Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28,
2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to
Commission File Number 0-22972
CLST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
75-2479727
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
|
|
|
17304
Preston Road, Dominion Plaza, Suite 420
|
|
|
Dallas,
Texas
|
|
75252
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
(972) 267-0500
(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
o
No
x
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter)
during the preceeding 12 months (or for such shorter period that the registrant
was required to submit and post such files).* Yes
o
No
o
* The registrant is not
subject to the requirements of Rule 405 of Regulation S-T at this time.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
(Do not check if a smaller
reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act.). Yes
o
No
x
On April 13, 2009,
there were 23,949,282 outstanding shares of common stock, $0.01 par value per
share.
Table of Contents
EXPLANATORY
NOTE
We are filing this Amendment No. 1 on Form 10-Q/A
(
Form 10-Q/A
)
to our Quarterly Report on Form 10-Q for the quarterly period ended February 28,
2009 originally filed with the SEC on April 14, 2009 (the
Original Form 10-Q
)
in response to comments we have received from the SEC. For convenience, we have repeated the
Original Form 10-Q in its entirety.
This amendment does not reflect events occurring after
the filing of the Original Form 10-Q, and does not modify or update the
disclosures therein in any way other than as required to reflect the matters
described above.
CLST HOLDINGS, INC.
INDEX TO FORM 10-Q/A
2
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)
|
|
February 28,
|
|
November 30,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,434
|
|
$
|
9,754
|
|
Notes receivable, net - current
|
|
9,528
|
|
8,698
|
|
Accounts receivable - other
|
|
1,015
|
|
893
|
|
Prepaid expenses and other current assets
|
|
177
|
|
177
|
|
Total current assets
|
|
17,154
|
|
19,522
|
|
|
|
|
|
|
|
Notes receivable, net - long term
|
|
36,854
|
|
31,547
|
|
Property and equipment, net
|
|
11
|
|
12
|
|
Deferred income taxes
|
|
4,786
|
|
4,786
|
|
Other assets
|
|
810
|
|
863
|
|
|
|
$
|
59,615
|
|
$
|
56,730
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Loans payable - current
|
|
$
|
7,835
|
|
$
|
7,436
|
|
Notes payable - related parties
|
|
319
|
|
|
|
Accounts payable
|
|
14,250
|
|
14,512
|
|
Income taxes payable
|
|
77
|
|
207
|
|
Accrued expenses
|
|
454
|
|
473
|
|
Total current liabilities
|
|
22,935
|
|
22,628
|
|
|
|
|
|
|
|
Loans payable - long term
|
|
28,421
|
|
26,902
|
|
Notes payable - related parties - long term
|
|
558
|
|
|
|
Total liabilities
|
|
51,914
|
|
49,530
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued
|
|
|
|
|
|
Common stock, $.01 par value, 200,000,000 shares
authorized; 24,283,306 and 21,187,229 shares issued, respectively, and
23,649,282 and 20,553,205 shares outstanding, respectively
|
|
243
|
|
212
|
|
Additional paid-in capital
|
|
126,957
|
|
126,034
|
|
Accumulated other comprehensive incomeforeign
currency translation adjustments
|
|
217
|
|
217
|
|
Accumulated deficit
|
|
(118,069
|
)
|
(117,616
|
)
|
|
|
9,348
|
|
8,847
|
|
Less: Treasury stock (634,024 shares at cost)
|
|
(1,647
|
)
|
(1,647
|
)
|
|
|
7,701
|
|
7,200
|
|
|
|
|
|
|
|
|
|
$
|
59,615
|
|
$
|
56,730
|
|
See accompanying notes to unaudited consolidated financial statements.
3
Table of Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended February 28, 2009 and February 29, 2008
(unaudited)
(In thousands, except per share data)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Interest income
|
|
$
|
1,530
|
|
$
|
|
|
Other
|
|
91
|
|
|
|
Total revenues
|
|
1,621
|
|
|
|
|
|
|
|
|
|
Loan servicing fees
|
|
306
|
|
|
|
Trust administrative fees
|
|
1
|
|
|
|
Provision for doubtful accounts
|
|
703
|
|
|
|
Interest expense
|
|
536
|
|
|
|
General and administrative expenses
|
|
661
|
|
458
|
|
Operating loss
|
|
(586
|
)
|
(458
|
)
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Other, net
|
|
3
|
|
133
|
|
Total other income
|
|
3
|
|
133
|
|
|
|
|
|
|
|
Loss from continuing operations before income
taxes
|
|
(583
|
)
|
(325
|
)
|
|
|
|
|
|
|
Income tax benefit
|
|
(130
|
)
|
(5
|
)
|
|
|
|
|
|
|
Loss from continuing operations, net of taxes
|
|
(453
|
)
|
(320
|
)
|
|
|
|
|
|
|
Discontinued operations, net of taxes of $5 for
2008
|
|
|
|
10
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(453
|
)
|
$
|
(310
|
)
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of taxes
|
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
21,261
|
|
20,553
|
|
See accompanying notes to unaudited consolidated financial statements.
4
Table of
Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
Three months ended February 28, 2009 and February 29, 2008
(Unaudited)
(In thousands)
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Accumulated
other
comprehensive
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
paid-in capital
|
|
income
|
|
deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2008
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(117,616
|
)
|
$
|
7,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(453
|
)
|
(453
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(453
|
)
|
Grant of restricted stock
|
|
900
|
|
9
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
(300
|
)
|
(3
|
)
|
|
|
|
|
3
|
|
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
55
|
|
Stock issuance for notes receivable
|
|
2,496
|
|
25
|
|
|
|
|
|
874
|
|
|
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2009
|
|
24,283
|
|
$
|
243
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,957
|
|
$
|
217
|
|
$
|
(118,069
|
)
|
$
|
7,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2007
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(115,953
|
)
|
$
|
8,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
(310
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2008
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(116,263
|
)
|
$
|
8,553
|
|
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended February 28, 2009 and February 29, 2008
(Unaudited)
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(453
|
)
|
$
|
(310
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
Stock based compensation
|
|
55
|
|
|
|
Provision for doubtful accounts
|
|
703
|
|
|
|
Depreciation
|
|
1
|
|
|
|
Non-cash interest expense
|
|
10
|
|
|
|
Amortization of notes receivable acquisition costs
|
|
22
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable - other
|
|
(458
|
)
|
4,532
|
|
Prepaid expenses and other current assets
|
|
|
|
322
|
|
Other assets
|
|
43
|
|
120
|
|
Accounts payable
|
|
(262
|
)
|
29
|
|
Income taxes payable
|
|
(130
|
)
|
|
|
Accrued expenses
|
|
(19
|
)
|
4
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
(488
|
)
|
4,697
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
|
(2
|
)
|
Notes receivable collections
|
|
2,298
|
|
|
|
Acquisition of notes receivable
|
|
(2,865
|
)
|
|
|
Additions to notes receivable acquisition costs
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(740
|
)
|
(2
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Payments on loans payable
|
|
(2,092
|
)
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(2,092
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(3,320
|
)
|
4,695
|
|
Cash and cash equivalents at beginning of period
|
|
9,754
|
|
11,799
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,434
|
|
$
|
16,494
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of notes receivable for common stock
|
|
$
|
899
|
|
$
|
|
|
|
|
|
|
|
|
Acquisition of notes receivable for debt
|
|
$
|
4,909
|
|
$
|
|
|
|
|
|
|
|
|
Acquisition of notes receivable for accounts
receivable, other
|
|
$
|
336
|
|
$
|
|
|
|
|
|
|
|
|
Returned notes receivable in exchange for
reduction of debt
|
|
$
|
23
|
|
$
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
Table of
Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary
of Significant Accounting Policies
(a)
Basis for Presentation
Although the interim
consolidated financial statements of CLST Holdings, Inc., formerly
CellStar Corporation, and subsidiaries (the
Company
)
are unaudited, Company management is of the opinion that all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results have been reflected therein. Net income (loss) for
any interim period is not necessarily indicative of results that may be
expected for any other interim period or for the entire year.
On November 10,
2008, we purchased all of the outstanding equity interests of FCC Investment
Trust I, and on December 12, 2008 we purchased
certain receivables,
installment sales contracts and related assets owned by
SSPE Investment Trust I and SSPE, LLC.
Subsequently, on February 13, 2009, we purchased assets owned by Fair
Finance Company, an Ohio corporation (
Fair
),
James F. Cochran, Chairman and Director of Fair, and by Timothy S. Durham,
Chief Executive Officer and Director of Fair and an officer, director and
stockholder of our Company. Messrs. Durham and Cochran own all of the
outstanding equity of Fair. The Board believes that each of these acquisitions
will be a better investment return for our stockholders when compared to the
recent changes to interest rates and other investment alternatives. Although we
are now engaged in the business of holding and collecting consumer notes
receivable, we have not abandoned our plan of liquidation and dissolution. We
believe that should we decide that continuing with the plan of liquidation and
dissolution is in the best interest of our stockholders, we will be able to
dispose of these assets on favorable terms prior to the time that we would be
in a position to make a final distribution to stockholders and terminate our
corporate existence.
The Company has reclassified to discontinued
operations, for all periods presented, the results and related charges for the
North American and Latin American Regions. (See footnote 2.)
(b)
Notes Receivable
Notes receivable are recorded at the historical cost
paid at the date of acquisition net of any purchase discounts. Subsequent to
the date of acquisition, notes receivable are reduced by any principal payments
made by the customer. Purchase discounts are recorded based on the negotiated
difference between the face value and the amount paid for the notes receivable.
Purchase discounts are recognized as revenue, using the effective interest
method, as principal payments are collected.
The Company establishes an allowance for doubtful
accounts for receivables where the customer has not made a payment for the most
recent 120 day period. The Company may from time to time make additional
increases to the allowance based on debtor circumstances and economic
conditions. Once a note receivable has been reserved due to nonpayment, the
Company will no longer accrue, for financial reporting purposes, interest
earned on the note receivable. Should the note receivable return to a
performing status, then the Company will resume accruing interest on the note
receivable. The majority of the notes receivable have collateral in various
forms, which may include a second lien position on the borrowers home or
property. Actual results could differ
from those estimates. Recoveries are recorded against the allowance when
payments are received. Recoveries of
notes receivable, which were previously charged off, are recorded to income
when payments are received. Notes receivable are charged off against the
allowance after all means of collection have been exhausted and a legal
determination has been rendered that less than the full amount of the note
receivable will be collected.
The
following table details the activity in the allowance for doubtful accounts for
the three months ended February 28, 2009:
|
|
Three Months
Ended
February 28,
2009
|
|
|
|
|
|
Beginning balance
|
|
$
|
144,000
|
|
Additions to allow for
doubtful accounts
|
|
703,000
|
|
Recoveries
|
|
|
|
Charge offs
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
847,000
|
|
(c) Revenue Recognition
Revenues consist of
interest earned, late fees and other miscellaneous charges. Revenues are not
accrued on accounts over 120 days without payment activity, unless payment
activity resumes.
(d) Deferred Costs
We have recorded acquisition costs related to the
purchase of certain notes receivables and deferred loan costs associated with
certain
Company obligations. The
acquisition costs are amortized over the remaining principal balance of the
notes receivable and are recorded as contra revenue. The deferred loan costs
are amortized over the remaining outstanding balance of the Company obligation
and are recorded in operating interest expense. Any impact of prepayment of the
balances by either the Company or our customers would be recognized in the
period of prepayment.
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/A
for the fiscal year ended November 30, 2008.
The results of
discontinued operations for U.S., Miami, Mexico and Chile for the three months
ended February 28, 2009 and February 29, 2008, are as follows (in
thousands):
|
|
February 28,
|
|
February 29,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
|
|
Cost of sales
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
Loss on sale of accounts receivable
|
|
|
|
|
|
Minority Interest
|
|
|
|
|
|
Gain on transactions
|
|
|
|
|
|
Other, net
|
|
|
|
15
|
|
Total other income (expense)
|
|
|
|
15
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
15
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
5
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
$
|
|
|
$
|
10
|
|
(3) Stock-Based
Compensation
We
have granted stock options to directors, officers and key employees of the Company
for purchase of the Companys common stock pursuant to the CellStar Corporation
2003 Long-Term Incentive Plan (the
2003 Plan
),
the CellStar Corporation 1993 Amended and Restated Long-Term Incentive Plan and
our 1994 Amended and Restated Director Non-Qualified Stock Option Plan. Options
granted generally vest ratably over four year periods.
We are currently
using the Black-Scholes option pricing model to determine the fair value of all
option grants. We did not grant any options during the three months ended February 28,
2009 and February 29, 2008.
On December 1,
2008, our Board of Directors (the
Board
)
approved the 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, officer, directors,
consultants and advisors of the Company and its subsidiaries.
·
The aggregate number of shares of Common Stock of the
Company that may be issued under the plan is 20,000,000 shares.
·
The plan provides that the administrator of the plan
may determine the terms and conditions applicable to each award and each award
will be evidenced by a stock option agreement or restricted stock agreement.
·
The plan will terminate on December 1, 2018.
In addition, on December 1,
2008 the Board approved the grant of 300,000 shares of restricted stock to each
of Timothy S. Durham, Robert A. Kaiser and Manoj Rajegowda. On February 24,
2009, Mr. Rajegowda forfeited all stock issuances provided to him during
the course of his Board membership in connection with his resignation from the
Board. Subsequently on
March 5, 2009, our
8
Table of
Contents
Board
approved the grant of 300,000 shares of restricted stock to David Tornek
.
Of each restricted stock grant, 100,000 shares vested
on the date of grant and the remaining 200,000 of the shares vest in two equal
annual installments on each anniversary of the date of grant. The restricted
stock grants will be evidenced by restricted stock agreements to be approved by
the Board. The total value of the awards using a grant date price of $0.22 per
share is $198,000 and will be expensed over the vesting period.
For the quarter
ended February 28, 2009, the Company recognized $55,000 of expense related
to the restricted stock grants.
(4) Acquisition
of new business
(a)
CLST Asset I
On November 10, 2008, we, through CLST Asset I,
LLC (
CLST Asset I
), a wholly
owned subsidiary of CLST Financo, Inc. (
Financo
), which is one of our direct, wholly owned
subsidiaries, entered into a purchase agreement to acquire all of the
outstanding equity interests of 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 (
FCC
),
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.
The
repayment terms on the accounts are standardized, but are dependent on the form
of agreement used by the originator.
Customers are required to make monthly payments until the loans are paid
in full. At the time of purchase of the CLST Asset I portfolio, the remaining
time to maturity was in a range of 8-10 years, not including prepayments, if
any.
Financo
has historically conducted our financing business, including ownership of
receivables generated by our businesses and providing internal financing to our
other operating subsidiaries. Substantially all of the assets acquired by the
Trust consisted of a portfolio of home improvement consumer receivables, some
of which are collateralized or otherwise secured by interests in real estate.
We are engaging in the business of holding and collecting the receivables with
the intention of generating a higher rate of return on our assets than we
currently receive on our cash and cash equivalents balances. At the same time,
we will continue to review the relative benefits to our stockholders of
continuing to wind down our business pursuant to our
plan of dissolution
or continuing
to do business in one or more of our historic lines of business or related
businesses or in a new line of business. Although we are now engaged in the
business of holding and collecting consumer notes receivable, we have not
abandoned our
plan of
dissolution
. We believe that should we decide that continuing with the plan of dissolution
is in the best interest of our stockholders, we will be able to dispose of the
Trust, if properly marketed, whether through the use of reputable brokers or
investment bankers, through an auction process or other strategies for
maximizing proceeds from an asset disposition, for the then-current book value of the portfolios and within the timeframe
necessary to complete the winding down of the Company prior to final
dissolution of the Company.
The cut-off date
for the receivables acquired was October 31, 2008, with all collections
subsequent to that date inuring to our benefit. As of October 31, 2008,
the portfolio consisted of approximately 6,000 accounts with an aggregate
outstanding balance of approximately $41.5 million and an average outstanding
balance per account of approximately $6,900. These loans were primarily
consumer home improvement loans of which approximately 63% were secured with a
second lien on the property, with the remainder being unsecured. Approximately 89% of the loans are in the
Northeast with the remainder in Texas, Georgia and Missouri. As of October 31, 2008, the weighted
average interest rate of the portfolio was 14.4%. We have the right to require
the seller to repurchase any accounts, for the original purchase price applicable
to such account, that do not satisfy certain specified eligibility requirements
set out in the Trust Purchase Agreement. To date there has not been a
determination that any receivables did not meet the 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
).
9
Table of
Contents
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.
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.
10
Table of
Contents
The
following unaudited pro forma information presents for the quarter ended February 28,
2008, combined results of operations of FCC
Investment Trust I and the Company as if the acquisition had occurred on
December 1, 2007. The unaudited pro
forma results are for informational purposes and are not necessarily indicative
of results that would have occurred had the acquisition been in effect for the
periods presented, nor are they necessarily indicative of future results. The unaudited proforma information was
prepared from the historical financial information of FCC Investment Trust I
and the Company.
(unaudited, in thousands)
|
|
Proforma
|
|
|
|
February 28,
|
|
|
|
2008
|
|
|
|
|
|
Revenues
|
|
|
|
Interest income
|
|
$
|
2,111
|
|
Other
|
|
7
|
|
Total revenues
|
|
2,118
|
|
|
|
|
|
Loan servicing fees
|
|
21
|
|
Management fees
|
|
249
|
|
Interest expense
|
|
1,237
|
|
General and
administrative expenses
|
|
589
|
|
Operating income
|
|
22
|
|
|
|
|
|
Other expense:
|
|
|
|
Realized loss on sale
of assets
|
|
(1,071
|
)
|
Other, net
|
|
133
|
|
|
|
|
|
Total other expenses
|
|
(938
|
)
|
|
|
|
|
Loss from continuing
operations before income taxes
|
|
(916
|
)
|
|
|
|
|
Income tax expense
(benefit)
|
|
(5
|
)
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
(911
|
)
|
|
|
|
|
Discontinued
operations, net of taxes of $5
|
|
10
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(901
|
)
|
|
|
|
|
Net income (loss) per
share:
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
Net income (loss) per
share
|
|
$
|
(0.04
|
)
|
|
|
|
|
Weighted average number
of shares:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
20,553
|
|
(b)
CLST Asset II
On December 12,
2008, we, through CLST Asset Trust II (the
Trust II
), a newly formed trust wholly owned by CLST
Asset II, LLC (
CLST Asset II
), a wholly
owned subsidiary of Financo, which is one of our direct, wholly owned
subsidiaries, entered into a purchase agreement, effective as of December 10,
2008, to acquire from time to time certain receivables, installment sales
contracts and related assets owned by third parties (the
Trust
II
Purchase Agreement
).
Our Board unanimously approved the transaction. We have fulfilled our original
commitment to purchase from the sellers receivables of at least $2 million
pursuant to the Trust II Purchase Agreement. We or the sellers under the Trust
II Purchase Agreement can terminate the Trust II Purchase Agreement at any time
(with notice) after March 29, 2009. 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.
11
Table of Contents
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
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 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 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 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 Credit
Agreement provides the material terms and conditions for the services to be
performed by the servicer. In return, the Trust II pays the servicer a monthly
servicing fee equal to an annual rate of 1.5% of the then aggregate outstanding
principal balance of the receivables and a 2% loan origination fee on each new
loan originated.
Portfolio
collections are distributed on a monthly basis. Absent an event of default,
after payment of the servicing fee and other amounts, fees and expenses due
under the Credit Agreement and the required principal, interest, unused
commitment fee payments to the lenders under the 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 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 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 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 Credit Agreement could be accelerated by
12
Table of
Contents
the
lender, causing the entire remaining outstanding principal balance plus accrued
and unpaid interest and fees to be declared immediately due and payable.
During the first
quarter 2009, Trust II purchased $5.8 million of receivables with an aggregate
purchase discount of $0.5 million. These receivables represent primarily home
improvement loans originated through First Consumer Credit, LLC (
FCC
), the service provider of CLST
Asset I. Trust II borrowed $3.7 million
utilizing the revolving facility.
Approximately 54% of these loans were secured through
a second lien on the property, with the remainder being unsecured. The loans are through the 48 mainland states
with the top five concentration as follows:
State
|
|
Percentage
|
|
|
|
|
|
Michigan
|
|
24
|
%
|
Ohio
|
|
21
|
%
|
Massachusetts
|
|
6
|
%
|
Florida
|
|
6
|
%
|
New York
|
|
4
|
%
|
(c)
CLST Asset III
Effective February 13,
2009, we, through CLST Asset III, LLC (
CLST
Asset III
), a newly formed, wholly owned subsidiary of Financo,
which is one of our direct, wholly owned subsidiaries, purchased certain
receivables, installment sales contracts and related assets owned by Fair,
James F. Cochran, Chairman and Director of Fair, and by Timothy S. Durham,
Chief Executive Officer and Director of Fair and an officer, director and
stockholder of our Company (the
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. Only 2% of these portfolios are home
improvement loans and none of the loans are secured. The loans are through the 48 mainland states
with the top five concentration as follows:
State
|
|
Percentage
|
|
|
|
|
|
Ohio
|
|
17
|
%
|
Florida
|
|
8
|
%
|
Colorado
|
|
8
|
%
|
Texas
|
|
6
|
%
|
Pennsylvania
|
|
6
|
%
|
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, 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).
13
Table of Contents
(5) Net Loss Per Share
Options to
purchase 0.1 million shares of Common Stock for the three months ended February 28,
2009 and February 29, 2008, were not included in the computation of
diluted earnings per share because the exercise price was higher than the
average market price. Restricted stock
of 0.6 million shares were not included in the computation of diluted earnings
per share for the three months ended February 28, 2009, because their
inclusion would have been anti-dilutive as the Company had a net loss.
(6) Commitments and Contingencies
We have an
agreement with one employee to assist with the final wind down of our business.
Under the agreement the employee is to receive her base salary as well as a
bonus upon the completion of certain objectives during the liquidation process.
The estimated commitment remaining under the agreement at February 28,
2009 is $68,000.
We have been
informed of the existence of an investigation that may relate to our Company or
our South American operations. Specifically, we understand that authorities are
reviewing allegations from unknown parties that remittances were made from
South America to Company accounts in the United States in 1999. We do not know
the nature or subject of the investigation, or the potential involvement, if
any, of our Company or our former subsidiaries. We do not know if allegations
of wrongdoing have been made against our Company, our former subsidiaries or
any current or former Company personnel or if any of them are subjects of the
investigation. However, the fact that the investigators are aware of an
allegation of transfers of money from South America to the United States and
that authorities may have questioned witnesses about such alleged transfers
means that we can not predict whether or not the investigation will result in a
material adverse effect on the consolidated financial condition or results of
operations of our Company.
On
February 13, 2009,
we filed a
lawsuit in the United States District Court for the Northern District of Texas
against Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandberg. Our Original Complaint and Application for
Injunctive Relief alleges that Red Oak Fund, L.P., Red Oak Partners, LLC, and
David Sandberg have engaged in numerous violations of federal securities laws
in making recent purchases of our Common Stock and sought to enjoin any future
unlawful purchases of our stock by the defendants, their agents, and persons or
entities acting in concert with them.
According to a Schedule 13D filed by David Sandberg, Red Oak Partners,
LLC and certain other reporting persons on February 18, 2009, it
beneficially owned 4,561,554 shares of the 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 on March 2, 2009 in
the 134th District Court of Dallas County, Texas. The complaint alleges that Messrs. Kaiser,
Durham, and Tornek entered into self-dealing transactions at the expense of the
Company and its stockholders and violated their fiduciary duties of loyalty,
independence, due care, good faith, and fair dealing. The complaint asks
the Court to order, among other things, a rescission of the alleged
self-interested transactions by Messrs. Kaiser, Durham, and Tornek; award
compensatory and punitive damages; remove Messrs. Kaiser, Durham and
Tornek from the Board; and hold an Annual Meeting of stockholders, or to
appoint a conservator to oversee and implement the dissolution plan approved by
stockholders in 2007.
On April 6, 2009, we filed our First Amended Complaint and
Application for Injunctive Relief in the United States District Court for the
Northern District of Texas against defendants Red Oak Fund, L.P., Red Oak
Partners, LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund LLLP, and
Bear Market Opportunity Fund, L.P. alleging the same and other violations of
federal securities laws. Through this
lawsuit, we seek to obtain various declaratory judgments that the defendants
have failed to comply with federal securities laws and to enjoin the defendants
from, among other things, further violating federal securities laws and from
voting any and all shares or proxies acquired in violation of such laws.
Also on April 6, 2009, because,
among other reasons, we do not expect the litigation, which bears directly upon
our annual meeting of stockholders, to be resolved for some months, our Board
has determined to delay the annual meeting of stockholders previously scheduled
for May 22, 2009 until September 25, 2009.
(7) New
Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
In September 2006,
the 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
14
Table of Contents
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.
15
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/A filed with the Securities and
Exchange Commission (the
SEC
) for
the fiscal year ended November 30, 2008, and with the unaudited
consolidated financial statements and related notes thereto presented in this
Quarterly Report on Form 10-Q/A.
Cautionary
Statement Regarding Forward-Looking Statements
Certain of the matters discussed in this Quarterly Report on Form 10-Q/A
may constitute forward-looking statements for purposes of the Securities Act
of 1933, as amended (the
Securities Act
),
and the Securities Exchange Act of 1934, as amended (the
Exchange
Act
), and, as such, may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of 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/A for the
fiscal year ended November 30, 2008,
those statements made in
conjunction with the forward-looking statements and otherwise herein. All
forward-looking statements attributable to the Company are expressly qualified
in their entirety by the Cautionary Statements. We have no intention, and
disclaim any obligation, to update or revise any forward-looking statements,
whether as a result of new information, future results or otherwise.
Overview
Sales Transactions
On December 18, 2006,
we entered into a definitive agreement (the
U.S.
Sale Agreement
) with a wholly owned subsidiary of Brightpoint, Inc.,
an Indiana corporation (
Brightpoint
),
providing for the sale of substantially all of our United States and
Miami-based Latin American operations (the
U.S.
Sale
) and for the buyer to assume certain liabilities related
to those operations. Our operations in Mexico and Chile and other businesses or
obligations of the Company were excluded from the transaction.
Our Board of Directors (the
Board
) and Brightpoint unanimously
approved the proposed transaction set forth in the U.S. Sale Agreement. The
purchase price was $88 million in cash, subject to adjustment based on
changes in net assets from December 18, 2006 to the closing date. The U.S.
Sale Agreement also required the buyers to deposit $8.8 million of the
purchase price into an escrow account for a period of six months from the
closing date.
Also on December 18,
2006, we entered a definitive agreement (the
Mexico
Sale Agreement
) with Soluciones Inalámbricas, S.A. de C.V.
(
Wireless Solutions
) and Prestadora
de Servicios en Administración y Recursos Humanos, S.A. de C.V. (
Prestadora
), two affiliated Mexican
companies, providing for the sale of all of the Companys Mexico operations
(the
Mexico Sale
). The Mexico
Sale was a stock acquisition of all of the outstanding shares of our Mexican
subsidiaries, and includes our interest in CII, our joint venture with Wireless
Solutions. Under the terms of the transaction, we received $20 million in
cash, and were entitled to receive our pro rata share of CII profits from January 1,
2007, up to the consummation of the transaction, within 150 days from the
closing date. Our Board unanimously approved the proposed transaction set forth
in the Mexico Sale Agreement. We have not received any pro-rata share of the
CII profits and other terms required as of 150 days from the closing date.
A demand for payment of up to $1.7 million and other required terms of the
agreement was sent to the purchasers on September 11, 2007. While we
believe that CII was profitable and therefore the purchasers owe the Company
its pro rata share, the purchasers are disputing this claim. We continue to
pursue the amounts we believe we are due, but at this time the purchasers are
not responding to or cooperating with our demands. Currently we cannot make any
estimates regarding future amounts we may be able to collect or the timing of
any collections on this matter.
We filed a proxy statement
with the SEC on February 20, 2007, which more fully describes the U.S. and
Mexico Sale transactions. Both of the transactions were subject to customary
closing conditions and the approval of our stockholders, and the transactions
were not dependent upon each other. The proxy statement also included a plan of
dissolution, which provides for the complete liquidation and dissolution of the
Company after the completion of the U.S. Sale, and a proposal to change the
name of the Company from CellStar Corporation to CLST Holdings, Inc.
16
Table of
Contents
On March 28, 2007, our stockholders approved the U.S. Sale, the
Mexico Sale, the plan of dissolution, and a name change from CellStar
Corporation to CLST Holdings, Inc. We continue to follow the plan of
dissolution. Consistent with the plan of dissolution and its fiduciary duties,
our Board will continue to consider the proper implementation of the plan of
dissolution and the exercise of the authority granted to it thereunder,
including the authority to abandon the plan of dissolution.
The U.S. Sale closed on March 30,
2007. At closing, $53.6 million was received and $4.5 million is
included in accounts 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. We have not
received any pro-rata share of profits and other terms required as of
150 days from the closing date under the Mexico Sale. A demand for payment
of up to $1.7 million and other required terms of the agreement was sent
to the purchasers, and if such amounts are received an additional gain will be
recognized.
On March 22, 2007, we
signed a letter of intent to sell our operations in Chile (the
Chile Sale
) to a group that
included local management for approximately book value. On June 11, 2007,
we completed the Chile Sale. The purchase price and cash transferred from the
operations in Chile prior to closing totaled $2.5 million, and we recorded
a gain of pre-tax $0.6 million on the transaction during the quarter
ending August 31, 2007. With the completion of the Chile Sale, we no
longer have any operating locations outside of the U.S. Currently only a small
administrative staff remained to wind up our business.
Plan of Dissolution
As we have
previously disclosed, the proxy statement we filed with the SEC on February 20,
2007 describes a proposal for a plan of dissolution, which provides for the
complete liquidation and dissolution of the Company after the completion of the
U.S. Sale (subject to abandonment by the Board in the exercise of their
fiduciary duties). On March 28,
2007, our stockholders approved the plan of dissolution in addition to the U.S.
Sale and the Mexico Sale. In the plan of
dissolution approved by our stockholders, we stated that no distribution of
proceeds from the U.S. Sale and Mexico Sale would be made until the
investigation by the SEC was resolved. On June 26, 2007, we received a
letter from the staff of the SEC giving notice of the completion of their
investigation with no enforcement action recommended to the SEC. Therefore, on June 27,
2007, our Board declared a cash distribution of $1.50 per share on Common Stock
to stockholders of record as of July 9, 2007. On July 19, 2007, we
issued the $1.50 per share dividend in the total amount of $30.8 million.
Then, on November 1, 2007 we paid an additional $0.60 per share dividend
to stockholders which brings the cumulative dividends paid to stockholders to
$2.10 per share or approximately $43.2 million. The amount and timing of
any additional distributions paid to stockholders in connection with the liquidation
and dissolution of the Company are subject to uncertainties and depend on the
resolution of certain contingencies more fully described in this quarterly
report on Form 10-Q/A, in the proxy statement and elsewhere in our Annual
Report on Form 10-K/A for the fiscal year ended November 30, 2008.
We have continued to wind
down aspects of our businesses, including dissolving some of our subsidiaries
and continuing to try to collect our remaining non-cash assets. In addition, we have continued to review our
liabilities and seek to satisfy or resolve those that we can in a favorable
manner. See Recent Developments below
and Item 1 Business 2008 Business of our Annual Report on Form 10-K/A
for the fiscal year ended November 30, 2008 for further discussion with
respect to our activities in this regard.
We expect that it will take several years to implement the plan of
dissolution because of the lengthy process of obtaining sufficient information
regarding all of our liabilities to pay and appropriately provide for them as
required under the plan of dissolution
.
Given this and the time necessary to complete
the governmental requirements for dissolution, our Board focused on ways to
generate higher returns on the Companys cash and other assets in order to
better offset the Company expenses and to take advantage of the favorable tax
treatment provided by our net operating losses.
Section 3 of the plan of dissolution states that we may not engage
in any business activities except to the extent necessary to preserve the value
of the Companys assets, wind up the Companys affairs, and distribute the
Companys assets. As further described
below under Recent Developments,
our Board determined to acquire several portfolios of receivables with the
intention of generating a higher rate of return on our assets than we were
receiving on our cash and cash equivalents balances which were held in money
market accounts or short term certificates of deposit, earning approximately 1%
(current interest rates are now close to 0%).
Our Board believed that each of these acquisitions would provide a
better investment return for our stockholders when compared to the low interest
rates available on our cash investments and other investment alternatives
although the acquisition would involve a higher risk profile than traditional
cash deposits and other cash equivalents positions. In addition, these investments offered the
Company a way to utilize its historical
tax net operating loss carryforwards (
NOLs
). At the time we began looking at purchasing
these portfolios during the second and third quarters of 2008, the credit
markets became significantly impaired, and the viability of many banks and
other financial institutions was in question.
The Companys cash was held in one bank subject to the limited
protection of FDIC coverage. The Board
considered, among other things, spreading the Companys cash among over a dozen
financial institutions. However, the
Board did not believe spreading the Companys cash among many different banks
to be practical or cost efficient. In
addition, the Board considered various cash strategies including investing in a
ladder of U.S. Treasury securities (securities of varying maturities) which
would have resulted in higher yields than cash deposits, but would have
required the Company to hold those securities in a brokerage firm and pay that
firm a fee to arrange the transactions.
The Board did not believe that the increased yield provided by a ladder of
U.S. Treasury securities, after associated fees and administrative costs, was
likely to be significantly better than that of cash deposits, and did not
believe that interest from U.S. Treasury securities would allow the Company to
use its NOLs to shield income from taxes.
Finally, the Board was unsure how to assess the brokerage and custody
risks associated with holding a ladder of U.S. Treasury securities through
third parties, and felt that the risk was similar to that associated with
commercial banks at the time.
We believe that the market conditions
have changed for our Trust I portfolio.
When we purchased Trust I, the historical default rate for the previous
three years for the portfolio was approximately 4%. Our recent experience has seen the default
rate increase to the 6-7% range; accordingly, we have been increasing our
allowances to reflect this change.
Upon examination of Trust
II and Asset III, we believe that the circumstances of these portfolios are
different from those of Trust I. Trust
II contains new originations with higher and more stringent credit requirements
than the requirements for the Trust I portfolio. Therefore the Trust II portfolio has a very
different risk profile when compared to Trust I. Asset III is protected from default risk by
the terms of the purchase agreement with the seller of that portfolio. The sellers of the Asset III portfolio bear
the majority of the default risk for receivables in that portfolio, and that
risk is secured by our ability to offset against amounts we owe the sellers on
the purchase price.
Management believes that
the various measures being taken by the federal government and the Federal
Reserve will ultimately have a positive impact on the credit markets and the
economy in general. In addition, we continue
to believe that, if needed, our portfolio assets could be sold, if properly
marketed, whether through the use of reputable brokers or investment bankers,
through an auction process or other strategies for maximizing proceeds from an
asset disposition, for the then-current book value of the portfolios and within
the timeframe necessary to complete the winding down of our Company, which will
likely take the Company two, three, or more years in order to resolve all
outstanding issues, including the dissolution of foreign subsidiaries, tax
audits, and outstanding liabilities.
This belief is based upon the following: (i) the portfolio balances
will continue to decrease through note receivable collections; (ii) the
default rates are expected to normalize with improving economic and market
conditions; and (iii) the Company would expect to begin to market the
portfolios a minimum of 12 months prior to any anticipated dissolution. Due to the lengthy process that will be
necessary to complete the plan of dissolution, and due to the state of the
credit markets at this time, our Board believes that sales of the Companys
portfolio assets at this time would not be in the best interest of our Company
or our stockholders.
Consistent with
the plan of dissolution and their fiduciary duties, our Board and Executive
Committee continue to consider both the timing of a filing of a certificate of
dissolution and whether amending, modifying or abandoning the plan of
dissolution and continuing to do business in one or more of our historical
lines of business or related businesses or in a new line of business is in the
best interests of the Company and its stockholders. Our Board has been
reviewing potential acquisitions and the value of the Companys tax assets. It
is possible that our Board of Directors will, in the exercise of its fiduciary
duties, elect to abandon the plan of dissolution for a strategic alternative
that it believes will maximize stockholder value. If our Board determines that
it is in the best interest of the Company to pursue an acquisition, it will
likely pursue a debt financing or equity issuance in order to finance such
acquisition. It is unlikely our Board will make any further distributions to
the Companys stockholders under the plan of dissolution while it considers the
strategic alternatives available to the Company.
17
Table of Contents
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
Notes
receivable are recorded at the historical cost paid at the date of acquisition
net of any purchase discounts. Subsequent to the date of acquisition, notes
receivable are reduced by any principal payments made by the customer. Purchase
discounts are recorded based on the negotiated difference between the face
value and the amount paid for the notes receivable. Purchase discounts are
recognized as revenue, using the effective interest method, as principal
payments are collected.
The
Company establishes an allowance for doubtful accounts for receivables where
the customer has not made a payment for the most recent 120 day period. The
Company may from time to time make additional increases to the allowance based
on debtor circumstances and economic conditions. Once a note receivable has
been reserved due to nonpayment, the Company will no longer accrue, for
financial reporting purposes, interest earned on the note receivable. Should
the note receivable return to a performing status, then the Company will resume
accruing interest on the note receivable. The majority of the notes receivable
have collateral in various forms, which may include a second lien position on
the borrowers home or property. Actual
results could differ from those estimates. Recoveries are recorded against the
allowance when payments are received.
Recoveries of notes receivable, which were previously charged off, are
recorded to income when payments are received. Notes receivable are charged off
against the allowance after all means of collection have been exhausted and a
legal determination has been rendered that less than the full amount of the
note receivable will be collected.
Stock-Based Compensation
Prior to fiscal 2006, the
Company accounted for its stock options under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Effective December 1, 2005, the
Company adopted the provisions of SFAS No. 123 (Revised 2004), Share-Based
Payments (SFAS 123(R)), and selected the modified prospective method to
initially report stock-based compensation amounts in the consolidated financial
statements. The Company used the Black-Scholes option pricing model to
determine the fair value of all option grants. The Company did not grant any
options during the quarters ended February 28, 2009 and February 29,
2008.
18
Table of Contents
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. Subsequently on
March 5,
2009, our Board approved the grant of 300,000 shares of restricted stock to
David Tornek
.
Of each restricted stock grant, 100,000
shares vested on the date of grant, and the remaining 200,000 of the shares
vest in two equal annual installments on each anniversary of the date of
grant.
The restricted stock 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 is $198,000, of which $55,000 was expensed in the
first quarter ended February 28, 2009 and the rest is being expensed over
a two year vesting period. The 2008 Plan permits withholding of shares by the
Company upon vesting to pay withholding tax. These withheld shares are
considered as treasury stock and are available to be re-issued under the 2008
Plan.
Recent
Developments
CLST
Asset I
On November 10, 2008,
our Board unanimously approved the
acquisition of
all of the outstanding equity interest of the
FCC Investment Trust I (
Trust I
) 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 Trust I is to hold
and collect certain receivables.
The approximate 6,000
receivables included in CLST Asset I are primarily consumer home improvement
loans to individual homeowners. All loans represent loans to single family
dwellings. As of the purchase date, a approximately 63% of the loans were
secured through a second lien on the property
, with the remainder being unsecured.
Approximately
89% of the loans are in the Northeastern part of the United States with the
remainder in Texas, Georgia and Missouri, and at the time of purchase of the
portfolio, the remaining time to maturity was in a range of 8-10 years, not
including prepayments, if any.
The following table
reflects the loan origination year as of the purchase date:
Year of origination
|
|
% of CLST Asset I
|
|
2000
2004
|
|
8.4
|
%
|
2005
|
|
8.1
|
%
|
2006
|
|
17.3
|
%
|
2007
|
|
36.4
|
%
|
2008
|
|
29.8
|
%
|
Total
|
|
100.0
|
%
|
CLST
Asset II
On December 12, 2008,
we, through
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 various other parties, Trust II committed to purchase
receivables of at least $2.0 million. In
conjunction with this agreement, Trust II became a co-borrower under a $50
million credit agreement that permits Trust II to utilize more than $15 million
of the aggregate availability under the revolving facility. Trust IIs commitment to purchase $2.0
million of receivables was fulfilled in the first quarter 2009, when Trust II
purchased $5.8 million of receivables with an aggregate purchase discount of
$0.5 million. These receivables represent primarily home improvement loans
originated through First Consumer Credit, LLC (
FCC
),
the service provider of CLST Asset I.
Trust II borrowed $3.7 million utilizing the revolving facility. Approximately 54% of these loans were secured
through a second lien on the property, with the remainder being unsecured. The loans are through the 48 mainland states
with the top five concentration as follows:
State
|
|
Percentage
|
|
|
|
|
|
Michigan
|
|
24
|
%
|
Ohio
|
|
21
|
%
|
Massachusetts
|
|
6
|
%
|
Florida
|
|
6
|
%
|
New York
|
|
4
|
%
|
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, 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. 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.
Only 2% of these portfolios are home improvement loans and none of the
loans are secured. The loans are through
the 48 mainland states with the top five concentration as follows:
State
|
|
Percentage
|
|
|
|
|
|
Ohio
|
|
17
|
%
|
Florida
|
|
8
|
%
|
Colorado
|
|
8
|
%
|
Texas
|
|
6
|
%
|
Pennsylvania
|
|
6
|
%
|
Now that the Company has acquired these receivable portfolios, most of
the activities of the Company with respect to the portfolios are conducted on
its behalf by the servicers of these portfolios. The servicers, on behalf of the Company,
receive payments from account debtors and pursue other collection activities
with respect to the receivables, monitor collection disputes with individual
account debtors, prepare and submit claims to the account debtors, maintain
servicing documents, books and records relating to the receivables and prepare
and provide reports to the lenders and the Company with respect to the
receivables and related activity, maintain the security interest of the lenders
in the receivables, and direct the collateral custodian to make payments out of
the proceeds of the portfolios to, among others, the Company, the lenders, the
servicers and/or backup servicers, and the collateral custodians pursuant to
the terms of the relevant servicing agreements.
Subsidiaries
We
are working steadily to complete a long list of actions necessary to complete
the wind down of our historical business in an orderly fashion. Completing the wind down is a cumbersome task
that requires many steps and may take a significant amount of time. These steps
include dissolving numerous subsidiaries, resolving pending litigation and
completing various regulatory filings and other requirements. We cannot predict
how long, how time-consuming or how costly resolution of the litigation matters
will be. To date, we have completed and filed final sales tax returns and
franchise tax returns for most of our entities. We have also completed the
requirements to withdraw most of our entities from doing business in multiple
state jurisdictions in the U.S. Furthermore, we are continuing to dissolve our
foreign and domestic subsidiaries pursuant to the plan of dissolution. However,
in order to protect the Companys cash and other assets from any actual or potential
liabilities of the Companys direct and indirect subsidiaries, we will not
dissolve our inactive direct or indirect domestic or foreign subsidiaries until
the actual and contingent liabilities of each such subsidiary have been
resolved or contingency reserves have been set aside sufficient to pay or make
reasonable provision to pay all such subsidiarys claims and obligations in
accordance with applicable law. Specifically, we will not dissolve
Audiomex Export Corp., National Auto
Center, Inc. and CLST-NAC, Ltd., which are direct parties to, and NAC
Holdings, Inc., which is an indirect party to, the arbitration proceeding
for our claim in Mexico against the purchasers of the Mexico Sale until
resolution of that claim.
In addition, in
certain jurisdictions, the dissolution process is an extended one.
We
completed the dissolution of our subsidiaries in the United Kingdom and
Guatemala in February 2008 and March 2009, respectively, and of
CLST-NAC Fulfillment, Ltd., a Texas limited partnership and indirect subsidiary
of the Company, in September 2009.
Furthermore, we completed the merger of CLST Fulfillment, Inc., a
Delaware corporation, into its parent, National Auto Center, Inc., a
Delaware corporation and our wholly owned subsidiary, effective September 10,
2009. In addition we have made demands on the purchaser of our former Colombian
subsidiary for the documents needed to divest our remaining minority interest
in that subsidiary. Further, we have
submitted documents to several governmental authorities in El Salvador as
required to dissolve our dormant entity in El Salvador. For our Netherlands
subsidiary, we have collected VAT tax refunds and are in the process of
preparing tax returns that are required to complete the dissolution process.
There are a number of actions required by governmental regulations in
order to dissolve our Philippines subsidiary, and we have made substantial
progress toward its dissolution. We obtained a Formal Entry of Judgment in two
longstanding lawsuits. We have also settled
a claim for 1999 withholding tax and obtained a determination from the Bureau
of Internal Revenue that no taxes are owed on a 2004 transaction. We are now completing audits that are
required to be submitted for regulatory approval prior to dissolution, and have
taken various other actions required by the Bureau of Internal Revenue and the
Philippines Securities and Exchange Commission.
19
Table of
Contents
Results of Operations
The Company
reported a net loss of $0.5 million or $0.02 per diluted share, for the first
quarter of 2009 compared to a net loss of $0.3 million, or $0.02 per diluted
share for the same quarter last year. The increase is primarily attributable to
the costs of the portfolio acquisitions and related start up costs and the cost
incurred in connection with the litigation.
The
following table shows certain information as of or for the three months ended February 28,
2009 for each of CLST Asset I, CLST Asset II and CLST Asset III. A more
detailed description of the results for each of these entities is provided
below.
|
|
CLST
Asset I
|
|
CLST
Asset II
|
|
CLST
Asset III
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Outstanding
Principal Balance of Receivables
|
|
$
|
39.3
|
million
|
|
$
|
5.4
|
million
|
|
$
|
3.4
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves/Chargebacks
|
|
$
|
0.8
|
million
|
|
$
|
|
million
|
|
$
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Purchase Discounts
|
|
$
|
0.6
|
million
|
|
$
|
0.5
|
million
|
|
$
|
0.1
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Acquisition Costs
|
|
$
|
0.2
|
million
|
|
$
|
0.1
|
million
|
|
$
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Receivables
|
|
$
|
38.1
|
million
|
|
$
|
5.0
|
million
|
|
$
|
3.3
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable and Loans Outstanding
|
|
$
|
32.5
|
million
|
|
$
|
3.7
|
million
|
|
$
|
0.9
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Number of Customer Accounts
|
|
5,582
|
|
|
719
|
|
|
2,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Outstanding Principal Balance per Account
|
|
$
|
6,900
|
|
|
$
|
7,681
|
|
|
$
|
1,156
|
|
|
Three Months Ended February 28, 2009, Compared to Three Months
Ended February 29, 2008
Revenues
.
Our revenues for the first quarter of
2009 were $1.6 million compared to zero in 2008, and such increase is primarily
due to interest and other charges collected in CLST Asset I of $1.5 million and
CLST Asset II of $0.1 million.
Loan
Servicing Fees.
Loan
servicing fees for the three months ended February 28, 2009 were $306,000,
$177,000 of which was attributable to CLST Asset I and $14,000 of which was
attributable to CLST Asset II. We also
incurred $115,000 of loan servicing commissions during the quarter related to
CLST Asset II. We do not incur additional servicing fees with respect to CLST
Asset III other than the initial cost of acquiring the portfolio.
Provision
for Doubtful Accounts.
Provision for doubtful accounts for the three months ended February 28,
2009 were $703,000, all of which was attributable to CLST Asset I.
Interest
Expense.
Interest
expense for the three months ended February 28, 2009 was $536,000 under
the credit facilities of CLST Asset I and CLST Asset II and the notes issued in
connection with the CLST Asset III acquisition.
General
and Administrative Expenses
. Our general and administrative expenses
were $0.7 million for the first quarter 2009 compared to $0.5 million for the
first quarter 2008. The increase in expenses in 2009 is primarily due to
increases in professional fees.
20
Table of
Contents
Total Other Income
. Our
total other income for the first quarter 2009 was $3,000, compared to $133,000
for the first quarter 2008. Virtually all of our other income is interest
earned on our cash balance, and the decrease is a result of lower interest
rates due to the current U.S. economic crisis.
Income taxes
. The Company had accrued $0.1 million of
Delaware franchise tax at year ended November 30, 2008. Upon further review it was determined that
this accrual was overstated and the Company adjusted the accrual, and therefore
has recorded tax benefit of $0.1 million for the first quarter of 2009 compared
to zero for 2008, which includes the impact of continuing and discontinued
operations.
Discontinued Operations
. We had no income from discontinued operations
for the first quarter 2009 and $10,000, net of taxes, in 2008. As
discussed in Note 2 to the Consolidated Financial Statements and Item 2. 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
The
Trust collections from customers for the first quarter of 2009 were
approximately $3.1 million, representing $1.6 million of principal payments and
$1.5 million of interest and other charges. As of February 28, 2009, the
aggregate outstanding principal balance of the notes receivables net of
reserves was $38.5 million, which represents 94.0% of the original purchase
price of $41.0 million. The ending balance consists of approximately 5,582
customer accounts, with an average outstanding principal balance per account of
approximately $6,900 and an average FICO score of 655. The average interest
rate for these accounts was 14.4%. Total assets of the Trust at the end of the
quarter net of reserves were $40.0 million, excluding certain accrued interest
and deferred cost.
Total
revenues for the quarter were $1.5 million and primarily consisted of interest
income collected from the notes receivable.
Operating expenses for the quarter were $1.4 million, which included
$0.7 million provision for doubtful accounts, $0.5 million of interest expense
to Fortress, our lender, and $0.2 million of servicing expense to FCC.
CLST
Asset II
Since the Trust II began
purchasing receivables, we have modified the approval standards increasing the
interest rate, increasing the purchase discount and requiring higher credit
scores. As a result, of these measures
the average interest rate is 14.8%, when the purchase discount is taken into
consideration, the computed effective yield would be 17%. The average FICO score was 672 for the
borrowers.
As of February 28,
2009, the aggregate outstanding principal balance of Trust IIs account
receivable was $5.4 million. Since these
receivables represent new origination, consistent with our accounting policy,
we did not need a provision for doubtful account as none of our receivables
were 120 days past due. Other current
assets were $0.2 million and consisted of notes receivable from Summit and
deferred costs.
During
the first quarter 2009, Trust II had collections from customers of $0.5
million, representing $0.4 million of principal payments and $0.1 million of
interest and other charges. Principal
payments were particularly high as a significant amount of the loans we
originated were paid in full. We do not expect this trend to continue long
term. Also for the first quarter 2009, Trust II recorded revenues of $110,000
and operating expenses of $140,000, representing up front origination fees and
servicing costs from FCC. Interest
expense was $30,000 for the quarter.
CLST
Asset III
The results of CLST Asset
III for the first quarter only reflect the activity for the partial month as we
acquired these assets effective February 13, 2009. Collections for the
quarter were $300,000 with the majority of the payment being applied to
principal. We recorded $27,000 of
revenue reflecting interest and other fees collected from customers and per our
agreement, we did not incur any servicing expenses. Defaults of $23,250 during the quarter were
applied to the notes payable to the seller per our purchase agreement.
As of February 28,
2009, our ending balance of receivables was $3.4 million. The receivables represent approximately 2,829
accounts with an average outstanding principal balance per account of $1,156.
21
Table of
Contents
Liquidity
and Capital Resources
Subsequent
to the sale of our discontinued operations in March 2007 and prior to the
acquisition of the Trust in November 2008, we met our cash needs with
existing funds and interest and investment income generated by our cash and
cash equivalents. At February 28, 2009, we had cash and cash equivalents
of approximately $6.4 million, down from $9.8 million at November 30,
2008. Historically we have invested our cash and cash equivalents in either
money market accounts or short term Certificate of Deposits with our primary
bank, Texas Capital Bank. To date, we
have financed our acquisitions of our receivables portfolios with cash,
non-recourse debt, and the issuance of shares of our Common Stock, and we
expect that any future portfolio acquisition would be financed with cash on
hand and cash from operations, non-recourse debt and additional issuance of our
Common Stock.
Operating Activities
. The net cash used in operating
activities for the three months ended February 28, 2009 was $0.5 million
compared to cash received of $4.7 million for the same period in 2008. The
primary reason for this decrease was the collection of $4.7 million of accounts
receivable from Brightpoint (the purchaser of our U.S. and Miami operations) in
2008 and increased operating expenses in 2009 related to the new business
offset in part by portfolio interest collections during 2009.
Investing Activities
.
The net cash used in investing activities for
the three months ended February 28, 2009 and February 29, 2008 was
$0.7 million and $2,000, respectively. The increase from 2008 to 2009 is
primarily a result of cash of $2.9 million used to fund the acquisitions of
CLST
Asset II and
CLST
Asset III portfolios, $0.2
million for the payment of acquisition costs and offset in part by collection
of portfolio principal of $2.3 million during the three months ended February 28,
2009
.
Financing Activities
. The net cash used in financing activities for the
three months ended February 28, 2009 was $2.1 million compared to zero for
the same period in 2008. The cash used
in financing activities in 2009 was used to reduce the outstanding debt principal
balance.
Liquidity Sources
.
CLST
Asset I
. As of February 28, 2009, the outstanding
balance of our term loan was $32.5 million, representing 93.0% of our original
balance. We have retired approximately $2.3 million of our obligation to
Fortress, and we have paid $495,000 in interest expense, all from customer
collections.
CLST
Asset II
. In
conjunction with the loan entered into between Trust II, Summit and various
other parties, Trust II has become a co-borrower under a $50 million credit
agreement that permits Trust II to utilize more than $15 million of the
aggregate availability under the revolving facility.
CLST
Asset III
. During
the first quarter of 2009 we did not make any cash payments of principal or
interest under the Notes issued by CLST Asset III to Fair, Mr. Durham and Mr. Cochran.
Instead, we applied $23,500 of delinquent receivables towards the principal and
interest of the Notes.
Asset Quality
. Our delinquency rates reflect, among
other factors, the credit risk of our receivables, the average age of our
receivables, the success of our collection and recovery efforts, and general
economic conditions. The average age of
our receivables affects the stability of delinquency and loss rates of the portfolio.
The following table presents, as of February 28, 2009, an aging of each of
our three portfolios:
|
|
CLST Asset I
|
|
CLST Asset II
|
|
CLST Asset III
|
|
|
|
Principal Balance
|
|
% of
Total
|
|
Principal Balance
|
|
% of
Total
|
|
Principal Balance
|
|
% of
Total
|
|
Receivables Aging (Principal)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current 0-30 Days
|
|
$
|
36,907,616
|
|
97.1
|
%
|
$
|
5,383,321
|
|
106.9
|
%
|
$
|
3,049,980
|
|
91.1
|
%
|
31 - 60 Days
|
|
669,470
|
|
1.8
|
%
|
|
|
0.0
|
%
|
131,499
|
|
3.9
|
%
|
61 - 90 Days
|
|
490,057
|
|
1.3
|
%
|
|
|
0.0
|
%
|
143,143
|
|
4.3
|
%
|
91 + 120
|
|
378,729
|
|
1.0
|
%
|
|
|
0.0
|
%
|
93,021
|
|
2.8
|
%
|
120+
|
|
846,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Purchase Discounts
|
|
(648,494
|
)
|
-1.7
|
%
|
(444,137
|
)
|
-8.8
|
%
|
(106,107
|
)
|
-3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Fees
|
|
200,889
|
|
0.5
|
%
|
97,314
|
|
1.9
|
%
|
35,553
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
(846,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,998,267
|
|
100.0
|
%
|
$
|
5,036,498
|
|
100.0
|
%
|
$
|
3,347,089
|
|
100.0
|
%
|
An account is
contractually delinquent if we do not receive the monthly payment by the
specified due date. After accounts are delinquent for 120 days, a provision
(reserve) is made for the account balance.
As of
February 28, 2009, the allowance for doubtful accounts recorded
for CLST Asset I is $0.8 million. The
allowance for CLST Asset I is expensed in provision for doubtful accounts. For CLST Asset III, delinquent receivables
are contractually charged against the Companys debt incurred to acquire CLST
Asset III.
Contractual Obligations
. We have an agreement with one employee to assist
with the final wind down of our historic business. Under the agreement, the
employee is to receive base salary as well as a bonus upon the completion of
certain objectives during the liquidation process. The maximum payment
remaining under this agreement at February 28, 2009 is $68,000, and we
expect to pay this amount out of our available cash. If we abandon our plan of liquidation and
dissolution, our obligations to this employee will continue.
Included in accounts payable at February 28,
2009, is approximately $14.2 million associated with liabilities which accrued
in periods 2002 and earlier. The Company now believes it has a variety of
defenses to some or all these liabilities, including defenses based upon the
running of statutes of limitations. The Company is reviewing these liabilities,
and considering appropriate steps to resolve them. The Company expects that the
liabilities may be resolved at less than the book value thereof, but can not
provide assurances as to the amount or timing of any adjustments.
22
Table of
Contents
New
Accounting Pronouncements
Footnote 1 of the Notes to
the Consolidated Financial Statements, included in the Companys Annual Report
on Form 10-K/A for the fiscal year ended November 30, 2008, includes
a summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. There were no changes
during the year ended November 30, 2008, to the significant accounting
policies used in the preparation of our Consolidated Financial Statements.
Accounting Pronouncements Not Yet Adopted
In September 2006,
the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a market-based framework or hierarchy for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157 is applicable
whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value. SFAS 157 does not expand or require
any new fair value measures; however the application of this statement may
change current practice. The requirements of SFAS 157 became effective for us December 1,
2008. However, in February 2008 the FASB decided that an entity need not
apply this standard to nonfinancial assets and liabilities that are recognized
or disclosed at fair value in the financial statements on a nonrecurring basis
until the subsequent year. Accordingly, our adoption of this standard on December 1,
2008 was limited to financial assets and liabilities and did not have a
material effect on our financial condition or results of operations. We are
still in the process of evaluating this standard with respect to its effect on
nonfinancial assets and liabilities and therefore have not yet determined the
impact that it will have on our financial statements upon full adoption.
In December 2007, the
FASB released Statement No. 141 R, Business Combinations (
SFAS 141R
), which establishes
principles for how the acquirer shall recognize acquired assets, assumed
liabilities and any non-controlling interest in the acquiree, recognize and
measure the acquired goodwill in the business combination, or gain from a
bargain purchase, and determines disclosures associated with financial
statements. This statement replaces SFAS 141 but retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. The requirements of
SFAS 141R apply to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Early application is not permitted.
From time to time, new accounting pronouncements are issued by the FASB
or other standards setting bodies which we adopt as of the specified effective
date. Unless otherwise discussed, our management believes the impact of
recently issued standards which are not yet effective will not have a material
impact on our consolidated financial statements upon adoption.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
This
information has been omitted as our Company qualifies as a smaller reporting
company.
Item
4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and procedures designed
to ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms
and include controls and procedures designed to ensure that information we are
required to disclose in such reports is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as defined in Rules 13a-15(e) and
15(d)-15(e) promulgated under the Exchange Act, as of the end of the
period covered by this Quarterly Report on Form 10-Q/A. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer has
concluded that, as of the end of the period covered by this Quarterly Report on
Form 10-Q/A, our disclosure controls and procedures are not effective
because we failed to include a clear conclusion with respect to the
effectiveness of the Companys internal control over financial reporting in the
Managements Report on Internal Control Over Financial Reporting in our
Original Form 10-Q. We remedied this failure in the effectiveness of our
disclosure controls and procedures by amending our Original Form 10-Q to
include a clear conclusion regarding the effectiveness of the Companys
internal control over financial reporting. We have implemented additional
controls and procedures designed to ensure that the disclosure provided by the
Company meets the then current requirements of the applicable filing made under
the Exchange Act.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during
the three months ended February 28, 2009 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting. The significant deficiencies reported in our Annual Report on Form 10-K/A
for the fiscal year ended November 30, 2008.
23
Table of
Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In December 2008,
the Red Oak Group, by a telephone call from David Sandberg to Robert Kaiser,
approached our Board of Directors about its interest in making a minority
investment in the Company and obtaining control of the Company. Our Board
responded by suggesting that the Red Oak Group and the Company discuss the Red
Oak Groups desire to make a minority investment and obtain control after the
Company had filed its annual report with the SEC and made its results of
operations available to stockholders. On January 15, 2009, the Red
Oak Group acquired 5,000 shares of our common stock in secondary market and privately
negotiated transactions. On or about January 30, 2009, the Red Oak
Group requested that the Company provide a stockholder list and security
position listings which it said it would use to make a tender offer. On February 3,
2009, the Red Oak Group announced its plan to commence a tender offer to
acquire up to 70% of our outstanding shares of common stock at $0.25 per
share. On February 5, 2009, we adopted a stockholder rights plan
which became effective on February 16, 2009. Stating as its reason
the Companys Rights Plan, the Red Oak Group announced on February 9, 2009
that it had abandoned its intention to make a tender offer. Nevertheless,
the Red Oak Group continued through February 13, 2009 to acquire shares of
our common stock in the secondary market and privately negotiated transactions
resulting in its beneficial ownership of 4,561,554 shares of our common stock,
according to the Red Oak Groups Schedule 13D filed with the SEC, representing
approximately 19.05% of our outstanding common stock as of the record date. The
Red Oak Group made its purchases of our common stock in open-market and
privately negotiated transactions, and not by means of tender offer materials
filed with the SEC. The Company alleges in the Federal Court Action discussed
below that by doing so, the Red Oak Group unlawfully deprived our stockholders
of the benefits of federal law regulating tender offers and such accumulations
of common stock. Among the consequences of this course of action is that
the Company and third parties were unable to make competing, superior proposals
to stockholders, and stockholders were deprived of the information that
complying with federal tender offer rules requires they receive.
On February 13,
2009, we filed a lawsuit in the United States District Court for the Northern
District of Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and David
Sandberg (the
Federal
Court Action
). Our Original Complaint and Application for
Injunctive Relief alleges that Red Oak Fund, L.P., Red Oak Partners, LLC, and
David Sandberg have engaged in numerous violations of federal securities laws
in making purchases of our common stock and sought to enjoin any future
unlawful purchases of our stock by them, their agents, and persons or entities
acting in concert with them. We believe the Red Oak Group violated federal
securities laws as follows:
(i)
violating Rule 14(e)-5 of the
Exchange Act by not truly abandoning its tender offer and instead directly or
indirectly purchasing or arranging to purchase shares not in connection with
its tender offer and without complying with the procedural, disclosure and
anti-fraud requirements applicable to tender offers regulated under Section 14
of the Exchange Act;
(ii)
violating Exchange Act Rule 14d-5(f) by
failing to return the Companys stockholder list, which we provided to Red Oak
upon its request, and by using such list for a purpose other than in connection
with the dissemination of tender offer materials in connection with its tender
offer;
(iii)
violating Exchange Act Rule 14(d)-10 by
purchasing shares pursuant to its tender offer at varying prices rather than
paying consideration for securities tendered in the tender offer at the highest
consideration paid to any stockholder for securities tendered; and
(iv)
violating Section 13(d) of the
Exchange Act by not timely filing a Schedule 13D and disclosing the information
required therein.
On March 2, 2009,
certain members of the Red Oak Group and Jeffrey S. Jones (
Jones
) filed a
derivative lawsuit against Robert A. Kaiser, Timothy S. Durham, and David
Tornek in the 134th District Court of Dallas County, Texas (the
State Court Action
).
The petition alleges that Messrs. Kaiser, Durham, and Tornek entered into
self-dealing transactions at the expense of the Company and its stockholders
and violated their fiduciary duties of loyalty, independence, due care, good
faith, and fair dealing. The petition asks the Court to order, among other
things, a rescission of the alleged self-interested transactions by Messrs. Kaiser,
Durham, and Tornek; an award of compensatory and punitive damages; the removal
of Messrs. Kaiser, Durham, and Tornek from the Board; and that the Company
hold an Annual Meeting of stockholders, or that the Company appoint a
conservator to oversee and implement the dissolution plan approved by
stockholders in 2007.
On March 13, 2009,
we announced that we would hold our Annual Meeting of Stockholders on May 22,
2009 in Dallas, Texas, and that the close of business on April 2, 2009
would be the record date for the determination of stockholders entitled to
receive notice of, and to vote at, the Annual Meeting or any adjournments or
postponements thereof.
On March 18, 2009,
the Red Oak Group sent a letter to us demanding to inspect and copy certain of
our books and records. We have taken the position that the Red Oak Group
has not complied with state law requirements applicable to stockholders seeking
such information.
On March 19, 2009,
the Red Oak Group sent a letter to us stating its intention to put forth
several precatory proposals including stockholder votes for: approval to
proceed with the 2007 shareholder-approved plan of dissolution; approval of the
November 10, 2008 transaction whereby CLST Asset I, LLC, a wholly owned
subsidiary of CLST Financo, Inc., which is one of CLSTs direct, wholly
owned subsidiaries, entered into a purchase agreement to acquire all of the
outstanding equity interests of FCC Investment Trust 1 from a third party for
approximately $41.0 million; approval of the 2008 Long Term Incentive Plan
pursuant to which the Board approved the new issuance to themselves of up to 20
million shares of common stock, or just over 97% of the common stock
outstanding at the time this plan was approved; approval of the December 12,
2008 transaction whereby CLST Asset Trust II, a newly formed trust wholly owned
by CLST Asset II, LLC, a wholly owned subsidiary of CLST Financo, Inc.
entered into a purchase agreement, effective as of December 10, 2008, to
acquire (i) on or before February 28, 2009 receivables of at least $2
million, subject to certain limitations and (ii) from time to time certain
other receivables, installment sales contracts and related assets; and approval
of the February 13, 2009 transaction whereby CLST Asset III, LLC, a newly
formed, wholly owned subsidiary of CLST Financo, Inc., which is one of
CLSTs direct, wholly owned subsidiaries, purchased certain receivables,
installment sales contracts and related assets owned by Fair Finance Company,
which is partly owned by Timothy S. Durham, an officer and director of CLST. On
the same day, the Red Oak Group sent a letter to us stating its intention to
nominate a slate of directors to our Board of Directors.
On April 6, 2009, we
notified the Red Oak Group that our Board rejected the Red Oak Groups
nominations for Class I and Class II seats, as the nominations were
not in accordance with our certificate of incorporation. In addition, we
also rejected the Red Oak Groups proposals because they were not proper in
form or substance under federal and state law to come before an Annual
Meeting. We offered to discuss the Red Oak Groups concerns, director
nominations, and stockholder proposals provided that (1) the Red Oak Group
and the Company enter into a confidentiality and standstill agreement, (2) the
Red Oak Group appropriately make publicly available disclosures regarding its
rapid accumulation of the Companys shares and its intentions to acquire
control of the Company that are required by the federal securities laws,
including in a Report on Schedule 13D, and (3) the Red Oak Group not vote
the shares that the Company believes it to have acquired in violation of
applicable law, including the tender offer rules and other rules regulating
such accumulation of shares under the federal securities laws, at the Annual
Meeting.
On April 6, 2009, we
filed our First Amended Complaint and Application for Injunctive Relief in the
Federal Court Action against defendants Red Oak Fund, L.P., Red Oak Partners,
LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund LLLP, and Bear
Market Opportunity Fund, L.P. alleging the same and other violations of federal
securities laws, including:
(i)
filing a materially false and misleading
Schedule 13D and failing to amend the same after delivering to the Company a
Notice of Director Nominations and proposal for business at the Annual Meeting;
(ii)
violating Section 14(d) of the
Exchange Act by engaging in fraudulent, deceptive and manipulative acts in
connection with its tender offer by failing to abide by Section 14(d)s
timing requirements and by failing to make required filings with the SEC; and
(iii)
that any attempt to solicit proxies from our
stockholders with respect to director nominations or notice of business would
be misleading in light of the defendants illegal activities in accumulating
Company stock.
Through this lawsuit, we
seek to obtain various declaratory judgments that the defendants have failed to
comply with federal securities laws and to enjoin the defendants from, among
other things, further violating federal securities laws and from voting any and
all shares or proxies acquired in violation of such laws. Also on April 6,
2009, because, among other reasons, we do not expect the litigation, which
bears directly upon our Annual Meeting of stockholders, to be resolved for some
months, our Board postponed the Annual Meeting of stockholders previously
scheduled for May 22, 2009 until September 25, 2009. On August 14,
2009, our Board again postponed the Annual Meeting of stockholders from September 25,
2009 to October 27, 2009.
On April 15, 2009,
the Red Oak Group submitted another letter to the Company, providing additional
information regarding the stockholder proposals it intends to bring before the
Annual Meeting and revising those proposals to: request the Board to complete
the dissolution approved at the stockholder meeting held in 2007; advise the
Board that the stockholders do not approve of the transaction purportedly
entered into as of November 10, 2008 whereby CLST Asset I, LLC, a wholly
owned indirect subsidiary of the Company, entered into a purchase agreement to
acquire the outstanding equity interest in FCC Investment Trust I and request
the directors to take any available and appropriate actions; disapprove the
2008 long term incentive plan adopted by the Board and request the Board not to
issue any additional share grants or option grants under such plan and request
that the directors rescind their approval of such plan; advise the Board that
the stockholders disapprove of the transaction purportedly entered into as of December 12,
2008 pursuant to which CLST Asset Trust II, an indirect wholly owned subsidiary
of the corporation, entered into a purchase agreement to acquire certain
receivables on or before February 28, 2009 and request the directors to
take any available and appropriate actions; and advise the Board that the
stockholders disapprove of the transaction purportedly entered into as of February 13,
2009 whereby CLST Asset III, LLC, an indirect wholly owned subsidiary of the
Company purchased certain receivables, installment contracts and related assets
owned by Fair Finance Company and request the directors to take any available
and appropriate actions.
On April 30, 2009,
the Red Oak Group and Jones amended their petition in the State Court
Action. In addition to the relief already requested, the petition sought
to compel the Company to hold its 2008 and 2009 annual stockholders meetings
within sixty days; to enjoin Messrs. Kaiser, Durham, and Tornek from any
interference or hindrance of such meetings or the election of directors; to
enjoin Messrs. Kaiser, Durham, and Tornek from voting any shares of stock
acquired in the alleged self-interested transactions; and to appoint a special
master. On June 3, 2009 and again on June 12, 2009, pursuant to
court order, Red Oak Partners, LLC, Pinnacle Fund, LLLP, Red Oak Fund, LP, and
Jeffrey S. Jones amended their petition in the State Court Action to, among
other things, remove Bear Market Opportunity Fund, L.P. as a plaintiff and add
Red Oak Fund, L.P. as a plaintiff.
On May 5, 2009, the
Red Oak Group and Jones filed a motion in the State Court Action seeking to
compel the Company to hold its 2008 and 2009 stockholders meetings on June 30,
2009 and to appoint a special master and requested an expedited hearing on
both. Hearings were held on May 8, 2009 and May 29, 2009, but
no ruling was reached.
On July 24, 2009, we
filed our Brief in Support of Application for Preliminary Injunction in the
Federal Court Action. The Red Oak Group filed its Opposition on August 7,
2009, and we filed our Reply Brief in Support on August 14, 2009.
On August 24, 2009,
the Red Oak Group resubmitted its director nomination letter and its letter
stating its intention to put forth the stockholder proposals, as mentioned in
the March 19, 2009 and April 15, 2009 letters.
On August 25, 2009,
the Court in the State Court Action set an evidentiary hearing on the
plaintiffs Application for Temporary Injunction, which had yet to be filed,
for October 7 and 8, 2009. The plaintiffs request for injunctive relief
concerned Messrs. Kaiser, Durham, and Tornek voting any shares of stock
acquired in the alleged self-interested transactions.
On August 28, 2009,
the parties to the State Court Action executed a Stipulation Regarding the
Companys Annual Meeting of Stockholders (
Stipulation
). The Court approved the
Stipulation the same day and entered an Order identical to the Stipulations
terms. Pursuant to the Stipulation, absent a determination by the Court
of good cause shown, the Company must hold its annual stockholders meeting for
the election of one Class I director and one Class II director and
consideration of any properly submitted proposals that are proper subjects for
consideration at an annual meeting on October 27, 2009, with a record date
for that meeting of September 25, 2009. Good cause for delaying the
Annual Meeting beyond October 27, 2009, and correspondingly amending the September 25,
2009 record date, includes among other things, situations where reasonable
delay is necessary: (1) for the Board to avoid breaching any of their
fiduciary duties to the Company or the Companys stockholders; (2) to
assure compliance with the Companys certificate of incorporation and bylaws; (3) for
the Company or the Board to comply with state or federal law; or (4) to
assure compliance with any order of any court or regulatory authority having
jurisdiction over the Company or members of its Board.
We received a letter dated September 22,
2009 from the Red Oak Group seeking, pursuant to Section 220 of the
Delaware General Corporation Law, to inspect the books and records of the
Company, including among other things a stockholder list as of the record date.
The letter states that the purpose of such request is to enable the Red Oak
Group to solicit proxies to elect directors at the 2009 Annual Meeting and to
communicate with stockholders. Our counsel responded by letter dated September 30,
2009 that the Company was aware of its obligations under Section 220 of
the Delaware General Corporation Law but believed that the demand letter did
not comply with the inspection requirements under Section 220. We received
another letter dated September 29, 2009 from the Red Oak Group pursuant to
Section 220 of the Delaware General Corporation Law in which the Red Oak
Group requests to inspect the books and records of the Company pertaining to,
among other things, all analyses performed with respect to our net operating
losses and a list of all business ventures and dealings Messrs. Tornek and
Durham have evaluated or commenced in the past ten years and a list of all
investments they currently share. Our counsel responded by letter dated October 6,
2009 that (i) the commencement of the Red Oak Groups derivative action
bars it from using a Section 220 demand as a substitute for discovery
permissible in litigation; (ii) the stated purposes of the demand letter
do not constitute proper purposes under Section 220; and (iii) the
scope of information requested in the demand letter is overly broad and not
limited to books and records that are essential and sufficient to accomplish
the Red Oak Groups stated purposes.
The evidentiary hearing
for the State Court Action was held October 7 and 8, 2009. On October 9,
2009, the Court denied Plaintiffs application for injunctive relief, which
sought to enjoin Messrs. Kaiser, Durham, and Tornek from voting certain
shares at the CLST annual shareholders meeting currently scheduled for October 27,
2009. Further, the Court granted Defendants plea to the
jurisdiction, granted Defendants motion to disqualify Plaintiffs, and
dismissed Plaintiffs derivative claims. Beyond that, the Court granted
Defendants amended motion to stay, thereby staying all remaining direct claims
asserted by Plaintiffs. Defendants motion to disqualify Plaintiffs
was based on Plaintiffs lack of adequacy to pursue derivative claims on the
following grounds: (1) that Red Oak improperly brought derivative claims
to advance its own personal interests; (2) that Red Oak had engaged in
illegal conduct by violating federal securities laws; and (3) that Jones
was only a tag-along plaintiff and therefore suffered the same adequacy
problems as Red Oak, the driving force behind the State Court Action. The
Court reached each of these rulings after the two-day evidentiary hearing.
On October 14, 2009,
the Court denied the Companys application for preliminary injunction in the
Federal Court Action. The Federal Court Action remains pending.
On October 15, 2009,
we applied to the Court, on an emergency basis, for an order to: (1) reopen
this case for the limited purpose of modifying the Courts Order Regarding
Annual Meeting of Stockholders entered on August 28, 2009 (the
Annual Meeting Order
); (2) modify
its Annual Meeting Order to prevent CLST from alternatively being in violation
of (a) federal securities law, Delaware statutory law, and its Bylaws or (b) the
Annual Meeting Order; (3) nullify the current September 25, 2009
record date; and (4) grant an emergency hearing as soon as possible.
A hearing was held on CLSTs emergency motion on October 16, 2009.
The Court continued the hearing until a time agreeable to the parties and the
Court on or before October 26, 2009.
The Company has expended
a significant amount of management time and resources in connection with
Federal Court Action and the State Court Action. The Company has had settlement
discussions with certain of the plaintiffs regarding the Federal Court Action
and the State Court Action. The Company may have further settlement
discussions in the future. No assurance can be given that any settlement
agreement could be reached if the Company undertakes further discussions or if
a settlement agreement is entered into that the terms of any such settlement
would not have a material adverse effect on the Company, its financial position
or its results of operations.
Item 1A. Risk Factors
For
risk factors, please refer to Item 1A, Risk Factors, of our Annual Report on Form 10-K/A
for the fiscal year ended November 30, 2008.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
On February 13, 2009, we issued 2,496,077 shares
of Common Stock in connection with our purchase of assets owned by Fair, of
which 1,969,077 shares of Common Stock were issued to Fair, 452,000 shares of
Common Stock were issued to Timothy S. Durham, Chief Executive Officer and
Director of Fair and an officer, director and stockholder of our Company, and
75,000 shares of Common Stock were issued to James F. Cochran, Chairman and
Director of Fair. The issuance of these shares constituted a portion of the
consideration paid for the assets of Fair, and the shares were deemed to have a
value of $0.36 per share. The shares of Common Stock were issued by us in a
transaction exempt from registration pursuant to Section 4(2) of the
Securities Act.
Also, on December 1, 2008,
our Board
approved the grant of
900,000
shares of restricted Common Stock for no cash consideration to our directors as
compensation for services during the fiscal year ended November 30, 2008.
We granted 300,000 shares of restricted Common Stock to each of Timothy S.
Durham, Robert A. Kaiser and Manoj Rajegowda. Subsequently on
March 5,
2009, our Board approved the grant of 300,000 shares of restricted stock
for no cash consideration
to David
Tornek
in connection
with his appointment as a director.
The shares of Common Stock were issued by us in
transactions exempt from registration pursuant to Section 4(2) of the
Securities Act. On February 24, 2009, Mr. Rajegowda forfeited all
option issuances provided to him during the
24
Table of
Contents
course
of his Board membership in connection with his resignation from the Board. See Item
9B, other informationResignation of Director in our Annual Report on Form 10-K/A
for the fiscal year ended November 30, 2008.
Item 3. Defaults
Upon Senior Securities
Not
applicable.
Item 4. Submission
of Matters to a Vote of Security Holders
We did
not submit any matters to a vote of security holders in the first quarter of
2009.
Item 5. Other Information
Not
applicable.
25
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
|
|
CLST
Holdings, Inc. 2008 Long Term Incentive Plan.
|
|
Previously filed as an
exhibit to a
Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 5, 2008
, and incorporated herein by reference.
|
|
|
|
|
|
10.2
|
|
Form of
Restricted Stock Award Agreement under the CLST Holdings, Inc. 2008 Long
Term Incentive Plan.
|
|
Previously filed as an
exhibit to our companys Annual Report Form on Form 10-K for the
fiscal year ended November 30, 2008 and incorporated herein by
reference.
|
|
|
|
|
|
10.3
|
|
Purchase
Agreement, effective as of December 10, 2008, by and between
SSPE Investment Trust I, SSPE, LLC
, and CLST
Asset Trust II.
|
|
Previously filed as an
exhibit to a
Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on March 5, 2009
, and incorporated herein by reference.
|
|
|
|
|
|
10.4
|
|
Second
Amended and Restated Revolving Credit Agreement, effective as of December 10,
2008, by and between Summit Consumer Receivables Fund, L.P., as originator, Summit
Alternative Investments, LLC, as servicer, SSPE, LLC, as LLC borrower, SSPE
Investment Trust I, as trust borrower, CLST Asset Trust II, as Trust II
borrower, Summit Consumer Receivables Fund, L.P., as guarantor, Eric J.
Gangloff, as guarantor, Fortress Credit Corp., as lender and administrative
agent, U.S. Bank National Association, as collateral custodian, and Lyon
Financial Services, Inc, as backup servicer.(1)
|
|
Previously filed as an
exhibit to a
Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on March 5, 2009, and on the date of
this Form 10-Q/A
,
and incorporated herein by reference.
|
26
Table of
Contents
10.5
|
|
Letter
Agreement, effective as of December 10, 2008, by and between CLST Asset
Trust II, CLST Financo, Inc., Summit Consumer Receivables Fund, L.P.,
Summit Alternative Investments, LLC, SSPE, LLC, SSPE Investment Trust I, and
Eric J. Gangloff.
|
|
Previously filed as an
exhibit to a
Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on March 5, 2009
, and incorporated herein by reference.
|
|
|
|
|
|
10.6
|
|
Purchase Agreement between
Drawbridge Special Opportunities Fund LP and CLST Asset I, LLC, dated November 10,
2008.
|
|
Previously filed as an exhibit to a
Current
Report on Form 8-K/A filed with the Securities and Exchange Commission
on March 5, 2009
,
and incorporated herein by reference.
|
|
|
|
|
|
10.7
|
|
Credit
Agreement by and among FCC Finance LLC, as the servicer, FCC Investment Trust
I, as the borrower, Fortress Credit Co LLC, as a lender and the
administrative agent, U.S. Bank National Association, as the collateral
custodian, and Lyon Financial Services, Inc., d/b/a/ U.S. Bank Portfolio
Services, as the backup servicer, dated November 10, 2008.(1)
|
|
Previously filed as an
exhibit to a
Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on March 5, 2009, and on the date of
this Form 10-Q/A
,
and incorporated herein by reference.
|
|
|
|
|
|
31.1
|
|
Certification of the
Chief Executive Officer 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.
|
|
|
|
|
|
99.1
|
|
Letter
from Richards, Layton, & Finger P.A., legal counsel to Mr. Manoj
Rajegowda, dated February 24, 2009.
|
|
Previously filed as an
exhibit to our companys Annual Report Form on Form 10-K/A for the
fiscal year ended November 30, 2008 and incorporated herein by
reference.
|
|
Management contract,
compensatory plan or arrangement.
|
(1)
|
Portions of this
exhibit have been omitted pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission.
|
27
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)
|
|
|
|
|
November 4, 2009
|
|
28
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