Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
|
|
For
the quarterly period ended May 31, 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
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
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. (Check one):
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 July 13,
2009, there were 23,949,282
outstanding
shares of common stock, $0.01 par value per share.
Table of
Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
May 31,
|
|
November 30,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
5,940
|
|
$
|
9,754
|
|
Notes receivable, net -
current
|
|
8,865
|
|
8,698
|
|
Accounts receivable -
other
|
|
1,366
|
|
893
|
|
Prepaid expenses and
other current assets
|
|
177
|
|
177
|
|
Total current assets
|
|
16,348
|
|
19,522
|
|
|
|
|
|
|
|
Notes receivable, net -
long-term
|
|
36,875
|
|
31,547
|
|
Property and equipment,
net
|
|
10
|
|
12
|
|
Deferred income taxes
|
|
4,786
|
|
4,786
|
|
Other assets
|
|
990
|
|
863
|
|
|
|
$
|
59,009
|
|
$
|
56,730
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Loan payable - current
|
|
$
|
7,839
|
|
$
|
7,436
|
|
Notes payable - related
parties
|
|
378
|
|
|
|
Accounts payable
|
|
14,628
|
|
14,512
|
|
Income taxes payable
|
|
85
|
|
207
|
|
Accrued expenses
|
|
792
|
|
473
|
|
Total current
liabilities
|
|
23,722
|
|
22,628
|
|
|
|
|
|
|
|
Loans payable - long
term
|
|
28,437
|
|
26,902
|
|
Notes payable - related
parties
|
|
290
|
|
|
|
Total liabilities
|
|
52,449
|
|
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; 24,583,306 and 21,187,229 shares
issued, respectively, and 23,949,282 and 20,553,205 shares outstanding,
respectively
|
|
246
|
|
212
|
|
Additional paid-in
capital
|
|
126,985
|
|
126,034
|
|
Accumulated other
comprehensive incomeforeign currency translation adjustments
|
|
217
|
|
217
|
|
Accumulated deficit
|
|
(119,241
|
)
|
(117,616
|
)
|
|
|
8,207
|
|
8,847
|
|
Less: Treasury stock
(634,024 shares at cost)
|
|
(1,647
|
)
|
(1,647
|
)
|
|
|
6,560
|
|
7,200
|
|
|
|
|
|
|
|
|
|
$
|
59,009
|
|
$
|
56,730
|
|
See accompanying notes to unaudited consolidated financial statements.
3
Table of
Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three and six months ended May 31, 2009 and 2008
(unaudited)
(In thousands, except per share data)
|
|
Three months ended
|
|
Six months ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,645
|
|
$
|
|
|
$
|
3,175
|
|
$
|
|
|
Other
|
|
142
|
|
|
|
233
|
|
|
|
Total revenues
|
|
1,787
|
|
|
|
3,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fees
|
|
76
|
|
|
|
382
|
|
|
|
Trust administrative
fees
|
|
3
|
|
|
|
4
|
|
|
|
Provision for doubtful
accounts
|
|
600
|
|
|
|
1,303
|
|
|
|
Interest expense
|
|
546
|
|
|
|
1,082
|
|
|
|
General and
administrative expenses
|
|
1,746
|
|
511
|
|
2,263
|
|
969
|
|
Operating loss
|
|
(1,184
|
)
|
(511
|
)
|
(1,626
|
)
|
(969
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
6
|
|
87
|
|
9
|
|
220
|
|
Total other income
|
|
6
|
|
87
|
|
9
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations before income taxes
|
|
(1,178
|
)
|
(424
|
)
|
(1,617
|
)
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
(6
|
)
|
|
|
8
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
(1,172
|
)
|
(424
|
)
|
(1,625
|
)
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of taxes of $5 for 2008
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,172
|
)
|
$
|
(424
|
)
|
$
|
(1,625
|
)
|
$
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
Discontinued
operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
23,344
|
|
20,553
|
|
22,314
|
|
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
Six months ended May 31, 2009 and 2008
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
other
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
paid-in
|
|
comprehensive
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,625
|
)
|
(1,625
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,625
|
)
|
Grant of restricted
stock
|
|
1,200
|
|
12
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
Cancellation of
restricted stock
|
|
(300
|
)
|
(3
|
)
|
|
|
|
|
3
|
|
|
|
|
|
|
|
Amortization of
restricted stock
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
86
|
|
Stock issuance for notes
receivable
|
|
2,496
|
|
25
|
|
|
|
|
|
874
|
|
|
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31,
2009
|
|
24,583
|
|
$
|
246
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,985
|
|
$
|
217
|
|
$
|
(119,241
|
)
|
$
|
6,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
November 30, 2007
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(115,953
|
)
|
$
|
8,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(734
|
)
|
(734
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31,
2008
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(116,687
|
)
|
$
|
8,129
|
|
See accompanying notes to unaudited consolidated financial statements.
5
Table of
Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Six months ended May 31, 2009 and 2008
(Unaudited)
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(1,625
|
)
|
$
|
(734
|
)
|
Adjustments to
reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Stock based
compensation
|
|
86
|
|
|
|
Provision for doubtful
accounts
|
|
1,303
|
|
|
|
Depreciation
|
|
2
|
|
|
|
Non-cash interest
expense
|
|
58
|
|
|
|
Amortization of notes
receivable acquisition costs
|
|
56
|
|
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
Accounts receivable -
other
|
|
(809
|
)
|
5,161
|
|
Prepaid expenses and
other current assets
|
|
|
|
311
|
|
Other assets
|
|
(185
|
)
|
271
|
|
Accounts payable
|
|
116
|
|
164
|
|
Income taxes payable
|
|
(122
|
)
|
|
|
Accrued expenses
|
|
319
|
|
(613
|
)
|
|
|
|
|
|
|
Net cash provided by
(used in) operating activities
|
|
(801
|
)
|
4,560
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Purchases of property
and equipment
|
|
|
|
(3
|
)
|
Notes receivable
collections
|
|
5,663
|
|
|
|
Acquisition of notes
receivable
|
|
(4,028
|
)
|
|
|
Additions to notes
receivable acquisition costs
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by
(used in) investing activities
|
|
1,484
|
|
(3
|
)
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Payments on notes
payable
|
|
(4,497
|
)
|
|
|
|
|
|
|
|
|
Net cash used in
financing activities
|
|
(4,497
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease)
in cash and cash equivalents
|
|
(3,814
|
)
|
4,557
|
|
Cash and cash equivalents
at beginning of period
|
|
9,754
|
|
11,799
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
5,940
|
|
$
|
16,356
|
|
|
|
|
|
|
|
Non-Cash Investing and
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of notes
receivable for common stock
|
|
$
|
899
|
|
$
|
|
|
|
|
|
|
|
|
Acquisition of notes
receivable for debt
|
|
$
|
7,273
|
|
$
|
|
|
|
|
|
|
|
|
Acquisition of notes
receivable for accounts receivable, other
|
|
$
|
336
|
|
$
|
|
|
|
|
|
|
|
|
Returned notes
receivable in exchange for reduction of debt
|
|
$
|
170
|
|
$
|
|
|
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, 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 of Directors (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 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 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
In
determining the adequacy of the allowance for doubtful accounts, management
considers a number of factors including the aging of the receivable portfolio,
customer payment trends, financial condition of the customer, economic
conditions in the customers country, and industry conditions. Actual results
could differ from those estimates. The Company will establish an allowance for
doubtful accounts for all receivables. The allowance will be based on defaulted
receivables as defined in the Companys financing arrangements. Under those
arrangements, a defaulted receivable is one where the customer has not made a
payment for the most recent 120 day period. Under such circumstances, the
remaining balance will not be allowed in the borrowing base which helps
determine the amount of allowed borrowings. On a quarterly basis, the Company
will adjust the allowance for doubtful accounts to a minimum amount equal to
the defaulted receivables. The Company may from time to time make additional
increases to the allowance based on business circumstances. Once the note
receivable is in default, the Company will no longer accrue, for financial
reporting purposes, interest earned on the note receivable. Should the note
receivable return to a non-default 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 borrowers home or property.
(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) Discounts and Deferred Costs
We have recorded assets related to purchase
discounts on certain notes receivables, deferred acquisition costs related to
the purchase of certain notes receivables and deferred loan costs associated
with certain
Company obligations. Both
the purchase discounts and the deferred acquisition cost 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 prepayment of the balances by either the Company or our customers
would be recognized in the period of prepayment.
7
Table of Contents
(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 Companys Annual Report on Form 10-K
filed on March 2, 2009.
The results of
discontinued operations for U.S., Miami, Mexico and Chile for the three and six
months ended May 31, 2009 and 2008, are as follows (in thousands):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Loss on sale of
accounts receivable
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
Gain on transactions
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
15
|
|
Total other income
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued
operations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
10
|
|
(3) Stock-Based
Compensation
On December 1,
2008, our Board approved the Companys 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, officers, 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. On
March 5, 2009, our Board approved the grant of 300,000 shares of
restricted stock to David Tornek, our director who was appointed to fill the
vacancy on the Board
.
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 for 600,000 shares and $0.16 per share for 300,000 shares is
$180,000 and will be expensed over the vesting period.
For the three and
six months ended May 31, 2009, the Company recognized $31,000 and $86,000,
respectively, of expense related to the restricted stock grants.
8
Table of Contents
(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 FCC Investment Trust I (the
Trust
) from a third party for
approximately $41.0 million (the
Trust
Purchase Agreement
). Our Board unanimously
approved the transaction. Our acquisition of the Trust 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 the Trust, pursuant to the terms and conditions
set forth in the credit agreement, dated November 10, 2008, among the
Trust, the lender, FCC Finance, LLC, as the initial servicer, the backup
servicer, and the collateral custodian (the
Trust
Credit Agreement
). The Company is
now responsible for the collection of the receivables included in the trust
through its wholly owned subsidiary Financo.
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 to be acquired by
the Trust will consist 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 equivalent 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 the Trust 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 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. 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 Purchase Agreement.
The Trust 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 Credit
Agreement). The obligations under the Trust Credit Agreement are secured by a
first priority security interest in substantially all of the assets of the
Trust, including portfolio collections.
The Trust Credit
Agreement provides the material terms and conditions for the services to be
performed by the servicer. In return, the Trust 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 Credit Agreement and the required principal and interest payments to the
lender under the Trust Credit Agreement, all remaining amounts from portfolio
collections are paid to the Trust 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 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 Credit
Agreement contains customary covenants for facilities of its type, including
among other things covenants that restrict the Trusts ability to incur
indebtedness, grant liens, dispose of property, pay dividends, make certain
acquisitions or to take actions that would negatively affect the Trusts
special purpose vehicle status. Generally, these covenants do not impact the
activities that may be undertaken by the Company. The Trust 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 the Trust, bankruptcy or insolvency
of the Trust, the occurrence of an event which causes a material adverse effect
on the Trust, the occurrence of certain defaults by the servicer, entry of
certain material judgments against the Trust, and the occurrence of a change of
control or certain material events and the issuance of a qualified audit
opinion with respect to the Trusts financials.
9
Table of Contents
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 the Trusts obligations
under the Trust 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:
·
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 the results of operations of
the Trust and the Company for
the three and six months ended May 31, 2008, as if the acquisition had
occurred on December 1, 2007. The
unaudited pro forma results are not comparable to our historical financial
information 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.
(unaudited, in thousands)
|
|
Pro
forma
|
|
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
|
|
ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Interest income
|
|
$
|
2,111
|
|
$
|
4,222
|
|
Other
|
|
7
|
|
14
|
|
Total revenues
|
|
2,118
|
|
4,236
|
|
|
|
|
|
|
|
Loan servicing fees
|
|
21
|
|
42
|
|
Management fees
|
|
249
|
|
498
|
|
Interest expense
|
|
1,237
|
|
2,474
|
|
General and
administrative expenses
|
|
642
|
|
1,231
|
|
Operating income
|
|
(31
|
)
|
(9
|
)
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
Realized loss on sale
of assets
|
|
(1,071
|
)
|
(2,142
|
)
|
Other, net
|
|
87
|
|
220
|
|
|
|
|
|
|
|
Total other expenses
|
|
(984
|
)
|
(1,922
|
)
|
|
|
|
|
|
|
Loss from continuing
operations before income taxes
|
|
(1,015
|
)
|
(1,931
|
)
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
(1,015
|
)
|
(1,926
|
)
|
|
|
|
|
|
|
Discontinued
operations, net of taxes of $5
|
|
|
|
10
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,015
|
)
|
$
|
(1,916
|
)
|
|
|
|
|
|
|
Net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share
|
|
$
|
(0.05
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
Weighted average number
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
20,553
|
|
20,553
|
|
The pro forma information is
unaudited and includes the use of estimates, and therefore should not be relied
upon. Readers of these financial statements should understand that the
historical financials of the Trust are not representative of the Trust as of November 10,
2008. Historical notes receivable were materially greater in the past than as
of our purchase date. Certain realized losses have been recorded prior to our
purchase, which have a material impact to the pro forma results. In addition,
the historical revenues and expenses may be materially different than those in
future periods due to differences in the number of notes receivable.
(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
10
Table of Contents
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. 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 Purchase 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 lenders rights in those assets
as collateral under the revolving facility. The terms and conditions of the
revolver are set forth in 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
) 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.
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
IIs special purpose vehicle status and covenants that restrict the Trust IIs
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
11
Table of Contents
principal
and interest when due, breach of covenants, materially incorrect
representations, default under certain other agreements of 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 IIs
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 IIs 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 six
months ended May 31, 2009, Trust II purchased $9.6 million of receivables
with an aggregate purchase discount of $0.8 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 $6.4
million utilizing the revolving facility.
(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
Fair
Purchase Agreement
). Messrs. Durham
and Cochran own all of the outstanding equity of Fair. In return for assets
acquired under the Fair 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 Fair 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 Fair 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 Fairs 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. 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 Fair 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%. The
sellers are required to repurchase any accounts, for the outstanding balance
(at the time of repurchase) of such account plus interest accrued thereon, that
do not satisfy certain specified eligibility requirements set out in the Fair
Purchase Agreement. Additionally, each of the sellers is required to jointly
and severally pay CLST Asset III, up to the aggregate stated principal amount
of the Notes issued to such seller, the outstanding balance of any receivable
that becomes a defaulted receivable within the parameters of the Fair Purchase
Agreement.
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,
12
Table of Contents
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 and six months ended May 31,
2009 and 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 and
six months ended May 31, 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 May 31, 2009 is
$40,000.
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 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 (
Red Oak Partners
), 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. According to a Schedule 13D filed by David
Sandberg, Red Oak Partners, LLC and certain other reporting persons on February 18,
2009, Red Oak Partners beneficially owns 4,561,554 shares of the Companys Common
Stock representing approximately 19.0% of the Companys 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 in the 134th District Court of Dallas
County, Texas (the
State Court 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; 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
Federal Court Action against defendants Red Oak Fund, L.P., Red Oak Partners,
LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund, LLP, 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
postponed the annual meeting of stockholders previously scheduled for May 22,
2009 until September 25, 2009.
On April 30, 2009, Red Oak Partners, LLC, Pinnacle
Fund, LLP, Bear Market Opportunity Fund, L.P., and Jeffrey S. Jones amended
their petition in the State Court Action.
In addition to the relief already requested, the petition seeks 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, LLP, 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. Discovery is ongoing in both the Federal
Court Action and State Court Action.
13
Table of Contents
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.
(7) New
Accounting Pronouncements
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.
14
Table of Contents
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations
The following
discussion and analysis should be read in conjunction with the Managements
Discussion and Analysis of Financial Condition and Results of Operations
section and audited consolidated financial statements and related notes thereto
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (the
SEC
) on March 2,
2009 and with the unaudited consolidated financial statements and related notes
thereto presented in this Quarterly Report on Form 10-Q.
Cautionary
Statement Regarding Forward-Looking Statements
Certain of the matters discussed in this Quarterly Report on Form 10-Q
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 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
managements 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 Companys 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
filed with the SEC on March 2, 2009
, 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 into 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 Companys
Mexico operations (the
Mexico Sale
).
The Mexico Sale was structured as the sale of all of the outstanding shares of
our Mexican subsidiaries, and included 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 for the first quarter 2007 and 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 had 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, the amount we believe is our pro rata share of CII
profits for such period, was sent to the purchasers on September 11, 2007,
as well as a demand that the sellers comply with other required terms of the
agreement. While we believe that CII was profitable and therefore the
purchasers owe the Company its pro rata share, the purchasers are disputing
this claim.
Therefore,
we are pursuing claims against the buyers from the Mexico Sale in an ICC
arbitration proceeding, which is currently scheduled for October 2009.
We cannot make any estimates
regarding future amounts that 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
15
Table of
Contents
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 we received cash of approximately $53.6 million and
$4.5 million was included in Accounts ReceivableOther in the
accompanying balance sheet for November 30, 2007. We recorded a pre-tax
gain of $52.7 million on the 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. As disclosed
above, 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.
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 pre-tax gain of
$0.6 million on the transaction during the quarter ended 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
remains 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. The amount and timing
of any 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 the proxy statement
and elsewhere in our Annual Report on Form 10-K filed with the SEC on March 2,
2009.
In the plan of
dissolution approved during our Special Meeting of stockholders on March 28,
2007, 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.
Consistent with the plan
of dissolution and its fiduciary duties, our Board and the Executive Committee
of our Board will continue to review the relative benefits to our stockholders
of (1) continuing to wind down our businesses pursuant to our plan of
dissolution or (2) abandoning our 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.
In addition, our Board has in the past year considered, and is currently
considering, whether it is possible, and if it would be in the best interest of
the Company and its stockholders, to de-register its common stock under Section 12(g) of
the Exchange Act and thereby suspend the Companys responsibilities to file
reports, including Forms 10-K, 10-Q and 8-K, with the SEC under Section 13(a) and
15(d) of the Exchange Act. We believe that given the limited time and
resources available to our management, the high cost of compliance with the
Sarbanes-Oxley Act of 2002 and other public company reporting requirements may
no longer outweigh the benefits to the Company and its stockholders of being a
reporting company. If the Company does
decide to deregister, the Companys common stock would cease to be eligible to
be traded on the OTC Bulletin Board. Our
common stock would continue to be quoted on the Pink Sheets, but no assurance
could be given that any broker would continue to make a market in our common
stock. Neither our Board nor our
Executive Committee has made a final decision to de-register with the SEC, but
it will continue to consider whether de-registering would be in the best
interests of the Company and its stockholders.
Any determination by the Board in the future to take any of the
foregoing actions, will require that the Board, in fulfilling its fiduciary
obligations, perform such analysis and consider such information, as provided
by management and external consultants, as its deems reasonable and necessary
to come to a determination that is in the best interests of the Company and its
stockholders. It is unlikely
16
Table of
Contents
that our Board or the
Executive Committee of our Board will make any further distributions to the
Companys stockholders under the plan of dissolution while it considers the
strategic alternatives available to the Company.
Although we have
purchased the various assets described below under Recent Developments and
are now engaged in the business of holding and collecting consumer notes
receivable, we have not abandoned our plan of dissolution. 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. Given the time necessary to complete the governmental
requirements for dissolution, 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 equivalent
balances. By investing our cash
resources in relatively high yielding assets, we are also able to take
advantage of the favorable tax treatment provided by our net operating losses.
Our net operating losses may offer significant value to us, if they can be
utilized to reduce tax liabilities prior to the termination of our corporate
status. Our ability to use our net operating losses depends upon a number of
factors, including our ability to generate taxable income. No assurances can be
given that we will be able to do so. We
have continued to wind up 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 filed with the SEC on March 2, 2009 for further
discussion with respect to our activities in this regard. We are doing this so that we can satisfy or
provide for our liabilities as required by our plan of dissolution and
applicable law. We do not now have, and
do not believe that we will have in the immediate future, sufficient
information regarding all of our liabilities to pay or appropriately provide
for them as required by our plan of dissolution and applicable law. We expect that fully implementing our plan of
dissolution may require several years.
We believe that should we decide that continuing with the plan of
dissolution is in the best interest of the Company and 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. For a
discussion regarding Manoj Rajegowdas apparent allegations that the Board has
abandoned the plan of dissolution, see Item 9B Other InformationResignation
of Director of our Annual Report on Form 10-K filed with the SEC on March 2,
2009.
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 managements 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
In determining the
adequacy of the allowance for doubtful accounts, management considers a number
of factors including the aging of the receivable portfolio, customer payment
trends, financial condition of the customer, economic conditions in the customers
country, and industry conditions. Actual results could differ from those
estimates. We will establish an allowance for doubtful accounts for all
receivables. The allowance will be based
on defaulted receivables as defined in our financing arrangements. Under those arrangements, a defaulted
receivable is one where the customer has not made a payment for the most recent
120 day period. Under such
circumstances, the remaining balance will not be allowed in the borrowing base
which helps determine the amount of allowed borrowings. On a quarterly basis,
we will adjust the allowance for doubtful accounts to a minimum amount equal to
the defaulted receivables. We may from
time to time make additional increases to the allowance based on business
circumstances.
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
17
Table of
Contents
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 six months ended May 31,
2009 and 2008.
On December 1, 2008, our Board approved the Companys 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. On
March 5, 2009, our
Board approved the grant of 300,000 shares of restricted stock to David Tornek,
our director who was appointed to fill the vacancy on the Board
.
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 becomes 100% vested if any of the following occurs: (i) the
participants 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 for 600,000 shares
and $0.16 for 300,000 shares is $180,000, of which $86,000 was expensed in the
six months ended May 31, 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,
the Board unanimously approved the acquisition
of
all of the outstanding equity interest of the
FCC Investment Trust I (the
Trust
) from Drawbridge Special
Opportunities Fund LP 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
.
The purchase price was approximately
$41.0 million, which was financed by $6.1 million of cash on hand and by a
$34.9 million non-recourse term loan from Fortress Credit Co LLC (
Fortress
), an affiliate of the seller.
The primary
business of the Trust is to hold and collect certain receivables.
We are now responsible for the collection of the
consumer notes receivables of the Trust.
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
, 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
SSPE
Investment Trust I (the
SSPE
Trust
) and SSPE, LLC (
SSPE
)
.
The Board unanimously approved the
establishment of the Trust II and the 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, LLC and SSPE Investment Trust I, 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 use more than $15 million of
the aggregate availability under the revolving facility. Trust IIs commitment to purchase $2.0
million of receivables was fulfilled in the first quarter of 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 First Consumer Credit, LLC (
FCC
),
the service provider of CLST Asset I.
During the second quarter of 2009 we were notified by
Summit that the credit facility we entered into with Trust II, Summit and
various other parties had been reduced. Although, we believe our $15 million
aggregate availability under the revolving facility is not impacted, we have
elected to stop purchasing newly originated loans at this time. Since the credit facility term ends in 2010,
there can be no assurance that it will be renewed. Therefore, we are currently
evaluating options, which include ceasing all purchases under this facility or
seeking alternate credit facilities.
CLST
Asset III
Effective February 13,
2009, we, through CLST Asset III, LLC (the
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,
18
Table of
Contents
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
Fair
Purchase Agreement
).
Messrs. Durham and Cochran own all of the outstanding equity of Fair. In
return for assets acquired under the Fair Purchase Agreement, CLST Asset III
paid the sellers total consideration of $3,594,354, consisting of cash, common
stock of the Company and six promissory notes. 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 Fairs 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.
During the second
quarter of 2009 we began implementing the servicing, collection and other
procedures relating to management of CLST Asset III contemplated by the
agreements between us and the servicer of the portfolio. The implementation of
those procedures required several meetings with the servicer and was not fully
complete in the second quarter of 2009. We expect the reporting, collection and
other procedures contemplated in our agreements with the servicer to be fully
implemented during the third quarter of 2009 and do not foresee any
difficulties in doing so. Fair is the
servicer of the CLST Asset III portfolio and is an affiliate of Mr. Durham.
Foreign Subsidiaries
During the second quarter of 2009 we made progress
under our plan of dissolution by dissolving additional foreign entities. We
completed the dissolution of our subsidiary in Guatemala. In the Philippines,
we obtained a formal Entry of Judgment in one longstanding lawsuit and are
nearing receipt of formal court approval for the resolution of another
longstanding lawsuit. Once these lawsuits are resolved, we anticipate
dissolving our Philippines subsidiary as soon as possible. We also obtained a
final determination from the taxing authority that no taxes are owed on a 2004
transaction. In the Netherlands, we
commenced the final audits that are required to complete the dissolution
process.
Colombia
During
the second quarter of 2009 we completed the collection of the previously
written-off receivable from the 2004 sale of our Colombia operations. During this quarter we collected $61,000,
representing the final payment of the original note amount of $720,869. The
note had been fully reserved and the payment received was recorded in general
and administrative expenses. We are now in the process of releasing the 19%
interest that we retained in the Colombia operation, per the terms of the
purchase agreement.
Results
of Operations
The Company
reported a net loss of $1.2 million or $0.05 per diluted share, for the second
quarter of 2009, compared to a net loss of $0.4 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 Federal Court Action and State Court Action.
The
following tables show certain information for the three and six months ended May 31,
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.
19
Table of Contents
|
|
CLST
Asset I
|
|
CLST
Asset II
|
|
CLST
Asset III
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31, 2009
|
|
$
|
3.1
|
million
|
|
$
|
1.1
|
million
|
|
$
|
0.9
|
million
|
|
Six months ended
May 31, 2009
|
|
$
|
6.2
|
million
|
|
$
|
1.6
|
million
|
|
$
|
1.1
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Outstanding
Principal
|
|
|
|
|
|
|
|
|
|
|
Balance of Receivables
|
|
$
|
37.5
|
million
|
|
$
|
8.3
|
million
|
|
$
|
2.7
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
$
|
1.4
|
million
|
|
$
|
|
|
|
$
|
0.2
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Purchase
Discounts
|
|
$
|
0.6
|
million
|
|
$
|
0.7
|
million
|
|
$
|
0.1
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Receivables
|
|
$
|
0.1
|
million
|
|
$
|
|
|
|
$
|
0.8
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Receivables
|
|
$
|
35.6
|
million
|
|
$
|
7.6
|
million
|
|
$
|
3.2
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-intercompany Loans
|
|
$
|
30.5
|
million
|
|
$
|
5.7
|
million
|
|
$
|
0.7
|
million
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Number of Customer
Accounts
|
|
5,481
|
|
|
1,086
|
|
|
2,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Outstanding
Principal
|
|
$
|
6,847
|
|
|
$
|
7,645
|
|
|
$
|
1,120
|
|
|
Balance per Account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31, 2009
|
|
$
|
0.1
|
million
|
|
$
|
0.3
|
million
|
|
$
|
0.1
|
million
|
|
Six months ended
May 31, 2009
|
|
$
|
0.2
|
million
|
|
$
|
0.3
|
million
|
|
$
|
0.1
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remittance Received:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31, 2009
|
|
$
|
0.6
|
million*
|
|
$
|
0.8
|
million
|
|
$
|
1.0
|
million**
|
|
Six months ended
May 31, 2009
|
|
$
|
1.4
|
million*
|
|
$
|
0.8
|
million
|
|
$
|
1.0
|
million**
|
|
*
Includes $0.2 million for May remittances received subsequent to quarter
end.
**
Includes $0.6 millon received subsequent to quarter end.
Three Months Ended May 31, 2009, Compared to Three Months Ended May 31,
2008
Consolidated
Revenues
.
Revenues for the second quarter of 2009
were $1.8 million compared to zero in 2008.
The second quarter of 2009 results reflected interest and other charges
from CLST Asset I of $1.3 million, CLST Asset II of $0.4 million and CLST Asset
III of $0.1 million. There were no
revenues recorded in the second quarter of 2008.
Loan
Servicing Fees.
Loan servicing fees for the second quarter of 2009 were $76,000. There were no loan servicing fees recorded in
the second quarter of 2008. 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 second quarter of 2009 were
$600,000, reflecting accounts greater than 120 days past due in CLST Asset
I. CLST Asset II and CLST Asset III had
no provision for doubtful accounts as CLST Asset II had no accounts greater
than 120 days past due and any defaulted receivables under CLST Asset III were
offset per the requirement that the sellers must jointly and severally pay CLST
Asset III the outstanding balance of any defaulted receivable, within the
parameters of the Fair Purchase Agreement.
We did not make a provision for doubtful accounts in the second quarter
of 2008.
20
Table of Contents
Interest
Expense.
Interest
expense for the second quarter of 2009 was $546,000 compared to zero in the
second quarter of 2008.
General
and Administrative Expenses
. Our general and administrative expenses
were $1.7 million for the second quarter of 2009 compared to $0.5 million for
the second quarter of 2008. Our legal and professional expenses during the
second quarter of 2009 were $1.0 million, primarily due to legal and
professional fees related to the Federal Court Action and the State Court
Action, including amounts paid on behalf of our directors, and the pursuit of
claims against Wireless Solutions in connection with the Mexico Sale. We believe that Wireless Solutions owes us
amounts relating to the sale of our interest in CII in connection with the
Mexico Sale. Therefore, we are pursuing
claims against the buyers from the Mexico Sale in an ICC arbitration
proceeding, which is currently scheduled for October 2009. We believe we are owed up to $1.7 million
from the Mexico Sale. In addition in 2008, general and
administrative expenses were favorably impacted by a one time insurance refund
of $141,000 and a $114,000 payroll settlement adjustment related to the
settlement of a claim for breach of employment agreement made by Sherrian Gunn.
Net
Operating Loss.
The net operating loss for the second quarter
of 2009 was a loss of $1.0 million compared to $511,000 for the second quarter
of 2008. The second quarter of 2009
includes $1.0 million of legal and professional fees, primarily due to legal
and professional fees related to the Federal Court Action and the State Court
Action, including amounts paid on behalf of our directors, and the pursuit of
claims against Wireless Solutions in connection with the Mexico Sale. Our three portfolios had a significant effect
on the quarter as CLST Assets I, II and III generated a total of $530,000
of operating income.
Total Other Income
. Our
total other income for the second quarter of 2009 was $6,000, compared to
$87,000 for the second 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 and lower cash balances.
Income taxes
. The Company recorded tax benefit of $6,000 for
the second quarter of 2009 compared to zero for 2008, which includes the impact
of continuing and discontinued operations.
Net Loss.
Net loss for the second quarter of 2009 was $1.2 million compared to
$0.4 million for the same quarter in 2008, as interest earned on our cash last
year generated $87,000 of interest income.
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 Federal Court Action and State Court Action.
CLST
Asset I
The
Trusts collections for the second quarter of 2009 were approximately $3.1
million, representing $1.8 million of principal payments and $1.3 million of
interest and other charges.
As of May 31, 2009, the
aggregate outstanding principal balance of the notes receivables net of
reserves was $36.1 million, which represents 88% of the original purchase price
of $41.0 million. The ending balance
consists of approximately 5,481 customer accounts, with an average outstanding
principal balance per account of approximately $6,847 and an average FICO score
of 655. The average interest rate for
these accounts was 14.4%. Total assets
of the Trust at the end of the quarter net of reserves were $36.2 million,
excluding certain accrued interest and deferred cost.
For
the second quarter of 2009, the Trust reported $93,000 of net operating
profit. Total revenues for the second
quarter of 2009 were approximately $1.3 million and primarily consisted of
interest income collected from the notes receivable. Operating expenses for the quarter were $1.2
million, which included $0.6 million provision for doubtful accounts, $0.45 million
of interest expense to Fortress, our lender, and $0.13 million of servicing
expense to FCC.
CLST
Asset II
Trust II had collections
of approximately $1.1 million during the second quarter of 2009, reflecting
principal payments of $892,000 and interest and other fees of $245,000. For the quarter, revenues were $328,000,
resulting in a net operating profit of $305,000. The results benefited from an adjustment to
origination costs of $95,000. There were
no defaults recorded during the quarter as we did not have any accounts past
due greater than 120 days. Interest
expense under the credit facility was $67,000 while our servicing costs were
$30,000.
For the second quarter of
2009, Trust II purchased $3.8 million of receivables at a purchase discount averaging
about 10%. The purchases were financed
with borrowings under the credit facility of $2.4 million, purchase discounts
of $354,000, and the remainder with Company cash. The average interest rate on the notes is
15.3% and when the unamortized purchase discounts are applied, we expect that
the calculated leveraged yield would be greater than 30%. Nearly 68% of the purchases had customer FICO
scores of 680 or higher with the average score being 679.
21
Table
of Contents
During the quarter, Trust
II received remittances of $791,000 after paying down the credit facility by
$349,000. As of May 31, 2009, Trust
II had $8.3 million of receivables and an outstanding balance on the credit
line of over $5.7 million.
CLST
Asset III
Collections for the
second quarter of 2009 were $903,000, representing $787,000 of principal and
$116,000 of interest and fees. For the
quarter, CLST Asset III also recorded revenues of $121,000 reflecting interest
and other fees collected from customers.
Also for the quarter, CLST Asset III reported net operating income of
$111,000. Defaults of $146,000 during
the quarter were applied to the notes payable to the seller per our purchase
agreement.
For the second quarter of
2009, we have received $1.0 million of cash remittances from Fair. The April 2009 cash remittances totaling
$305,000 were remitted in early June 2009. As of May 31, 2009, our
outstanding balance of receivables was $2.5 million, representing in excess of
2,200 accounts. The average principal
balance per account was approximately $1,120.
Six Months Ended May 31, 2009, Compared to Six Months Ended May 31,
2008
Consolidated
Revenues
.
Our revenues for the six months ended May 31,
2009 were $3.4 million compared to zero in 2008. The results for 2009 reflected
interest and other charges from CLST Asset I of $2.8 million, CLST Asset II of
$0.5 million and CLST Asset III of $0.1 million. There were no revenues recorded in the first
six months of 2008.
Loan
Servicing Fees.
Loan servicing fees for the six months ended May 31, 2009 were $386,000.
There were no loan servicing fees recorded in the first six months of 2008. 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 six months ended May 31,
2009 were $1.3 million, all of which was attributable to CLST Asset I.
We had no provision
for doubtful accounts for the same period of 2008.
Interest
Expense.
Interest
expense for the six months ended May 31, 2009 was $1.1 million under the
credit facilities of CLST Asset I and CLST Asset II and the notes issued in
connection with the CLST Asset III acquisition. We had no interest expense for
the same period of 2008.
General
and Administrative Expenses
. Our general and administrative expenses
were $2.3 million for the six months ended May 31, 2009 compared to $1.0
million for the six months ended May 31, 2008. The increase in expenses in
2009 is primarily due to legal and professional fees related to the Federal
Court Action and the State Court Action, including amounts advanced to our
directors, and the pursuit of claims against Wireless Solutions in connection
with the Mexico Sale. See also the discussion above under Three Months Ended May 31, 2009,
Compared to Three Months Ended May 31, 2008 General and Administrative
Expenses.
Total Other Income
. Our
total other income for the six months ended May 31, 2009 was $9,000,
compared to $220,000 for the same period in 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 and lower cash
balances.
Income taxes
. The Company recorded a tax expense of $8,000
for the six months ended May 31, 2009 compared to a benefit of $5,000 for
2008, which includes the impact of continuing and discontinued operations.
Discontinued Operations
. We had no income from discontinued operations
for the six months ended May 31, 2009 and $10,000, net of taxes, in
2008. As discussed in Note 2 to the Consolidated Financial Statements and
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations Overview, we sold our operations in the U.S.,
Miami, Mexico and Chile
.
CLST
Asset I
For
the six months ended May 31, 2009, collections for Trust I were $6.2
million, representing $3.4 million of principal payments and $2.8 million of
interest and payments and other charges.
As of May 31, 2009, the aggregate outstanding principal balance of
the notes receivables net of reserves was $36.1 million, which represents 88%
of the original purchase price of $41.0 million. The ending balance consists of approximately
5,481 customer accounts, with an average outstanding principal balance per
account of approximately $6,847
and an average FICO score of 655. The average interest rate for these accounts
was 14.4%. Total assets of the Trust at May 31,
2009 net of reserves were $36.2 million, excluding certain accrued interest and
deferred cost.
22
Table of Contents
For
the six months ended May 31, 2009, the Trust reported $190,000 of net
operating income. Total revenues for the
period were approximately $2.8 million and primarily consisted of interest
income collected from the notes receivable.
Operating expenses for the period were $2.6 million, which included $1.3
million provision for doubtful accounts, $946,000 of interest expense to
Fortress, our lender, and $309,000 of servicing expense to FCC.
CLST
Asset II
Year to date collections
for Trust II were $1.6 million representing $1.3 million of principal payments
and $330,000 of interest and other charges.
Revenues for Trust II were $439,000 and net operating income was
$246,000 for the year to date. We have
not provided any reserves for doubtful accounts as we do not have any past due
accounts greater than 120 days. Interest
expense under the credit facility was $96,000 and loan servicing fees were
$78,000 year to date.
For the year, Trust II
has purchased $9.6 million of customer receivables at purchase discounts
averaging 9%. The highest discount has
been 14.5% and the lowest has been 6%.
The purchases have been financed with borrowings under the credit
facility of $6,374,000, purchase discounts of $831,000 and the balance from
Company cash. The average interest rate
to date is 15.3% and the calculated leveraged yield when the purchase discount
is taken into effect is greater than 30%.
For the six months ended May 31,
2009, Trust II has received remittances of $791,000 after paying down the
credit facility of $635,000.
CLST
Asset III
For the six months ended May 31,
2009, collections for CLST Asset III were $1.1 million, representing $1.0
million of principal and $140,000 of interest and other fees. The April 2009 cash remittances totaling
$305,000 were remitted in early June 2009. Total revenue for the year was
$149,000 with net operating income of $137,000.
We incurred $12,000 of interest expense related to the sellers notes
delivered as part of the purchase price.
Year to date defaults of $170,000 have been applied to the sellers notes
per our agreement, reducing the principal owed under those notes.
Liquidity
and Capital Resources
As of May 31,
2009, we had cash and cash equivalents of approximately $5.9 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. All of our cash deposits
are in accounts that are federally insured. 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.
Our
three portfolios are now a source of additional funds as we are receiving
remittances from collections of accounts less associated expenses. The following table reflects the cash
remittances received for the three and six months ended May 31, 2009.
|
|
(in millions)
|
|
|
|
|
|
|
|
CLST
Asset I
|
|
CLST
Asset II
|
|
CLST
Asset III
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31, 2009
|
|
$
|
0.6
|
*
|
$
|
0.8
|
|
$
|
1.0
|
**
|
|
|
|
|
|
|
|
|
Six months ended
May 31, 2009
|
|
$
|
1.4
|
*
|
$
|
0.8
|
|
$
|
1.0
|
**
|
*
Includes $0.2 million for May remittances received subsequent to quarter
end.
**
Includes $0.6 millon received subsequent to quarter end.
Operating Activities
. The net cash used in operating activities for the
six months ended May 31, 2009 was $0.8 million compared to cash received
of $4.6 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 cost incurred in connection
with the Federal Court Action and State Court Action offset in part by
portfolio interest collections during 2009.
23
Table of Contents
Investing Activities
.
The net cash provided by investing activities
for the six months ended May 31, 2009 was $1.5 million compared to cash
used in 2008 of $3,000. The increase
from 2008 to 2009 is primarily a result of the collection of portfolio
principal of $5.7 million during the six months ended May 31, 2009 offset
in part by (i) cash of $4.0 million used to fund the acquisitions of
CLST
Asset II and
CLST
Asset III portfolios and (ii) $0.2
million in acquisition costs during the six months ended May 31, 2009
.
Financing Activities
. The net cash used in financing activities for the
six months ended May 31, 2009 was $4.5 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 under both the Trust Credit Agreement and Trust II Credit Agreement.
Liquidity Sources
.
CLST Asset I
.
Our acquisition of the Trust was financed by approximately $6.1 million
of cash on hand and by a non-recourse, term loan of approximately $34.9 million to the Trust by an affiliate of the
seller of the Trust, pursuant to the terms and conditions set forth in the
credit agreement, dated November 10, 2008, among the Trust, Fortress, as
the lender, FCC Finance, LLC, as the initial servicer, and various other
parties (the
Trust
Credit Agreement
). The loan matures on November 10, 2013
and bears interest at an annual rate of 5.0% over the LIBOR Rate (as defined in
the Trust Credit Agreement). The obligations under the Trust Credit Agreement
are secured by a first priority security interest in substantially all of the
assets of the Trust, including portfolio collections.
An
event of default occurs under the Trust Credit Agreement if the three-month
rolling average delinquent accounts rate exceeds 10.0% or the three-month
rolling average annualized default rate exceeds 7.0%. For the second quarter of
2009, these default rates were 5.14% and 6.34%, respectively.
As
of May 31, 2009, the outstanding balance of our term loan was $30.5
million, representing 87.5% of our original balance. We have retired
approximately $4.4 million of our obligation to Fortress, and we have paid
$946,000 in interest expense, all from customer collections. Total liabilities
of the Trust as of May 31, 2009 were $63.7 million, which includes $5.6
million of intercompany payables and deferred revenue of $0.6 million,
representing the remaining purchase discount from the original principal.
During
the six months ended May 31, 2009 CLST Asset I generated $919,000 of net
cash with an additional $121,000 received in June 2009. This amount brings
our net cash generated for the six months ended May 31, 2009 to
$1,040,000, net of all expenses and required payments to Fortress. Under the
terms of the Trust Credit Agreement, the net cash proceeds in any particular
month are remitted to the Company on or about the 20
th
of the following month. The $919,000 of net
proceeds recorded for the six months ended May 31, 2009, relate to the
activities of November 2008 through April 2009. May 2009 net cash proceeds of $121,000
were remitted on June 22, 2009.
CLST
Asset II
.
The
Trust II
has become a co-borrower
under
a $50 million
credit agreement that permits Trust II to use more than $15 million of the
aggregate availability under the revolving facility to purchase receivables.
The
non-recourse revolving facility was initially established by Summit, an
affiliate of the sellers under the
Trust II Purchase Agreement
.
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.
An event of default occurs under the Trust II Credit
Agreement 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. As of May 31, 2009,
there were no defaulted receivables.
As of May 31,
2009, Trust II had an outstanding loan to Fortress Corp. in the amount of $5.7
million and intercompany account payable of $1.9 million, the proceeds of which
were used to fund in part Trust IIs purchase of $9.6 million of the customer
accounts receivable. Deferred revenue as
of the end of the quarter was $0.7 million, representing the purchase discounts
related to the purchased receivables.
CLST Asset III
. The consideration paid by CLST Asset
III in return for assets acquired under the Fair Purchase Agreement, was
financed in part by the issuance of common stock and promissory notes to the
sellers. We issued
2,496,077 shares of our common stock at a
price of $0.36 per share. In addition,
we issued the sellers six promissory notes with an aggregate original stated
principal amount of $898,588 (the
Notes
), of
which two promissory notes in an aggregate original principal amount of
$708,868
24
Table of Contents
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.
The Notes 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).
Fair
has remitted $707,000 to the Company, reflecting cash received from customers
for the months of February, March and April 2009. The April 2009 cash remittances totaling
$305,000 were remitted in early June 2009. Per our agreement, we paid the
sellers the scheduled note payments, which amounted to $72,000. The remaining obligation to the sellers, as
of May 31, 2009, was $668,000 after the scheduled payment was made,
interest was accrued and defaulted receivables were recorded.
The
following table presents the aging of the receivables held by CLST Asset III at
May 31, 2009:
Receivables Aging (Principal)
|
|
Principal Balance ($)
|
|
% of Total
|
|
|
|
|
|
|
|
Current
0-30 Days
|
|
2,270,991.11
|
|
91.09
|
%
|
|
|
|
|
|
|
31 -
60 Days
|
|
95,269.89
|
|
3.82
|
%
|
|
|
|
|
|
|
61 -
90 Days
|
|
90,831.05
|
|
3.64
|
%
|
|
|
|
|
|
|
91 -
120 Days
|
|
20,634.95
|
|
0.83
|
%
|
|
|
|
|
|
|
120+
Days
|
|
15,551.46
|
|
0.62
|
%
|
|
|
|
|
|
|
Total:
|
|
$
|
2,493,278.46
|
|
100
|
%
|
|
|
|
|
|
|
|
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 May 31, 2009 is $40,000, and we expect
to pay this amount out of our available cash.
If we abandon our plan of dissolution, our obligations to this employee
will continue.
Included in accounts payable at May 31, 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. In addition, the Company has
contacted the vendor in question several times during the second quarter of
2009 regarding this matter with no results. 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.
New
Accounting Pronouncements
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
25
Table of Contents
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
Our Chief Executive Officer and Chief Financial Officer has evaluated
the effectiveness of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e)) as of the end of the period
covered by this report. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer has concluded that the Companys disclosure
controls and procedures were effective at May 31, 2009.
Changes
in Internal Control over Financial Reporting
There have been no
changes in our internal control over financial reporting during the three
months ended May 31, 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 for
the fiscal year ended November 30, 2008, filed with the SEC on March 2,
2009, continue to exist.
26
Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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 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 (
Red Oak Partners
), 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. According to a Schedule 13D filed by David
Sandberg, Red Oak Partners, LLC and certain other reporting persons on February 18,
2009, Red Oak Partners beneficially owns 4,561,554 shares of the Companys
Common Stock representing approximately 19.0% of the Companys 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 in the 134th District Court of Dallas
County, Texas (the
State Court 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; 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
Federal Court Action against defendants Red Oak Fund, L.P., Red Oak Partners,
LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund, LLP, 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
postponed the annual meeting of stockholders previously scheduled for May 22,
2009 until September 25, 2009.
On April 30, 2009, Red Oak Partners, LLC,
Pinnacle Fund, LLP, Bear Market Opportunity Fund, L.P., and Jeffrey S. Jones
amended their petition in the State Court Action. In addition to the relief already requested,
the petition seeks 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, LLP, 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. Discovery
is ongoing in both the Federal Court Action and 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
other risk factors, please refer to Item 1A, Risk Factors, of our Annual Report
on Form 10-K for the fiscal year ended November 30, 2008, filed with
the SEC on March 2, 2009.
27
Table of
Contents
We are subject to certain default provisions under our loan agreements
related to the acquisitions by CLST Asset I and CLST Asset II that may be
triggered by events over which we have no control; furthermore, the credit
facility that CLST Asset II currently has access to has been reduced and will
expire in September 2010.
CLST
Asset I
The
loan obligations of the Trust under the Trust Credit Agreement are secured by a
first priority security interest in substantially all of the assets of the
Trust, including portfolio collections. The loan is a non-recourse term
loan. The Trust Credit Agreement
contains customary covenants and events of default for facilities of its type,
including among other things, limitations on the delinquent accounts rate and
default rates of the notes receivable accounts, as more fully described in
Footnote 4 of the notes to the consolidated financial statements. A copy of the Trust Credit Agreement was
filed as an Exhibit to the Companys Current Report on Form 8-K filed
November 17, 2008, as amended to date.
If
an event of default occurs under the Trust Credit Agreement, whether or not the
default is material to the loan as a whole, the lender has various remedies,
including among other things, raising the interest rate payable on the loan and
accelerating all of the Trusts obligations under the Trust Credit Agreement,
which would cause the entire remaining outstanding principal balance plus
accrued and unpaid interest and fees to be declared immediately due and
payable.
In
addition, the Company has no control over the delinquency or default rates of
the notes receivable accounts now held by the Trust.
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%. For the
second quarter of 2009, these default rates were 5.14% and 6.34%, respectively.
There can be no assurance that the delinquency or default rates of such
accounts will not result in an event of default for the Trust, which would
allow the lender to, among other things, raise the interest rate payable on the
loan, accelerate all of the Trusts obligations under the Trust Credit
Agreement, and sell all the assets of the Trust to satisfy the amounts due.
CLST
Asset II
Trust
II is a party to a non-recourse, revolving loan agreement between Trust II,
Summit,
SSPE and SSPE
Trust, as co-borrowers, Summit and Eric J. Gangloff, as Guarantors, Fortress
Corp., as the lender, and Summit Alternative Investments, LLC, as the initial
servicer
, pursuant to which Trust II purchased
$9.6 million of receivables with an aggregate purchase
discount of $0.8 million during the six months ended May 31, 2009
. In conjunction with this loan agreement,
Trust II borrowed $3.7 million to purchase the consumer receivables and became
a co-borrower under a $50 million revolving credit agreement (the
Trust II
Credit Agreement
) that permits Trust II to use more than
$15 million of the aggregate availability under the revolving facility. A copy
of the Trust II Credit Agreement was filed as an Exhibit to the Companys
Current Report on Form 8-K filed December 19, 2008, as amended to
date.
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.
During
the second quarter of 2009, we were notified by Summit that the revolving
commitment under the Trust II Credit Agreement had been reduced.
Although, we believe our $15 million
aggregate availability under the revolving facility is not impacted, w
e have elected
to stop purchasing newly originated loans from Summit at this time. There can be no assurance that the amount of
the loan will not be further reduced at any time, which could restrict our
ability to purchase additional consumer loans in the future. In addition, the Trust II Credit Agreement
expires in September 2010. As of May 31, 2009, Trust II had an
outstanding balance of approximately $5.7 million. If the revolving facility is not renewed or
extended, we will need to find alternate credit facilities or use existing cash
to pay off the outstanding balance under the Trust II Credit Agreement at that
time.
The
Trust II Credit Agreement contains customary covenants and events of default
for facilities of its type, including among other things, limitations on the
delinquent accounts rate and default rates of the consumer receivable accounts,
as more fully described in Footnote 4 of the notes to the consolidated
financial statements. If an event of
default occurs, whether or not the default is material to the loan as a whole,
the lender has various remedies, including among other things, raising the
interest rate payable on the loan and accelerating all of Trust IIs
obligations under the Trust II Credit Agreement, which would cause the entire
remaining outstanding principal balance plus accrued and unpaid interest and
fees to be declared immediately due and payable.
28
Table of
Contents
Furthermore,
the Company has no control over the delinquency or default rates of the
consumer receivable accounts that the Trust II acquires. 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. As of May 31, 2009, there were no
defaulted receivables. There can be no assurance that these delinquency or
default rates will not result in an event of default for Trust II, which would
allow the lender to, among other things, raise the interest rate payable on the
loan, accelerate all of Trust IIs obligations under the Trust II Credit
Agreement, and sell all the assets of Trust II to satisfy the amounts due.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
On
March 5,
2009, our Board approved the grant of 300,000 shares of restricted stock
for no cash consideration
to David
Tornek, pursuant to the Companys 2008 Long Term Incentive Plan,
in connection with his appointment as a
director.
The shares
of Common Stock were issued by us in a transaction exempt from registration pursuant
to Section 4(2) of the Securities Act.
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 second quarter of
2009.
Item 5. Other Information
Not
applicable.
29
Table of Contents
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 companys 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 companys 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 companys 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 companys 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
|
|
Form of
Restricted Stock Award Agreement under the CLST Holdings, Inc. 2008 Long
Term Incentive Plan.
|
|
Previously filed as an
exhibit to our companys Annual Report Form on Form 10-K for the
fiscal year ended November 30, 2008 and incorporated herein by
reference.
|
|
|
|
|
|
31.1
|
|
Certification of the
Chief Executive Officer and 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.
|
Management
contract, compensatory plan or arrangement.
30
Table of
Contents
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, President,
|
|
|
Chief Financial
Officer, Treasurer
|
|
|
(Principal
Financial Officer)
|
|
|
|
July 14, 2009
|
|
|
|
|
|
|
31
CLST (PK) (USOTC:CLHI)
Historical Stock Chart
From Jun 2024 to Jul 2024
CLST (PK) (USOTC:CLHI)
Historical Stock Chart
From Jul 2023 to Jul 2024