquire control of the Company that are required by the federal securities laws, including in a Report on Schedule 13D, and (3) the Red Oak Group not vote the shares that the Company believes it to have acquired in violation of applicable law, including the tender offer rules and other rules regulating such accumulation of shares under the federal securities laws, at the Annual Meeting.

 

On April 6, 2009, we filed our First Amended Complaint and Application for Injunctive Relief in the Federal Court Action against defendants Red Oak Fund, L.P., Red Oak Partners, LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund LLLP, and Bear Market Opportunity Fund, L.P. alleging the same and other violations of federal securities laws, including:

 

(i)

filing a materially false and misleading Schedule 13D and failing to amend the same after delivering to the Company a Notice of Director Nominations and proposal for business at the Annual Meeting;

 

 

(ii)

violating Section 14(d) of the Exchange Act by engaging in fraudulent, deceptive and manipulative acts in connection with its tender offer by failing to abide by Section 14(d)’s timing requirements and by failing to make required filings with the SEC; and

 

 

(iii)

that any attempt to solicit proxies from our stockholders with respect to director nominations or notice of business would be misleading in light of the defendants’ illegal activities in accumulating Company stock.

 

Through this lawsuit, we seek to obtain various declaratory judgments that the defendants have failed to comply with federal securities laws and to enjoin the defendants from, among other things, further violating federal securities laws and from voting any and all shares or proxies acquired in violation of such laws.  Also on April 6, 2009, because, among other reasons, we do not expect the litigation, which bears directly upon our Annual Meeting of stockholders, to be resolved for some months, our Board postponed the

 

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Annual Meeting of stockholders previously scheduled for May 22, 2009 until September 25, 2009. On August 14, 2009, our Board again postponed the Annual Meeting of stockholders from September 25, 2009 to October 27, 2009.

 

On April 15, 2009, the Red Oak Group submitted another letter to the Company, providing additional information regarding the stockholder proposals it intends to bring before the Annual Meeting and revising those proposals to: request the Board to complete the dissolution approved at the stockholder meeting held in 2007; advise the Board that the stockholders do not approve of the transaction purportedly entered into as of November 10, 2008 whereby CLST Asset I, a wholly owned indirect subsidiary of the Company, entered into a purchase agreement to acquire the outstanding equity interest in Trust I and request the directors to take any available and appropriate actions; disapprove the 2008 long term incentive plan adopted by the Board and request the Board not to issue any additional share grants or option grants under such plan and request that the directors rescind their approval of such plan; advise the Board that the stockholders disapprove of the transaction purportedly entered into as of December 12, 2008 pursuant to which CLST Asset II, an indirect wholly owned subsidiary of the corporation, entered into a purchase agreement to acquire certain receivables on or before February 28, 2009 and request the directors to take any available and appropriate actions; and advise the Board that the stockholders disapprove of the transaction purportedly entered into as of February 13, 2009 whereby CLST Asset III, an indirect wholly owned subsidiary of the Company purchased certain receivables, installment contracts and related assets owned by Fair and request the directors to take any available and appropriate actions.

 

On April 30, 2009, the Red Oak Group and Jones amended their petition in the State Court Action.  In addition to the relief already requested, the petition sought to compel the Company to hold its 2008 and 2009 annual stockholders’ meetings within sixty days; to enjoin Messrs. Kaiser, Durham, and Tornek from any interference or hindrance of such meetings or the election of directors; to enjoin Messrs. Kaiser, Durham, and Tornek from voting any shares of stock acquired in the alleged self-interested transactions; and to appoint a special master.  On June 3, 2009 and again on June 12, 2009, pursuant to court order, Red Oak Partners, LLC, Pinnacle Fund, LLLP, Red Oak Fund, LP, and Jeffrey S. Jones amended their petition in the State Court Action to, among other things, remove Bear Market Opportunity Fund, L.P. as a plaintiff and add Red Oak Fund, L.P. as a plaintiff.

 

On May 5, 2009, the Red Oak Group and Jones filed a motion in the State Court Action seeking to compel the Company to hold its 2008 and 2009 stockholders’ meetings on June 30, 2009 and to appoint a special master and requested an expedited hearing on both.  Hearings were held on May 8, 2009 and May 29, 2009, but no ruling was reached.

 

On July 24, 2009, we filed our Brief in Support of Application for Preliminary Injunction in the Federal Court Action.  The Red Oak Group filed its Opposition on August 7, 2009, and we filed our Reply Brief in Support on August 14, 2009.

 

On August 24, 2009, the Red Oak Group resubmitted its director nomination letter and its letter stating its intention to put forth the stockholder proposals, as mentioned in the March 19, 2009 and April 15, 2009 letters.

 

On August 25, 2009, the Court in the State Court Action set an evidentiary hearing on the plaintiffs’ Application for Temporary Injunction, which had yet to be filed, for October 7 and 8, 2009. The plaintiffs’ request for injunctive relief concerned Messrs. Kaiser, Durham, and Tornek voting any shares of stock acquired in the alleged self-interested transactions.

 

On August 28, 2009, the parties to the State Court Action executed a Stipulation Regarding the Company’s Annual Meeting of Stockholders (“Stipulation”).  The Court approved the Stipulation the same day and entered an Order identical to the Stipulation’s terms.  Pursuant to the Stipulation, absent a determination by the Court of good cause shown, the Company must hold its annual stockholders’ meeting for the election of one Class I director and one Class II director and consideration of any properly submitted proposals that are proper subjects for consideration at an annual meeting on October 27, 2009, with a record date for that meeting of September 25, 2009.  Good cause for delaying the Annual Meeting beyond October 27, 2009, and correspondingly amending the September 25, 2009 record date, includes among other things, situations where reasonable delay is necessary: (1) for the Board to avoid breaching any of their fiduciary duties to the Company or the Company’s stockholders; (2) to assure compliance with the Company’s certificate of incorporation and bylaws; (3) for the Company or the Board to comply with state or federal law; or (4) to assure compliance with any order of any court or regulatory authority having jurisdiction over the Company or members of its Board.

 

We received a letter dated September 22, 2009 from the Red Oak Group seeking, pursuant to Section 220 of the Delaware General Corporation Law, to inspect the books and records of the Company, including among other things a stockholder list as of the record date. The letter states that the purpose of such request is to enable the Red Oak Group to solicit proxies to elect directors at the 2009 Annual Meeting and to communicate with stockholders. Our counsel responded by letter dated September 30, 2009 that the Company was aware of its obligations under Section 220 of the Delaware General Corporation Law but believed that the demand letter did not comply with the inspection requirements under Section 220. We received another letter dated September 29, 2009 from the Red Oak Group pursuant to Section 220 of the Delaware General Corporation Law in which the Red Oak Group requests to inspect the books and records of the Company pertaining to, among other things, all analyses performed with respect to our net operating losses and a list of all business ventures and dealings Messrs. Tornek and Durham have evaluated or commenced in the past

 

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ten years and a list of all investments they currently share. Our counsel responded by letter dated October 6, 2009 that (i) the commencement of the Red Oak Group’s derivative action bars it from using a Section 220 demand as a substitute for discovery permissible in litigation; (ii) the stated purposes of the demand letter do not constitute proper purposes under Section 220; and (iii) the scope of information requested in the demand letter is overly broad and not limited to books and records that are “essential and sufficient” to accomplish the Red Oak Group’s stated purposes.

 

The evidentiary hearing for the State Court Action was held October 7 and 8, 2009.  On October 9, 2009, the Court denied Plaintiffs’ application for injunctive relief, which sought to enjoin Messrs. Kaiser, Durham, and Tornek from voting certain shares at the CLST annual shareholders’ meeting currently scheduled for October 27, 2009.   Further, the Court granted Defendants’ plea to the jurisdiction, granted Defendants’ motion to disqualify Plaintiffs, and dismissed Plaintiffs’ derivative claims.  Beyond that, the Court granted Defendants’ amended motion to stay, thereby staying all remaining direct claims asserted by Plaintiffs.   Defendants’ motion to disqualify Plaintiffs was based on Plaintiffs’ lack of adequacy to pursue derivative claims on the following grounds: (1) that Red Oak improperly brought derivative claims to advance its own personal interests; (2) that Red Oak had engaged in illegal conduct by violating federal securities laws; and (3) that Jones was only a tag-along plaintiff and therefore suffered the same adequacy problems as Red Oak, the driving force behind the State Court Action.  The Court reached each of these rulings after the two-day evidentiary hearing.

 

On October 14, 2009, the Court denied the Company’s application for preliminary injunction in the Federal Court Action.  The Federal Court Action remains pending.

 

On October 15, 2009, we applied to the Court, on an emergency basis, for an order to: (1) reopen this case for the limited purpose of modifying the Court’s Order Regarding Annual Meeting of Stockholders entered on August 28, 2009 (the “Annual Meeting Order”); (2) modify its Annual Meeting Order to prevent CLST from alternatively being in violation of (a) federal securities law, Delaware statutory law, and its Bylaws or (b) the Annual Meeting Order; (3) nullify the current September 25, 2009 record date; and (4) grant an emergency hearing as soon as possible.  A hearing was held on CLST’s emergency motion on October 16, 2009.  The Court continued the hearing until a time agreeable to the parties and the Court on or before October 26, 2009.

 

The Company has expended a significant amount of management time and resources in connection with Federal Court Action and the State Court Action. The Company has had settlement discussions with certain of the plaintiffs regarding the Federal Court Action and the State Court Action.  The Company may have further settlement discussions in the future.  No assurance can be given that any settlement agreement could be reached if the Company undertakes further discussions or if a settlement agreement is entered into that the terms of any such settlement would not have a material adverse effect on the Company, its financial position or its results of operations.

 

Item 1A.    Risk Factors

 

For risk factors, please refer to Item 1A, Risk Factors, of our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 13, 2009, we issued 2,496,077 shares of Common Stock in connection with our purchase of assets owned by Fair, of which 1,969,077 shares of Common Stock were issued to Fair, 452,000 shares of Common Stock were issued to Timothy S. Durham, Chief Executive Officer and Director of Fair and an officer, director and stockholder of our Company, and 75,000 shares of Common Stock were issued to James F. Cochran, Chairman and Director of Fair. The issuance of these shares constituted a portion of the consideration paid for the assets of Fair, and the shares were deemed to have a value of $0.36 per share. The shares of Common Stock were issued by us in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act.

 

Also, on December 1, 2008, our Board approved the grant of 900,000 shares of restricted Common Stock for no cash consideration to our directors as compensation for services during the fiscal year ended November 30, 2008. We granted 300,000 shares of restricted Common Stock to each of Timothy S. Durham, Robert A. Kaiser and Manoj Rajegowda. Subsequently on March 5, 2009, our Board approved the grant of 300,000 shares of restricted stock for no cash consideration to David Tornek in connection with his appointment as a director. The shares of Common Stock were issued by us in transactions exempt from registration pursuant to Section 4(2) of the Securities Act. On February 24, 2009, Mr. Rajegowda forfeited all option issuances provided to him during the course of his Board membership in connection with his resignation from the Board. See “Item 9B, other information—Resignation of Director” in our Annual Report on Form 10-K/A for the fiscal year ended November 30, 2008.

 

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Item 3.

Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

We did not submit any matters to a vote of security holders in the first quarter of 2009.

 

Item 5.

Other Information

 

Not applicable.

 

Item 6.  Exhibits

 

Exhibit
No.

 

Description

 

Previously filed as an Exhibit and Incorporated by Reference From

3.1

 

Amended and Restated Certificate of Incorporation of CellStar Corporation (the “Certificate of Incorporation”).

 

Previously filed as an exhibit to our company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 1995, and incorporated herein by reference.

 

 

 

 

 

3.2

 

Certificate of Amendment to Certificate of Incorporation.

 

Previously filed as an exhibit to our company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference.

 

 

 

 

 

3.3

 

Certificate of Amendment to Certificate of Incorporation dated as of February 20, 2002.

 

Previously filed as an exhibit to our company’s Annual Report Form on Form 10-K for the fiscal year ended November 30, 2002 and incorporated herein by reference.

 

 

 

 

 

3.4

 

Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated as of March 30, 2007.

 

Previously filed as an exhibit to our company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2007, and incorporated herein by reference.

 

 

 

 

 

3.5

 

Amended and Restated Bylaws of CellStar Corporation, effective as of May 1, 2004.

 

Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended May 31, 2004, and incorporated herein by reference.

 

 

 

 

 

4.1

 

Rights Agreement, dated as of February 13, 2009, by and between CLST Holdings, Inc. and Mellon Investor Services LLC, as rights agent.

 

Previously filed as an exhibit to a Form 8-A filed with the Securities and Exchange Commission on February 13, 2009, and incorporated herein by reference.

 

 

 

 

 

4.2

 

Certificate of Designation of Series B Junior Preferred Stock of CLST Holdings, Inc., dated as of February 5, 2009.

 

Previously filed as an exhibit to a Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 2009, and incorporated herein by reference.

 

 

 

 

 

10.1†

 

CLST Holdings, Inc. 2008 Long Term Incentive Plan.

 

Previously filed as an exhibit to a Current Report on Form 8-K filed with the Securities and Exchange Commission on December 5, 2008, and incorporated herein by reference.

 

 

 

 

 

10.2†

 

Form of Restricted Stock Award Agreement under the CLST Holdings, Inc. 2008 Long Term Incentive Plan.

 

Previously filed as an exhibit to our company’s Annual Report Form on Form 10-K for the fiscal year ended November 30, 2008 and incorporated herein by reference.

 

 

 

 

 

10.3

 

Purchase Agreement, effective as of December 10, 2008, by and between SSPE Investment Trust I, SSPE, LLC, and CLST Asset Trust II.

 

Previously filed as an exhibit to a Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 5, 2009, and incorporated herein by reference.

 

 

 

 

 

10.4

 

Second Amended and Restated Revolving Credit Agreement, effective as of December 10, 2008, by and between Summit Consumer Receivables Fund, L.P., as originator, Summit Alternative Investments, LLC, as servicer, SSPE, LLC, as LLC borrower, SSPE Investment Trust I, as trust

 

Previously filed as an exhibit to a Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 5, 2009 and on the date of this Form 10-Q/A, and incorporated herein by reference.

 

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borrower, CLST Asset Trust II, as Trust II borrower, Summit Consumer Receivables Fund, L.P., as guarantor, Eric J. Gangloff, as guarantor, Fortress Credit Corp., as lender and administrative agent, U.S. Bank National Association, as collateral custodian, and Lyon Financial Services, Inc, as backup servicer. (1)

 

 

 

 

 

 

 

10.5

 

Letter Agreement, effective as of December 10, 2008, by and between CLST Asset Trust II, CLST Financo, Inc., Summit Consumer Receivables Fund, L.P., Summit Alternative Investments, LLC, SSPE, LLC, SSPE Investment Trust I, and Eric J. Gangloff.

 

Previously filed as an exhibit to a Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 5, 2009, and incorporated herein by reference.

 

 

 

 

 

10.6

 

Purchase Agreement between Drawbridge Special Opportunities Fund LP and CLST Asset I, LLC, dated November 10, 2008.

 

Previously filed as an exhibit to a Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 5, 2009, and incorporated herein by reference.

 

 

 

 

 

10.7

 

Credit Agreement by and among FCC Finance LLC, as the servicer, FCC Investment Trust I, as the borrower, Fortress Credit Co LLC, as a lender and the administrative agent, U.S. Bank National Association, as the collateral custodian, and Lyon Financial Services, Inc., d/b/a/ U.S. Bank Portfolio Services, as the backup servicer, dated November 10, 2008. (1)

 

Previously filed as an exhibit to a Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 5, 2009 and on the date of this Form 10-Q/A, and incorporated herein by reference.

 

 

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

Filed herewith.

 

 

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

Filed herewith.

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

 

Filed herewith.

 

 

 

 

 

99.1

 

Letter from Richards, Layton, & Finger P.A., legal counsel to Mr. Manoj Rajegowda, dated February 24, 2009.

 

Previously filed as an exhibit to our company’s Annual Report Form on Form 10-K/A for the fiscal year ended November 30, 2008 and incorporated herein by reference.

 


 

†    Management contract, compensatory plan or arrangement.

 

(1)

Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.

 

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Signatures

 

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

 

CLST HOLDINGS, INC.

 

By:

/s/ Robert A. Kaiser

 

 

Robert A. Kaiser

 

 

Chief Executive Officer and President

 

 

 

 

 

 

 

By:

/s/ William E. Casper

 

 

William E. Casper

 

 

Chief Financial Officer

 

 

January 29, 2010

 

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