Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended May 31, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to
Commission File Number 0-22972
CLST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
75-2479727
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
17304
Preston Road, Dominion Plaza, Suite 420
|
|
|
Dallas,
Texas
|
|
75252
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
(972) 267-0500
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
o
No
x
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). * Yes
o
No
o
* The registrant is not
subject to the requirements of Rule 405 of Regulation S-T at this time.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
(Do not check if a smaller
reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act.). Yes
o
No
x
On July 13,
2009, there were 23,949,282
outstanding
shares of common stock, $0.01 par value per share.
Table of Contents
EXPLANATORY
NOTE
We are filing this Amendment No. 2 on Form 10-Q/A
(
Form 10-Q/A
)
to our Quarterly Report on Form 10-Q for the quarterly period ended May 31,
2009 originally filed with the Securities and Exchange Commission (the
SEC
) on July 14, 2009 (the
Original Form 10-Q
),
as amended by Amendment No. 1 on Form 10-Q/A filed with the SEC on November 5,
2009, in response to comments we have received from the SEC. For convenience, we have repeated the
Original Form 10-Q in its entirety.
This amendment
does not reflect events occurring after the filing of the Original Form 10-Q,
and does not modify or update the disclosures therein in any way other than as
required to reflect the matters described above.
CLST HOLDINGS, INC.
INDEX TO FORM 10-Q/A
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)
|
|
May 31,
|
|
November 30,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
5,940
|
|
$
|
9,754
|
|
Notes receivable, net -
current
|
|
8,865
|
|
8,698
|
|
Accounts receivable -
other
|
|
1,366
|
|
893
|
|
Prepaid expenses and
other current assets
|
|
177
|
|
177
|
|
Total current assets
|
|
16,348
|
|
19,522
|
|
|
|
|
|
|
|
Notes receivable, net -
long-term
|
|
36,875
|
|
31,547
|
|
Property and equipment,
net
|
|
10
|
|
12
|
|
Deferred income taxes
|
|
4,786
|
|
4,786
|
|
Other assets
|
|
990
|
|
863
|
|
|
|
$
|
59,009
|
|
$
|
56,730
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Loan payable - current
|
|
$
|
7,839
|
|
$
|
7,436
|
|
Notes payable - related
parties
|
|
378
|
|
|
|
Accounts payable
|
|
14,628
|
|
14,512
|
|
Income taxes payable
|
|
85
|
|
207
|
|
Accrued expenses
|
|
792
|
|
473
|
|
Total current
liabilities
|
|
23,722
|
|
22,628
|
|
|
|
|
|
|
|
Loans payable - long
term
|
|
28,437
|
|
26,902
|
|
Notes payable - related
parties
|
|
290
|
|
|
|
Total liabilities
|
|
52,449
|
|
49,530
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, $.01
par value, 5,000,000 shares authorized; none issued
|
|
|
|
|
|
Common stock, $.01 par
value, 200,000,000 shares authorized; 24,583,306 and 21,187,229 shares
issued, respectively, and 23,949,282 and 20,553,205 shares
outstanding, respectively
|
|
246
|
|
212
|
|
Additional paid-in
capital
|
|
126,985
|
|
126,034
|
|
Accumulated other
comprehensive incomeforeign currency translation adjustments
|
|
217
|
|
217
|
|
Accumulated deficit
|
|
(119,241
|
)
|
(117,616
|
)
|
|
|
8,207
|
|
8,847
|
|
Less: Treasury stock
(634,024 shares at cost)
|
|
(1,647
|
)
|
(1,647
|
)
|
|
|
6,560
|
|
7,200
|
|
|
|
|
|
|
|
|
|
$
|
59,009
|
|
$
|
56,730
|
|
See accompanying notes to unaudited consolidated financial statements.
3
Table of Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and six months ended May 31, 2009 and 2008
(unaudited)
(In thousands, except per share data)
|
|
Three months ended
|
|
Six months ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,645
|
|
$
|
|
|
$
|
3,175
|
|
$
|
|
|
Other
|
|
142
|
|
|
|
233
|
|
|
|
Total revenues
|
|
1,787
|
|
|
|
3,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing fees
|
|
76
|
|
|
|
382
|
|
|
|
Trust administrative
fees
|
|
3
|
|
|
|
4
|
|
|
|
Provision for doubtful
accounts
|
|
600
|
|
|
|
1,303
|
|
|
|
Interest expense
|
|
546
|
|
|
|
1,082
|
|
|
|
General and
administrative expenses
|
|
1,746
|
|
511
|
|
2,263
|
|
969
|
|
Operating loss
|
|
(1,184
|
)
|
(511
|
)
|
(1,626
|
)
|
(969
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
6
|
|
87
|
|
9
|
|
220
|
|
Total other income
|
|
6
|
|
87
|
|
9
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations before income taxes
|
|
(1,178
|
)
|
(424
|
)
|
(1,617
|
)
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
(6
|
)
|
|
|
8
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
(1,172
|
)
|
(424
|
)
|
(1,625
|
)
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of taxes of $5 for 2008
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,172
|
)
|
$
|
(424
|
)
|
$
|
(1,625
|
)
|
$
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
Discontinued
operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.07
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
23,344
|
|
20,553
|
|
22,314
|
|
20,553
|
|
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
Six months ended May 31, 2009 and 2008
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
other
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
paid-in
|
|
comprehensive
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
capital
|
|
income
|
|
deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
November 30, 2008
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(117,616
|
)
|
$
|
7,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,625
|
)
|
(1,625
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,625
|
)
|
Grant of restricted
stock
|
|
1,200
|
|
12
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
Cancellation of
restricted stock
|
|
(300
|
)
|
(3
|
)
|
|
|
|
|
3
|
|
|
|
|
|
|
|
Amortization of
restricted stock
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
86
|
|
Stock issuance for notes
receivable
|
|
2,496
|
|
25
|
|
|
|
|
|
874
|
|
|
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31,
2009
|
|
24,583
|
|
$
|
246
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,985
|
|
$
|
217
|
|
$
|
(119,241
|
)
|
$
|
6,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
November 30, 2007
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(115,953
|
)
|
$
|
8,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(734
|
)
|
(734
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31,
2008
|
|
21,187
|
|
$
|
212
|
|
(634
|
)
|
$
|
(1,647
|
)
|
$
|
126,034
|
|
$
|
217
|
|
$
|
(116,687
|
)
|
$
|
8,129
|
|
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended May 31, 2009 and 2008
(Unaudited)
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(1,625
|
)
|
$
|
(734
|
)
|
Adjustments to
reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Stock based
compensation
|
|
86
|
|
|
|
Provision for doubtful
accounts
|
|
1,303
|
|
|
|
Depreciation
|
|
2
|
|
|
|
Non-cash interest
expense
|
|
58
|
|
|
|
Amortization of notes
receivable acquisition costs
|
|
56
|
|
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
Accounts receivable -
other
|
|
(809
|
)
|
5,161
|
|
Prepaid expenses and
other current assets
|
|
|
|
311
|
|
Other assets
|
|
(185
|
)
|
271
|
|
Accounts payable
|
|
116
|
|
164
|
|
Income taxes payable
|
|
(122
|
)
|
|
|
Accrued expenses
|
|
319
|
|
(613
|
)
|
|
|
|
|
|
|
Net cash provided by
(used in) operating activities
|
|
(801
|
)
|
4,560
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Purchases of property
and equipment
|
|
|
|
(3
|
)
|
Notes receivable
collections
|
|
5,663
|
|
|
|
Acquisition of notes
receivable
|
|
(4,028
|
)
|
|
|
Additions to notes
receivable acquisition costs
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by
(used in) investing activities
|
|
1,484
|
|
(3
|
)
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Payments on notes
payable
|
|
(4,497
|
)
|
|
|
|
|
|
|
|
|
Net cash used in
financing activities
|
|
(4,497
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease)
in cash and cash equivalents
|
|
(3,814
|
)
|
4,557
|
|
Cash and cash
equivalents at beginning of period
|
|
9,754
|
|
11,799
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
5,940
|
|
$
|
16,356
|
|
|
|
|
|
|
|
Non-Cash Investing and
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of notes
receivable for common stock
|
|
$
|
899
|
|
$
|
|
|
|
|
|
|
|
|
Acquisition of notes
receivable for debt
|
|
$
|
7,273
|
|
$
|
|
|
|
|
|
|
|
|
Acquisition of notes
receivable for accounts receivable, other
|
|
$
|
336
|
|
$
|
|
|
|
|
|
|
|
|
Returned notes receivable
in exchange for reduction of debt
|
|
$
|
170
|
|
$
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
Table of
Contents
CLST HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary
of Significant Accounting Policies
(a)
Basis for Presentation
Although the interim
consolidated financial statements of CLST Holdings, Inc., formerly
CellStar Corporation, and subsidiaries (the
Company
)
are unaudited, Company management is of the opinion that all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results have been reflected therein. Net income (loss) for
any interim period is not necessarily indicative of results that may be
expected for any other interim period or for the entire year.
On November 10,
2008, we purchased all of the outstanding equity interests of FCC Investment
Trust I (
Trust I
), and on December 12,
2008 we purchased
certain receivables, installment sales contracts and
related assets owned by
SSPE
Investment Trust I and SSPE, LLC. Subsequently, on February 13, 2009, we
purchased assets owned by Fair Finance Company, an Ohio corporation (
Fair
), James F. Cochran,
Chairman and Director of Fair, and by Timothy S. Durham, Chief Executive
Officer and Director of Fair and an officer, director and stockholder of our
Company. Messrs. Durham and Cochran own all of the outstanding equity of
Fair. The Board of Directors (the
Board
)
believes that each of these acquisitions will be a better investment return for
our stockholders when compared to the recent changes to interest rates and
other investment alternatives. Although we are now engaged in the business of
holding and collecting consumer notes receivable, we have not abandoned our
plan of dissolution. We believe that should we decide that continuing with the
plan of dissolution is in the best interest of our stockholders, we will be
able to dispose of these assets on favorable terms prior to the time that we
would be in a position to make a final distribution to stockholders and terminate
our corporate existence.
The Company has reclassified to discontinued
operations, for all periods presented, the results and related charges for the
North American and Latin American Regions. (See footnote 2.)
(b)
Notes Receivable
Notes receivable are
recorded at the historical cost paid at the date of acquisition net of any
purchase discounts. Subsequent to the date of acquisition, notes receivable are
reduced by any principal payments made by the customer. Purchase discounts are
recorded based on the negotiated difference between the face value and the
amount paid for the notes receivable. Purchase discounts are recognized as
revenue, using the effective interest method, as principal payments are
collected.
The Company establishes
an allowance for doubtful accounts for receivables where the customer has not
made a payment for the most recent 120 day period. The Company specifically analyzes notes
receivable using historical activity, current economic trends, changes in its
customer payment terms, recoveries of previously reserved notes and collection
trends when evaluating the adequacy of its allowance for doubtful accounts. Any
change in the assumptions used in analyzing a specific note receivable may
result in an additional allowance for doubtful accounts being recognized in the
period in which the change occurs. The
Company may from time to time make additional increases to the allowance based
on the foregoing factors. Once a note receivable has been reserved due to
nonpayment, the Company will no longer accrue, for financial reporting
purposes, interest earned on the note receivable. Should the note receivable
return to a performing status, then the Company will resume accruing interest
on the note receivable. The majority of the notes receivable have collateral in
various forms, which may include a second lien position on the 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.
7
Table of Contents
The
following table details the activity in the allowance for doubtful accounts for
the three months ended May 31, 2009 and the six months ended May 31,
2009:
|
|
Three
Months
Ended May
31, 2009
|
|
Six Months
Ended May
31, 2009
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
847,000
|
|
$
|
144,000
|
|
Additions to allow for doubtful accounts
|
|
600,000
|
|
1,303,000
|
|
Recoveries
|
|
|
|
|
|
Charge offs
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,447,000
|
|
$
|
1,447,000
|
|
(c) Revenue Recognition
Revenues consist of
interest earned, late fees and other miscellaneous charges. Revenues are not
accrued on accounts over 120 days without payment activity, unless payment
activity resumes.
(d) Deferred Costs
We
have recorded acquisition costs related to the purchase of certain notes
receivables and deferred loan costs associated with certain Company
obligations. The acquisition costs are amortized over the remaining principal
balance of the notes receivable and are recorded as contra revenue. The
deferred loan costs are amortized over the remaining outstanding balance of the
Company obligation and are recorded in operating interest expense. Any impact
of prepayment of the balances by either the Company or our customers would be
recognized in the period of prepayment.
(2) Discontinued
Operations
During fiscal year
2007 we sold all of our U.S. operations, including our Miami-based Latin
American operations, Mexico operations and Chile operations. For more
information on these transactions, please see the Companys Annual Report on Form 10-K/A
for the year ended November 30, 2008.
The results of discontinued
operations for U.S., Miami, Mexico and Chile for the three and six months ended
May 31, 2009 and 2008, are as follows (in thousands):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Loss on sale of accounts
receivable
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
Gain on transactions
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
15
|
|
Total other income
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued
operations
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
10
|
|
8
Table of Contents
(3) Stock-Based
Compensation
On December 1,
2008, our Board approved the Companys 2008 Long Term Incentive Plan. The
following is a brief description of the material terms of the 2008 Long Term
Incentive Plan:
·
The plan is administered by the Board of the Company.
·
The plan permits the grant of restricted stock, stock
options and other stock-based awards to employees, officers, directors,
consultants and advisors of the Company and its subsidiaries.
·
The aggregate number of shares of Common Stock of the
Company that may be issued under the plan is 20,000,000 shares.
·
The plan provides that the administrator of the plan
may determine the terms and conditions applicable to each award and each award
will be evidenced by a stock option agreement or restricted stock agreement.
·
The plan will terminate on December 1, 2018.
In addition, on December 1,
2008 the Board approved the grant of 300,000 shares of restricted stock to each
of Timothy S. Durham, Robert A. Kaiser and Manoj Rajegowda. On February 24,
2009, Mr. Rajegowda forfeited all stock issuances provided to him during
the course of his Board membership in connection with his resignation from the
Board. On
March 5, 2009, our Board approved the grant of 300,000 shares of
restricted stock to David Tornek, our director who was appointed to fill the
vacancy on the Board
.
Of each restricted stock grant, 100,000
shares vested on the date of grant and the remaining 200,000 of the shares vest
in two equal annual installments on each anniversary of the date of grant. The
restricted stock grants will be evidenced by restricted stock agreements to be
approved by the Board. The total value of the awards using a grant date price
of $0.22 per share for 600,000 shares and $0.16 per share for 300,000 shares is
$180,000 and will be expensed over the vesting period.
For the three and
six months ended May 31, 2009, the Company recognized $31,000 and $86,000,
respectively, of expense related to the restricted stock grants.
(4) Acquisition
of new business
(a)
CLST Asset I
On November 10, 2008, we, through CLST Asset I,
LLC (
CLST Asset I
), a wholly
owned subsidiary of CLST Financo, Inc. (
Financo
), which is one of our direct, wholly owned
subsidiaries, entered into a purchase agreement to acquire all of the
outstanding equity interests of Trust I from a third party for approximately
$41.0 million (the
Trust I Purchase Agreement
).
Our Board unanimously approved the transaction. Our acquisition of Trust I was
financed by approximately $6.1 million of cash on hand and by a non-recourse,
term loan of approximately $34.9 million by an affiliate of the seller of Trust I, pursuant to the terms and
conditions set forth in the credit agreement, dated November 10, 2008,
among Trust I, the lender, FCC Finance, LLC (
FCC
),
as the initial servicer, the backup servicer, and the collateral custodian (the
Trust I Credit Agreement
). The
Company is now responsible for the collection of the receivables included in
the trust through its wholly owned subsidiary Financo.
The
repayment terms on the accounts are standardized, but are dependent on the form
of agreement used by the originator.
Customers are required to make monthly payments until the loans are paid
in full. At the time of purchase of the CLST Asset I portfolio, the remaining
time to maturity was in a range of 8-10 years, not including prepayments, if
any.
Financo has
historically conducted our financing business, including ownership of
receivables generated by our businesses and providing internal financing to our
other operating subsidiaries. Substantially all of the assets acquired by Trust
I consisted of a portfolio of home improvement consumer receivables, some of
which are collateralized or otherwise secured by interests in real estate. We
are engaging in the business of holding and collecting the receivables with the
intention of generating a higher rate of return on our assets than we currently
receive on our cash and cash equivalents balances. At the same time, we will
continue to review the relative benefits to our stockholders of continuing to
wind down our business pursuant to our plan of dissolution or continuing to do
business in one or more of our historic lines of business or related businesses
or in a new line of business. Although we are now engaged in the business of
holding and collecting consumer notes receivable, we have not abandoned our
plan of dissolution. We believe that should we decide that continuing with the
plan of dissolution is in the best interest of our stockholders, we will be
able to dispose of Trust I, if properly marketed, whether through the use of
reputable brokers or investment bankers, through an auction process or other
strategies for maximizing proceeds from an asset disposition, within the
timeframe necessary to complete the winding down of the Company prior to final
dissolution of the Company.
9
Table of
Contents
The cut-off date for the receivables acquired was October 31,
2008, with all collections subsequent to that date inuring to our benefit. As
of October 31, 2008, the portfolio consisted of approximately 6,000
accounts with an aggregate outstanding balance of approximately $41.5 million
and an average outstanding balance per account of approximately $6,900. These
loans are all home improvement, repair and other home related loans to
homeowners of which approximately 63% were secured with a second lien on the
property, with the remainder being unsecured.
Approximately 89% of the loans are in the Northeast with the remainder
in Texas, Georgia and Missouri. As of October 31,
2008, the weighted average interest rate of the portfolio was 14.4%.
We have the right to require the seller
to repurchase any accounts, for the original purchase price applicable to such
account, that do not satisfy certain specified eligibility requirements set out
in the Trust I Purchase Agreement as of the October 31, 2008 cut-off date.
If it is discovered by a party that a receivable account was not an Eligible
Receivable as of the cut-off date of October 31, 2008, the seller is
required to repurchase such receivable account unless such breach is remedied
within thirty business days of notice of such breach. An account is not an
Eligible Receivable if, as of October 31, 2008, such receivable account
is, among other things, a defaulted receivable, subject to litigation, dispute
or rights of rescission, setoff or counterclaim, or is not subject to a duly
recorded and perfected lien, the seller must repurchase the account. For the
quarterly period ended May 31, 2009, there had not been a determination
that any receivables failed to meet the eligibility requirements set out in the
Trust I Purchase Agreement.
When we purchased
Trust I, the historical default rate for the previous three years for our
portfolio was approximately 4%, which was the basis for assessing the
creditworthiness of the assets included in CLST Asset I.
The Trust I Credit
Agreement provides for a non-recourse, term loan of approximately $34.9
million, maturing on November 10, 2013. The term loan bears interest at an
annual rate of 5.0% over the LIBOR Rate (as defined in the Trust I Credit
Agreement). The obligations under the Trust I Credit Agreement are secured by a
first priority security interest in substantially all of the assets of Trust I,
including portfolio collections.
The Trust I Credit
Agreement provides the material terms and conditions for the services to be
performed by the servicer. In return, Trust I pays the servicer a monthly
servicing fee equal to 1.5%, per annum of the then aggregate outstanding
principal balance of the receivables.
Portfolio
collections are distributed on a monthly basis. Absent an event of default,
after payment of the servicing fee and other fees and expenses due under the
Trust I Credit Agreement and the required principal and interest payments to
the lender under the Trust I Credit Agreement, all remaining amounts from
portfolio collections are paid to Trust I and are available for distribution to
CLST Asset I and subsequently to Financo.
Principal payments
on the term loan are due monthly to the extent that the aggregate principal
amount of the term loan outstanding exceeds the sum of (a) the sum for
each outstanding receivable of the product of (1) 85%, (2) the then-current
aggregate unpaid principal balance of such receivable and (3) a percentage
specified in the Trust I Credit Agreement based upon the aging of such
receivable, and (b) amounts on deposit in the collection account for the
receivables net of any accrued and unpaid interest on the loan and fees due to
the servicer, the backup servicer, the collateral custodian and the owner
trustee (the
Maximum Advance Amount
).
Principal payments are also due within
five business days of any time that the aggregate principal amount of the term
loan outstanding exceeds the Maximum Advance Amount. The remaining outstanding
principal amount of the loan plus all accrued interest, fees and expenses are
due on the maturity date. Interest payments on the term loan are due monthly.
The Trust I Credit
Agreement contains customary covenants for facilities of its type, including
among other things covenants that restrict Trust Is ability to incur
indebtedness, grant liens, dispose of property, pay dividends, make certain
acquisitions or to take actions that would negatively affect Trust Is special
purpose vehicle status. Generally, these covenants do not impact the activities
that may be undertaken by the Company. The Trust I Credit Agreement contains
various events of default, including failure to pay principal and interest when
due, breach of covenants, materially incorrect representations, default under
certain other agreements of Trust I, bankruptcy or insolvency of Trust I, the
occurrence of an event which causes a material adverse effect on Trust I, the
occurrence of certain defaults by the servicer, entry of certain material
judgments against Trust I, and the occurrence of a change of control or certain
material events and the issuance of a qualified audit opinion with respect to
Trust Is financials.
In addition, an
event of default occurs if the three-month rolling average delinquent accounts
rate exceeds 10.0% or the three-month rolling average annualized default rate
exceeds 7.0%. If an event of default occurs, all of Trust Is obligations under
the Trust I Credit Agreement could be accelerated by the lender, causing the
entire remaining outstanding principal balance plus accrued and unpaid interest
and fees to be declared immediately due and payable.
The purchase price
of $41 million consisted of the following:
·
cash paid to the sellers in the amount of $6.1
million; and
·
debt financing of $34.9 million.
The following unaudited pro forma information
presents for the three and six months ended May 31, 2008, combined results
of operations of Trust I and the Company as if the acquisition had occurred on December 1,
2007. The unaudited pro forma results
are
10
Table of Contents
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 pro forma information was
prepared from the historical financial information of Trust I and the Company.
(unaudited, in thousands)
|
|
Pro
forma
|
|
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
|
|
ended
|
|
|
|
May 31,
|
|
May 31,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Interest income
|
|
$
|
2,111
|
|
$
|
4,222
|
|
Other
|
|
7
|
|
14
|
|
Total revenues
|
|
2,118
|
|
4,236
|
|
|
|
|
|
|
|
Loan servicing fees
|
|
21
|
|
42
|
|
Management fees
|
|
249
|
|
498
|
|
Interest expense
|
|
1,237
|
|
2,474
|
|
General and
administrative expenses
|
|
642
|
|
1,231
|
|
Operating income
|
|
(31
|
)
|
(9
|
)
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
Realized loss on sale
of assets
|
|
(1,071
|
)
|
(2,142
|
)
|
Other, net
|
|
87
|
|
220
|
|
|
|
|
|
|
|
Total other expenses
|
|
(984
|
)
|
(1,922
|
)
|
|
|
|
|
|
|
Loss from continuing
operations before income taxes
|
|
(1,015
|
)
|
(1,931
|
)
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
Loss from continuing
operations, net of taxes
|
|
(1,015
|
)
|
(1,926
|
)
|
|
|
|
|
|
|
Discontinued
operations, net of taxes of $5
|
|
|
|
10
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,015
|
)
|
$
|
(1,916
|
)
|
|
|
|
|
|
|
Net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share
|
|
$
|
(0.05
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
Weighted average number
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
20,553
|
|
20,553
|
|
(b)
CLST Asset II
On December 12, 2008, we, through CLST Asset Trust II (the
Trust II
), a newly formed
trust wholly owned by CLST Asset II, LLC (
CLST Asset II
),
a wholly owned subsidiary of Financo, which is one of our direct, wholly
owned subsidiaries, entered into a purchase agreement, effective as of December 10,
2008, to acquire from time to time certain receivables, installment sales
contracts and related assets owned by third parties (the
Trust
II
Purchase Agreement
).
Our Board unanimously approved the transaction. We have fulfilled our original
commitment to purchase from the sellers receivables of at least $2 million pursuant
to the Trust II Purchase Agreement. We or the sellers under the Trust II
Purchase Agreement can terminate the Trust II Purchase Agreement at any time
(with notice) after March 29, 2009.
Also, pursuant to the second amended and restated
revolving credit agreement, effective as of December 10, 2008, among the
Trust II, the originator, the co-borrowers (who are the sellers under the Trust
II Purchase Agreement), the lender, the initial servicer, the backup servicer,
the guarantor, and the collateral custodian (the
Trust
II
Credit Agreement
),
we have the right to require the sellers to repurchase any accounts, for the
original purchase price applicable to such account plus interest accrued
thereon, that do not satisfy certain specified eligibility requirements set out
in the Trust II Credit Agreement as of the purchase date. If it is discovered
by a party that a receivable account was not an Eligible Receivable as of the
purchase date, the seller is required to repurchase such receivable account. An
account is not an Eligible Receivable if, as of the purchase date, such
receivable account is, among other things, a defaulted receivable, a delinquent
receivable, subject to litigation, dispute or rights of rescission, setoff or
counterclaim, or is not subject to a duly recorded and perfected lien, the
seller must repurchase the account. For
the quarterly period ended May 31, 2009, there had not been a
determination that any receivables failed to meet the eligibility requirements
set out in the Trust II Credit 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 Trust II Credit Agreement and the letter
agreement, effective as of December 10, 2008, among the
Trust II
, Financo, the originator,
the co-borrowers, the initial servicer, and the guarantor (the
Letter Agreement
). Advances
under the revolver are limited to an amount equal to, net of certain
concentration limitations set forth in the Trust II Credit Agreement, (a) the
lesser of (1) the product of 85% and the purchase price being paid for
eligible receivables with a credit score greater than or equal to 650 (
Class A Receivables
) or
(2) the product of 80% and the then-current aggregate balance of principal
and accrued and unpaid interest outstanding for Class A Receivables plus (b) the
lesser of (1) the product of 75% and the purchase price being paid for
eligible receivables with a credit score less than 650 (
Class B Receivables
) or
(2) the product of 50% and the then-current aggregate balance of principal
and accrued and unpaid interest outstanding for Class B Receivables (
Maximum Advance
).
The revolver
matures on September 28, 2010. The revolver bears interest at an annual
rate of 4.5% over the LIBOR Rate (as defined in the
Trust II Credit Agreement
). The Trust II pays an additional fee to
the co-borrowers equal to an annual rate of 0.5% for loans attributable to the
Trust II equal to or below $10 million and an annual rate of 1.5% for loans
attributable to the Trust II in excess of $10 million. In addition, a
commitment fee is due to the lender equal to an annual rate of 0.25% of the
unused portion of the maximum committed amount. The obligations under the
Trust II Credit
Agreement
are secured
by a first priority security interest in substantially all of the assets of the
Trust II and the co-borrowers, including portfolio collections.
The
Trust II Credit
Agreement
provides
the material terms and conditions for the services to be performed by the
servicer. In return, the Trust II pays the servicer a monthly servicing fee
equal to an annual rate of 1.5% of the then aggregate outstanding principal
balance of the receivables and a 2% loan origination fee on each new loan
originated.
Portfolio
collections are distributed on a monthly basis. Absent an event of default,
after payment of the servicing fee and other amounts, fees and expenses due
under the
Trust II Credit Agreement
and the required principal, interest, unused
commitment fee payments to the lenders under the
Trust II Credit Agreement
and fees due to the co-borrowers under
the Letter Agreement, all remaining amounts from portfolio collections are paid
to the Trust II and are available for distribution to CLST Asset II and subsequently
to Financo.
Principal payments
on the revolver are due monthly to the extent that the aggregate principal
amount of the loan outstanding exceeds the lesser of (1) $50 million or (2) the
Maximum Advance plus the amount on deposit in the collection account net of any
accrued and unpaid interest on the loan and fees due to the lenders, the
servicer, the backup servicer, the collateral custodian and the owner trustee
(the
Maximum Outstanding Loan Amount
).
The borrowers are also required to either make principal payments or add
additional eligible receivables as collateral within 5 business days of any
time that the aggregate principal amount of the revolver exceeds the Maximum
Outstanding Loan Amount. The remaining outstanding principal amount of the loan
plus all accrued interest, fees and expenses is due on the maturity date. The
Trust II may, at its option, repay in whole or in part borrowings under the
revolver but prepayments made before September 28, 2010 are subject to a
prepayment premium equal to 2.0%. Interest payments on the term loan are due
monthly.
The Trust II Credit Agreement contains customary covenants for
facilities of its type, including among other things maintenance of the Trust
IIs special purpose vehicle status and covenants that restrict the Trust IIs
ability to incur indebtedness, grant liens, dispose of property, pay dividends,
and make certain acquisitions. Generally, these covenants do not impact the
activities that may be undertaken by the Company. The Trust II Credit Agreement
contains various events of default, including failure to pay principal and
interest when due, breach of covenants, materially incorrect representations,
default under certain other agreements of the Trust II, bankruptcy or
insolvency of the Trust II, the occurrence of an event which causes a material
adverse effect on the Trust II, the occurrence of certain defaults by the
servicer, entry of certain material judgments against the Trust II, and the
occurrence of a change of control or certain material events and the issuance
of a qualified audit opinion with respect to the Trust IIs financials. In
addition, an event of default occurs if the three-month rolling average
delinquent accounts rate exceeds 15.0% for Class A Receivables or 30.0%
for Class B Receivables, or the three-month rolling average annualized
default rate exceeds 5.0% for Class A Receivables or 12.0% for Class B
Receivables. If an event of default occurs, all of the Trust IIs obligations
under the Trust II Credit Agreement could be accelerated by the lender, causing
the entire remaining outstanding principal balance plus accrued and unpaid
interest and fees to be declared immediately due and payable.
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During the six
months ended May 31, 2009, Trust II purchased $9.6 million of receivables
with an aggregate purchase discount of $0.8 million. These receivables
represent primarily home improvement loans originated through First Consumer
Credit, LLC (
FCC
), the service provider
of CLST Asset I. Trust II borrowed $6.4
million utilizing the revolving facility.
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
|
|
23
|
%
|
Ohio
|
|
18
|
%
|
Massachusetts
|
|
8
|
%
|
Florida
|
|
5
|
%
|
New York
|
|
5
|
%
|
(c)
CLST Asset III
Effective February 13,
2009, we, through CLST Asset III, LLC (
CLST
Asset III
), a newly formed, wholly owned subsidiary of Financo,
which is one of our direct, wholly owned subsidiaries, purchased certain
receivables, installment sales contracts and related assets owned by Fair,
James F. Cochran, Chairman and Director of Fair, and by Timothy S. Durham,
Chief Executive Officer and Director of Fair and an officer, director and
stockholder of our Company (the
Trust III Purchase
Agreement
). Messrs. Durham and Cochran own all of the
outstanding equity of Fair. In return for assets acquired under the Trust III
Purchase Agreement, CLST Asset III paid the sellers total consideration of
$3,594,354 as follows:
(1)
cash in the amount of $1,797,178 of which $1,417,737
was paid to Fair, $325,440 was paid to Mr. Durham and $54,000 was paid to Mr. Cochran,
(2)
2,496,077 newly issued shares of our common stock, par
value $.01 per share (
Common
Stock
) at a price of $0.36 per share, of which 1,969,077 shares
of Common Stock were issued to Fair, 452,000 shares of Common Stock were issued
to Mr. Durham and 75,000 shares of Common Stock were issued to Mr. Cochran
and
(3)
six promissory notes (the
Notes
) issued by CLST Asset III in an aggregate
original stated principal amount of $898,588, of which two promissory notes in
an aggregate original principal amount of $708,868 were issued to Fair, two
promissory notes in an aggregate original principal amount of $162,720 were
issued to Mr. Durham and two promissory notes in an aggregate original
principal amount of $27,000 were issued to Mr. Cochran.
We received a
fairness opinion of Business Valuation Advisors (
BVA
) stating that BVA is of the opinion that the
consideration paid by us pursuant to the Trust III Purchase Agreement is fair,
from a financial point of view, to our nonaffiliated stockholders. A copy
of the fairness opinion was filed as an exhibit to our Current Report on Form 8-K
filed with the SEC on February 20, 2009. The shares of Common Stock
were issued by us in a transaction exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended. As additional inducement for CLST
Asset III to enter into the Trust III Purchase Agreement, Fair agreed to use
its best efforts to facilitate negotiations to add CLST Asset III or one of its
affiliates as a co-borrower under one of 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:
13
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State
|
|
Percentage
|
|
Ohio
|
|
17
|
%
|
Florida
|
|
8
|
%
|
Colorado
|
|
8
|
%
|
Texas
|
|
6
|
%
|
Pennsylvania
|
|
6
|
%
|
At least
initially, Fair will continue to act as servicer for these receivables.
Fair will receive no additional consideration for acting as servicer.
As of February 13,
2009, the portfolios of receivables acquired pursuant to the Trust III Purchase
Agreement collectively consisted of approximately 3,000 accounts with an
aggregate outstanding balance of approximately $3,709,500 and an average outstanding
balance per account of approximately $1,015 for Portfolio A and approximately
$5,740 for Portfolio B. As of February 13, 2009, the weighted
average interest rate of the portfolios exceeded 18%. We have the right
to require the seller to repurchase any accounts, for the original purchase
price applicable to such account, that do not satisfy certain specified
eligibility requirements set out in the Trust III Purchase Agreement as of February 13,
2009. If it is discovered by a party that a receivable account was not an Eligible
Receivable as of February 13, 2009, the closing date of the acquisition,
the seller is required to repurchase such receivable account. An account is not
an Eligible Receivable if, as of February 13, 2009, such receivable account
is a delinquent receivable, a defaulted receivable subject to litigation,
dispute or rights of rescission, setoff or counterclaim, or is not subject to a
duly recorded and perfected lien, the seller must repurchase the account. For the quarterly period ended May 31,
2009, there had not been a determination that any receivables failed to meet
the eligibility requirements set out in the Trust III Purchase Agreement.
Additionally, the
Trust III Purchase Agreement provides that each of the sellers jointly and
severally guarantee to CLST Asset III, up to the aggregate stated principal
amount of the Notes issued to such seller, that the outstanding receivable
balance of each receivable as of the closing date will be collectible in full. For each receivable that becomes a defaulted
receivable following the closing date, the sellers are obligated to pay to CLST
Asset III an amount equal to the outstanding receivable balance of such
receivable and CLST Asset III has the right to offset such amount against the
amount due to the seller under the promissory notes issued to the sellers on
the closing date. The aggregate amount
of each sellers guarantee obligation is limited to the aggregate stated
principal amount of the promissory note issued to such seller representing
approximately 25% of the total purchase price of the portfolio of approximately
$3.6 million. Since the principal
balance of the notes declines over time as payments are made by the Company to
the sellers, future defaulted receivables can be offset only against the then
remaining balance of the notes issued to the sellers. Any future defaults of receivables will be
offset against any remaining amounts owed the sellers pursuant to these notes. Defaults of $147,000 during the quarterly
period ended May 31, 2009 were applied to the notes payable to the
sellers.
The Notes issued
by CLST Asset III in favor of the sellers are full-recourse with respect to
CLST Asset III and are unsecured. The three Notes relating to Portfolio A
(the
Portfolio A Notes
)
are payable in 11 quarterly installments, each consisting of equal principal
payments, plus all interest accrued through such payment date at a rate of 4.0%
plus the LIBOR Rate (as defined in the Portfolio A Notes). The three
Notes relating to Portfolio B (the
Portfolio
B Notes
) are payable in 21 quarterly installments, each
consisting of equal principal payments, plus all interest accrued through such
payment date at a rate of 4.0% plus the LIBOR Rate (as defined in the Portfolio
B Notes).
(5) Net
Loss Per Share
Options to
purchase 0.1 million shares of Common Stock for the three and six months ended May 31,
2009 and 2008, were not included in the computation of diluted earnings per
share because the exercise price was higher than the average market price. Restricted Stock of 0.6 million shares were
not included in the computation of diluted earnings per share for the three and
six months ended May 31, 2009, because their inclusion would have been
anti-dilutive as the Company had a net loss.
(6) Commitments
and Contingencies
We have an
agreement with one employee to assist with the final wind down of our business.
Under the agreement the employee is to receive her base salary as well as a
bonus upon the completion of certain objectives during the liquidation process.
The estimated commitment remaining under the agreement at May 31, 2009 is
$40,000.
We have been informed of
the existence of an investigation that may relate to our Company or our South
American operations. Specifically, we understand that authorities are reviewing
allegations from unknown parties that remittances were made from South America
to Company accounts in the United States in 1999. We do not know the nature or
subject of the investigation, or
14
Table of Contents
the potential
involvement, if any, of our Company or our former subsidiaries. We do not know
if allegations of wrongdoing have been made against our Company, our former
subsidiaries or any current or former Company personnel or if any of them are
subjects of the investigation. However, the fact that the investigators are
aware of an allegation of transfers of money from South America to the United
States and that authorities may have questioned witnesses about such alleged
transfers means that we can not predict whether or not the investigation will
result in a material adverse effect on the consolidated financial condition or
results of operations of our Company.
On February 13,
2009, we filed a lawsuit in the United States District Court for the Northern
District of Texas against Red Oak Fund, L.P., Red Oak Partners, LLC (
Red Oak Partners
), and David
Sandberg (the
Federal Court Action
). Our Original Complaint and Application for
Injunctive Relief alleges that Red Oak Fund, L.P., Red Oak Partners, LLC, and
David Sandberg have engaged in numerous violations of federal securities laws
in making purchases of our Common Stock and sought to enjoin any future unlawful
purchases of our stock by them, their agents, and persons or entities acting in
concert with them. According to a
Schedule 13D filed by David Sandberg, Red Oak Partners, LLC and certain other
reporting persons on February 18, 2009, Red Oak Partners beneficially owns
4,561,554 shares of the Companys Common Stock representing approximately 19.0%
of the Companys outstanding Common Stock.
On March 2, 2009,
Red Oak Partners, LLC, Pinnacle Fund, LLP, Bear Market Opportunity Fund, L.P., and
Jeffrey S. Jones filed a derivative lawsuit against Robert A. Kaiser, Timothy
S. Durham and David Tornek in the 134th District Court of Dallas County, Texas
(the
State Court Action
). The
petition alleges that Messrs. Kaiser, Durham, and Tornek entered into
self-dealing transactions at the expense of the Company and its stockholders
and violated their fiduciary duties of loyalty, independence, due care, good
faith, and fair dealing. The petition asks the Court to order, among other
things, a rescission of the alleged self-interested transactions by Messrs. Kaiser,
Durham, and Tornek; award compensatory and punitive damages; remove Messrs. Kaiser,
Durham and Tornek from the Board; and hold an annual meeting of stockholders,
or to appoint a conservator to oversee and implement the dissolution plan
approved by stockholders in 2007.
On April 6, 2009, we
filed our First Amended Complaint and Application for Injunctive Relief in the
Federal Court Action against defendants Red Oak Fund, L.P., Red Oak Partners,
LLC, David Sandberg, Pinnacle Partners, LLC, Pinnacle Fund, LLP, and Bear
Market Opportunity Fund, L.P. alleging the same and other violations of federal
securities laws. Through this lawsuit,
we seek to obtain various declaratory judgments that the defendants have failed
to comply with federal securities laws and to enjoin the defendants from, among
other things, further violating federal securities laws and from voting any and
all shares or proxies acquired in violation of such laws. Also on April 6, 2009, because, among
other reasons, we do not expect the litigation, which bears directly upon our
annual meeting of stockholders, to be resolved for some months, our Board
postponed the annual meeting of stockholders previously scheduled for May 22,
2009 until September 25, 2009.
On April 30, 2009, Red Oak Partners, LLC,
Pinnacle Fund, LLP, Bear Market Opportunity Fund, L.P., and Jeffrey S. Jones
amended their petition in the State Court Action. In addition to the relief already requested,
the petition seeks to compel the Company to hold its 2008 and 2009 annual
stockholders meetings within sixty days; to enjoin Messrs. Kaiser,
Durham, and Tornek from any interference or hindrance of such meetings or the
election of directors; to enjoin Messrs. Kaiser, Durham, and Tornek from
voting any shares of stock acquired in the alleged self-interested
transactions; and to appoint a special master.
On June 3, 2009 and again on June 12, 2009, pursuant to court
order, Red Oak Partners, LLC, Pinnacle Fund, LLP, Red Oak Fund, LP, and Jeffrey
S. Jones amended their petition in the State Court Action to, among other
things, remove Bear Market Opportunity Fund, L.P. as a plaintiff and add Red
Oak Fund, L.P. as a plaintiff. Discovery
is ongoing in both the Federal Court Action and State Court Action.
The Company has had settlement discussions with
certain of the plaintiffs regarding the Federal Court Action and the State
Court Action. The Company may have
further settlement discussions in the future.
No assurance can be given that any settlement agreement could be reached
if the Company undertakes further discussions or if a settlement agreement is
entered into that the terms of any such settlement would not have a material
adverse effect on the Company, its financial position or its results of
operations.
(7) New
Accounting Pronouncements
In September 2006,
the
Financial Accounting Standards Board (the
FASB
)
issued Statement of
Financial Accounting Standard (
SFAS
) No. 157,
Fair Value Measurements (
SFAS 157
).
SFAS 157 defines fair value, establishes a market-based framework or hierarchy
for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is applicable whenever another accounting pronouncement
requires or permits assets and liabilities to be measured at fair value. SFAS
157 does not expand or require any new fair value measures; however the
application of this statement may change current practice. The requirements of
SFAS 157 became effective for us December 1, 2008. However, in February 2008
the FASB decided that an entity need not apply this standard to nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis until the subsequent year.
Accordingly, our adoption of this standard on December 1, 2008 was limited
to financial assets and liabilities and did not have a material effect on our
financial condition or results of operations. We are
15
Table of Contents
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.
16
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 SEC for the
fiscal year ended November 20, 2008 and with the unaudited consolidated
financial statements and related notes thereto presented in this Quarterly
Report on Form 10-Q/A.
Cautionary
Statement Regarding Forward-Looking Statements
Certain of the matters discussed in this Quarterly Report on Form 10-Q/A
may constitute forward-looking statements for purposes of the Securities Act
of 1933, as amended (the
Securities Act
),
and the Securities Exchange Act of 1934, as amended (the
Exchange
Act
), and, as such, may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of CLST Holdings, Inc., formerly CellStar Corporation, and
subsidiaries (the
Company
) to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. When used in this report, the words
anticipates, estimates, believes, continues, expects, intends,
may, might, could, should, likely, and similar expressions are
intended to be among the statements that identify forward-looking statements.
When we make forward-looking statements, we are basing them on our 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 into a definitive agreement (the
Mexico
Sale Agreement
) with Soluciones Inalámbricas, S.A. de C.V.
(
Wireless Solutions
) and Prestadora
de Servicios en Administración y Recursos Humanos, S.A. de C.V. (
Prestadora
), two affiliated Mexican
companies, providing for the sale of all of the Companys Mexico operations
(the
Mexico Sale
). The Mexico
Sale was structured as the sale of all of the outstanding shares of our Mexican
subsidiaries, and included our interest in
Comunicación Inalámbrica Inteligente, S.A. de
C.V.
(
CII
), our joint venture with
Wireless Solutions. Under the terms of the transaction, we received
$20 million in cash, and were entitled to receive our pro rata share of
CII profits for the first quarter 2007 and up to the consummation of the
transaction, within 150 days from the closing date. Our Board unanimously
approved the proposed transaction set forth in the Mexico Sale Agreement. We
had not received any pro rata share of the CII profits and other terms required
as of 150 days from the closing date. A demand for payment of up to $1.7 million,
the amount we believe is our pro rata share of CII profits for such period, was
sent to the purchasers on September 11, 2007, as well as a demand that the
sellers comply with other required terms of the agreement. While we believe
that CII was profitable and therefore the purchasers owe the Company its pro
rata share, the purchasers are disputing this claim.
Therefore, we are pursuing claims against
the buyers from the Mexico Sale in an ICC arbitration proceeding, which is
currently scheduled for October 2009.
We cannot make any estimates regarding future amounts that we may be
able to collect or the timing of any collections on this matter.
We filed a proxy statement
with the SEC on February 20, 2007, which more fully describes the U.S. and
Mexico Sale transactions. Both of the transactions were subject to customary
closing conditions and the approval of our stockholders, and the transactions
were not dependent upon each other. The proxy statement also included a plan of
dissolution, which provides for the complete liquidation and dissolution of the
Company after the completion of the U.S. Sale, and a proposal to change the
name of the Company from CellStar Corporation to CLST Holdings, Inc.
17
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 we received cash of approximately $53.6 million and
$4.5 million was included in Accounts ReceivableOther in the
accompanying balance sheet for November 30, 2007. We recorded a pre-tax
gain of $52.7 million on the transaction during the twelve months ended November 30,
2007. The buyer of our U.S. business previously asserted total claims for
indemnity against the escrow of approximately $1.4 million, and the
remainder, approximately $7.6 million, including accrued interest, was
distributed to the Company on October 4, 2007. On December 21, 2007,
the Company and Brightpoint entered into a Letter Agreement which settled the
dispute concerning the additional escrow amount. All currently outstanding
disputes between the parties regarding the determination of the purchase price
under the U.S. Sale Agreement have been resolved, and payments of funds have
been made in accordance with the terms described in the Letter Agreement. In January 2008
the Company received approximately $3.2 million from Brightpoint plus
accrued interest and less transition expenses, and approximately
$1.4 million from the escrow agent. These are the final amounts to be received
under the U.S. Sale Agreement.
The Mexico Sale closed on April 12,
2007, and we recorded a loss on the transaction of $7.0 million primarily
due to accumulated foreign currency translation adjustments as well as expenses
related to the transaction. We had approximately $9.1 million of
accumulated foreign currency translation adjustments related to Mexico. As the
proposed sale did not meet the criteria to classify the operations as held for
sale under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, as of February 28, 2007, we recognized the
$9.1 million as a charge upon the closing of the Mexico Sale. As disclosed
above, we have not received any pro-rata share of profits and other terms
required as of 150 days from the closing date under the Mexico Sale.
On March 22, 2007, we
signed a letter of intent to sell our operations in Chile (the
Chile Sale
) to a group that
included local management for approximately book value. On June 11, 2007,
we completed the Chile Sale. The purchase price and cash transferred from the
operations in Chile prior to closing totaled $2.5 million, and we recorded
a pre-tax gain of $0.6 million on the transaction during the quarter ended
August 31, 2007. With the completion of the Chile Sale, we no longer have
any operating locations outside of the U.S. Currently only a small
administrative staff remains to wind up our business.
Plan of Dissolution
As we have previously
disclosed, the proxy statement we filed with the SEC on February 20, 2007
describes a proposal for a plan of dissolution, which provides for the complete
liquidation and dissolution of the Company after the completion of the U.S.
Sale (subject to abandonment by the Board in the exercise of their fiduciary
duties). On March 28, 2007, our
stockholders approved the plan of dissolution in addition to the U.S. Sale and
the Mexico Sale. 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 (
NOLs
). Section 3 of the plan of dissolution
states that we may not engage in any business activities except to the extent
necessary to preserve the value of the 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
18
Table of Contents
return
for our stockholders when compared to the low interest rates available on our
cash investments and other investment alternatives although the acquisition
would involve a higher risk profile than traditional cash deposits and other
cash equivalents positions. At the time
we began looking at purchasing these portfolios during the second and third
quarters of 2008, the credit markets became significantly impaired, and the
viability of many banks and other financial institutions was in question. The 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.
Our
Board understood that to obtain higher returns on its investments, the Company
would have to assume a higher risk of loss.
The Board believed that the opportunity offered by these purchases to
earn higher returns than offered by cash and demand deposits, would offset the
increased risks, and offer the Board a way of maximizing the value of the
Company for the stockholders. In
addition, these investments offered the Company an opportunity to utilize its
NOLs if the returns resulted in positive income for the Company. The purchases the Company made utilized
borrowed money. Using borrowed money to
purchase an income generating asset increases the return on investment, but
increases the risk of loss on that investment.
The Board carefully considered the amount of leverage in each of its
purchases, believing each investment would be able to generate sufficient
income to pay interest and principal on the debt, and still produce an
attractive return for the Company and its stockholders. In considering the risk associated with
leverage, the Board considered a number of different scenarios for performance
of the investments, including the risk associated with increased default
rates. The Board did not expect default
rates to increase to current levels, but did consider that and other
possibilities. In addition, the Board
considered the costs associated with investments in our portfolios, including
the ongoing costs of paying a servicer to service the portfolio, as part of its
consideration of the overall potential return associated with those
investments.
When
we purchased FCC Investment Trust I (
Trust I
),
the historical default rate for the previous three years for our portfolio was
approximately 4%, which was the basis for assessing the creditworthiness of the
assets included in CLST Asset I, LLC (
CLST Asset I
).
Upon
examination of CLST Asset Trust II (
Trust II
)
and CLST Asset III, LLC (
CLST Asset III
),
we believe that the circumstances of these portfolios are different from those
of Trust I. As of the date we acquired
Trust I, approximately 39% of the receivables in the Trust I portfolio had
credit scores higher than 676. Trust II
contains new originations with higher credit requirements than the requirements
for the Trust I portfolio. Since Trust II
is comprised of new loans, the Company has managed the originations such that
almost 65% of the new loans have credit scores higher than 680. Further, we acquired the Trust I portfolio at
a discount of approximately 3% and acquired the Trust II portfolio at a
discount of approximately 10%. Therefore
the Trust II portfolio has a very different risk profile when compared to Trust
I, and we anticipate that as a result of holding receivables from borrowers
with higher credit scores, Trust II will experience lower rates of
default. The sellers of the CLST Asset
III portfolio have retained the risk of collectability of the receivables in
that portfolio for up to an amount equal to the principal amount of the notes
issued by the Company to the sellers. At
the time of the closing of the acquisition of the CLST Asset III portfolio, the
notes issued to the sellers represented approximately 25% of the total purchase
price of the portfolio of approximately $3.6 million. Since the principal balance of the notes declines
over time as payments are made by the Company to the sellers, future defaulted
receivables can be offset only against the then remaining balance of the notes
issued to the sellers. Any future
defaults of receivables will be offset against any remaining amounts owed the
sellers pursuant to these notes. The
difference in the purchase discounts between CLST Asset I and CLST Asset II,
LLC (
CLST Asset II
) was impacted
by the tightening of the credit markets between the time of these two
acquisitions.
The
Company has not performed a market check and, as a result, cannot give any
assurance that the portfolios can be sold on favorable terms or within any
particular time frame given the risk and uncertainties associated with current
economic conditions. Our Board believes
that a quick sale of our portfolio assets at the current time is unlikely to
yield the same value to the Company as a sale in an orderly course in the
future. Among other things, our Board
believes economic conditions will improve over the next few years, along with
credit market conditions and conditions affecting consumer default rates. Because the Companys winding up will take
several years, the Company has the ability to wait until economic conditions
improve before it sells its portfolio assets.
For the same reason, the Company has the ability to market those assets,
in the future, in an orderly fashion designed to enhance any sales proceeds
over what could be received in a quicker sale at the current time. While the Company continues its winding up
activities, it will receive collections on the portfolios, and its overall book
investment in the portfolios will decline.
At the same time, the size of the portfolios and the debt associated with
them will also decline as the assets and related indebtedness liquidate
themselves. For those reasons, the Board
believes that, based upon the assumptions above, a sale of the Companys
portfolio assets in the future will likely result in greater value to the
Company than a rapid sale at the current time.
19
Table of Contents
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 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.
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 specifically analyzes notes
receivable using historical activity, current economic trends, changes in its
customer payment terms, recoveries of previously reserved notes and collection
trends when evaluating the adequacy of its allowance for doubtful accounts. Any
change in the assumptions used in analyzing a specific note receivable may
result in an additional allowance for doubtful accounts being recognized in the
period in which the change occurs. The
Company may from time to time make additional increases to the allowance based
on the foregoing factors. Once a note receivable has been reserved due to
nonpayment, the Company will no longer accrue, for financial reporting
purposes, interest earned on the note receivable. Should the note receivable
return to a performing status, then the Company will resume accruing interest
on the note receivable. The majority of the notes receivable have collateral in
various forms, which may include a second lien position on the 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 six months ended May 31,
2009 and 2008.
20
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. On
March 5, 2009, our
Board approved the grant of 300,000 shares of restricted stock to David Tornek,
our director who was appointed to fill the vacancy on the Board
.
Of each restricted stock grant, 100,000 shares vested
on the date of grant, and the remaining 200,000 of the shares vest in two equal
annual installments on each anniversary of the date of grant.
The restricted
stock becomes 100% vested if any of the following occurs: (i) the
participants death or (ii) the disability of the participant while
employed or engaged as a director or consultant by the Company. The total value
of the awards using a grant date price of $0.22 per share for 600,000 shares
and $0.16 for 300,000 shares is $180,000, of which $86,000 was expensed in the
six months ended May 31, 2009 and the rest is being expensed over a two
year vesting period. The 2008 Plan permits withholding of shares by the Company
upon vesting to pay withholding tax. These withheld shares are considered as
treasury stock and are available to be re-issued under the 2008 Plan.
Recent
Developments
CLST
Asset I
On November 10, 2008,
our Board unanimously approved the acquisition of all of the outstanding equity
interest of Trust I from Drawbridge Special Opportunities Fund LP through CLST
Asset I, a wholly owned subsidiary of CLST Financo, Inc. (
Financo
), which is one of
our direct, wholly owned subsidiaries through entry into a purchase agreement
to acquire all of the outstanding equity interests of Trust I from a third
party (the
Trust I Purchase Agreement
). The purchase price was approximately $41.0
million, which was financed by $6.1 million of cash on hand
and by a non-recourse, term loan of
approximately $34.9 million by
an affiliate of the seller of Trust I, pursuant to the terms and conditions set
forth in the credit agreement, dated November 10, 2008, among Trust I, the
lender, FCC Finance, LLC (
FCC
), as
the initial servicer, the backup servicer, and the collateral custodian (the
Trust I Credit Agreement
)
. The primary
business of Trust I is to hold and collect certain receivables.
The approximate 6,000
receivables included in CLST Asset I are all home improvement, repair and other
home related loans to homeowners. All loans represent loans to single family
dwellings. As of the purchase date, a approximately 63% of the loans were
secured through a second lien on the property,
with the remainder being unsecured. Approximately 89% of the loans are
in the Northeastern part of the United States with the remainder in Texas,
Georgia and Missouri, and at the time of purchase of the portfolio, the
remaining time to maturity was in a range of 8-10 years, not including prepayments,
if any.
The following table
reflects the loan origination year as of the purchase date:
Year
of origination
|
|
% of CLST Asset I
|
|
2000
2004
|
|
8.4
|
%
|
2005
|
|
8.1
|
%
|
2006
|
|
17.3
|
%
|
2007
|
|
36.4
|
%
|
2008
|
|
29.8
|
%
|
Total
|
|
100.0
|
%
|
CLST
Asset II
On December 12, 2008,
we, through
Trust II,
a newly formed trust wholly owned by CLST Asset II, LLC (
CLST
Asset II
), a wholly owned subsidiary of Financo
, entered into
a purchase agreement, effective as of December 10, 2008 (the
Trust II Purchase Agreement
), to acquire
from time to time certain receivables, installment sales contracts and related
assets owned by
SSPE
Investment Trust I (the
SSPE
Trust
) and SSPE,
LLC (
SSPE
)
.
The Board unanimously approved the
establishment of the Trust II and the Trust II Purchase Agreement.
Under the terms of a non-recourse,
revolving loan, which Trust II entered into with Summit Consumer Receivables
Fund, L.P. (
Summit
), as
originator, and SSPE and SSPE Trust, as co-borrowers, Summit and Eric J.
Gangloff, as Guarantors, Fortress Credit Corp. (
Fortress
Corp
.), as the lender, Summit Alternative Investments, LLC, as
the initial servicer, and various other parties (
Trust
II Credit Agreement
), Trust II committed to purchase
receivables of at least $2.0 million. In
conjunction with this agreement, Trust II became a co-borrower under a $50
million credit agreement that permits Trust II to use more than $15 million of
the aggregate availability under the revolving facility. Trust IIs commitment to purchase $2.0
million of
21
Table of Contents
receivables
was fulfilled in the first quarter of 2009, when Trust II purchased $5.8
million of receivables with an aggregate purchase discount of $0.5 million.
These receivables represent primarily home improvement loans originated through
FCC, the service provider of CLST Asset I.
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
|
|
23
|
%
|
Ohio
|
|
18
|
%
|
Massachusetts
|
|
8
|
%
|
Florida
|
|
5
|
%
|
Pennsylvania
|
|
5
|
%
|
During the second quarter of 2009 we were informed by
Summit that the credit facility we entered into with Trust II, Summit and
various other parties had been reduced by $20 million to $30 million. This reduction is reflected in the Amendment
to the Trust II Credit Agreement, attached to this Form 10-Q/A as Exhibit 10.2. Summit did not indicate the specific reasons
for the reduction in the credit facility other than it was part of a
negotiation with Fortress regarding a default on another Summit portfolio. This reduction has no impact on the Company
because during the third quarter of 2009, we ceased purchasing any new
receivables under the facility and are no longer originating new loans under
the credit agreement and, as a result, the Company is no longer drawing
additional funds under the credit agreement.
Because we are no longer originating new loans under this credit
agreement, FCC is no longer providing origination services to the Company. The
origination services performed by FCC included loan documentation, collateral documentation
where applicable, credit verification, and other required activities to secure
loan approval per the Companys standards.
FCC was paid a one-time fee of 2% of the original principal amount of
loans originated for performing these services.
Once a loan was approved, FCC would perform the monthly servicing
activities, which would include collections, reporting, lock box services,
customer service, and other related services. FCC was paid 1.5%, per annum, of
the outstanding principal balance for these services. As of May 31, 2009, Trust II had an
outstanding balance of approximately $7.6 million.
CLST
Asset III
Effective
February 13, 2009, we, through CLST Asset III, a newly formed, wholly
owned subsidiary of Financo, purchased certain receivables, installment sales
contracts and related assets owned by Fair Finance Company, an Ohio corporation
(
Fair
), James F.
Cochran, Chairman and Director of Fair, and Timothy S. Durham, Chief Executive
Officer and Director of Fair and an officer, director and stockholder of our
Company (the
Trust III Purchase Agreement
).
Messrs. Durham and Cochran own all of the outstanding equity of Fair. In
return for assets acquired under the Trust III Purchase Agreement, CLST Asset
III paid the sellers total consideration of $3,594,354, consisting of cash,
common stock of the Company and six promissory notes. Additionally, Fair agreed
to use its best efforts to facilitate negotiations to add CLST Asset III or one
of its affiliates as a co-borrower under one of Fairs existing lines of credit
with access to at least $15,000,000 of credit for our own purposes.
To date we
have not been added as a co-borrower.
Substantially all of the assets acquired by CLST Asset
III are in one of two portfolios. Portfolio A is a mixed pool of receivables
from several asset classes, including health and fitness club memberships,
resort memberships, receivables associated with campgrounds and timeshares,
in-home food sales and services, buyers clubs, delivered products and home
improvement and tuitions. Portfolio B is made up entirely of receivables
related to the sale of tanning bed products.
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
|
%
|
During the second
quarter of 2009 we began implementing the servicing, collection and other
procedures relating to management of CLST Asset III contemplated by the
agreements between us and the servicer of the portfolio. The implementation of
those procedures required several meetings with the servicer and was not fully
complete in the second quarter of 2009. We expect the reporting, collection and
other procedures contemplated in our agreements with the servicer to be fully
implemented during the third quarter of 2009 and do not foresee any
difficulties in doing so. Fair is the
servicer of the CLST Asset III portfolio and is an affiliate of Mr. Durham.
22
Table of Contents
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, which is currently scheduled for October 21 and
22, 2009, 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.
Colombia
During
the second quarter of 2009 we completed the collection of the previously
written-off receivable from the 2004 sale of our Colombia operations. During this quarter we collected $61,000,
representing the final payment of the original note amount of $720,869. The
note had been fully reserved and the payment received was recorded in general
and administrative expenses. We are now in the process of releasing the 19%
interest that we retained in the Colombia operation, per the terms of the
purchase agreement.
Results
of Operations
The Company
reported a net loss of $1.2 million or $0.05 per diluted share, for the second
quarter of 2009, compared to a net loss of $0.4 million, or $0.02 per diluted
share for the same quarter last year. The increase is primarily attributable to
the costs of the portfolio acquisitions and related start up costs and the cost
incurred in connection with the Federal Court Action and State Court Action.
The
following table shows certain information as of May 31, 2009 for each of
CLST Asset I, CLST Asset II and CLST Asset III. A more detailed description of
the results for each of these entities is provided below.
23
Table of Contents
|
|
CLST
Asset I
|
|
CLST
Asset II
|
|
CLST
Asset III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Outstanding
Principal Balance of Receivables
|
|
$
|
37.6
|
|
million
|
|
$
|
8.3
|
|
million
|
|
$
|
2.7
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves/Chargebacks
|
|
$
|
1.5
|
|
million
|
|
$
|
|
|
million
|
|
$
|
0.2
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Purchase
Discounts
|
|
$
|
0.6
|
|
million
|
|
$
|
0.7
|
|
million
|
|
$
|
0.1
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Acquisition
Costs
|
|
$
|
0.1
|
|
million
|
|
$
|
|
|
million
|
|
$
|
0.1
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Receivables
|
|
$
|
35.6
|
|
million
|
|
$
|
7.6
|
|
million
|
|
$
|
2.5
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable and Loans
Outstanding
|
|
$
|
30.5
|
|
million
|
|
$
|
5.7
|
|
million
|
|
$
|
0.7
|
|
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Number of
Customer Accounts
|
|
5,481
|
|
|
|
1,086
|
|
|
|
2,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Outstanding
Principal Balance per Account
|
|
$
|
6,847
|
|
|
|
$
|
7,645
|
|
|
|
$
|
1,120
|
|
|
|
Three Months Ended May 31, 2009, Compared to Three Months Ended May 31,
2008
Consolidated
Revenues
.
Revenues for the second quarter of 2009 were
$1.8 million compared to zero in 2008.
The second quarter of 2009 results reflected interest and other charges
from CLST Asset I of $1.3 million, CLST Asset II of $0.4 million and CLST Asset
III of $0.1 million. There were no
revenues recorded in the second quarter of 2008.
Loan
Servicing Fees.
Loan servicing fees for the second quarter of 2009 were $76,000. There were no loan servicing fees recorded in
the second quarter of 2008. We do not incur additional servicing fees with
respect to CLST Asset III other than the initial cost of acquiring the
portfolio.
Provision
for Doubtful Accounts.
Provision for doubtful accounts for the second quarter of 2009 were
$600,000, reflecting accounts greater than 120 days past due in CLST Asset
I. CLST Asset II and CLST Asset III had
no provision for doubtful accounts as CLST Asset II had no accounts greater
than 120 days past due and any defaulted receivables under CLST Asset III were
offset per the requirement that the sellers must jointly and severally pay CLST
Asset III the outstanding balance of any defaulted receivable, within the
parameters of the Trust III Purchase Agreement.
We did not make a provision for doubtful accounts in the second quarter
of 2008.
Interest
Expense.
Interest
expense for the second quarter of 2009 was $546,000 compared to zero in the
second quarter of 2008.
General
and Administrative Expenses
. Our general and administrative expenses
were $1.7 million for the second quarter of 2009 compared to $0.5 million for
the second quarter of 2008. Our legal and professional expenses during the
second quarter of 2009 were $1.0 million, primarily due to legal and
professional fees related to the Federal Court Action and the State Court
Action, including amounts paid on behalf of our directors, and the pursuit of
claims against Wireless Solutions in connection with the Mexico Sale. We believe that Wireless Solutions owes us
amounts relating to the sale of our interest in CII in connection with the
Mexico Sale. Therefore, we are pursuing
claims against the buyers from the Mexico Sale in an ICC arbitration
proceeding, which is currently scheduled for October 2009. We believe we are owed up to $1.7 million
from the Mexico Sale. In addition in 2008, general and
administrative expenses were favorably impacted by a one time insurance refund
of $141,000 and a $114,000 payroll settlement adjustment related to the
settlement of a claim for breach of employment agreement made by Sherrian Gunn.
Net
Operating Loss.
The net operating loss for the second quarter
of 2009 was a loss of $1.0 million compared to $511,000 for the second quarter
of 2008. The second quarter of 2009
includes $1.0 million of legal and professional fees, primarily due to legal
and professional fees related to the Federal Court Action and the State Court
Action, including amounts paid on behalf of our directors, and the pursuit of
claims against Wireless Solutions in connection with the Mexico Sale. Our three portfolios had a significant effect
on the quarter as CLST Assets I, II and III generated a total of $530,000
of operating income.
Total Other Income
. Our
total other income for the second quarter of 2009 was $6,000, compared to
$87,000 for the second quarter 2008. Virtually all of our other income is
interest earned on our cash balance, and the decrease is a result of lower
interest rates due to the current U.S. economic crisis and lower cash balances.
24
Table of Contents
Income taxes
. The Company recorded tax benefit of $6,000 for
the second quarter of 2009 compared to zero for 2008, which includes the impact
of continuing and discontinued operations.
Net Loss.
Net loss for the second quarter of 2009 was $1.2 million compared to
$0.4 million for the same quarter in 2008, as interest earned on our cash last
year generated $87,000 of interest income.
The increase is primarily attributable to the costs of the portfolio
acquisitions and related start up costs and the cost incurred in connection
with the Federal Court Action and State Court Action.
CLST
Asset I
Trust
Is collections for the second quarter of 2009 were approximately $3.1 million,
representing $1.8 million of principal payments and $1.3 million of interest
and other charges.
As of May 31, 2009, the
aggregate outstanding principal balance of the notes receivables net of
reserves was $36.1 million, which represents 88% of the original purchase price
of $41.0 million. The ending balance
consists of approximately 5,481 customer accounts, with an average outstanding
principal balance per account of approximately $6,847 and an average FICO score
of 655. The average interest rate for
these accounts was 14.4%. Total assets
of Trust I at the end of the quarter net of reserves were $36.2 million,
excluding certain accrued interest and deferred cost.
For
the second quarter of 2009, Trust I had total revenues of approximately $1.3
million and primarily consisted of interest income collected from the notes
receivable. Operating expenses for the
quarter were $1.2 million, which included $0.6 million provision for doubtful
accounts, $0.45 million of interest expense to Fortress, our lender, and $0.13
million of servicing expense to FCC.
When we purchased Trust I, the historical
default rate for the previous three years for our portfolio was approximately
4%, which was the basis for assessing the creditworthiness of the assets
included in CLST Asset I.
CLST
Asset II
Trust II had collections
of approximately $1.1 million during the second quarter of 2009, reflecting
principal payments of $892,000 and interest and other fees of $245,000. For the quarter, revenues were $328,000. The results benefited from an adjustment to
origination costs of $95,000. There were
no defaults recorded during the quarter as we did not have any accounts past
due greater than 120 days. Interest
expense under the credit facility was $67,000 while our servicing costs were
$30,000.
For the second quarter of
2009, Trust II purchased $3.8 million of receivables at a purchase discount
averaging about 10%. The purchases were
financed with borrowings under the credit facility of $2.4 million, purchase
discounts of $354,000, and the remainder with Company cash. The average interest rate on the notes is
15.3% and when the unamortized purchase discounts are applied, we expect that
the calculated leveraged yield would be greater than 30%. Nearly 68% of the purchases had customer FICO
scores of 680 or higher with the average score being 679.
As of May 31, 2009,
Trust II had $8.3 million of receivables and an outstanding balance on the
credit line of over $5.7 million.
CLST
Asset III
Collections for the
second quarter of 2009 were $903,000, representing $787,000 of principal and
$116,000 of interest and fees. For the
quarter, CLST Asset III also recorded revenues of $121,000 reflecting interest
and other fees collected from customers.
Defaults of $147,000 during the quarter were applied to the notes
payable to the seller per our purchase agreement.
As of May 31, 2009,
our outstanding balance of receivables was $2.5 million, representing in excess
of 2,200 accounts. The average principal
balance per account was approximately $1,120.
Six Months Ended May 31, 2009, Compared to Six Months Ended May 31,
2008
Consolidated
Revenues
.
Our revenues for the six months ended May 31,
2009 were $3.4 million compared to zero in 2008. The results for 2009 reflected
interest and other charges from CLST Asset I of $2.8 million, CLST Asset II of
$0.5 million and CLST Asset III of $0.1 million. There were no revenues recorded in the first
six months of 2008.
25
Table of Contents
Loan
Servicing Fees.
Loan servicing fees for the six months ended May 31, 2009 were $386,000.
There were no loan servicing fees recorded in the first six months of 2008. We
do not incur additional servicing fees with respect to CLST Asset III other than
the initial cost of acquiring the portfolio.
Provision
for Doubtful Accounts.
Provision for doubtful accounts for the six months ended May 31,
2009 were $1.3 million, all of which was attributable to CLST Asset I.
We had no provision
for doubtful accounts for the same period of 2008.
Interest
Expense.
Interest
expense for the six months ended May 31, 2009 was $1.1 million under the
credit facilities of CLST Asset I and CLST Asset II and the notes issued in
connection with the CLST Asset III acquisition. We had no interest expense for
the same period of 2008.
General
and Administrative Expenses
. Our general and administrative expenses
were $2.3 million for the six months ended May 31, 2009 compared to $1.0
million for the six months ended May 31, 2008. The increase in expenses in
2009 is primarily due to legal and professional fees related to the Federal
Court Action and the State Court Action, including amounts advanced to our
directors, and the pursuit of claims against Wireless Solutions in connection
with the Mexico Sale. See also the discussion above under Three Months Ended May 31, 2009,
Compared to Three Months Ended May 31, 2008 General and Administrative
Expenses.
Total Other Income
. Our
total other income for the six months ended May 31, 2009 was $9,000,
compared to $220,000 for the same period in 2008. Virtually all of our other
income is interest earned on our cash balance, and the decrease is a result of
lower interest rates due to the current U.S. economic crisis and lower cash
balances.
Income taxes
. The Company recorded a tax expense of $8,000
for the six months ended May 31, 2009 compared to a benefit of $5,000 for
2008, which includes the impact of continuing and discontinued operations.
Discontinued Operations
. We had no income from discontinued operations
for the six months ended May 31, 2009 and $10,000, net of taxes, in
2008. As discussed in Note 2 to the Consolidated Financial Statements and
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations Overview, we sold our operations in the U.S.,
Miami, Mexico and Chile
.
CLST
Asset I
For
the six months ended May 31, 2009, collections for Trust I were $6.2
million, representing $3.4 million of principal payments and $2.8 million of
interest and payments and other charges.
As of May 31, 2009, the aggregate outstanding principal balance of
the notes receivables net of reserves was $36.1 million, which represents 88%
of the original purchase price of $41.0 million. The ending balance consists of approximately
5,481 customer accounts, with an average outstanding principal balance per
account of approximately $6,847
and an average FICO score of 655. The average interest rate for these accounts
was 14.4%. Total assets of Trust I at May 31,
2009 net of reserves were $36.2 million, excluding certain accrued interest and
deferred cost.
For
the six months ended May 31, 2009,total revenues for the period were
approximately $2.8 million and primarily consisted of interest income collected
from the notes receivable. Operating
expenses for the period were $2.6 million, which included $1.3 million
provision for doubtful accounts, $946,000 of interest expense to Fortress, our
lender, and $309,000 of servicing expense to FCC.
CLST
Asset II
Year to date collections
for Trust II were $1.6 million representing $1.3 million of principal payments
and $330,000 of interest and other charges.
Revenues for Trust II were $439,000 ear to date. We have not provided any reserves for
doubtful accounts as we do not have any past due accounts greater than 120
days. Interest expense under the credit
facility was $96,000 and loan servicing fees were $78,000 year to date.
For the year, Trust II
has purchased $9.6 million of customer receivables at purchase discounts
averaging 9%. The highest discount has
been 14.5% and the lowest has been 6%.
The purchases have been financed with borrowings under the credit
facility of $6,374,000, purchase discounts of $831,000 and the balance from
Company cash. The average interest rate
to date is 15.3% and the calculated leveraged yield when the purchase discount
is taken into effect is greater than 30%.
26
Table of
Contents
CLST
Asset III
For the six months ended May 31,
2009, collections for CLST Asset III were $1.1 million, representing $1.0
million of principal and $140,000 of interest and other fees. Total revenue for the year was $149,000. We incurred $12,000 of interest expense
related to the sellers notes delivered as part of the purchase price. Defaults of $170,000 during the year were
applied to the notes payable to the seller per our purchase agreement.
Liquidity
and Capital Resources
As of May 31,
2009, we had cash and cash equivalents of approximately $5.9 million, down from
$9.8 million at November 30, 2008. Historically we have invested our cash
and cash equivalents in either money market accounts or short term Certificate
of Deposits. All of our cash deposits
are in accounts that are federally insured. To date, we have financed our
acquisitions of our receivables portfolios with cash, non-recourse debt, and
the issuance of shares of our Common Stock, and we expect that any future
portfolio acquisition would be financed with cash on hand and cash from
operations, non-recourse debt and additional issuance of our Common Stock.
Operating Activities
. The net cash used in operating activities for the
six months ended May 31, 2009 was $0.8 million compared to cash received
of $4.6 million for the same period in 2008. The primary reason for this
decrease was the collection of $4.7 million of accounts receivable from
Brightpoint (the purchaser of our U.S. and Miami operations) in 2008 and
increased operating expenses in 2009 related to the cost incurred in connection
with the Federal Court Action and State Court Action offset in part by
portfolio interest collections during 2009.
Investing Activities
.
The net cash provided by investing activities
for the six months ended May 31, 2009 was $1.5 million compared to cash
used in 2008 of $3,000. The increase from 2008 to 2009 is primarily a result of
the collection of portfolio principal of $5.7 million during the six months
ended May 31, 2009 offset in part by (i) cash of $4.0 million used to
fund the acquisitions of
CLST
Asset II and
CLST
Asset III portfolios and (ii) $0.2
million in acquisition costs during the six months ended May 31, 2009
.
Financing Activities
. The net cash used in financing activities for the
six months ended May 31, 2009 was $4.5 million compared to zero for the
same period in 2008. The cash used in
financing activities in 2009 was used to reduce the outstanding debt principal
balance under both the Trust I Credit Agreement and Trust II Credit Agreement.
Liquidity Sources
.
CLST Asset I
.
Our acquisition of Trust I was financed by approximately $6.1 million of
cash on hand and by a non-recourse, term loan of approximately $34.9 million to Trust I by an affiliate of the
seller of Trust I, pursuant to the terms and conditions set forth in the Trust
I Credit Agreement. The loan matures on November 10, 2013 and bears
interest at an annual rate of 5.0% over the LIBOR Rate (as defined in the Trust
I Credit Agreement). The obligations under the Trust I Credit Agreement are
secured by a first priority security interest in substantially all of the
assets of Trust I, including portfolio collections.
Also, we have the right to require the seller to
repurchase any accounts, for the original purchase price applicable to such
account, that do not satisfy certain specified eligibility requirements set out
in the Trust I Purchase Agreement as of the October 31, 2008 cut-off date.
If it is discovered by a party that a receivable account was not an Eligible
Receivable as of the cut-off date of October 31, 2008, the seller is
required to repurchase such receivable account unless such breach is remedied
within thirty business days of notice of such breach. An account is not an
Eligible Receivable if, as of October 31, 2008, such receivable account
is, among other things, a defaulted receivable, subject to litigation, dispute
or rights of rescission, setoff or counterclaim, or is not subject to a duly
recorded and perfected lien, the seller must repurchase the account. For the
quarterly period ended May 31, 2009, there had not been a determination
that any receivables failed to meet the eligibility requirements set out in the
Trust I Purchase Agreement.
An
event of default occurs under the Trust I Credit Agreement if the three-month
rolling average delinquent accounts rate exceeds 10.0% or the three-month
rolling average annualized default rate exceeds 7.0%. For the second quarter of
2009, these default rates were 5.14% and 6.34%, respectively.
As
of May 31, 2009, the outstanding balance of our term loan was $30.5
million, representing 87.5% of our original balance. We have retired
approximately $4.4 million of our obligation to Fortress, and we have paid
$946,000 in interest expense, all from customer collections.
CLST
Asset II
.
The
Trust II
has become a co-borrower
under
a $50 million
credit agreement that permits Trust II to use more than $15 million of the
aggregate availability under the revolving facility to purchase receivables.
The
non-recourse revolving facility was initially established by Summit, an
affiliate of the sellers under the
Trust II Purchase Agreement
.
The revolver matures on September 28,
2010. The revolver bears interest at an annual rate of 4.5% over the LIBOR Rate
(as defined in the
Trust II Credit Agreement
). The Trust II pays an additional fee to the
co-borrowers equal to an annual rate of 0.5% for loans attributable to the
Trust
27
Table of Contents
II equal to or below $10
million and an annual rate of 1.5% for loans attributable to the Trust II in
excess of $10 million. In addition, a commitment fee is due to the lender equal
to an annual rate of 0.25% of the unused portion of the maximum committed
amount. The obligations under the
Trust II Credit Agreement
are secured by a first priority security
interest in substantially all of the assets of the Trust II and the
co-borrowers, including portfolio collections.
An event of default occurs under the Trust II Credit
Agreement if the three-month rolling average delinquent accounts rate exceeds
15.0% for Class A Receivables or 30.0% for Class B Receivables, or
the three-month rolling average annualized default rate exceeds 5.0% for Class A
Receivables or 12.0% for Class B Receivables. As of May 31, 2009,
there were no defaulted receivables.
Also, pursuant to
the Trust II Credit Agreement, we have the right to require the sellers to
repurchase any accounts, for the original purchase price applicable to such
account plus interest accrued thereon, that do not satisfy certain specified
eligibility requirements set out in the Trust II Credit Agreement as of the
purchase date. If it is discovered by a party that a receivable account was not
an Eligible Receivable as of the purchase date, the seller is required to
repurchase such receivable account. An account is not an Eligible Receivable
if, as of the purchase date, such receivable account is, among other things, a defaulted
receivable, a delinquent receivable, subject to litigation, dispute or rights
of rescission, setoff or counterclaim, or is not subject to a duly recorded and
perfected lien, the seller must repurchase the account. For the quarterly period ended May 31,
2009, there had not been a determination that any receivables failed to meet
the eligibility requirements set out in the Trust II Credit Agreement.
CLST Asset III
. The consideration paid by CLST Asset
III in return for assets acquired under the Trust III Purchase Agreement, was
financed in part by the issuance of common stock and promissory notes to the
sellers. We issued
2,496,077 shares of our common stock at a
price of $0.36 per share. In addition,
we issued the sellers six promissory notes with an aggregate original stated
principal amount of $898,588 (the
Notes
), of
which two promissory notes in an aggregate original principal amount of
$708,868 were issued to Fair, two promissory notes in an aggregate original
principal amount of $162,720 were issued to Mr. Durham and two promissory
notes in an aggregate original principal amount of $27,000 were issued to Mr. Cochran.
The Notes are full-recourse with respect
to CLST Asset III and are unsecured. The three Notes relating to
Portfolio A (the
Portfolio
A Notes
) are payable in
11 quarterly installments, each consisting of equal principal payments, plus
all interest accrued through such payment date at a rate of 4.0% plus the LIBOR
Rate (as defined in the Portfolio A Notes). The three Notes relating to
Portfolio B (the
Portfolio
B Notes
) are payable in 21 quarterly installments, each
consisting of equal principal payments, plus all interest accrued through such
payment date at a rate of 4.0% plus the LIBOR Rate (as defined in the Portfolio
B Notes).
Also, we have the
right to require the seller to repurchase any accounts, for the original
purchase price applicable to such account, that do not satisfy certain
specified eligibility requirements set out in the Trust III Purchase Agreement
as of February 13, 2009. If it is discovered by a party that a receivable
account was not an Eligible Receivable as of February 13, 2009, the
closing date of the acquisition, the seller is required to repurchase such
receivable account. An account is not an Eligible Receivable if, as of February 13,
2009, such receivable account is a delinquent receivable, a defaulted
receivable subject to litigation, dispute or rights of rescission, setoff or
counterclaim, or is not subject to a duly recorded and perfected lien, the
seller must repurchase the account. For
the quarterly period ended May 31, 2009, there had not been a
determination that any receivables failed to meet the eligibility requirements
set out in the Trust III Purchase Agreement.
Additionally, the
Trust III Purchase Agreement provides that each of the sellers jointly and
severally guarantee to CLST Asset III, up to the aggregate stated principal
amount of the Notes issued to such seller, that the outstanding receivable
balance of each receivable as of the closing date will be collectible in
full. For each receivable that becomes a
defaulted receivable following the closing date, the sellers are obligated to
pay to CLST Asset III an amount equal to the outstanding receivable balance of
such receivable and CLST Asset III has the right to offset such amount against
the amount due to the seller under the promissory notes issued to the sellers
on the closing date. The aggregate
amount of each sellers guarantee obligation is limited to the aggregate stated
principal amount of the promissory note issued to such seller representing
approximately 25% of the total purchase price of the portfolio of approximately
$3.6 million. Since the principal
balance of the notes declines over time as payments are made by the Company to
the sellers, future defaulted receivables can be offset only against the then
remaining balance of the notes issued to the sellers. Any future defaults of receivables will be
offset against any remaining amounts owed the sellers pursuant to these
notes. Defaults of $147,000 during the
quarterly period ended May 31, 2009 were applied to the notes payable to
the sellers.
Per
our agreement, we paid the sellers the scheduled note payments, which amounted
to $72,000. The remaining obligation to
the sellers, as of May 31, 2009, was $668,000 after the scheduled payment
was made, interest was accrued and delinquent receivables were recorded.
28
Table of
Contents
Asset
Quality
. Our
delinquency rates reflect, among other factors, the credit risk of our
receivables, the average age of our receivables, the success of our collection
and recovery efforts, and general economic conditions. The average age of our receivables affects
the stability of delinquency and loss rates of the portfolio. The table below
contains performance information for the receivables as of and for the quarter
ended May 31, 2009. The composition
of the portfolios is expected to change over time. The future performance of the receivables in
the portfolios may be different from the historical performance set forth
below. The table below also sets forth our
aging and the aggregate delinquency and loss experience for the accounts in the
portfolios as of and for the quarter ended May 31, 2009. The global and economic crisis has had and
could continue to have an adverse effect on the portfolio. The current deep economic recession and
rising unemployment have contributed to the significant increases in
delinquencies for 2009 compared to historical performance. Our net losses and delinquencies may continue
to correlate with declines in the general economy and increases in
unemployment. Increases in net losses and delinquencies could continue,
particularly if conditions in the general economy further deteriorate. We cannot assure you that the future
delinquency and loss experience for the receivables will be similar to the
historical experience set forth below.
|
|
CLST Asset I
|
|
CLST Asset II
|
|
CLST Asset III
|
|
|
|
Principal
Balance
|
|
% of
Total
|
|
Principal
Balance
|
|
% of
Total
|
|
Principal
Balance
|
|
% of
Total
|
|
Receivables Aging (Principal)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current 0-30 Days
|
|
$
|
33,955,565
|
|
95.2
|
%
|
$
|
8,273,196
|
|
108.7
|
%
|
$
|
2,277,435
|
|
92.0
|
%
|
31 - 60 Days
|
|
1,274,226
|
|
3.6
|
%
|
14,738
|
|
0.2
|
%
|
95,270
|
|
3.8
|
%
|
61 - 90 Days
|
|
410,968
|
|
1.2
|
%
|
981
|
|
0.0
|
%
|
90,831
|
|
3.7
|
%
|
91 + 120
|
|
439,654
|
|
1.2
|
%
|
13,601
|
|
0.2
|
%
|
36,186
|
|
1.5
|
%
|
120+
|
|
1,447,263
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Purchase Discounts
|
|
(622,052
|
)
|
-1.7
|
%
|
(719,747
|
)
|
-9.5
|
%
|
(78,748
|
)
|
-3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Fees
|
|
195,080
|
|
0.5
|
%
|
28,347
|
|
0.4
|
%
|
55,042
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
(1,447,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,653,441
|
|
100.0
|
%
|
$
|
7,611,116
|
|
100.0
|
%
|
$
|
2,476,016
|
|
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
May 31, 2009, the allowance for doubtful accounts recorded for
CLST Asset I is $1.4 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. Defaults of $147,000 during the quarterly
period ended May 31, 2009 were applied to the notes payable to the
sellers.
Contractual Obligations
. We have an agreement with one employee to assist
with the final wind down of our historic business. Under the agreement, the
employee is to receive base salary as well as a bonus upon the completion of
certain objectives during the liquidation process. The maximum payment
remaining under this agreement at May 31, 2009 is $40,000, and we expect
to pay this amount out of our available cash.
If we abandon our plan of dissolution, our obligations to this employee
will continue.
Included in accounts payable at May 31, 2009,
is approximately $14.2 million associated with liabilities which accrued in
periods 2002 and earlier. The Company now believes it has a variety of defenses
to some or all these liabilities, including defenses based upon the running of
statutes of limitations. The Company is reviewing these liabilities, and
considering appropriate steps to resolve them. In addition, the Company has
contacted the vendor in question several times during the second quarter of
2009 regarding this matter with no results. The Company expects that the
liabilities may be resolved at less than the book value thereof, but can not
provide assurances as to the amount or timing of any adjustments.
29
Table of Contents
New
Accounting Pronouncements
In September 2006, the FASB issued Statement of
Financial Accounting Standard (
SFAS
) No. 157,
Fair Value Measurements (
SFAS 157
).
SFAS 157 defines fair value, establishes a market-based framework or hierarchy
for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is applicable whenever another accounting pronouncement
requires or permits assets and liabilities to be measured at fair value. SFAS
157 does not expand or require any new fair value measures; however the
application of this statement may change current practice. The requirements of
SFAS 157 became effective for us December 1, 2008. However, in February 2008
the FASB decided that an entity need not apply this standard to nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis until the subsequent year.
Accordingly, our adoption of this standard on December 1, 2008 was limited
to financial assets and liabilities and did not have a material effect on our
financial condition or results of operations. We are still in the process of
evaluating this standard with respect to its effect on nonfinancial assets and
liabilities and therefore have not yet determined the impact that it will have
on our financial statements upon full adoption.
In December 2007, the
FASB released Statement No. 141 R, Business Combinations (
SFAS 141R
), which establishes
principles for how the acquirer shall recognize acquired assets, assumed
liabilities and any non-controlling interest in the acquiree, recognize and
measure the acquired goodwill in the business combination, or gain from a
bargain purchase, and determines disclosures associated with financial
statements. This statement replaces SFAS 141 but retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (which
SFAS 141called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. The
requirements of SFAS 141R apply to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Early application is not
permitted.
From time to time, new accounting pronouncements are issued by the FASB
or other standards setting bodies which we adopt as of the specified effective
date. Unless otherwise discussed, our management believes the impact of
recently issued standards which are not yet effective will not have a material
impact on our consolidated financial statements upon adoption.
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
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. To address the Companys lack of adequate
segregation of duties around check writing, the Company hired an accountant
beginning in January 2009. The new
accountant participates in the duties around check writing and the review of
financial reports for reasonableness. To
address the Companys lack of sufficient accounting technical expertise, during
2009 the Company brought in additional accounting technical expertise as
needed. There have been no changes in
our internal control over financial reporting during the three months ended
May
30
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31,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. The significant
deficiencies reported in our Annual Report on Form 10-K/A for the fiscal
year ended November 30, 2008 continue to exist.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In December 2008,
the Red Oak Group, by a telephone call from David Sandberg to Robert Kaiser,
approached our Board about its interest in making a minority investment in the
Company and obtaining control of the Company. Our Board responded by suggesting
that the Red Oak Group and the Company discuss the Red Oak 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.
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On March 13, 2009,
we announced that we would hold our Annual Meeting of Stockholders on May 22,
2009 in Dallas, Texas, and that the close of business on April 2, 2009
would be the record date for the determination of stockholders entitled to
receive notice of, and to vote at, the Annual Meeting or any adjournments or
postponements thereof.
On March 18, 2009,
the Red Oak Group sent a letter to us demanding to inspect and copy certain of
our books and records. We have taken the position that the Red Oak Group
has not complied with state law requirements applicable to stockholders seeking
such information.
On March 19, 2009,
the Red Oak Group sent a letter to us stating its intention to put forth
several precatory proposals including stockholder votes for: approval to
proceed with the 2007 shareholder-approved plan of dissolution; approval of the
November 10, 2008 transaction whereby CLST Asset I, a wholly owned
subsidiary of Financo, which is one of CLSTs direct, wholly owned
subsidiaries, entered into a purchase agreement to acquire all of the
outstanding equity interests of Trust I from a third party for approximately
$41.0 million; approval of the 2008 Long Term Incentive Plan pursuant to which
the Board approved the new issuance to themselves of up to 20 million shares of
common stock, or just over 97% of the common stock outstanding at the time this
plan was approved; approval of the December 12, 2008 transaction whereby
Trust II, a newly formed trust wholly owned by CLST Asset II, a wholly owned
subsidiary of Financo entered into a purchase agreement, effective as of December 10,
2008, to acquire (i) on or before February 28, 2009 receivables of at
least $2 million, subject to certain limitations and (ii) from time to
time certain other receivables, installment sales contracts and related assets;
and approval of the February 13, 2009 transaction whereby CLST Asset III,
a newly formed, wholly owned subsidiary of Financo, which is one of CLSTs
direct, wholly owned subsidiaries, purchased certain receivables, installment
sales contracts and related assets owned by Fair, which is partly owned by
Timothy S. Durham, an officer and director of CLST. On the same day, the Red
Oak Group sent a letter to us stating its intention to nominate a slate of
directors to our Board.
On April 6, 2009, we
notified the Red Oak Group that our Board rejected the Red Oak 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, a wholly owned indirect
subsidiary of the Company, entered into a purchase agreement to acquire the
outstanding equity interest in Trust I and request the directors to take any
32
Table of Contents
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 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,
an indirect wholly owned subsidiary of the Company purchased certain
receivables, installment contracts and related assets owned by Fair and request
the directors to take any available and appropriate actions.
On April 30, 2009,
the Red Oak Group and Jones amended their petition in the State Court
Action. In addition to the relief already requested, the petition sought
to compel the Company to hold its 2008 and 2009 annual stockholders meetings
within sixty days; to enjoin Messrs. Kaiser, Durham, and Tornek from any
interference or hindrance of such meetings or the election of directors; to
enjoin Messrs. Kaiser, Durham, and Tornek from voting any shares of stock
acquired in the alleged self-interested transactions; and to appoint a special
master. On June 3, 2009 and again on June 12, 2009, pursuant to
court order, Red Oak Partners, LLC, Pinnacle Fund, LLLP, Red Oak Fund, LP, and
Jeffrey S. Jones amended their petition in the State Court Action to, among
other things, remove Bear Market Opportunity Fund, L.P. as a plaintiff and add
Red Oak Fund, L.P. as a plaintiff.
On May 5, 2009, the
Red Oak Group and Jones filed a motion in the State Court Action seeking to
compel the Company to hold its 2008 and 2009 stockholders meetings on June 30,
2009 and to appoint a special master and requested an expedited hearing on
both. Hearings were held on May 8, 2009 and May 29, 2009, but
no ruling was reached.
On July 24, 2009, we
filed our Brief in Support of Application for Preliminary Injunction in the
Federal Court Action. The Red Oak Group filed its Opposition on August 7,
2009, and we filed our Reply Brief in Support on August 14, 2009.
On August 24, 2009,
the Red Oak Group resubmitted its director nomination letter and its letter
stating its intention to put forth the stockholder proposals, as mentioned in
the March 19, 2009 and April 15, 2009 letters.
On August 25, 2009,
the Court in the State Court Action set an evidentiary hearing on the
plaintiffs Application for Temporary Injunction, which had yet to be filed,
for October 7 and 8, 2009. The plaintiffs request for injunctive relief
concerned Messrs. Kaiser, Durham, and Tornek voting any shares of stock
acquired in the alleged self-interested transactions.
On August 28, 2009,
the parties to the State Court Action executed a Stipulation Regarding the
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
33
Table of Contents
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
We are subject to certain default provisions under our loan agreements
related to the acquisitions by CLST Asset I and CLST Asset II that may be
triggered by events over which we have no control; furthermore, the credit
facility that CLST Asset II currently has access to has been reduced and will
expire in September 2010.
CLST
Asset I
The
loan obligations of Trust I under the Trust I Credit Agreement are secured by a
first priority security interest in substantially all of the assets of Trust I,
including portfolio collections. The loan is a non-recourse term loan. The Trust I Credit Agreement contains
customary covenants and events of default for facilities of its type, including
among other things, limitations on the delinquent accounts rate and default rates
of the notes receivable accounts, as more fully described in Footnote 4 of the
notes to the consolidated financial statements.
A copy of the Trust I Credit Agreement was filed as an exhibit to
the Companys Current Report on Form 8-K filed November 17, 2008, as
amended to date.
If
an event of default occurs under the Trust I Credit Agreement, whether or not
the default is material to the loan as a whole, the lender has various
remedies, including among other things, raising the interest rate payable on
the loan and accelerating all of the obligations of Trust I under the Trust I
Credit Agreement, which would cause the entire remaining outstanding principal
balance plus accrued and unpaid interest and fees to be declared immediately
due and payable.
In
addition, the Company has no control over the delinquency or default rates of
the notes receivable accounts now held by Trust I.
An event of default occurs if the three-month rolling
average delinquent accounts rate exceeds 10.0% or the three-month rolling
average annualized default rate exceeds 7.0%. For the second quarter of 2009,
these default rates were 5.14% and 6.34%, respectively.
There can be no
assurance that the delinquency or default rates of such accounts will not
result in an event of default for Trust I, which would allow the lender to,
among other things, raise the interest rate payable on the loan, accelerate all
of the obligations of Trust I under the Trust I Credit Agreement, and sell all
the assets of Trust I to satisfy the amounts due.
CLST
Asset II
Trust
II is a party to a non-recourse, revolving loan agreement between Trust II,
Summit,
SSPE and SSPE
Trust, as co-borrowers, Summit and Eric J. Gangloff, as Guarantors, Fortress
Corp., as the lender, and Summit Alternative Investments, LLC, as the initial
servicer
, pursuant to which Trust II purchased
$9.6 million of receivables with an aggregate purchase
discount of $0.8 million during the six months ended May 31, 2009
. In conjunction with this loan agreement,
Trust II borrowed $3.7 million to
34
Table of Contents
purchase
the consumer receivables and became a co-borrower under the Trust II Credit
Agreement that permits Trust II to use more than $15 million of the aggregate
availability under the revolving facility. A copy of the Trust II Credit
Agreement was filed as an Exhibit to the Companys Current Report on Form 8-K
filed December 19, 2008, as amended to date.
Advances
under the revolver are limited to an amount equal to, net of certain
concentration limitations set forth in the Trust II Credit Agreement, (a) the
lesser of (1) the product of 85% and the purchase price being paid for
eligible receivables with a credit score greater than or equal to 650 (
Class A Receivables
) or
(2) the product of 80% and the then-current aggregate balance of principal
and accrued and unpaid interest outstanding for Class A Receivables plus (b) the
lesser of (1) the product of 75% and the purchase price being paid for
eligible receivables with a credit score less than 650 (
Class B Receivables
) or
(2) the product of 50% and the then-current aggregate balance of principal
and accrued and unpaid interest outstanding for Class B Receivables.
During
the second quarter of 2009 we were informed by Summit that the credit facility
we entered into with Trust II, Summit and various other parties had been
reduced by $20 million to $30 million.
Summit did not indicate the specific reasons for the reduction in the
credit facility other than it was part of a negotiation with Fortress regarding
a default on another Summit portfolio.
This reduction has no impact on the Company because during the third
quarter of 2009, we ceased purchasing any new receivables under the facility
and are no longer originating new loans under the credit agreement and, as a
result, the Company is no longer drawing additional funds under the credit
agreement. Because we are no longer
originating new loans under this credit agreement, FCC is no longer providing
origination services to the Company. The origination services performed by FCC
included loan documentation, collateral documentation where applicable, credit
verification, and other required activities to secure loan approval per the
Companys standards. FCC was paid a
one-time fee of 2% of the original principal amount of loans originated for
performing these services. Once a loan
was approved, FCC would perform the monthly servicing activities, which would
include collections, reporting, lock box services, customer service, and other
related services. FCC was paid 1.5%, per annum, of the outstanding principal
balance for these services. As of May 31,
2009, Trust II had an outstanding balance of approximately $7.6
million.
The
Trust II Credit Agreement contains customary covenants and events of default
for facilities of its type, including among other things, limitations on the
delinquent accounts rate and default rates of the consumer receivable accounts,
as more fully described in Footnote 4 of the notes to the consolidated
financial statements. If an event of
default occurs, whether or not the default is material to the loan as a whole,
the lender has various remedies, including among other things, raising the
interest rate payable on the loan and accelerating all of Trust IIs
obligations under the Trust II Credit Agreement, which would cause the entire
remaining outstanding principal balance plus accrued and unpaid interest and
fees to be declared immediately due and payable.
Furthermore,
the Company has no control over the delinquency or default rates of the
consumer receivable accounts that the Trust II acquires. An event of default occurs if the three-month
rolling average delinquent accounts rate exceeds 15.0% for Class A
Receivables or 30.0% for Class B Receivables, or the three-month rolling
average annualized default rate exceeds 5.0% for Class A Receivables or
12.0% for Class B Receivables. As of May 31, 2009, there were no
defaulted receivables. There can be no assurance that these delinquency or
default rates will not result in an event of default for Trust II, which would
allow the lender to, among other things, raise the interest rate payable on the
loan, accelerate all of Trust IIs obligations under the Trust II Credit
Agreement, and sell all the assets of Trust II to satisfy the amounts due.
For other 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
March 5,
2009, our Board approved the grant of 300,000 shares of restricted stock
for no cash consideration
to David
Tornek, pursuant to the Companys 2008 Long Term Incentive Plan,
in connection with his appointment as a
director.
The shares
of Common Stock were issued by us in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior
Securities
Not
applicable.
Item 4. Submission of Matters to
a Vote of Security Holders
We did
not submit any matters to a vote of security holders in the second quarter of
2009.
Item 5. Other Information
Not
applicable.
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Contents
Item 6. Exhibits
Exhibit
No.
|
|
Description
|
|
Previously filed as an Exhibit and
Incorporated by Reference From
|
3.1
|
|
Amended and Restated
Certificate of Incorporation of CellStar Corporation (the Certificate of
Incorporation).
|
|
Previously filed as an
exhibit to our companys Quarterly Report on Form 10-Q for the quarter
ended August 31, 1995, and incorporated herein by reference.
|
|
|
|
|
|
3.2
|
|
Certificate of
Amendment to Certificate of Incorporation.
|
|
Previously filed as an
exhibit to our companys Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998, and incorporated herein by reference.
|
|
|
|
|
|
3.3
|
|
Certificate of
Amendment to Certificate of Incorporation dated as of February 20, 2002.
|
|
Previously filed as an
exhibit to our companys Annual Report Form on Form 10-K for the
fiscal year ended November 30, 2002 and incorporated herein by
reference.
|
|
|
|
|
|
3.4
|
|
Certificate of
Amendment to the Amended and Restated Certificate of Incorporation dated as
of March 30, 2007.
|
|
Previously filed as an
exhibit to our companys Quarterly Report on Form 10-Q for the quarter
ended May 31, 2007, and incorporated herein by reference.
|
|
|
|
|
|
3.5
|
|
Amended and Restated
Bylaws of CellStar Corporation, effective as of May 1, 2004.
|
|
Previously filed as an
exhibit to our Quarterly Report on Form 10-Q for the quarter ended
May 31, 2004, and incorporated herein by reference.
|
|
|
|
|
|
4.1
|
|
Rights
Agreement, dated as of February 13, 2009, by and between CLST
Holdings, Inc. and Mellon Investor Services LLC, as rights agent.
|
|
Previously filed as an
exhibit to a
Form 8-A filed with the Securities and
Exchange Commission on February 13, 2009
, and incorporated herein by reference.
|
|
|
|
|
|
4.2
|
|
Certificate
of Designation of Series B Junior Preferred Stock of CLST
Holdings, Inc., dated as of February 5, 2009.
|
|
Previously filed as an
exhibit to a
Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 6, 2009
, and incorporated herein by reference.
|
|
|
|
|
|
10.1
|
|
Form of
Restricted Stock Award Agreement under the CLST Holdings, Inc. 2008 Long
Term Incentive Plan.
|
|
Previously filed as an
exhibit to our companys Annual Report Form on Form 10-K/A for the
fiscal year ended November 30, 2008 and incorporated herein by
reference.
|
|
|
|
|
|
10.2
|
|
First
Amendment to Credit Agreement, dated as of May 20, 2009 by and among
CLST Asset Trust II, SSPE Investment Trust I and SSPE, LLC, as borrowers,
Summit Consumer Receivables Fund, L.P., as the originator and as a guarantor,
Summit Alternative Investments, LLC, as the servicer, Eric J. Gangloff, as a
guarantor, Fortress Credit Opportunities I L.P., as a lender and Fortress
Credit Corp., as the administrative agent.
|
|
Filed
herewith.
|
|
|
|
|
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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.
|
|
|
|
|
|
31.2
|
|
Certification of the
Chief Financial Officer pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
|
|
Filed herewith.
|
|
|
|
|
|
32.1
|
|
Certification of the
Chief Executive Officer pursuant to Rule 13a-14(b) promulgated
under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
|
|
Filed herewith.
|
Management
contract, compensatory plan or arrangement.
36
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 and President
|
|
|
|
|
|
By:
|
/s/
William
E. Casper
|
|
|
William E.
Casper
|
|
|
Chief Financial
Officer
|
|
January 29, 2010
37
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