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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K/A**

**Amendment No. 1**

 

| **(Mark One)** | ** **                                                                                                |
|---------------------|-----------------------------------------------------------------------------------------------------------|
| **x**               | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thefiscal year ended November 30, 2008**

** **

**OR**

 

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

** **

**For thetransition period from                  to                  **

** **

**CommissionFile Number 0-22972**

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**CLSTHOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                            | ** ** | **75-2479727**                       |
|---------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of                         |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)                          |       |                                 |
|                                                    |       |                                 |
| **17304 Preston Road, Dominion  Plaza, Suite 420** |       |                                 |
| **Dallas, Texas**                                       | ** ** | **75252**                            |
| (Address of principal  executive offices)               |       | (Zip Code)                           |

 

Registrant’s telephone number including areacode: **(972) 267-0500**

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Securities registered pursuant to Section 12(b) ofthe Act:

 

| ** **                             | ** ** | **Name of each exchange on** |
|----------------------------------------|------------|--------------------------------------------------|
| **Title of each class** | ** ** | **which registered**                        |
| None                                   |       | N/A                                              |

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**CommonStock, par value $0.01 per share**

(Title of Class)

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o  No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o  No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes o  No x

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or a smallerreporting company. See definitions of “large accelerated filer,” “acceleratedfiler” 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 ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The aggregate market value of the registrant’scommon stock held by non-affiliates of the registrant as of May 31, 2008,the last business day of the Company’s most recently completed second fiscalquarter, based on the closing sale price of $0.37 as reported on the OTCmarket, as compiled by Pink Sheets LLC, on May 31, 2008, was approximately$7,604,686.

 

On February 27, 2009, there were 23,649,282outstanding shares of common stock, $0.01 par value per share.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None.

 

 

 

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**EXPLANATORYNOTE**

 

We are filing this Amendment No. 1 on Form 10-K/A(“***Form 10-K/A***”) to our AnnualReport on Form 10-K for the fiscal year ended November 30, 2008 originallyfiled with the SEC on March 2, 2009 (the “***OriginalForm 10-K***”) in response to comments we have received fromthe SEC.  For convenience, we haverepeated the Original Form 10-K in its entirety.

 

This amendment does not reflect events occurring afterthe filing of the Original Form 10-K, and does not modify or update thedisclosures therein in any way other than as required to reflect the mattersdescribed above.

 

**CLST Holdings, Inc.**

 

**INDEX TO FORM 10-K/A**

 
| ** **         | ** **                                                                                                               | **Page  Number** |
|--------------------|--------------------------------------------------------------------------------------------------------------------------|------------------|
| **PART I.**   |                                                                                                                     |             |
| Item 1.       | Business                                                                                                                 | 3                |
| Item 1A.      | Risk Factors                                                                                                             | 10               |
| Item 1B.      | Unresolved  Staff Comments                                                                                               | 16               |
| Item 2.       | Properties                                                                                                               | 16               |
| Item 3.       | Legal Proceedings                                                                                                        | 16               |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                     | 16               |
| **PART II.**  |                                                                                                                     |             |
| Item 5.       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 17               |
| Item 6.       | Selected  Consolidated Financial Data                                                                                    | 19               |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 19               |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 28               |
| Item 8.       | Financial  Statements and Supplementary Data                                                                             | 28               |
| Item 9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                    | 28               |
| Item 9A(T).   | Controls  and Procedures                                                                                                 | 29               |
| Item 9B.      | Other  Information                                                                                                       | 31               |
| **PART III.** |                                                                                                                     |             |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                                                  | 32               |
| Item 11.      | Executive  Compensation                                                                                                  | 36               |
| Item 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                         | 38               |
| Item 13.      | Certain  Relationships and Related Transactions, and Director Independence                                               | 40               |
| Item 14.      | Principal  Accounting Fees and Services                                                                                  | 42               |
| **PART IV.**  |                                                                                                                     |             |
| Item 15.      | Exhibits  and Financial Statement Schedules                                                                              | 43               |
| Signatures         |                                                                                                                     | 46               |

 

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**PART I.**

 

**Special Cautionary Notice Regarding Forward-LookingStatements**

 

Certain of the matters discussed in this AnnualReport on Form 10-K/A may constitute “forward-looking” statements forpurposes of the Securities Act of 1933, as amended, and the Securities ExchangeAct of 1934, as amended (as so amended the “***ExchangeAct***”), and, as such, may involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements of the Company to be materially different from future results,performance or achievements expressed or implied by such forward-lookingstatements. 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 identifyforward-looking statements. When we make forward-looking statements, we arebasing them on our management’s beliefs and assumptions, using informationcurrently available to us. Although we believe that the expectations reflectedin the forward-looking statements are reasonable, these forward-lookingstatements are subject to risks, uncertainties and assumptions. Statements ofvarious factors that could cause the actual results, performance orachievements of the Company to differ materially from the Company’sexpectations (“***Cautionary Statements***”) aredisclosed in this report, including, without limitation, those discussed in the“Item 1A, Risk Factors” of this Form 10-K/A, those statements made inconjunction with the forward-looking statements and otherwise herein. Allforward-looking statements attributable to the Company are expressly qualifiedin their entirety by the Cautionary Statements. We have no intention, anddisclaim any obligation, to update or revise any forward-looking statements,whether as a result of new information, future results or otherwise.

 

**Item 1.  Business**

 

CLST Holdings, Inc. (the “***Company***”) was formed on April 1,1993 as a Delaware corporation under the name of CellStar Corporation to holdthe stock of National Auto Center, Inc. (“***NationalAuto Center***”), a company that is now an operating subsidiary. Weoperated in the wireless telecommunications industry through National AutoCenter, which was originally formed in 1981 to distribute and installautomotive aftermarket products and later, in 1984, began offering wirelesscommunications products and services. In 1989, National Auto Center became anauthorized distributor of Motorola wireless handsets in certain portions of theUnited States. National Auto Center entered into similar arrangements withMotorola in the Latin American Region in 1991. The terms “CLST,” “the Company,”“we,” “our” and “us” refer to CLST Holdings, Inc. and its consolidatedsubsidiaries, unless the context suggests otherwise.

 

**Sale of Operations in Fiscal 2007**

 

On December 18, 2006, we entered into adefinitive agreement (the “***U.S. Sale Agreement***”)with a wholly owned subsidiary of Brightpoint, Inc., an Indianacorporation (“***Brightpoint***”), providing forthe sale of substantially all of the Company’s United States and Miami-basedLatin American operations and for the buyer to assume certain liabilitiesrelated to those operations (the “***U.S. Sale***”).Our operations in Mexico and Chile and other businesses or obligations of theCompany were excluded from the transaction.

 

Our Board of Directors (the “***Board***”)and Brightpoint unanimously approved the proposed transaction set forth in theU.S. Sale Agreement. The purchase price was $88 million in cash, subjectto the Company’s working capital and other terms of the agreement at closing,and also subject to adjustment based on changes in net assets from December 18,2006 to the closing date.

 

Also on December 18, 2006, we entered into adefinitive agreement (the “***Mexico Sale Agreement***”)with Soluciones Inalámbricas, S.A. de C.V. (“***WirelessSolutions***”) and Prestadora de Servicios en Administración yRecursos Humanos, S.A. de C.V. (“***Prestadora***”),two affiliated Mexican companies, providing for the sale of all of the Company’sMexico operations (the “***Mexico Sale***”).The Mexico Sale was a stock acquisition of all of the outstanding shares of theCompany’s Mexican subsidiaries, and included our interest in ComunicaciónInalámbrica Inteligente, S.A. de C.V. (“***CII***”),our joint venture with Wireless Solutions. Our Board unanimously approved theproposed transaction set forth in the Mexico Sale Agreement. Under the terms ofthe transaction, we received $20 million in cash, and were required toreceive our pro rata share of CII profits from January 1, 2007, up to theconsummation of the transaction, within 150 days from the closing date. Wehave not received any pro-rata share of the CII profits and other termsrequired as of 150 days from the closing date. A demand for payment of upto $1.7 million and other required terms of the agreement was sent to thepurchasers on September 11, 2007. While we believe that CII was profitableand therefore the purchasers owe the Company its pro rata share, the purchasersare disputing this claim. We continue to pursue the amounts we believe we aredue, but at this time the purchasers are not responding to or cooperating withour demands. Currently we cannot make any estimates regarding future amounts wemay be able to collect or the timing of any collections on this matter.

 

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We filed a proxy statement with the Securities andExchange Commission (the “***SEC***”) on February 20,2007, which more fully describes the U.S. sale and Mexico Sale transactions.Both of the transactions were subject to customary closing conditions and theapproval of our stockholders, and the transactions were not dependent upon eachother. On March 28, 2007, our stockholders approved the U.S. Sale, theMexico Sale and the name change to CLST Holdings, Inc.

 

The U.S. Sale closed on March 30, 2007. Atclosing, $53.6 million was received and $11.5 million was included inaccounts receivable—other in the accompanying balance sheet for August 31,2007; $8.8 million of which was placed in an escrow account and subject toany indemnity claims by the buyers of the Company’s U.S. business. A portion ofthe proceeds from the sale was used to pay off the Company’s bank debt (seefootnote 9). We recorded a pre-tax gain of $52.7 million on thetransaction during the twelve months ended November 30, 2007. Brightpointasserted total claims for indemnity against the escrow of approximately$1.4 million. The Company objected to these claims. Brightpoint alsoproposed negative adjustments to the net working capital of approximately$1.4 million, which these claims for adjustment were largely the same asthe claims for indemnity asserted against the escrow account. As of November 30,2007, we had received approximately $7.6 million of the amounts held inthe escrow account, which such amount included accrued interest. On December 21,2007, we entered into a Letter Agreement (the “***LetterAgreement***”) with Brightpoint which settled the disputeconcerning the additional escrow amount. All currently outstanding disputesbetween the parties regarding the determination of the purchase price under theU.S. Sale Agreement have been resolved, and payments of funds in respectthereof were made in accordance with the terms described in the LetterAgreement. Pursuant to the Letter Agreement, in January 2008 we receivedapproximately $3.2 million from Brightpoint plus accrued interest and lesstransition expenses, and approximately $1.4 million from the escrow agent.These amounts were the final amounts received under the U.S. Sale Agreement.

 

The Mexico Sale closed on April 12, 2007, andwe recorded a loss on the transaction of $7.0 million primarily due toaccumulated foreign currency translation adjustments as well as expensesrelated to the transaction. We had approximately $9.1 million of accumulatedforeign currency translation adjustments related to Mexico. As the proposedsale did not meet the criteria to classify the operations as held for saleunder SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”, as of February 28, 2007, we recognized the$9.1 million as a charge upon the closing of the Mexico Sale.

 

On March 22, 2007, we signed a letter of intentto sell our operations in Chile to a group that included local management forapproximately book value. On June 11, 2007, we completed the sale of ouroperations in Chile. The purchase price and cash transferred from theoperations in Chile prior to closing totaled $2.5 million, and we recordeda pre-tax gain of $0.6 million on the transaction during the quarterending August 31, 2007. With the completion of the sale of our operationsin Chile, we no longer have any operating locations outside of the U.S.

 

**Prior Business**

 

Prior to the sale of our operations and assetsthrough these various transactions, the Company was a leading distributor ofwireless products and provider of distribution and value-added logisticsservices to the wireless communications industry, serving network operators,agents, resellers, dealers, and retailers with operations in the North Americanand Latin American Regions. We provided comprehensive logistics solutions andfacilitated the distribution of handsets, related accessories and otherwireless products from leading manufacturers to network operators, agents,resellers, dealers and retailers. We also provided activation services inMexico and Chile that generated new subscribers for wireless carriers. When theCompany was operating in the wireless communications industry, we derivedsubstantially all of our revenues from net product sales, which included salesof handsets and other wireless communications products. We also derivedrevenues from value-added services, including activations, residualcommissions, and prepaid wireless services, none of which accounted for 10% ormore of consolidated revenues in fiscal 2007. Value-added service revenuesinclude fulfillment service fees, handling fees and assembly revenues.

 

Our business concentrated primarily on distributionand logistics. We delivered handsets and related accessories from the manufacturersto carriers, other distributors, retailers, and consumers. We assisted themanufacturers in expanding their distribution network and customer base. Ourfulfillment, kitting, packaging, and other services assisted the carriers ingetting the handsets ready for use by their subscribers. Our distributionservices included purchasing, selling, warehousing, picking, packing, shippingand “just-in-time” delivery of wireless handsets and accessories. We alsooffered one of the industry’s first completely integrated asset recovery andlogistics services, our Omnigistics® (patentpending) supply chain management system. In addition, we offered value-addedservices, including Internet-based supply chain services via our OrderStar® system (patent pending), Internet-basedtracking and reporting, inventory management, marketing, prepaid wirelessproducts, product fulfillment, kitting and customized packaging, privatelabeling, light assembly, accounts receivable management and end-user supportservices. We also provided wireless activation services and operated retail 

 

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locationsin certain markets from which we sold wireless communications products andaccessories directly to the public. Both Omnigistics® and OrderStar® were included in the U.S. sale to Brightpoint.

 

Our customers included large carriers, ruralcarriers, agents, mobile virtual network operators (MVNOs), big box and smallretailers, distribution companies, and insurance warranty providers. Wemarketed our products to wholesale purchasers using, among other methods,direct sales strategies, the Internet, strategic account management, tradeshows and trade journal advertising. We offered a variety of name brandproducts, comprehensive forward and reverse logistics solutions,highly-responsive customer service, merchandising and marketing elements andaccess to hard-to-find products to potential new and existing customers. Duringfiscal 2006, the Company maintained or acquired agreements with suchmanufacturers as Motorola, LG Electronics MobileComm U.S.A., Inc. (“***L.G.***”), Nokia, Inc. (“***Nokia***”), Kyocera Wireless Corp. (“***Kyocera***”), Palm, Inc. (“***Palm***”) and Pantech Co., Ltd.(“***Pantech***”).

 

Prior to the sale of our U.S., Mexico and Chileoperations, our customer base consisted of Dobson Cellular Systems, Inc.,Telefonica Moviles Colombia, S.A., Radio Movil Dipsa S.A. de C.V. andClaro Chile S.A. as well as manufacturers such as Motorola, LG ElectronicsMobileComm U.S.A., Inc., Nokia, Inc., Kyocera Wireless Corp. and Palm, Inc.

 

**2008 Business**

 

For most of 2008, we had nosignificant operations and the majority of our efforts were associated withwinding down the remaining entities and other activities related to the priorbusiness.  Even though the primary LatinAmerican operations were sold during 2007, in 2008 we collected more than$400,000 from a  previously written-offnote receivable.  The Brightpointtransaction closed on March 30, 2007, yet in 2008 we resolved all escrowamounts and finalized all working capital adjustments which resulted in excessof $4.5 million of collected cash.  Therewere numerous administrative matters related to the prior business that were resolvedfavorably during 2008.  We applied forand collected more than $500,000 in insurance refunds related to the priorbusiness.  We, with our taxprofessionals, filed and received tax refunds of nearly $1.1 million.  In total, the Company, during 2008, collectednearly $7 million related to our prior business.

 

At the end of 2007, we hadeight non-operating U.S. entities and four non-operating foreign entities,including one each in the United Kingdom, Sweden, the Netherlands, and thePhilippines.  The Company also has twodormant entities in El Salvador and Guatemala that never conducted operations.

 

Dissolution proceedings inforeign countries can be cumbersome and lengthy.  We have been diligently working to resolveoutstanding matters and to complete all statutory and governmental requirementsto dissolve our foreign entities.  Wedissolved our United Kingdom entity in 2008. Dissolution of our one Swedish entity cannot be commenced until theexpiration of a contractual indemnity obligation on December 31, 2009,which arises out of the sale of the assets of this entity in 2002.

 

Dissolution proceedings arenow underway in the Philippines and the Netherlands, where audits, tax claims,and longstanding lawsuits that prevented the commencement of dissolutionproceedings have now been resolved.  Inthe Philippines, we have resolved two outstanding lawsuits for which officialcourt approval is pending.  We alsosettled a 1999 tax claim and have applied for relief from taxes associated witha 2004 transaction.  We are working tocomplete all other governmental requirements for dissolution of the Philippinesentity by the end of 2009.  In theNetherlands, we filed for value added tax (VAT) refunds, completed VAT taxaudits that were required to be filed prior to filing for dissolution, and haverecently commenced the formal dissolution process.

 

Governmental requirementsfor closure are complicated in El Salvador and Guatemala, where we have onedormant entity in each country. We are working with local counsel in thesecountries to complete the process and have been advised to expect closure totake several more months or possibly more than one year to complete.

 

We believe at this time thatwe have resolved all known liabilities in our foreign entities, and in somecases have collected or will collect amounts resulting from the successfulresolution of tax refunds of approximately $35,000 in the Netherlands and thereturn of the unused portion of a bond of $29,000 in the Philippines.  We do not anticipate that the dissolution orclosure of any of the remaining foreign entities will result in any significantliabilities.

 

Dissolution of most of ourU.S. entities has been delayed on advice of legal counsel pending resolution ofmatters unrelated to the dissolutions. Audiomex Export Corp. is a party to ourclaim against the purchasers of our Mexico operations and will not be dissolveduntil resolution of that claim. Commencement of the dissolutions of CLST-NAC, Ltd., CLST Fulfillment,Ltd., CLST Fulfillment, Inc., and NAC Holdings, Inc. has been delayedpending resolution of a preference claim 

 

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in a bankruptcy action filed by a formercustomer.  The claim was dismissed in January 2009,which will allow us to move forward to close these entities in fiscal 2009.

 

National Auto Center, Inc.directly or indirectly conducted all of our historical discontinued operations,both foreign and domestic.  As our formerprimary operating entity and a direct wholly owned subsidiary of CLST Holdings, Inc.,we anticipate that it will not be dissolved until all matters in all otherentities have been resolved and such other entities have been dissolved.

 

CLST InternationalCorporation/SA and CLST International Corporation/Asia, both Delawarecorporations, are holding companies for the entities in El Salvador andGuatemala, and the Philippines, respectively. As such, we believe that these two holding companies should not bedissolved or merged out of existence until their subsidiary entities have beendissolved.

 

During 2008 we, in conjunction with our taxaccountants, performed a detailed review and analysis of the Company’shistorical tax net operatingloss carryforwards (the “***NOLs***”).  Webelieve in many circumstances the NOLs, which amount to approximately $125million and begin to expire after November 13, 2020, can be utilized tooffset future income.  However, in theevent of a change in control, the NOLs would be impaired and result in only afraction of their otherwise future potential tax savings.  As of November 30, 2008, approximately12% of the change in control had occurred historically.  If additionally an approximately 38% changein control occurs in the future, as determined by IRS regulations, the Companycould lose substantially all of the potential value of the NOLs.

 

***CLST Asset I, LLC***

 

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 ownedsubsidiaries, entered into a purchase agreement to acquire all of theoutstanding equity interests of FCC Investment Trust I (the “***Trust I***”) from a third partyfor approximately $41.0 million (the “***Trust******Purchase Agreement***”).Our Board unanimously approved the transaction. Our acquisition of the Trust Iwas financed by approximately $6.1 million of cash on hand and by anon-recourse, term loan of approximately $34.9 million by an affiliate of the seller of the Trust I, pursuant to theterms and conditions set forth in the credit agreement, dated November 10,2008, among Trust I, Fortress Credit CO LLC (“***Fortress***”),the lender, FCC Finance, LLC (“***FCC***”), asthe initial servicer, the backup servicer, and the collateral custodian (the “***Trust Credit Agreement***”). The Company, through its servicers, isnow responsible for the collection of the receivables included in the Trust Iportfolio through its wholly owned subsidiary Financo.  Financo has historically conducted ourfinancing business, including ownership of receivables generated by ourbusinesses and providing internal financing to our other operatingsubsidiaries. We are engaging in the business of holding and collecting thereceivables with the intention of generating a higher rate of return on ourassets than we currently receive on our cash and cash equivalent balances.

 

The repayment terms on the accounts arestandardized, but are dependent on the form of agreement used by the originator.  Customers are required to make monthlypayments until the loans are paid in full. At the time of purchase of the TrustI portfolio, the remaining time to maturity was in a range of 8-10 years, notincluding prepayments, if any.

 

The cut-off date for the receivables acquired was October 31,2008, with all collections subsequent to that date inuring to ourbenefit.  As of October 31, 2008, the portfolio consisted ofapproximately 6,000 accounts with an aggregate outstanding balance ofapproximately $41.5 million and an average outstanding balance per account ofapproximately $6,900.  These loans were primarily consumer homeimprovement loans of which approximately 63% were secured with a second lien onthe property, with the remainder being unsecured.  Approximately 89% of the loans are in theNortheast with the remainder in Texas, Georgia and Missouri.  As of October 31, 2008, the weightedaverage interest rate of the portfolio was 14.4%.  We have the right torequire the seller to repurchase any accounts, for the original purchase priceapplicable to such account, that do not satisfy certain specified eligibilityrequirements set out in the Trust Purchase Agreement.  To date there has not been a determination thatany receivables did not meet the eligibility requirements set out in the TrustPurchase Agreement.

 

Thefollowing table reflects the loan origination year for the Trust I Portfolio asof 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                 | %          |

 

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***CLST Asset Trust II, LLC***

 

On December 12, 2008, we, through CLST AssetTrust II (the “***Trust II***”), anewly formed trust wholly owned by CLST Asset II, LLC, a wholly ownedsubsidiary of Financo, entered into a purchase agreement, effective as of December 10,2008, to acquire from time to time certain receivables, installment salescontracts and related assets owned by third parties (the “***TrustII Purchase Agreement***”). The Trust II has committed to purchase, subject to certain limitations, fromthe sellers on or before February 28, 2009 receivables of at least $2million pursuant to the Trust II Purchase Agreement.  We or the sellersunder the Trust II Purchase Agreement can terminate the Trust II PurchaseAgreement at any time (with notice) after March 29, 2009.  We havethe right to require the sellers to repurchase any accounts, for the originalpurchase price applicable to such account plus interest accrued thereon, thatdo not satisfy certain specified eligibility requirements set out in the TrustII Purchase Agreement.

 

Thepurchases of receivables by the Trust II from the sellers under the Trust IIPurchase Agreement and other approved sellers or dealers will be financed bycash on hand and by advances under a non-recourse, revolving facility providedby a third party lender.  The terms and conditions of the revolver are setforth in the second amended and restated revolving credit agreement, effectiveas of December 10, 2008, among the Trust II, the originator, theco-borrowers (who are the sellers under the Trust II Purchase Agreement), thelender, the initial servicer, the backup servicer, the guarantor and thecollateral custodian (the “***Trust II Credit Agreement***”)and the letter agreement, effective as of December 10, 2008, among theTrust II, Financo, the originator, the co-borrowers, the initial servicer, andthe guarantor (the “***Trust II Letter Agreement***”).

 

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

 

***CLST Asset III, LLC***

 

EffectiveFebruary 13, 2009, we, through CLST Asset III, LLC (the “***Asset III***”), a newly formed, whollyowned subsidiary of Financo, purchased certain receivables, installment salescontracts and related assets owned by Fair Finance Company, an Ohio corporation(“***Fair***”), James F.Cochran, Chairman and Director of Fair, and by Timothy S. Durham, ChiefExecutive Officer and Director of Fair and an officer, director and stockholderof our company (the “***Asset III**Purchase Agreement***”). Messrs. Durham and Cochran own all of the outstanding equity ofFair.  In return for assets acquired under the Asset III PurchaseAgreement, Asset III paid the sellers total consideration of $3,594,354 asfollows:

 

(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 $54,000was paid to Mr. Cochran,

 

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

 

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

 

Wereceived a fairness opinion of Business Valuation Advisors (“***BVA***”) stating that BVA is ofthe opinion that the consideration paid by us pursuant to the Asset IIIPurchase Agreement is fair, from a financial point of view, to ournonaffiliated stockholders.  A copy of the fairness opinion has beenattached to a Current Report on Form 8-K filed on February 20,2009.  The shares of Common Stock were issued by us in a transactionexempt from registration pursuant to Section 4(2) of the SecuritiesAct of 1933, as amended.  As additional inducement for Asset III to enterinto the Asset III Purchase Agreement, Fair agreed to use its best efforts tofacilitate negotiations to add Asset III or one of its affiliates as a 

 

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co-borrower under one ofFair’s existing lines of credit with access to at least $15,000,000 of creditfor our own purposes.

 

Substantiallyall of the assets acquired by Asset III are in one of two portfolios. PortfolioA is a mixed pool of receivables from several asset classes, including healthand fitness club memberships, membership resort memberships, receivablesassociated 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 tanningbed products.  At least initially, Fairwill continue to act as servicer for these receivables.  Fair will receiveno additional consideration for acting as servicer.

 

As of February 13,2009, the portfolios of receivables acquired pursuant to the Asset III PurchaseAgreement collectively consisted of approximately 3,000 accounts with anaggregate outstanding balance of approximately $3,709,500 and an averageoutstanding balance per account of approximately $1,015 for Portfolio A andapproximately $5,740 for Portfolio B.  The receivables were recorded atthe fair value based on an evaluation prepared by Business Valuation Advisorsupon which we relied.  All the loans were originated by Fair between November 1998and August 2009 and are unsecured loans.  None of the loans purchasedwere in default.  The loans have remaining terms of between 30 and 48months and have an average interest rate of 14.4%.  As of February 13, 2009, the weightedaverage interest rate of the portfolios exceeded 18%.  The sellers arerequired to repurchase any accounts, for the outstanding balance (at the timeof repurchase) of such account plus interest accrued thereon, that do notsatisfy certain specified eligibility requirements set out in the Asset IIIPurchase Agreement.  Additionally, each of the sellers is required tojointly and severally pay Asset III, up to the aggregate stated principalamount of the Notes issued to such seller, the outstanding balance of anyreceivable that becomes a defaulted receivable within the parameters of theAsset III Purchase Agreement.

 

Nowthat the Company has acquired these receivable portfolios, most of theactivities of the Company with respect to the portfolios are conducted on itsbehalf by the servicers of these portfolios.  The servicers, on behalf ofthe Company, receive payments from account debtors and pursue other collectionactivities with respect to the receivables, monitor collection disputes withindividual account debtors, prepare and submit claims to the account debtors,maintain servicing documents, books and records relating to the receivables andprepare and provide reports to the lenders and the Company with respect to thereceivables and related activity, maintain the security interest of the lendersin the receivables, and direct the collateral custodian to make payments out ofthe proceeds of the portfolios to, among others, the Company, the lenders, theservicers and/or backup servicers, and the collateral custodians pursuant tothe terms of the relevant servicing agreements.

 

***Planof Dissolution***

 

As wehave 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 thecomplete liquidation and dissolution of the Company after the completion of theU.S. Sale (subject to abandonment by the Board in the exercise of theirfiduciary 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 ofdissolution approved by our stockholders, we stated that no distribution ofproceeds from the U.S. Sale and Mexico Sale would be made until the investigationby the SEC was resolved. On June 26, 2007, we received a letter from thestaff of the SEC giving notice of the completion of their investigation with noenforcement action recommended to the SEC. Therefore, on June 27, 2007,our Board declared a cash distribution of $1.50 per share on Common Stock tostockholders of record as of July 9, 2007. On July 19, 2007, weissued 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 dividendto stockholders which brings the cumulative dividends paid to stockholders to$2.10 per share or approximately $43.2 million. The amount and timing ofany additional distributions paid to stockholders in connection with theliquidation and dissolution of the Company are subject to uncertainties anddepend on the resolution of certain contingencies more fully described in theproxy statement and elsewhere in this Annual Report on Form 10-K/A.

 

Wehave continued to wind down aspects of our businesses, including dissolvingsome of our subsidiaries and continuing to try to collect our remainingnon-cash assets.  In addition, we havecontinued to review our liabilities and seek to satisfy or resolve those thatwe can in a favorable manner.  See “Item1 Business — 2008 Business” above for further discussion with respect to ouractivities in this regard.  We expectthat it will take several years to implement the plan of dissolution because ofthe lengthy process of obtaining sufficient information regarding all of ourliabilities to pay and appropriately provide for them as required under theplan of dissolution*.*  Given this and the time necessary to completethe governmental requirements for dissolution, our Board focused on ways togenerate higher returns on the Company’s cash and other assets in order tobetter offset the Company expenses and to take advantage of the favorable taxtreatment provided by our NOLs.  Section 3of the plan of dissolution states that we may not engage in any businessactivities except to the extent necessary to preserve the value of the Company’sassets, wind up the Company’s affairs, and distribute the Company’sassets.  As further described above under“Item 1 Business — 2008 Business,” our Board determined to acquire several 

 

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portfolios of receivableswith the intention of generating a higher rate of return on our assets than wewere receiving on our cash and cash equivalents balances which were held inmoney market accounts or short term certificates of deposit, earningapproximately 1% (current interest rates are now close to 0%).  Our Board believed that each of theseacquisitions would provide a better investment return for our stockholders whencompared to the low interest rates available on our cash investments and otherinvestment alternatives although the acquisition would involve a higher riskprofile than traditional cash deposits and other cash equivalents positions.  In addition, these investments offered theCompany a way to utilize its NOLs.  Atthe time we began looking at purchasing these portfolios during the second andthird quarters of 2008, the credit markets became significantly impaired, andthe viability of many banks and other financial institutions was inquestion.  The Company’s cash was held inone bank subject to the limited protection of FDIC coverage.  The Board considered, among other things,spreading the Company’s cash among over a dozen financial institutions.  However, the Board did not believe spreadingthe Company’s cash among many different banks to be practical or costefficient.  In addition, the Boardconsidered various cash strategies including investing in a “ladder” of U.S.Treasury securities (securities of varying maturities) which would haveresulted in higher yields than cash deposits, but would have required theCompany to hold those securities in a brokerage firm and pay that firm a fee toarrange the transactions.  The Board didnot believe that the increased yield provided by a ladder of U.S. Treasurysecurities, after associated fees and administrative costs, was likely to besignificantly better than that of cash deposits, and did not believe thatinterest from U.S. Treasury securities would allow the Company to use its NOLsto shield income from taxes.  Finally,the Board was unsure how to assess the brokerage and custody risks associatedwith holding a ladder of U.S. Treasury securities through third parties, andfelt that the risk was similar to that associated with commercial banks at thetime.

 

Webelieve that the market conditions have changed for our Trust I portfolio.  When we purchased Trust I, the historicaldefault rate for the previous three years for our portfolio was approximately4%.  Our recent experience has seen thedefault rate increase to the 6-7% range; accordingly, we have been increasingour allowances to reflect this change.

 

Uponexamination of Trust II and Asset III, we believe that the circumstances ofthese portfolios are different from those of Trust I.  Trust II contains new originations withhigher and more stringent credit requirements than the requirements for theTrust I portfolio.  Therefore the TrustII portfolio has a very different risk profile when compared to Trust I.  Asset III is protected from default risk bythe terms of the purchase agreement with the seller of that portfolio.  The sellers of the Asset  III portfolio bear the majority of thedefault risk for receivables in that portfolio, and that risk is secured by ourability to offset against amounts we owe the sellers on the purchase price.

 

Management believes that thevarious measures being taken by the federal government and the Federal Reservewill ultimately have a positive impact on the credit markets and the economy ingeneral.  In addition, we continue tobelieve that, if needed, our portfolio assets could be sold, if properlymarketed, whether through the use of reputable brokers or investment bankers,through an auction process or other strategies for maximizing proceeds from anasset disposition, for the then-current book value of the portfolios and withinthe timeframe necessary to complete the winding down of our Company, which willlikely take the Company two, three, or more years in order to resolve alloutstanding issues, including the dissolution of foreign subsidiaries, taxaudits, and outstanding liabilities. This belief is based upon the following: (i) the portfolio balanceswill continue to decrease through note receivable collections; (ii) thedefault rates are expected to normalize with improving economic and marketconditions; and (iii) the Company would expect to begin to market theportfolios a minimum of 12 months prior to any anticipated dissolution.  Due to the lengthy process that will benecessary to complete the plan of dissolution, and due to the state of thecredit markets at this time, our Board believes that sales of the Company’sportfolio assets at this time would not be in the best interest of our Companyor our stockholders.

 

Consistentwith the plan of dissolution and their fiduciary duties, our Board andExecutive Committee continue to consider both the timing of a filing of acertificate of dissolution and whether amending, modifying or abandoning theplan of dissolution and continuing to do business in one or more of ourhistorical lines of business or related businesses or in a new line of businessis in the best interests of the Company and its stockholders. Our Board hasbeen reviewing potential acquisitions and the value of the Company’s taxassets. It is possible that our Board of Directors will, in the exercise of itsfiduciary duties, elect to abandon the plan of dissolution for a strategicalternative that it believes will maximize stockholder value. If our Boarddetermines that it is in the best interest of the Company to pursue anacquisition, it will likely pursue a debt financing or equity issuance in orderto finance such acquisition. It is unlikely our Board will make any further distributionsto the Company’s stockholders under the plan of dissolution while it considersthe strategic alternatives available to the Company.

 

***Governmental Regulations***

 

Federal, state and municipal laws, rules, regulationsand ordinances may limit our ability to recover and enforce our rights withrespect to the receivables acquired by us. These laws include, but are notlimited to, the following federal statutes 

 

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and regulationspromulgated thereunder and comparable statutes in states where consumers resideand/or where creditors are located:

 

·                  the Fair Debt Collection Practices Act;

·                  the Federal Trade Commission Act;

·                  the Truth-In-Lending Act;

·                  the Fair Credit Billing Act;

·                  the Equal Credit Opportunity Act; and

·                  the Fair Credit Reporting Act.

 

**Financial Information**

 

The Company’s consolidated financial statements andaccompanying notes for the last two fiscal years can be found in Part IVof this Annual Report on Form 10-K/A.

 

**Competition**

 

Ourbusiness of purchasing consumer receivables is highly competitive andfragmented, and we expect that competition from new and existing companies willincrease. We compete with:

 

·                  other purchasers of consumer receivables, including third-partycollection companies; and

·                  other financial services companies who purchase consumer receivables.

 

We are new to thebusiness of purchasing receivables. Many of our competitors are larger and moreestablished and have substantially greater financial, technological, personneland other resources than we have, including greater access to capital markets.****Companies withgreater financial resources may elect at a future date to enter the consumerdebt collection business, and current debt sellers may change strategies andcease selling debt portfolios in the future. Furthermore, as the unemploymentrate and the number of bankruptcy filings continue to rise, we could face amore challenging collection environment as debtors have fewer resourcesavailable to satisfy their debt.

 

Since most of our receivables were bulk purchaseswith collateral, we will face another form of competition, which is some of ourcustomers may be able to secure a lower cost loan from other sources.  In these cases, our customers will prepay ouraccounts at the higher interest rate by borrowing from lenders at lowerrates.  Our receivables in general allowcustomers to prepay their account without significant prepayment charges.  Although under these circumstances we willreceive payment of our principal, these prepayments will result in lowerreturns as we will collect less interest on the accounts.

 

**Employees**

 

At February 27, 2009, the Company had 2permanent employees and 1 temporary employee worldwide.

 

**Available Information and Code of Ethics**

 

We maintain an Internet website at *www.clstholdings.com*. Our annual reportson Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and any amendments to these reports will be made available, free of charge, atour website as soon as reasonably practicable after we electronically file suchreports with or furnish them to the SEC.

 

We have adopted a code of ethics that applies to ourdirectors, officers and all employees. Our Business Ethics Policy can be foundat our Internet website at *www.clstholdings.com*.

 

**Item 1A.  Risk Factors**

 

Our future performance is subject to a variety ofrisks. If any of the events or circumstances described in the following riskfactors actually occurs, our business, financial condition or results ofoperations could suffer and the trading price of our Common Stock could be negativelyaffected. In addition to the following disclosures, please refer to the otherinformation contained in this report, including consolidated financialstatements and the related notes, and information contained in our other SECfilings.

 

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***The******Board******, in its fiduciary capacity, will continue to considerabandoning the Company’s plan of liquidation and dissolution, which will likelyaffect whether stockholders receive distributions pursuant to the plan.***

 

Our plan of liquidation and dissolution provided forthe complete liquidation and dissolution of the Company after the completion ofthe U.S. Sale, but subject to the ability of the Board to abandon the plan ifit deems appropriate. Consistent with its fiduciary duties, the Board has andwill continue to give careful consideration to the strategic alternativesavailable to the Company, with a view to maximizing stockholder value.  We have acquired certain portfolios ofreceivables and are engaging in the business of holding and collecting thereceivables with the intention of generating a higher rate of return on ourassets than we currently receive on our cash and cash equivalent balances.  Among other matters, the Board will continueto review additional potential acquisitions and the value of the Company’s taxassets. If the Board determines that it is in the best interest of the Companyto pursue additional acquisitions, it will likely require the Company to obtaindebt and/or equity financing. Even if we obtain access to the necessarycapital, we may be unable to identify suitable acquisition opportunities,negotiate acceptable terms or successfully acquire identified targets.

 

It is unlikely the Board will make any furtherdistributions to the Company’s stockholders under the plan while it considersthe strategic alternatives available to the Company. It is possible that theBoard will, in the exercise of its fiduciary duty, elect to abandon the plan fora strategic alternative that it believes will maximize stockholder value, andthat no further liquidating distributions will be made.  See “Item 1, Business — Plan of Dissolution”,for further discussion regarding our plan of dissolution.

 

***Because the Company has been in theprocess of liquidating its business, it is difficult to secure and retainqualified employees*****.**

 

During the last three quarters of fiscal year 2007,the Company began reducing its employee base, consistent with the Company’splan to liquidate and dissolve. However, the Company still requires the serviceof some employees for handling routine business matters. Retaining employeeswho are knowledgeable of the Company’s business and background has proven to bedifficult while the Company has been winding down its business. Furthermore, itis difficult to hire and train new employees when the Company is alreadyworking with a reduced staff, and new employees may see little incentive inworking for a Company with a plan of liquidation and dissolution.

 

***We are experiencing significantrisks related to information technology*****.**

 

Although the Company has outsourced certaininformation technology (“***IT***”)functions, the Company currently has no employees who are qualified to performIT services for the Company, nor does the Company have any plans to hire ITemployees. Therefore, maintaining the Company’s website and other IT-relatedinformation has proven to be difficult, and there is a risk that suchinformation may not be adequately maintained. Furthermore, during the periodfollowing the U.S. sale, email backup tapes were not properly protected, and asa result historical email detail is limited. The Company has had difficultiesrestoring email records from Brightpoint when the Company has requested suchinformation. Without access to these emails, the Company may not have completehistorical email records. These risks may adversely impact the Company’sinternal control environment.

 

***We are subject to the requirementsof Section 404 of the Sarbanes-Oxley Act. If we are unable to timelycomply with Section 404 or if the costs related to compliance aresignificant, our profitability, stock price and results of operations andfinancial condition could be materially adversely affected.***

 

We are required to comply with the provisions of Section 404of the Sarbanes-Oxley Act of 2002 for this Annual Report on Form 10-K/A. Section 404requires that we document and test our internal control over financialreporting and issue management’s assessment of our internal control overfinancial reporting. This section also requires that our independent registeredpublic accounting firm opine on those internal controls and management’sassessment of those controls beginning with our fiscal year ending November 30,2010. We have hired an outside consulting firm to work with management inassessing our internal controls, and they, with management, have concluded thatthe internal controls are adequate. During the course of our ongoing evaluationand integration of the internal control over financial reporting, we mayidentify areas requiring improvement, and we may have to design enhancedprocesses and controls to address issues identified through this review.

 

We believe that the out-of-pocket costs, thediversion of management’s attention from running the day-to-day operations andoperational changes caused by the need to comply with the requirements of Section 404of the Sarbanes-Oxley Act could be significant. If the time and costsassociated with such compliance exceed our current expectations, ourprofitability, cash flow and financial condition could be negatively affected.

 

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We cannot be certain at this time that our auditorswill not identify material weaknesses in internal control over financialreporting. If we fail to comply with the requirements of Section 404 or ifwe or our auditors identify and report such material weakness, the accuracy andtimeliness of the filing of our annual and quarterly reports may be negativelyaffected and could cause investors to lose confidence in our reported financialinformation, which could have a negative effect on the trading price of our Common Stock. In addition, a materialweakness in the effectiveness of our internal control over financial reportingcould result in an increased chance of fraud and reduce our ability to detectand prevent fraud, reduce our ability to obtain financing and requireadditional expenditures to comply with these requirements, each of which couldnegatively impact our business, profitability and financial condition.

 

***We are subject to the risks ofinterest rate fluctuation.***

 

Our net interest income is affected by changes inmarket interest rates and other economic factors beyond our control. Interestrates for demand deposits and other short term cash investments in the U.S.have dropped significantly in the past year. The Company’s assets consistlargely of cash. As of November 30, 2008, our cash and cash equivalentswas $9.8 million. As a result, declines in such interest rates will reduce theCompany’s income and directly and adversely affect the Company’s budget. Ourcash is invested in Texas Capital Bank, N.A. at a variable interest rate and ingovernment repurchase contracts, where we are earning less than 1% per year.Each deposit of our cash is FDIC insured or government insured.

 

***The Company has had difficultycollecting money it is due from some purchasers of its operations.***

 

We are owed amounts from the sales of our non-U.S.operations. Collection proceedings outside of the U.S. tend to be cumbersomeand expensive. We believe we are owed as much as $1.7 million from the MexicoSale.  Due to the difficulty ofcollecting money from Mexico, we cannot predict an outcome at this time.However, we are pursuing various strategies to collect what we believe is owedto us. The cost of collecting the amount from Mexico that we believe is owedmay be significant and may exceed the value of the amount at issue.

 

***Our******Common Stock******trades at low prices and low volumes and may besubject to certain fraud and abuse in the market.***

 

Our Common Stock trades at low prices andrelatively low volumes and is not listed on an exchange. As such, the marketfor Common Stock such as oursmay be subject to certain patterns of fraud and abuse, similar to Common Stock that is subject to the SEC’s“penny stock” rule, including:

 

·                  control of the market for the security by oneor a few broker-dealers that are often related to the promoter or issuer;

 

·                  manipulation of prices through prearrangedmatching of purchases and sales and false and misleading press releases;

 

·                  “boiler room” practices involvinghigh-pressure sales tactics and unrealistic price projections by inexperiencedsales persons;

 

·                  excessive and undisclosed bid-askdifferentials and markups by selling broker-dealers; and

 

·                  the wholesale dumping of the same securitiesby promoters and broker-dealers after prices have been manipulated to a desiredlevel, along with the resulting inevitable collapse of those prices and withconsequent investor losses.

 

Although we do not expect to be in a position todictate the behavior of the market or of broker-dealers who participate in themarket, management will strive within the confines of practical limitations toprevent the described patterns from being established with respect to our Common Stock. On February 17, 2009,we filed a lawsuit in the United States District Court for the NorthernDistrict of Texas against Red Oak Fund, L.P., Red Oak Partners LLC, and DavidSandberg alleging that defendants engaged in numerous violations of federalsecurities laws in making recent purchases of our Common Stock. See “Item 3, LegalProceedings,” for further discussion regarding this lawsuit.

 

***Our stock is thinly traded, so youmay be unable to sell at or near ask prices or at all.***

 

The shares of our Common Stock are traded on the PinkSheets. Shares of our CommonStock are thinly-traded, 

 

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meaningthat the number of persons interested in purchasing our common shares at ornear ask prices at any given time may be relatively small or non-existent. Thissituation is attributable to a number of factors, including ourreclassification to discontinued operations.

 

As a consequence, our stock price may not reflect anactual or perceived value. Also, there may be periods of several days or morewhen trading activity in our shares is minimal or non-existent, as compared toa seasoned issuer that has a large and steady volume of trading activity thatwill generally support continuous sales without an adverse effect on shareprice. A broader or more active public trading market for our common shares maynot develop or if developed, may not be sustained.

 

Dueto these conditions, you may not be able to sell your shares at or near askprices or at all if you need money or otherwise desire to liquidate yourshares.

 

***The financial results of our receivables businessdepend on our ability to purchase receivable portfolios on acceptable terms andin sufficient amounts. If we are unable to do so, our business, results of operationsand financial condition could be adversely affected.***

 

If we are unable to purchaseconsumer receivables from credit originators and other debt sellers onacceptable terms and in sufficient amounts, our business, results of operationsand financial condition could be adversely affected. The availability ofportfolios that generate an appropriate return on our investment depends on anumber of factors both within and beyond our control, including:

 

·                  competition from other buyers of consumerreceivable portfolios;

·                  the growth of consumer debt;

·                  continued sales of consumer receivableportfolios by credit originators;

·                  continued growth in the number of industriesselling consumer receivable portfolios; and

·                  our ability to collect upon a sufficient percentageof accounts to satisfy our contractual obligations.

 

At certain times the marketfor acquiring consumer receivable portfolios can become more competitive,thereby possibly diminishing our ability to acquire such receivables atattractive prices in future periods. The growth in consumer debt may also beaffected by:

 

·                  a slowdown in the economy;

·                  reductions in consumer spending;

·                  changes in the underwriting criteria byoriginators; and

·                  changes in laws and regulations governingconsumer lending.

 

Any slowing of the consumerdebt could result in a decrease in the availability of consumer receivableportfolios for purchase that could affect the purchase prices of suchportfolios. Any increase in the prices we are required to pay for suchportfolios in turn will reduce the profit, if any, we generate from suchportfolios.

 

***Because of the nature of our business, ourquarterly operating results may fluctuate, which may adversely affect themarket price of our******Common Stock******.***

 

Our results may fluctuate asa result of any of the following:

 

·                  the timing and amount of collections on ourconsumer receivable portfolios;

·                  our inability to identify and acquireadditional consumer receivable portfolios;

·                  a decline in the estimated value of ourconsumer receivable portfolio recoveries;

·                  increases in operating expenses associatedwith the growth of our operations; and

·                  general and economic market conditions.

 

***We may not be able to recover sufficient amounts onour consumer receivable portfolios to recover the costs associated with thepurchase of those portfolios and to fund our operations. In order to operateprofitably over the long term, we must continually purchase and collect on asufficient volume of receivables to generate revenue that exceeds our costs.***

 

Our ability to recover onour portfolios and produce sufficient returns can be negatively impacted by thequality of the purchased receivables. In the normal course of our portfolioacquisitions, some receivables may be included in the portfolios that fail toconform to certain terms of the purchase agreements, and we may seek to returnthese receivables to the 

 

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sellerfor payment. However, we cannot guarantee that any of such sellers will be ableto meet their payment obligations to us. Accounts that we are unable to returnto sellers may yield no return. If cash flows from operations are less thananticipated as a result of our inability to collect sufficient amounts on ourreceivables, our ability to satisfy our debt obligations, purchase newportfolios and our future growth and profitability may be materially adverselyaffected.

 

***We are subject to intense competition for thepurchase of consumer receivable portfolios and, as a result of thiscompetition, if we are unable to purchase receivable portfolios, our profits,if any, will be limited.***

 

We compete with otherpurchasers of consumer receivable portfolios, with third-party collectionagencies and with financial services companies that manage their own consumerreceivable portfolios. Some of our competitors have greater capital, personneland other resources than we have. The possible entry of new competitors,including competitors that historically have focused on the acquisition ofdifferent asset types, and the expected increase in competition from currentmarket participants may reduce our access to consumer receivable portfolios.Aggressive pricing by our competitors could raise the price of consumerreceivable portfolios above levels that we are willing to pay, which couldreduce the number of consumer receivable portfolios suitable for us to purchaseor if purchased by us, reduce the profits, if any, generated by suchportfolios. If we are unable to purchase receivable portfolios at favorableprices or at all, our revenues and earnings could be materially reduced.Failure of our third party recovery partners to adequately perform collectionservices could materially reduce our revenues and our profitability, if any.

 

***We are dependent upon outside collection agenciesto service all our consumer receivable portfolios.***

 

Any failure by our thirdparty recovery partners to adequately perform collection services for us orremit such collections to us could materially reduce our revenues and ourprofitability. In addition, our revenues and profitability could be materiallyadversely affected if we are not able to secure replacement recovery partnersand redirect payments from the debtors to our new recovery partner promptly inthe event our agreements with our third-party recovery partners are terminated,our third-party recovery partners fail to adequately perform their obligationsor if our relationships with such recovery partners adversely change.

 

***Our collections may decrease if bankruptcy filingsincrease.***

 

During times of economicrecession, the amount of defaulted consumer receivables generally increases,which contributes to an increase in the amount of personal bankruptcy filings.As of November 10, 2008 our portfolios related to the Trust have accountsover 90 days past due in the amount of approximately $186,000.** **Under certainbankruptcy filings, a debtor’s assets are sold to repay credit originators, butsince the defaulted consumer receivables we purchase are generally unsecured weoften would not be able to collect on those receivables. We cannot assure youthat our collection experience would not decline with an increase in bankruptcyfilings. If our actual collection experience with respect to a defaultedconsumer receivables portfolio is significantly lower than we projected when wepurchased the portfolio, our earnings could be negatively affected.

 

***Government regulations may limit our ability torecover and enforce the collection of our receivables.***

 

Federal, state and municipallaws, rules, regulations and ordinances may limit our ability to recover andenforce our rights with respect to the receivables acquired by us. These lawsinclude, but are not limited to, the following federal statutes and regulationspromulgated thereunder and comparable statutes in states where consumers resideand/or where creditors are located:

 

·                  the Fair Debt Collection Practices Act;

·                  the Federal Trade Commission Act;

·                  the Truth-In-Lending Act;

·                  the Fair Credit Billing Act;

·                  the Equal Credit Opportunity Act; and

·                  the Fair Credit Reporting Act.

 

Additional laws may beenacted that could impose additional restrictions on the servicing andcollection of receivables. Such new laws may adversely affect the ability tocollect the receivables. Because the receivables were originated and servicedpursuant to a variety of federal and/or state laws by a variety of entities andinvolved consumers which may include all 50 states, the District of Columbiaand Puerto Rico, there can be no assurance that all original servicing entitieshave at all times been in substantial compliance with applicable law.Additionally, there can be no 

 

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assurancethat we or our recovery partners have been or will continue to be at all timesin substantial compliance with applicable law. The failure to comply withapplicable law could materially adversely affect our ability to collect ourreceivables and could subject us to increased costs and fines and penalties. Inaddition, our third-party recovery partners may be subject to these and otherlaws and their failure to comply with such laws could also materially adverselyaffect our revenues and earnings.

 

***We are subject to certain default provisions underour loan agreements related to the acquisitions by CLST Asset I and CLST AssetII 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 reducedand will expire in September 2010.***

 

**CLST Asset I**

 

The loan obligations of Trust I under the TrustCredit Agreement are secured by a first priority security interest insubstantially all of the assets of the Trust, including portfolio collections.The loan is a non-recourse term loan. The Trust Credit Agreement contains customary covenants and events ofdefault for facilities of its type, including among other things, limitationson the delinquent accounts rate and default rates of the notes receivableaccounts, as more fully described in Footnote 4 of the notes to theconsolidated financial statements.  Acopy of the Trust Credit Agreement was filed as an exhibit to the Company’sCurrent Report on Form 8-K filed November 17, 2008, as amended todate.

 

If an event of default occurs under the Trust CreditAgreement, whether or not the default is material to the loan as a whole, thelender has various remedies, including among other things, raising the interestrate payable on the loan and accelerating all of the obligations of Trust Iunder the Trust Credit Agreement, which would cause the entire remainingoutstanding principal balance plus accrued and unpaid interest and fees to bedeclared immediately due and payable.

 

In addition, the Company has no control over thedelinquency or default rates of the notes receivable accounts now held by TrustI. An event ofdefault occurs if the three-month rolling average delinquent accounts rateexceeds 10.0% or the three-month rolling average annualized default rateexceeds 7.0%. For the second quarter of 2009, these default rates were 5.14%and 6.34%, respectively. There can be no assurance that thedelinquency or default rates of such accounts will not result in an event ofdefault for Trust I, which would allow the lender to, among other things, raisethe interest rate payable on the loan, accelerate all of the obligations ofTrust I under the Trust Credit Agreement, and sell all the assets of the Trustto satisfy the amounts due.

 

**CLST Asset II**

 

Trust II is a party to a non-recourse, revolvingloan agreement between Trust II, Summit, SSPE and SSPE Trust, as co-borrowers, Summit and EricJ. Gangloff, as Guarantors, Fortress Corp., as the lender, and SummitAlternative Investments, LLC, as the initial servicer, pursuant towhich Trust II purchased $9.6 million of receivables with an aggregate purchase discount of $0.8million during the six months ended May 31, 2009.  In conjunction with this loan agreement,Trust II borrowed $3.7 million to purchase the consumer receivables and becamea co-borrower under the $50 million Trust II Credit Agreement that permitsTrust II to use more than $15 million of the aggregate availability under therevolving facility. A copy of the Trust II Credit Agreement was filed as an Exhibit tothe Company’s Current Report on Form 8-K filed December 19, 2008, asamended to date.

 

Advances under the revolver are limited to an amountequal to, net of certain concentration limitations set forth in the Trust IICredit Agreement, (a) the lesser of (1) the product of 85% and thepurchase price being paid for eligible receivables with a credit score greaterthan or equal to 650 (“***Class AReceivables***”) or (2) the product of 80% and thethen-current aggregate balance of principal and accrued and unpaid interestoutstanding for Class A Receivables plus (b) the lesser of (1) theproduct of 75% and the purchase price being paid for eligible receivables witha credit score less than 650 (“***Class BReceivables***”) or (2) the product of 50% and thethen-current aggregate balance of principal and accrued and unpaid interestoutstanding for Class B Receivables.

 

Duringthe second quarter of 2009 we were notified by Summit that the credit facilitywe entered into with Trust II, Summit and various other parties had beenreduced. We believe our $15 million aggregate availability under the revolvingfacility is not impacted. However, since the credit facility term ends in 2010,there can be no assurance that it will be renewed. During the third quarter ofthis fiscal year, we ceased all purchasing of new receivables under thefacility and are no longer originating new loans under the creditagreement. As aresult, FCC is no longer providing origination services to the Company. Theorigination services performed by FCC included loan documentation, collateraldocumentation where applicable, credit verification, and other requiredactivities to secure loan approval per the Company’s standards.  FCC was paid a one-time fee of 2% of theoriginal principal amount of loans originated for performing theseservices.  Once a loan was approved, FCCwould perform the monthly servicing activities, which would includecollections, reporting, lock box 

 

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services,customer service, and other related services. FCC was paid 1.5%, per annum, ofthe outstanding principal balance for these services. As of August 31,2009, Trust II had an outstanding balance of approximately $5.3 million.

 

The Trust II Credit Agreement contains customarycovenants and events of default for facilities of its type, including amongother things, limitations on the delinquent accounts rate and default rates ofthe consumer receivable accounts, as more fully described in Footnote 4 of thenotes to the consolidated financial statements. If an event of default occurs, whether or not the default is material tothe loan as a whole, the lender has various remedies, including among otherthings, raising the interest rate payable on the loan and accelerating all ofTrust II’s obligations under the Trust II Credit Agreement, which would causethe entire remaining outstanding principal balance plus accrued and unpaidinterest and fees to be declared immediately due and payable.

 

Furthermore, the Company hasno control over the delinquency or default rates of the consumer receivableaccounts that the Trust II acquires.  Anevent of default occurs if the three-month rolling average delinquent accountsrate exceeds 15.0% for Class A Receivables or 30.0% for Class BReceivables, or the three-month rolling average annualized default rate exceeds5.0% 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 thesedelinquency or default rates will not result in an event of default for TrustII, which would allow the lender to, among other things, raise the interestrate payable on the loan, accelerate all of Trust II’s obligations under theTrust II Credit Agreement, and sell all the assets of Trust II to satisfy theamounts due.

 

**Item 1B.  Unresolved Staff Comments**

 

This information has been omitted as the Companyqualifies as a smaller reporting company.

 

**Item 2.  Properties**

 

In October 2007, we moved from our previouscorporate headquarters located in Coppell, Texas to a temporary office locatedin Dallas, Texas, upon receipt of notice from Brightpoint that we were requiredto vacate the Coppell office within thirty (30) days of such notice. Our leasein the temporary office expired on March 31, 2008. On April 1, 2008,we moved into our current location at 17304 Preston Road, Dallas, TX75252.  We believe the new office spaceis in a reasonable location and adequately suits our needs. Our lease expireson May 31, 2009.  We neither own norlease any other properties at this time.

 

**Item 3.  Legal Proceedings**

 

The Company has been informed of the existence of aninvestigation that may relate to the Company or its South American operations.Specifically, the Company understands that authorities are reviewing allegationsfrom unknown parties that remittances were made from South America to Companyaccounts in the United States in 1999. The Company does not know the nature orsubject of the investigation, or the potential involvement, if any, of theCompany or its former subsidiaries. The Company does not know if allegations ofwrongdoing have been made against the Company, its former subsidiaries or anycurrent or former Company personnel or if any of them are subjects of theinvestigation. However, the fact that the investigators are aware of anallegation of transfers of money from South America to the United States andmay have questioned witnesses about such alleged transfers means that theCompany can not predict whether or not the investigation will result in a materialadverse effect on the consolidated financial condition or results of operationsof the Company.

 

On February 17, 2009,****wefiled a lawsuit in the United States District Court for the Northern Districtof Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandbergalleging that defendants engaged in numerous violations of federal securitieslaws in making recent purchases of our Common Stock. According to a Schedule 13D filed by RedOak Partners, LLC on February 18, 2009, it beneficially owned as of thatdate 22.19% of the Company’s Common Stock. The complaint seeks to enjoin any futureunlawful purchases of our stock by the defendants, their agents, and persons orentities acting in concert with them.

 

We are party to various claims, legal actions andcomplaints arising in the ordinary course of business. Our management believesthat the disposition of these matters will not have a materially adverse effecton the consolidated financial condition or results of operations of theCompany.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

We did not submit any matters to a vote of securityholders in the fourth quarter of 2008.

 

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**PART II.**

 

**Item 5.****          ****Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

 

**Market Information**

 

The Company’s Common Stock was delisted from theNasdaq National Market effective with the open of business on June 10,2005. The Company’s CommonStock is currently traded on the over-the-counter (OTC) market and is quotedon the Pink Sheets® under the symbol “CLHI.”

 

The following table sets forth, on a per sharebasis, high and low prices for our Common Stock for each quarter of fiscalyears 2007 and 2008. Prices are the high and low bid quotations per share forour Common Stock as reported onthe OTC market, as compiled by Pink Sheets LLC. Such bid quotationsreflect inter-dealer prices, without retail mark-up, mark-down or commissionand may not necessarily represent actual transactions.

 
| ** **                                | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal Year ended  November 30, 2008 |       |     |       |    |       |
| Quarter Ended:                            |       |     |       |    |       |
| February 28, 2008                    |       | $        | 0.50       |    | $          | 0.31 |   |
| May 31, 2008                         |       | 0.40     |       | 0.34    |       |
| August 31, 2008                      |       | 0.40     |       | 0.25    |       |
| November 30, 2008                    |       | 0.40     |       | 0.17    |       |
|                                      |       |     |       |    |       |
| Fiscal Year ended  November 30, 2007 |       |     |       |    |       |
| Quarter Ended:                            |       |     |       |    |       |
| February 28, 2007                    |       | $        | 3.75       |    | $          | 2.49 |   |
| May 31, 2007                         |       | 2.66     |       | 2.50    |       |
| August 31, 2007                      |       | 2.76     |       | 1.10    |       |
| November 30, 2007                    |       | 1.17     |       | 0.40    |       |

 

**Holders**

 

As of February 27, 2009, the last reportedprice of our CommonStock on the OTC market was $0.21 per share. As of February 27, 2009,there were 309 stockholders of record.

 

**Dividends**

 

Prior to the adoption of our plan of liquidation anddissolution in 2007, our policy had been to reinvest earnings to fund futuregrowth. Accordingly, we generally did not pay cash dividends on our Common Stock. However, consistent withthe plan, we paid the following cash distributions to the holders of our Common Stock during fiscal year 2007:

 
| **Date**              | ** ** | **Dividend Amount** | ** ** |
|-----------------------|------------|--------------------------|------------|
| July 19, 2007    |       | $                        | 1.50       |   |
| November 1, 2007 |       | $                        | 0.60       |   |

 

The distributions under the plan totaled $2.10 pershare or approximately $43.2 million. Approximately 61.21% of thedistribution was considered a taxable dividend in accordance with U.S. Federalincome tax rules, and the remaining 38.79% was considered a non-dividenddistribution. This determination was a direct result of the Company’s earningsand profits of $26.3 million, requiring the first $26.3 million ofdistributions to be treated as taxable dividends. The Company’s status did notaffect the tax determination. Stockholders are encouraged to contact their taxand financial advisors regarding implications and appropriate tax treatment ofthe distribution.

 

It is unlikely the Board will make any furtherdistributions to the Company’s stockholders under the plan of liquidation anddissolution while it considers the strategic alternatives available to theCompany. It is possible that the Board will, in the exercise of its fiduciaryduty, elect to abandon the plan of liquidation and dissolution for a strategicalternative 

 

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thatit believes will maximize stockholder value, and that no further liquidatingdistributions will be made.  See “Item 1,Business — Plan of Dissolution”, for further discussion regarding our plan ofdissolution.

 

**Sales of Unregistered Securities**

 

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

 

Also, on December 1, 2008, we issued 900,000shares of restricted Common Stock for no cash consideration to our directors ascompensation for services during the fiscal year ended November 30, 2008.We granted 300,000 shares of restricted Common Stock to each of Timothy S.Durham, Robert A. Kaiser and Manoj Rajegowda. The shares of Common Stock wereissued by us in a transaction exempt from registration pursuant to Section 4(2) ofthe Securities Act. Subsequently, on February 24, 2009, Mr. Rajegowdaforfeited all option issuances provided to him during the course of his Boardmembership in connection with his resignation from the Board. See “Item 98,other information—Resignation of Director” for more information.

 

**Issuer Purchases of Equity Securities**

 

We have no programs to repurchase shares of our Common Stock. Furthermore, we did notrepurchase any of our CommonStock during the fourth quarter of the last fiscal year.

 

**Equity Compensation Plan Information**

 

Our former 1993 Long-Term Incentive Plan (the “***1993 Plan***”) terminated on December 3,2003. However, as disclosed in “Item 11, Executive Compensation,” Mr. Kaisercurrently has exercisable options that were granted under the 1993 Plan. At ameeting of the Board of Directors on September 25, 2007, our Boardunanimously resolved to terminate our 2003 Long-Term Incentive Plan (the “***2003 Plan***”) due to the reduction inthe Company’s workforce. As a result of the termination of the 2003 Plan, alloutstanding options to purchase the equity securities of the Company issuedthereunder were terminated as well. Therefore, there are no currentlyoutstanding options to purchase the Company’s securities under the 2003 Plan.

 

The following table provides the number ofsecurities to be issued upon the exercise of outstanding options, warrants andrights as of November 30, 2008:

 

**EquityCompensation Plan Information**

 
| **Plan Category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding  options, warrants and  rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
| ** **                                                  | ** ** | ** **                                                                                                                                           | ** ** | ** **                                                                                                  | ** ** | ** **                                                                                                                                                                                                       | ** ** |
| Equity compensation plans  approved by security holders     |       | 130,000                                                                                                                                              |       | $                                                                                                           | 4.93       |                                                                                                                                                                                                             | 0          |   |
| Equity compensation plans  not approved by security holders |       | n/a                                                                                                                                                  |       | n/a                                                                                                         |       | n/a                                                                                                                                                                                                              |       |
| **Total**                                                   | ** ** | **130,000**                                                                                                                                          | ** ** | **$**                                                                                                       | **4.93**   | ** **                                                                                                                                                                                                       | **0**      | ** ** |

 

Subsequent to fiscal 2008, on December 1, 2008,our Board approved the Company’s 2008 Long Term Incentive Plan.  The 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 plan providesthat 

 

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theadministrator of the plan may determine the terms and conditions applicable toeach award, and each award will be evidenced by a stock option agreement orrestricted stock agreement. The aggregate number of shares of Common Stock of the Company that maybe issued under the plan is 20,000,000 shares. The plan will terminate on December 1,2018.

 

Inaddition, on December 1, 2008 our Board approved the grant of 300,000 shares ofrestricted stock to each of Timothy S. Durham, Robert A. Kaiser and ManojRajegowda.  Of each restricted stock grant, 100,000 shares vested on thedate of grant and the remaining 200,000 of the shares vest in two equal annualinstallments on each anniversary of the date of grant. Subsequently, on February 24,2009, Mr. Rajegowda forfeited all stock issuances provided to him duringthe course of his Board membership in connection with his resignation from theBoard.

 

**Item 6.****          ****Selected Consolidated Financial Data**

 

This information has been omitted as the Companyqualifies as a smaller reporting company.

 

**Item 7.****          ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Overview**

 

During 2007 we sold all of our major assets. Ourstockholders approved the U.S. Sale, the Mexico Sale, the plan of dissolution,and the name change to CLST Holdings, Inc. on March 28, 2007. Throughout2008, only a small administrative staff remained to wind up our business, andwe continued to follow the plan of dissolution adopted by our stockholders.However, consistent with the plan of dissolution and its fiduciary duties, ourBoard has continued to consider the proper implementation of the plan ofdissolution and the exercise of the authority granted to it thereunder,including the authority to abandon the plan of dissolution. Our Board has inthe past year considered whether it is possible, and if it would be in the bestinterest of the Company, to de-register with the SEC and thereby eliminate theCompany’s responsibilities to file reports with the SEC. Our Board is notcurrently considering de-registering with the SEC, but may consider doing so inthe future. In addition, due to the recent economic crisis, the Board andmanagement has evaluated various alternatives to safeguard our primary asset,cash, and took several steps in late 2008 to protect this asset.  Although we believe our cash is now safe frombank failure and other near term economic risks, the effective interest rateshave been reduced substantially due to the U.S. economic crisis.  As discussed in further detail below under “—Recent Developments,” on November 10, 2008, December 12, 2008 and February 13,2009, we consummated three acquisitions of receivables portfolios which webelieve will provide a better investment return for our stockholders whencompared to the recent changes to interest rates and other investment alternatives.Although we are now engaged in the business of holding and collecting consumeraccounts receivable, we have not abandoned our plan of liquidation anddissolution. We believe that should we decide that continuing with the plan ofliquidation and dissolution is in the best interest of our stockholders, wewill be able to dispose of these assets on favorable terms prior to the timethat we would be in a position to make a final distribution to stockholders andterminate our corporate existence.  See “Item1, Business — Plan of Dissolution,” for further discussion regarding our planof dissolution.

 

**Discussion of Critical Accounting Policies**

 

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

 

***Revenue Recognition***

 

For the Company’s discontinued operations, revenuewas recognized on product sales when delivery occurred, the customer took titleand assumed risk of loss, terms were fixed and determinable, and collectibilitywas reasonably assured. The Company did not generally grant rights of return.

 

For the Company’s continuing operations, revenueswill be recorded as earned from notes receivable.  Revenues will consist of interest earned,late fees and other miscellaneous charges. Revenues will not be accrued on accounts over 120 

 

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dayswithout payment activity, unless payment activity resumes.

 

***Notes Receivable***

 

Notesreceivable are recorded at the historical cost paid at the date of acquisitionnet of any purchase discounts. Subsequent to the date of acquisition, notesreceivable are reduced by any principal payments made by the customer. Purchasediscounts are recorded based on the negotiated difference between the facevalue and the amount paid for the notes receivable. Purchase discounts arerecognized as revenue, using the effective interest method, as principalpayments are collected.

 

TheCompany establishes an allowance for doubtful accounts for receivables wherethe customer has not made a payment for the most recent 120 day period. TheCompany may from time to time make additional increases to the allowance basedon debtor circumstances and economic conditions. Once a note receivable hasbeen reserved due to nonpayment, the Company will no longer accrue, forfinancial reporting purposes, interest earned on the note receivable. Shouldthe note receivable return to a performing status, then the Company will resumeaccruing interest on the note receivable. The majority of the notes receivablehave collateral in various forms, which may include a second lien position onthe borrower’s home or property.  Actualresults could differ from those estimates. Recoveries are recorded against theallowance when payments are received. Recoveries of notes receivable, which were previously charged off, arerecorded to income when payments are received. Notes receivable are charged offagainst the allowance after all means of collection have been exhausted and alegal determination has been rendered that less than the full amount of thenote receivable will be collected.

 

***Stock-Based Compensation***

 

Prior to fiscal 2006, the Company accounted for itsstock 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 themodified prospective method to initially report stock-based compensationamounts in the consolidated financial statements. The Company used theBlack-Scholes option pricing model to determine the fair value of all optiongrants. The Company did not grant any options during the years ended November 30,2008 and 2007.

 

During 2006, the Company granted shares ofrestricted stock to executive officers, directors and certain employees of theCompany pursuant to the 2003 Plan. The shares of restricted stock vested inthirds over a three-year period, beginning on the first anniversary of thegrant date. The restricted stock was to become 100% vested if any of thefollowing occurred:

 

(i) theparticipant’s death; (ii) the termination of participant’s service as resultof disability; (iii) the termination of the participant without cause; (iv) theparticipant’s voluntary termination after the attainment of age 65; or (v) achange in control. The total value of the awards, $2.6 million, was beingexpensed over the service period. The 2003 Plan permitted withholding of sharesby the Company upon vesting to pay withholding tax. These withheld shares wereconsidered as treasury stock and were available to be re-issued under the 2003Plan, prior to the termination of the 2003 Plan on September 25, 2007.Restricted stock issued under the 2003 Plan vested upon the completion of theU.S. Sale and no new shares will be issued under the 2003 Plan.

 

On December 1, 2008, our Board approved theCompany’s 2008 Long Term Incentive Plan (the “***2008Plan***”).  The 2008 Plan, which is administered by the Board,permits the grant of restricted stock, stock options and other stock-basedawards to employees, officer, directors, consultants and advisors of theCompany and its subsidiaries. The 2008 Plan provides that the administrator ofthe plan may determine the terms and conditions applicable to each award, andeach award will be evidenced by a stock option agreement or restricted stockagreement. Theaggregate number of shares of Common Stock of the Company that may be issuedunder the 2008 Plan is20,000,000 shares. The 2008 Plan will terminate on December 1, 2018.

 

Inaddition, on December 1, 2008 our Board approved the grant of 300,000 shares ofrestricted stock to each of Timothy S. Durham, Robert A. Kaiser and ManojRajegowda.  Of each restricted stock grant, 100,000 shares vested on thedate of grant, and the remaining 200,000 of the shares vest in two equal annualinstallments on each anniversary of the date of grant. Subsequently, on February 24,2009, Mr. Rajegowda forfeited all stock issuances provided to him duringthe course of his Board membership in connection with his resignation from theBoard. The restricted stock becomes 100% vested if any of the followingoccurs: (i) the participant’s death or (ii) the disability of theParticipant while employed or engaged as a director or consultant by theCompany. Of the total value of the awards, $198,000, $66,000 was expensed in December 2008and the rest is being expensed over a two year vesting period. The 2008 Planpermits withholding of shares by the Company upon vesting to pay withholdingtax. These withheld shares are considered as treasury stock and are availableto be re-issued under the 2008 Plan.

 

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**Sales Transactions**

 

On December 18, 2006, we entered into the U.S.Sale Agreement with Brightpoint, providing for the sale of substantially all ofour United States and Miami-based Latin American operations and for the buyerto assume certain liabilities related to those operations. Our operations inMexico and Chile and other businesses or obligations of the Company wereexcluded from the transaction.

 

Our Board of Directors and Brightpoint unanimouslyapproved the proposed transaction set forth in the U.S. Sale Agreement. Thepurchase price was $88 million in cash, subject to adjustment based onchanges 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 thepurchase price into an escrow account for a period of six months from theclosing date.

 

Also on December 18, 2006, we entered theMexico Sale Agreement with Wireless Solutions and Prestadora, two affiliatedMexican companies, providing for the sale of all of the Company’s Mexicooperations. The Mexico Sale was a stock acquisition of all of the outstandingshares of our Mexican subsidiaries, and includes our interest in CII, our jointventure with Wireless Solutions. Under the terms of the transaction, wereceived $20 million in cash, and were entitled to receive our pro ratashare of CII profits from January 1, 2007, up to the consummation of thetransaction, within 150 days from the closing date. Our Board unanimouslyapproved the proposed transaction set forth in the Mexico Sale Agreement. Wehave not received any pro-rata share of the CII profits and other termsrequired as of 150 days from the closing date. A demand for payment of upto $1.7 million and other required terms of the agreement was sent to thepurchasers on September 11, 2007. While we believe that CII was profitableand therefore the purchasers owe the Company its pro rata share, the purchasersare disputing this claim. We continue to pursue the amounts we believe we aredue, but at this time the purchasers are not responding to or cooperating withour demands. Currently we cannot make any estimates regarding future amounts wemay 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 ofthe transactions were subject to customary closing conditions and the approvalof our stockholders, and the transactions were not dependent upon each other.The proxy statement also included a plan of dissolution, which provides for thecomplete liquidation and dissolution of the Company after the completion of theU.S. Sale, and a proposal to change the name of the Company from CellStarCorporation to CLST Holdings, Inc.

 

On March 28, 2007, our stockholders approvedthe U.S. Sale, the Mexico Sale, the plan of dissolution, and the name change toCLST Holdings, Inc. We continue to follow the plan of dissolution.Consistent with the plan of dissolution and its fiduciary duties, our Boardwill continue to consider the proper implementation of the plan of dissolutionand the exercise of the authority granted to it thereunder, including theauthority to abandon the plan of dissolution.

 

The U.S. Sale closed on March 30, 2007. Atclosing, $53.6 million was received and $4.5 million is included inaccounts receivable—other in the accompanying balance sheet for November 30,2007. We recorded a pre-tax gain of $52.7 million on the transactionduring the twelve months ended November 30, 2007. (See footnote 2). Thebuyer of the Company’s U.S. business previously asserted total claims forindemnity against the escrow of approximately $1.4 million, and theremainder, approximately $7.6 million, including accrued interest, wasdistributed to the Company on October 4, 2007. On December 21, 2007,the Company and Brightpoint entered into a Letter Agreement which settled thedispute concerning the additional escrow amount. All currently outstandingdisputes between the parties regarding the determination of the purchase priceunder the U.S. Sale Agreement have been resolved, and payments of funds havebeen made in accordance with the terms described in the Letter Agreement. In January 2008the Company received approximately $3.2 million from Brightpoint plusaccrued interest and less transition expenses, and approximately$1.4 million from the escrow agent. These are the final amounts to be receivedunder the U.S. Sale Agreement.

 

The Mexico Sale closed on April 12, 2007, andwe recorded a loss on the transaction of $7.0 million primarily due toaccumulated foreign currency translation adjustments as well as expensesrelated to the transaction. We had approximately $9.1 million ofaccumulated foreign currency translation adjustments related to Mexico. As theproposed sale did not meet the criteria to classify the operations as held forsale under SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”, as of February 28, 2007, we recognized the$9.1 million as a charge upon the closing of the Mexico Sale. We have notreceived any pro-rata share of profits and other terms required as of150 days from the closing date under the Mexico Sale. A demand for paymentof up to $1.7 million and other required terms of the agreement was sentto the purchasers, and if such amounts are received an additional gain will berecognized.

 

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On March 22, 2007, we signed a letter of intentto sell our operations in Chile to a group that includes local management forapproximately book value. On June 11, 2007, we completed the Chile Sale.The purchase price and cash transferred from the operations in Chile prior toclosing totaled $2.5 million, and we recorded a gain of pre-tax$0.6 million on the transaction during the quarter ending August 31,2007. With the completion of the Chile Sale, we no longer have any operatinglocations outside of the U.S.

 

On December 2, 2007 we received approximately$95,000 from Muniz Ramirez Perez-Taiman representing the final payment due theCompany from the 2002 sale of our operations in Peru. The accounts receivablehad been previously fully reserved.

 

**Recent Developments**

 

On November 10, 2008, we acquired all of theoutstanding equity interest of  TrustI.  The primary business of Trust I is tohold and collect certain receivables.  Asof November 30, 2008, Trust I had an outstanding principal balance of$40.8 million consisting of approximately 6,000 accounts with an averageweighted interest rate of approximately 14.4%. For the month of November Trust I made collections of approximately$1.1 million consisting of $600,000 of principal payments and $500,000 ofinterest and other fees.  There were$100,000 of defaults during the month of November 2008.  From the $1.1 million of collections Trust Igenerated $300,000 of net cash after payment of amount due under the creditagreement, including principal and interest on the term loan and servicingfees.  The net cash of $300,000 was thenused to pay down the intercompany debt with the excess cash distributed to itsparent company Financo.  For the month ofNovember 2008, Trust I reported a net income of $140,000.

 

Subsequent to fiscal 2008, we entered into two othertransactions involving receivables. On December 12, 2008, we, through Trust II, entered into a purchaseagreement, effective as of December 10, 2008, to acquire from time to timecertain receivables, installment sales contracts and related assets owned bythird parties.  Trust II has committed to purchase, subject to certainlimitations, from the sellers on or before February 28, 2009 receivablesof at least $2 million.

 

EffectiveFebruary 13, 2009, we, through Asset III, 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 ExecutiveOfficer and Director of Fair and an officer, director and stockholder of ourcompany.  Additionally, Fair agreed to use its best efforts to facilitatenegotiations to add Asset III or one of its affiliates as a co-borrower underone of Fair’s existing lines of credit with access to at least $15,000,000.00of credit for our own purposes.As of February 13, 2009, the portfolios ofreceivables acquired collectively consisted of approximately 3,000 accountswith an aggregate outstanding balance of approximately $3,709,500 and anaverage outstanding balance per account of approximately $1,015 for Portfolio Aand approximately $5,740 for Portfolio B.  As of February 13, 2009,the weighted average interest rate of the portfolios exceeded 18%.  The receivables were recorded at the fairvalue based on an evaluation prepared by Business Valuation Advisors upon whichwe relied.  All the loans were originated by Fair between November 1998and August 2009 and are unsecured loans.  None of the loans purchasedwere in default.  The loans have remaining terms of between 30 and 48months and have an average interest rate of 14.4%.

 

Nowthat the Company has acquired these receivable portfolios, most of theactivities of the Company with respect to the portfolios are conducted on itsbehalf by the servicers of these portfolios.  The servicers, on behalf ofthe Company, receive payments from account debtors and pursue other collectionactivities with respect to the receivables, monitor collection disputes withindividual account debtors, prepare and submit claims to the account debtors,maintain servicing documents, books and records relating to the receivables andprepare and provide reports to the lenders and the Company with respect to thereceivables and related activity, maintain the security interest of the lendersin the receivables, and direct the collateral custodian to make payments out ofthe proceeds of the portfolios to, among others, the Company, the lenders, theservicers and/or backup servicers, and the collateral custodians pursuant tothe terms of the relevant servicing agreements.

 

**Fiscal 2008 Compared to Fiscal 2007**

 

***Consolidated***

 

*Revenues. *Revenuesfor the twelve months ended November 30, 2008, were $496,000.  Revenues are recorded as earned.  Revenues consist of interest earned, latefees and other miscellaneous charges.

 

*Servicing Fees. *Servicingfees consist of loan servicing fees and trust administration fees.  The loan servicing fees were $53,000 and thetrust administration fees were $13,000 for the year ended November 30,2008.  The Trust Credit Agreement provides the material termsand conditions for the services to be performed by the servicer.  Inreturn, the Trust 

 

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pays the servicer amonthly servicing fee equal to 1.5%, per annum of the then aggregateoutstanding principal balance of the receivables.

 

*Provision for doubtful accounts. *Provisionfor doubtful accounts was $144,000 for the year ended November 30, 2008.  The allowance is based on “defaulted”receivables as defined in the Company’s financing arrangements.  Under those arrangements, a defaultedreceivable is one where the customer has not made a payment for the most recent120 day period.  Under suchcircumstances, the remaining balance will no be allowed in the borrowing basewhich help determine the amount of allowed borrowings.  On a quarterly basis, the Company will adjustthe allowance for doubtful accounts to a minimum amount equal to the defaultedreceivables.  The Company may from timeto time make additional increases to the allowance based on businesscircumstances.

 

*Operating Interest Expense.*  Interest expense for the twelve months ended November 30,2008 was approximately $145,000.  Theinterest expense is related to the term loan which bears interest at an annualrate of 5.0% over LIBOR.

 

*General and AdministrativeExpenses.*  Selling,general and administrative expenses for the twelve months ended November 30,2008 were approximately $2.2 million compared to approximately $15.2 millionfor the same period in 2007. There was a decrease in payroll from fiscal 2007due to payments under existing employment contracts and change of controlagreements and vesting of restricted stock totaling $8.4 million, which suchamounts were primarily as a result of the U.S. Sale.

 

*Interest Expense.*  Interest expense for the twelve months ended November 30,2007 was approximately $0.2 million. We paid off all of our existing debt in March 2007in conjunction with the U.S. Sale transaction. Prior to the U.S. Sale, on March 31, 2006, weentered into an Amended & Restated Loan and Security Agreement (the “***Amended Facility***”) with a bank,which extended the term of our previous facility until September 27, 2009.The borrowing rate under the revolver of the Amended Facility was prime for theprime rate option and London Interbank Offered Rate (“***LIBOR***”)plus 2.5% for the LIBOR option. At November 30, 2006, we had outstanding$1.9 million of 12% Senior Subordinated Notes (the “***SeniorNotes***”) due January 2007 bearing interest at 12%.  On August 31,2006, we entered into a Term Loan and Security Agreement (the “***Term Loan***”) with a finance companyfor up to $12.3 million to refinance the Senior Notes. The borrowing rateunder the Term Loan was LIBOR plus 7.5%, or a base rate plus an applicablemargin. The Term Loan was to mature September 27, 2009. The Term Loan wasto be amortized to an outstanding balance of $10 million at the rate ofapproximately $1 million per year payable in quarterly installmentsbeginning September 30, 2006, with interest-only payments thereafterthroughout the remainder of the Term Loan. On March 30, 2007, the outstandingbalances, including accrued interest, under the Amended Facility of$13.1 million and Term Loan of $11.9 million were paid off using theproceeds from the U.S. Sale.

 

Interest expense related to the Amended Facility andthe Term Loan has been allocated to discontinued operations. In 2007, it wasdetermined that 90% of the interest expense would be allocated to discontinuedoperations based on the small amount of borrowings in the four months beforethe sale. The total interest expense allocated to discontinued operations was$2.2 million in 2007.

 

*Settlement of note receivablerelated to the sale of Asia-Pacific.*  On March 5, 2007, we announced that wehad signed an agreement, effective February 27, 2007, with Fine Day and Mr. Horng,the Chairman and sole shareholder of Fine Day, and formerly an executiveofficer of the Company, accepting a settlement of an outstanding notereceivable related to the September 2005 sale of our Hong Kong and PRCoperations.  From September 2, 2005,Fine Day had made timely interest payments to us on the promissory note.However, Fine Day informed us in February 2007 that it would not be ableto pay quarterly interest payments or the principal amount of the note atmaturity. In settlement of the outstanding note, we agreed to accept a $650,000cash payment, along with the transfer to the Company of all of Mr. Horng’sshares of our CommonStock, approximately 474,000 shares. The transaction closed on April 12,2007. The shares of stock were valued at $2.56 per share based on the closingprice on April 12, 2007. The carrying value of the note, prior to theagreement, was $2.4 million. As a result of the settlement, we recorded aloss of $0.5 million for the twelve months ended November 30, 2007.At November 30, 2008 and 2007, the shares of stock previously owned by Mr. Horngwere included in treasury stock.

 

*Income Taxes.*We had incometax expense of $192,000 for the twelve months ended November 30, 2008. Wehad an income tax benefit from continuing operations of approximately $11.5million for the twelve months ended November 30, 2007. Discontinuedoperations included in the consolidated statement of operations is shown net oftaxes of approximately $15.9 million for the twelve months ended November 30,2007 reflecting a tax rate of 35% on gains on sales. The difference betweenthis amount and the Company’s consolidated provision has been included as a taxbenefit in continuing operations for the twelve months ended November 30,2007. In 2007, we used the loss from continuing operations as well as netoperating losses from prior years that previously had valuation allowances tooffset income from discontinued operations 

 

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exceptfor certain minimum taxes, withholding taxes and taxes related to CII. Thebenefit in 2007 was partially reduced by the closing of the Mexico Sale whichincreased the deferred income tax valuation allowance by approximately $2.7million as no future taxable income will be generated from the Mexicooperations.

 

In assessing the realizability of deferred incometax assets, management considers whether it is more likely than not that thedeferred income tax assets will be realized. For further discussion, please seefootnote 10 of the consolidated financial statements.

 

*Discontinued Operations.*As discussed infootnote 2 to the Consolidated Financial Statements, during the second quarterof 2007, we sold our operations in the U.S., Miami and Mexico and during thethird quarter of 2007 sold our operations in Chile. Results for theseoperations beginning December 1, 2006 and continuing through therespective sale date are recorded in Discontinued Operations. For 2007, the Companyrecorded earnings from discontinued operations of $29.5 million. During2007 the Company recorded a pre-tax gain on sale of domestic and foreignentities of $46.3 million. There were no gains or losses on sales infiscal 2008. Partially offsetting this gain in 2007 was a lower operatingincome amount. For 2007, the Company recorded operating loss of$3.0 million, net of tax.

 

**Liquidity and Capital Resources**

 

The U.S. Sale closed on March 30, 2007. Atclosing, $53.6 million was received and $4.5 million is included inaccounts receivable—other in the accompanying balance sheet for November 30,2007; $8.8 million had been placed in an escrow account and subject to anyindemnity claims by the buyers of the Company’s U.S. business. A portion of theproceeds from the sale was used to pay off the Company’s bank debt (seefootnote 7). We recorded a pre-tax gain of $52.7 million on thetransaction during the twelve months ended November 30, 2007. Brightpointasserted total claims for indemnity against the escrow of approximately$1.4 million. The Company objected to these claims. Brightpoint alsoproposed negative adjustments to the net working capital of approximately$1.4 million, which these claims for adjustment were largely the same asthe claims for indemnity asserted against the escrow account. As of November 30,2007, we had received approximately $7.6 million of the amounts held inthe escrow account, which such amount included accrued interest. On December 21,2007, we entered into the Letter Agreement with Brightpoint which settled thedispute concerning the additional escrow amount. All currently outstandingdisputes between the parties regarding the determination of the purchase priceunder the U.S. Sale Agreement have been resolved, and payments of funds inrespect thereof were made in accordance with the terms described in the LetterAgreement. Pursuant to the Letter Agreement, in January 2008 we receivedapproximately $3.2 million from Brightpoint plus accrued interest and lesstransition expenses, and approximately $1.4 million from the escrow agent.These amounts were the final amounts received under the U.S. Sale Agreement.

 

***Operating Activities***

 

The net cash provided by or used in operatingactivities for the year ended November 30, 2008 and 2007 was $4.9 millioncash received to $2.6 million cash used, respectively. The increase in fiscalyear 2008 is primarily a result of the collection of approximately $7 millionfrom other receivables.

 

***Investing Activities***

 

The net cash used in or received from investingactivities for the years ended November 30, 2008 and 2007 was $6.1 millioncash used to $82.8 million cash received, respectively. The decrease fromfiscal 2007 to 2008 is primarily a result of the sale of our U.S., Miami,Mexico and Chile operations, for which we received proceeds of $83.0 million.We used $6.1 million in cash for the purchase of the Trust on November 10,2008.

 

***Financing Activities***

 

On March 30, 2007, the outstanding balances,including accrued interest, under our previous credit facilities were paid offusing the proceeds from the U.S. Sale. An early termination fee of $0.5 millionwas paid in conjunction with the pay off of the Amended Facility and wasrecognized as a charge to earnings in the year ended November 30, 2007. Asof November 30, 2007 the Company did not have any term loans, notes orother forms of long-term debt. The historical term loans or Senior Notes havebeen paid off.

 

The net cash used in financing activities for theyears ended November 30, 2007 and 2008, decreased from $89.0 million to$736,000, respectively. Cash used in fiscal year 2007 was largely due to thepayoff of our previous credit facilities as a result of the sale of ourdiscontinued operations and distributions to our stockholders of $2.10 pershare, or approximately $43.2 million, pursuant to the plan of dissolution. Thecash used in fiscal year 2008 was related to costs 

 

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relatedto the acquisition of the term loan under the Trust Credit Agreement discussedin more detail below and a November 2008 payment to reduce the outstandingprincipal balance.

 

***LiquiditySources***

 

Subsequentto the sale of our discontinued operations in March 2007 and prior to theacquisition of the Trust in November 2008, we met our cash needs withexisting funds and interest and investment income generated by the Company’scash and cash equivalents (“***Existing Funds***”).At November 30, 2008, we had cash and cash equivalents of approximately$9.8 million. To date, we have financed our acquisitions of our receivablesportfolios with cash, non-recourse debt, and the issuance of shares of ourCommon Stock and we expect that any future portfolio acquisition would befinanced with cash on hand and cash from operations, non-recourse debt andadditional issuance of our Common Stock.

 

*TrustCredit Agreement*

 

On November 10, 2008, the Company financedapproximately $34.9 million of the purchase price of Trust I pursuant to theTrust Credit Agreement. The Trust Credit Agreement provides for a non-recourse,term loan of approximately $34.9 million, maturing on November 10,2013. The term loan bears interest at an annual rate of 5.0% over the LIBORRate (as defined in the Trust Credit Agreement).  The obligations underthe Trust Credit Agreement are secured by a first priority security interest insubstantially all of the assets of Trust I, including portfolio collections.

 

The Trust Credit Agreement provides the material termsand conditions for the services to be performed by the servicer.  Inreturn, Trust I pays the servicer a monthly servicing fee equal to 1.5%, perannum of the then aggregate outstanding principal balance of the receivables.

 

Portfolio collections are distributed on a monthlybasis.  Absent an event of default, after payment of the servicing fee andother fees and expenses due under the Trust Credit Agreement and the requiredprincipal and interest payments to the lender under the Trust Credit Agreement,all remaining amounts from portfolio collections are paid to Trust I and areavailable for distribution to CLST Asset I, LLC and subsequently to Financo.

 

Principal payments on the term loan are due monthly tothe extent that the aggregate principal amount of the term loan outstandingexceeds the sum of (a) the sum for each outstanding receivable of theproduct of (1) 85%, (2) the then-current aggregate unpaid principalbalance of such receivable and (3) a percentage specified in the TrustCredit Agreement based upon the aging of such receivable, and (b) amountson deposit in the collection account for the receivables net of any accrued andunpaid 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 arealso due within five business days of any time that the aggregate principalamount of the term loan outstanding exceeds the Maximum Advance Amount. The remaining outstanding principal amount of the loan plus all accruedinterest, fees and expenses are due on the maturity date.  Interestpayments on the term loan are due monthly.

 

The Trust Credit Agreement contains customarycovenants for facilities of its type, including among other things covenantsthat restrict Trust I’s ability to incur indebtedness, grant liens, dispose ofproperty, pay dividends, make certain acquisitions or to take actions thatwould negatively affect Trust I’s special purpose vehicle status. Generally, these covenants do not impact the activities that may be undertakenby the Company.  The Trust Credit Agreement contains various events ofdefault, including failure to pay principal and interest when due, breach ofcovenants, materially incorrect representations, default under certain otheragreements of Trust I, bankruptcy or insolvency of Trust I, the occurrence ofan event which causes a material adverse effect on Trust I, the occurrence ofcertain defaults by the servicer, entry of certain material judgments againstTrust I, and the occurrence of a change of control or certain material eventsand the issuance of a qualified audit opinion with respect to Trust I’sfinancials.  In addition, an event of default occurs if the three-monthrolling average delinquent accounts rate exceeds 10.0% or the three-monthrolling average annualized default rate exceeds 7.0%.  If an event ofdefault occurs, all of Trust I’s obligations under the Trust Credit Agreementcould be accelerated by the lender, causing the entire remaining outstandingprincipal balance plus accrued and unpaid interest and fees to be declaredimmediately due and payable.

 

*Trust IICredit Agreement*

 

Subsequent to the year ended November 30, 2008,on December 12, 2008 we financed approximately $813,000 of the purchaseprice of various assets purchased under the Trust II Purchase Agreementpursuant to the Trust II Credit Agreement. The revolving facility was initiallyestablished by an affiliate of the sellers under the Trust II PurchaseAgreement.  The Trust II has become a co-borrower under that facility andhas pledged its assets to secure performance by 

 

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theborrowers thereunder.  The revolving facility permits an aggregateborrowing of all co-borrowers thereunder of up to $50,000,000.  Financohas the ability to direct that not less than $15 million to be borrowed underthe revolving facility be utilized by the Trust II to purchase receivables,installment sales contracts and related assets for the Trust II.  With theconsent of its co-borrowers, the Trust II may utilize more than $15,000,000 ofthe aggregate availability under the revolving facility.  Receivablespurchased by the Trust II will be owned by the Trust II, and the Trust II willreceive the benefits of collecting them, subject to the third party lender’srights in those assets as collateral under the revolvingfacility. Advances under the revolver are limited to an amount equal to,net of certain concentration limitations set forth in the Trust II CreditAgreement, (a) the lesser of (1) the product of 85% and the purchaseprice being paid for Class A Receivables or (2) the product of 80%and the then-current aggregate balance of principal and accrued and unpaidinterest outstanding for Class A Receivables plus (b) the lesser of (1) theproduct of 75% and the purchase price being paid for Class B Receivablesor (2) the product of 50% and the then-current aggregate balance ofprincipal and accrued and unpaid interest outstanding for Class BReceivables (“***Maximum Advance***”).

 

Therevolver matures on September 28, 2010.  The revolver bears interestat an annual rate of 4.5% over the LIBOR Rate (as defined in the Trust IICredit Agreement).  The Trust II pays an additional fee to theco-borrowers equal to an annual rate of 0.5% for loans attributable to theTrust II equal to or below $10 million and an annual rate of 1.5% for loans attributableto the Trust II in excess of $10 million.  In addition, a commitment feeis due to the lender equal to an annual rate of 0.25% of the unused portion ofthe maximum committed amount.  The obligations under the Trust II CreditAgreement are secured by a first priority security interest in substantiallyall of the assets of the Trust II and the co-borrowers, including portfoliocollections.

 

TheTrust II Credit Agreement provides the material terms and conditions for theservices to be performed by the servicer.  In return, the Trust II paysthe servicer a monthly servicing fee equal to 0.5% of the then aggregateoutstanding principal balance of the receivables.

 

Principalpayments on the revolver are due monthly to the extent that the aggregateprincipal amount of the loan outstanding exceeds the lesser of (1) $50million or (2) the Maximum Advance plus the amount on deposit in thecollection account net of any accrued and unpaid interest on the loan and feesdue to the lenders, the servicer, the backup servicer, the collateral custodianand the owner trustee (the “***MaximumOutstanding Loan Amount***”).  The borrowers are also requiredto either make principal payments or add additional eligible receivables ascollateral within 5 business days of any time that the aggregate principalamount of the revolver exceeds the Maximum Outstanding Loan Amount.  Theremaining outstanding principal amount of the loan plus all accrued interest,fees and expenses is due on the maturity date.  The Trust II may, at itsoption, repay in whole or in part borrowings under the revolver but prepaymentsmade before September 28, 2010 are subject to a prepayment premium equalto 2.0%.  Interest payments on the term loan are due monthly.

 

TheTrust II Credit Agreement contains customary covenants for facilities of itstype, including among other things maintenance of the Trust’s special purposevehicle status and covenants that restrict the Trust II’s ability to incurindebtedness, grant liens, dispose of property, pay dividends, and make certainacquisitions.  Generally, these covenants do not impact the activitiesthat may be undertaken by CLST Holdings, Inc.  The Trust II CreditAgreement contains various events of default, including failure to payprincipal and interest when due, breach of covenants, materially incorrectrepresentations, default under certain other agreements of the Trust II,bankruptcy or insolvency of the Trust II, the occurrence of an event whichcauses a material adverse effect on the Trust II, the occurrence of certaindefaults by the servicer, entry of certain material judgments against the TrustII, and the occurrence of a change of control or certain material events andthe issuance of a qualified audit opinion with respect to the Trust II’sfinancials.  In addition, an event of default occurs if the three-monthrolling average delinquent accounts rate exceeds 15.0% for Class AReceivables or 30.0% for Class B Receivables, or the three-month rollingaverage annualized default rate exceeds 5.0% for Class A Receivables or12.0% for Class B Receivables.  If an event of default occurs, all ofthe Trust II’s obligations under the Trust II Credit Agreement could beaccelerated by the lender, causing the entire remaining outstanding principalbalance plus accrued and unpaid interest and fees to be declared immediatelydue and payable.

 

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*The Notes*

 

Alsosubsequent to the year ended November 30, 2008, on February 13, 2009we financed a portion of our purchase of the assets of Fair through the issuanceby Asset III of six promissory notes (the “***Notes***”) in an aggregate original stated principal amountof $898,588.00, of which two promissory notes in an aggregate originalprincipal amount of $708,868 were issued to Fair, two promissory notes in anaggregate original principal amount of $162,720 were issued to Mr. Durhamand two promissory notes in an aggregate original principal amount of $27,000were issued to Mr. Cochran. The Notes issued by Asset III in favor of thesellers are full-recourse with respect to Asset III and are unsecured. The three Notes relating to Portfolio A (the “***Portfolio A Notes***”) are payable in 11 quarterlyinstallments, each consisting of equal principal payments, plus all interestaccrued through such payment date at a rate of 4.0% plus the LIBOR Rate (asdefined in the Portfolio A Notes).  The three Notes relating to PortfolioB (the “***Portfolio B Notes***”)are payable in 21 quarterly installments, each consisting of equal principalpayments, 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).

 

***Contractual Obligations***

 

We have an agreement with one employee to assistwith the final wind down of our business. Under the agreement, the employee isto receive her base salary as well as a bonus upon the completion of certainobjectives during the liquidation process. The maximum payments remaining underthe agreement at November 30, 2008 is $96,000, and we expect to pay thisamount out of our available cash.

 

Included in accounts payable at November 30,2008, is approximately $14.2 million associated with liabilities which maybe resolved in the liquidation process. In the event these liabilities areresolved for less than book value, net operating loss carryforwards will beused to offset any tax liability associated with reductions of the recordedliabilities.

 

**Asset Quality**

 

Our delinquency ratesreflect, among other factors, the credit risk of our receivables, the averageage of our receivables, the success of our collection and recovery efforts, andgeneral economic conditions. The average age of our receivables affects thestability of delinquency and loss rates of the portfolio.

 

The following tablepresents the account aging of Trust I’s portfolios as of the purchase date:

 
| **All Eligible Receivables** | ** ** | **Principal Balance  (in $)** | ** ** | **% of Total** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|
| Current (less than 30  days)           |       | 40,208,135                              |       | 96.9                     | %          |
| 31-60 days                             |       | 875,224                                 |       | 2.1                      | %          |
| 61-90 days                             |       | 252,745                                 |       | 0.6                      | %          |
| 91-120 days                            |       | 185,944                                 |       | 0.4                      | %          |
| **Total**                              | ** ** | **41,522,048**                          | ** ** | **100.0**                | **%**      |

 

**New Accounting Pronouncements**

 

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

 

***Adoption of FIN 48***

 

In July 2006, the Financial Accounting StandardsBoard (“***FASB***”) issued FASBInterpretation No. 48 (“***FIN 48***”),“Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109”, which clarifies the accounting for uncertainty in tax positions.This interpretation requires that we recognize in our financial statements theimpact of a tax position, if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. The Companyadopted FIN 48 as of December 1, 2007, the adoption did not have amaterial impact on the Company’s consolidated financial statements or effectivetax rate and did not result in any unrecognized tax benefits. Interest costsand penalties related to income taxes are classified as other expenses in ourconsolidated financial statements. For the

 

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yearended November 30, 2008, we recognized $12,000 in interest and penaltyfees related to income taxes. It is determined not to be reasonably likely forthe amounts of unrecognized tax benefits to significantly increase or decreasewithin the next 12 months. We are currently subject to a three year statute oflimitations by major tax jurisdictions. We and our subsidiaries file income taxreturns in the U.S. federal jurisdiction.

 

***Accounting Pronouncements Not YetAdopted***

 

In September 2006, the FASB issued FASBStatement No. 157, “Fair Value Measurements” (“***SFAS 157***”),which defines fair value, establishes a market-based framework or hierarchy formeasuring fair value, and expands disclosures about fair value measurements.SFAS 157 is applicable whenever another accounting pronouncement requiresor permits assets and liabilities to be measured at fair value and, while notexpanding or requiring new fair value measurements, the application of thisstatement may change current practices. The requirements of SFAS 157 areeffective for the fiscal year beginning December 1, 2008. However, in February 2008the FASB decided that an entity need not apply this standard to nonfinancialassets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis until the subsequent year.Accordingly, the adoption of this standard on December 1, 2008 is limitedto financial assets and liabilities. The Company is still in the process ofevaluating this standard and therefore has not yet determined the impact thatit will have on our financial statements.

 

In December 2007, the FASB released Statement No. 141R, “Business Combinations” (“***SFAS 141R***”),which establishes principles for how the acquirer shall recognize acquiredassets, assumed liabilities and any non-controlling interest in the acquiree,recognize and measure the acquired goodwill in the business combination, orgain from a bargain purchase, and determines disclosures associated withfinancial statements. This statement replaces SFAS 141 but retains thefundamental requirements in SFAS 141 that the acquisition method ofaccounting (which SFAS 141called the purchase method) be used for allbusiness combinations and for an acquirer to be identified for each businesscombination. The requirements of SFAS 141R apply to business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. Earlyapplication is not permitted.

 

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

 

**Item 7(A). Quantitative andQualitative Disclosures About Market Risk**

 

This information has been omitted as the Companyqualifies as a smaller reporting company.

 

**Item 8. Consolidated FinancialStatements and Supplementary Data**

 

See Index to Consolidated Financial Statements on Page F-1of this Form 10-K/A.

 

**Item 9. Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

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**Item 9A(T). Controls andProcedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Disclosurecontrols and procedures are controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms and include controlsand procedures designed to ensure that information we are required to disclosein such reports is accumulated and communicated to management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure. Our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of our disclosure controlsand procedures as defined in Rules 13a-15(e) and 15(d)-15(e) promulgatedunder the Exchange Act, as of the end of the period covered by this AnnualReport on Form 10-K/A. Based on such evaluation, our Chief ExecutiveOfficer and Chief Financial Officer has concluded that, as of the end of theperiod covered by this Annual Report on Form 10-K/A, our disclosurecontrols and procedures are not effective because we failed to include a clearconclusion with respect to the effectiveness of the Company’s internal controlover financial reporting in the Management’s Report on Internal Control OverFinancial Reporting in our Original Form 10-K. We remedied this failure inthe effectiveness of our disclosure controls and procedures by amending ourOriginal Form 10-K to include a clear conclusion regarding the effectivenessof the Company’s internal control over financial reporting. We have implementedadditional controls and procedures designed to ensure that the disclosureprovided by the Company meets the then current requirements of the applicablefiling made under the Exchange Act.

 

**Management’s Annual Report on Internal Control OverFinancial Reporting**

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, in accordancewith Rules 13a-15 and 15d-15 of the Exchange Act. Under the supervisionand with the participation of the Company’s management, we, in conjunction withan independent third party, conducted an evaluation of the effectiveness of theCompany’s internal control over financial reporting based on the framework setforth by the Committee of Sponsoring Organizations (“***COSO***”) of theTreadway Commission in *Internal Control —Integrated Framework*.

 

Our internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles in theUnited States of America. The Company’s internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect thetransactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the Company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe Company’s internal control over financial reporting as of November 30,2008. In making this assessment, our management used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission inInternal Control — Integrated Framework. Based on this evaluation and thosecriteria, our management, with the participation of our Chief Executive Officerand Chief Financial Officer, concluded that, as of November 30, 2008, ourinternal control over financial reporting was effective.

 

Our management has identified two significantdeficiencies due to the Company’s small number of employees: (1) theCompany’s lacks adequate segregation of duties around check writing and (2) theCompany lacks sufficient accounting technical expertise.  Our management determined that these controldeficiencies did not represent material weaknesses.  All of our financial reporting is carried outby our Chief Financial Officer and Controller with the assistance of thirdparties from time to time. The lack of accounting staff and dependence on thirdparty assistance results in a lack of segregation of duties and at times a lackof sufficient accounting technical expertise which could impact our financialreporting function. The lack 

 

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of segregation of duties around disbursements did not rise to the levelof a material weakness as there are limited numbers of disbursements beingwritten each month and there is a monthly and quarterly review of the resultsof the Company by Robert Kaiser, the Company’s Chief Executive Officer andChief Financial Officer and the Board of Directors.  With the limited number of transactions andthe review of the results of the Company for unexpected variances,misstatements of a material nature will more than likely be prevented ordetected in a timely manner.  In order tomitigate this control deficiency to the fullest extent possible, all financialreports are reviewed by the Chief Financial Officer as well as the Board forreasonableness. All unexpected results are investigated. At any time, if itappears that any control can be implemented to continue to mitigate suchcontrol deficiencies, it is immediately implemented.

 

Our evaluation of and conclusion on the effectivenessof internal control over financial reporting as of November 30, 2008 didnot include the internal controls of Trust I and related portfolio ofreceivables because of the timing of the acquisition, which was completed in November 2008.For the year ended November 30, 2008, Trust I represented approximately$41.7 million of total assets and $496,000 of total revenues.

 

This Annual Report on Form 10-K/A does notinclude an attestation report of the Company’s independent registered publicaccounting firm regarding internal control over financial reporting. Management’sreport was not subject to attestation by the Company’s independent registeredpublic accounting firm pursuant to temporary rules of the SEC that permitthe Company to provide only management’s report in this Annual Report on Form 10-K/A.For our fiscal year ended November 30, 2010, we will be required toinclude the auditor attestation.

 

Thisreport shall not be deemed to be filed for purposes of Section 18 of theExchange Act, or otherwise subject to the liabilities of that section, and itis not incorporated by reference into any filing of the Company, whether madebefore or after the date hereof, regardless of any general incorporationlanguage in such filing.

 

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**Changes in Internal Control over Financial Reporting**

 

Therehave been no changes in our internal control over financial reporting duringthe fourth quarter ended November 30, 2008 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

**Item 9B. Other Information**

 

**Resignation of Director**

 

On February 24, 2009, our director and memberof our Audit Committee, Manoj Rajegowda, tendered his resignation as a memberof our Board, effective immediately, and, as a result, effectively resignedfrom our Audit Committee. Mr. Rajegowda notified us of his resignationthrough a letter from his counsel, Richards, Layton, & Finger P.A. Acopy of Mr. Rajegowda’s letter is attached hereto as Exhibit 99.1.

 

In his resignation letter, Mr. Rajegowda’scounsel gives, as the reason for his client’s resignation:

 

“. . . the fact that [Mr. Rajegowda has] beenisolated from any meaningful decision making role as a director, and in lightof the fact that the Company has determined to proceed in a manner which heconsiders to be antithetical to the expressed wishes of the majority ofstockholders . . .”

 

Wediscuss and respond to Mr. Mr. Rajegowda’s reasons for hisresignation below.

 

In addition to providing reasons for hisresignation, Mr. Rajegowda made a variety of allegations about ourcorporate governance and the conduct of our management. Among other things, inhis letter, Mr. Rajegowda:

 

·                  Alleges that he was not properly notified ofa transaction effective February 13, 2009 between us, on one hand, andFair, James Cochran and Timothy Durham, on the other hand;

 

·                  Alleges that the transaction with Fair, Mr. Cochranand Mr. Durham was not properly approved;

 

·                  States that we have failed to provide himwith minutes of meetings of the Board and that we have not submitted draftminutes to the Board for comments and a vote;

 

·                  Alleges that the Board has determined toabandon our plan of dissolution; and

 

·                  Alleges that “the Board’s attempts tocontinue the business of the Company in the face of a shareholders’ vote infavor of a prompt liquidation puts the interest of the Board ahead of theinterests of the shareholders”.

 

On February 3, 2009, the Board, by a vote of 3to 1, with Mr. Rajegowda voting against, created an Executive Committee ofthe Board of Directors, having all of the authority of the Board, including allof the authority that the Board had as a committee of the whole when serving asa committee of the Board (such as the Audit Committee). Our Board took thisaction because members of the Board, other than Mr. Rajegowda, had becomeconcerned that Mr. Rajegowda was unable, because of conflicts of interestbetween the interests of his employer, MC Investments, and his duties as amember of our Board, to perform his duties to the our stockholders, or tomaintain the confidentiality of our confidential information. Members of ourBoard were specifically concerned that Mr. Rajegowda was sharing ourconfidential information with his employer. In addition, Mr. Rajegowdaindicated to the Board that he was unwilling, under any circumstances, toconsider certain classes of transactions that might be presented to us. Inorder to maintain our ability to conduct our business in the best interests ofour stockholders, without the concern that Mr. Rajegowda’s conflicts ofinterest would adversely affect our decision making, and to assure theconfidentiality of our confidential information, the Board, with Mr. Rajegowdavoting against, decided to create an Executive Committee of the Board,exercising all of the authority and power of the Board, including all of theauthority of the Board when it is sitting as a committee of the whole.

 

We disagree with Mr. Rajegowda’s allegations,and do not believe that they are supported by the facts. Mr. Rajegowda iscorrect when he says that he has not been provided with copies of minutes ofmeetings. However, we do not believe that Mr. Rajegowda has requestedcopies of those minutes, or requested that minutes of meetings be reviewed andvoted upon. Our normal process does not include the vote that Mr. Rajegowdarefers to. We do not believe that Mr. Rajegowda objected to our normalprocess while he was a member of the Board.

 

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We are not sure what Mr. Rajegowda is referringto when he says that the Board has “determined to proceed in a manner which heconsiders to be antithetical to the expressed wishes of the majority ofstockholders.”  Although, from theremainder of the letter, it would appear that he believes that the Board hasdecided to abandon our plan of dissolution, our Board has not made thatdecision, nor has the Executive Committee of our Board. We have continued towind up aspects of our businesses, including dissolving of some of oursubsidiaries and continuing to try to collect our remaining non cash assets. Inaddition, we have continued to review our liabilities and seek to satisfy orresolve those that we can in a favorable manner. See “Item 1, Business — 2008Business” for further discussion with respect to our activities in this regard.We are doing this so that we can satisfy or provide for our liabilities asrequired by our plan of dissolution and applicable law. We do not now have, anddo not believe that we will have in the immediate future, sufficientinformation regarding all of our liabilities to pay or appropriately providefor them as required by our plan of dissolution and applicable law. We expectthat fully implementing our plan of dissolution may require several years. OurBoard may in the future elect to abandon the plan of dissolution. The plan of dissolutionreserves that right to the Board. If the Board abandons the plan ofdissolution, it will do so only after determining that doing so would be in thebest interest of our stockholders. The Board expects to review the plan ofdissolution in the near future, and to consider whether it is in the bestinterest of the stockholders to abandon the plan. See “Item 1, Business — Planof Dissolution” for further discussion regarding our plan of dissolution.

 

Finally, we note that, consistent with the concernsof members of our Board, Mr. Rajegowda was subject to conflicts ofinterest as a result of his employment by MC Investments, the letter from Mr. Rajegowda’scounsel submitting his resignation concluded by reserving Mr. Rajegowda’sand MC Investment’s rights against the Company and members of the Boardrelating to a transaction approved by the Executive Committee of the Boardbetween us and Fair, James Cochran and Timothy Durham. Mr. Durham is amember of our Board, and Fair is a company controlled by Mr. Durham.

 

We provided a copy of the disclosures we are makingin this Item 9B of Form 10-K/A to Mr. Rajegowda and informed him thathe may furnish the Company as promptly as possible a letter stating whether heagrees or disagrees with the disclosures made in response to this Item 9B, andthat if he disagrees, then the Company requests that he provide the respects inwhich he does not agree with the disclosures. We will undertake to file anyletter received from Mr. Rajegowda, if any, as an exhibit to a currentreport on Form 8-K within two business days after receipt.

 

**PART III**

 

**Item 10. Directors, ExecutiveOfficers and Corporate Governance**

 

The following table sets forth the names, ages, andtitles of executive officers and directors of the Company as of November 30,2008:

 
| **Name**           | ** ** | **Age** | ** ** | **Director  Since**   | ** ** | **Class**               | ** ** | **Position(s) Held**                                                                      |
|--------------------|------------|---------|------------|-----------------------|------------|-------------------------|------------|------------------------------------------------------------------------------------------------|
| Robert A. Kaiser   |       | 55      |       | May 2, 2005      |       | Class I Director   |       | Director, Chairman, Chief Executive Officer, President, Chief  Financial Officer and Treasurer |
| Timothy S. Durham  |       | 46      |       | August 7, 2007   |       | Class III Director |       | Director, Secretary                                                                            |
| David Tornek       |       | 48      |       | January 16, 2009 |       | Class III Director |       | Director                                                                                       |
| Manoj Rajegowda(1) |       | 28      |       | August 7, 2007   |       | Class II Director  |       | Director                                                                                       |

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(1)           Resigned from the Board effective February 24, 2009.See “Item 9B, Other Information — Resignation of Director,” for furtherinformation regarding the circumstances surrounding Mr. Rajegowda’sresignation.

 

Robert A. Kaiser, 55, currently serves as a Class Idirector and the Company’s Chairman of the Board, which he was elected to on August 7,2007, and as Chief Executive Officer, President, Chief Financial Officer andTreasurer, which positions he was elected to on September 25, 2007. Mr. Kaiserhas served as a director of the Company since May 2, 2005 and alsopreviously served as Chairman of the Board of Directors of the Company from May 2,2005 until his resignation on April 17, 2007. Mr. Kaiser wassubsequently elected to the board again on August 7, 2007, and was to haveserved a one-year term; however, because the Company did not have an annualmeeting of stockholders in 2008, he has continued to serve as director. Mr. Kaiseralso served as Senior Vice President and Chief Financial Officer of the Companyfrom December 21, 2001 until October 2, 2003, when the Board of Directorsnamed him President and Chief Operating Officer of the Company, which he servedas until March 30, 2007, when he resigned in connection with thecompletion of the sale of substantially all of the Company’s assets. Mr. Kaiserwas also promoted to Chief Executive Officer on May 1, 2004, with which heserved 

 

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consecutivelyas President and Chief Operating Officer until March 30, 2007. Mr. Kaiseralso serves as a member of the board of directors and audit committee chairmanfor RBC Life Sciences and has served in such capacities since September 2008.

 

Timothy S. Durham, 46, is currently serving athree-year term as a Class III director and was elected as Secretary ofthe Company on August 7, 2007. Mr. Durham is the Chairman and ChiefExecutive Officer of Obsidian Enterprises, Inc. (“Obsidian”), a privateholding company that invests in small and mid cap companies in basic industriessuch as manufacturing and transportation. As Chief Executive Officer ofObsidian, Mr. Durham is responsible for strategic direction and financialissues. Mr. Durham also serves as Chairman of Fair Holdings, Inc. (“FairHoldings”), a financial services company, where his responsibilitiesinclude strategic direction and financial issues. He has held such positionswith Obsidian and Fair Holdings for more than five years. Mr. Durham alsoserves as a director of National Lampoon, Inc. and has done so since 2002.

 

David Tornek, 48**,** is currentlyserving as a Class III director of the Company until his successor is dulyelected and qualified. Mr. Tornek also serves as a director of NationalLampoon, Inc., and has served in that capacity since December 22,2008. Mr. Tornek is currently Owner/Operator of Touch Catering, KosherTouch Catering, and Meat Market Miami Steakhouse, all Miami area restaurantsand catering companies. Prior to his work in the food services industry, Mr. Tornekworked as Chief Financial Officer and Chief Operating Officer of CenturyManagement Group from 1995 to 2004. Mr. Tornek received a B.S. inaccounting from Metropolitan State College in 1983. Mr. Tornek also servesas a director of National Lampoon, Inc. and has done so since December 22,2008.

 

Manoj Rajegowda, 28, was serving a two year term asa Class II director prior to his resignation from the Board on February 24,2009. See “Item 9B,Other Information — Resignation of Director,” for further information regardingthe circumstances surrounding Mr. Rajegowda’s resignation.Mr. Rajegowdais a Senior Analyst at MC Investment Partners, LLC, a private equity/hedge fundfirm, and has held such position since September 2006. Prior to workingfor MC Investment Partners, LLC, Mr. Rajegowda worked as a contractconsultant for Global Environment Fund, a private equity fund, from June 2006to August 2006 and as an Analyst at Bear, Stearns & Co., aninvestment banking firm, from June 2004 to December 2005. Prior toworking for Bear, Stearns & Co., Mr. Rajegowda received a B.A.from Princeton University in 2002 and a masters degree in bioscience from KeckGraduate Institute in 2004.

 

The Company does not maintain key man insurance onthe life of any officer of the Company. The loss or interruption of thecontinued full-time service of the Company’s executive officers and keyemployees could have a material adverse impact on the Company’s business. Theinability of the Company to retain such necessary personnel could also have amaterial adverse effect on the Company.

 

Nofamily relationships exist among our officers or directors. Except as indicatedabove, no director of ours is a director of any company with a class ofsecurities registered pursuant to Section 12 of the Securities ExchangeAct of 1934, or subject to the requirements of Section 15(d) of suchAct or any company registered as an investment company under the InvestmentCompany Act of 1940.

 

**Section 16(A) Beneficial Ownership ReportingCompliance**

 

Section 16(a) of the Exchange Act requiresthe Company’s executive officers, directors, and persons who beneficially ownmore than 10% of a registered class of the Company’s equity securities to filewith the SEC initial reports of ownership and reports of changes in ownershipof the Company’s CommonStock and other equity securities of the Company. Such persons are requiredby SEC regulations to furnish the Company with copies of all Section 16(a) formsthat they file.

 

Based solely on the Company’s review of such formsfurnished to the Company, the Company believes that all filing requirementsapplicable to the Company’s executive officers, directors, and greater than 10%beneficial owners were complied with for the Company’s 2008 fiscal year.

 

**Corporate Governance**

 

***Board of Directors and Committees***

 

We are managed under the direction of our Board ofDirectors. As of November 30, 2008, we had three directors, including twonon-employee directors.  During the yearended November 30, 2008, there were no changes to the Company’s Board.  Subsequently, on January 16, 2009, theBoard increased the size of the Board from three members to four members andappointed Mr. David Tornek to fill the vacancy as a Class IIIdirector to hold office for the remaining term of the 

 

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Class IIIdirectors until the annual meeting of stockholders in 2010 and until hissuccessor is duly elected and qualified. We expect that Mr. Tornek will benamed Chairman of the Audit Committee of our Board. On February 24, 2009, Mr. Rajegowdatendered his resignation from the Board. Mr. Rajegowda’s letter ofresignation is attached hereto as Exhibit 99.1.  See “Item 9B, Other Information — Resignationof Director,” for further information regarding the circumstances surrounding Mr. Rajegowda’sresignation.

 

Our Board of Directors is divided into three classesof directors and each class serves a three year term. Our Board of Directorspresently has two regular committees, the Audit Committee and the ExecutiveCommittee.  During fiscal 2008, the Boardmet 15 times and the Audit Committee met two times. The Executive Committee wasformed subsequent to fiscal 2008 and therefore did not meet in fiscal 2008.

 

*Executive Committee*

 

TheExecutive Committee was established by the Board on February 3, 2009 andcurrently consists of Messrs. Kaiser, Durham and Tornek. Mr. Rajegowda,when he served as a member of our Board, was not a member of the ExecutiveCommittee.  The Executive Committee hasall authority of the Board, including all of the authority the Board had as acommittee of the whole when serving as a committee of the Board (such as theAudit Committee).  Please see “Item 9B, Other Information — Resignation of Director”for a discussion concerning the formation of the Executive Committee and thecircumstances surrounding such formation.

 

*Audit Committee*

 

Currentlyall members of our Board are serving as members of the Company’s Audit Committeeand beginning with the formation of our Executive Committee on February 3,2009, all members of our Executive Committee serve as members of our AuditCommittee.  The primary purpose of theAudit Committee is to oversee the accounting and financial reporting processesof the Company and the audits of the financial statements of the Company. TheAudit Committee shall fulfill its oversight responsibilities by reviewing (i) thefinancial information which will be provided to the shareholders, potential shareholders,the investment community and others; (ii) reviewing areas of potentialsignificant financial risk to the Company including the systems of internalcontrols and disclosure controls and procedures which management and the Boardhave established; (iii) monitoring the independence and performance of theCompany’s independent accountants and internal audit function; and (iv) reportingon all such matters to the Board.  TheAudit Committee adopted and will periodically review the written charter thatspecifies the scope of the Audit Committee’s responsibilities for our AuditCommittee is posted on our website at *www.clstholdings.com*.

 

OurAudit Committee currently includes one independent member of our Board, Mr. Tornek,as such independence is defined by the standards of NASDAQ.  The Company does not have an audit committeefinancial expert, as such term is defined in Item 407(d)(5) ofRegulation S-K. In light of our limited operations at this time, our Boardhas determined that it will postpone any decision on whether to search for anaudit committee financial expert until such time as the Board decides toabandon the plan of liquidation and dissolution.

 

***Director Independence***

 

The Company’s Board of Directors has adopted theindependence standards of NASDAQ as its independence standards. In assessingthe independence of its directors, the board has determined that Mr. Tornekis an independent director of the Company and that Messrs. Durham andKaiser are not independent directors.  Indetermining the independence of Mr. Tornek, our board of directorsconsidered the fact that both Messrs. Durham and Tornek serve on the boardof directors of National Lampoon, Inc. and concluded that thisrelationship would not impair Mr. Tornek’s ability to remain independentas a director on our Board.

 

***Nominations to the Board of Directors***

 

We do not have a Nomination Committee of our Boardof Directors.  Our whole Board ofDirectors performs the functions of a Nominating Committee. The Board ofDirectors will consider nominees proposed by stockholders in accordance withguidelines for such consideration set forth in our Amended and Restated Certificate of Incorporationdated as of April 27, 1995, our Bylaws and any applicable rules andregulations of the SEC. A copy of our charter and Bylaws is available from ourChief Executive Officer upon written request. Requests or proposals should bedirected to Robert Kaiser, Chief Executive Officer, CLST Holdings, Inc.,17304 Preston Road, Dominion Plaza, Suite 420 Dallas, Texas 75252.  Article II, Section 7 of our Bylaws providesthat persons nominated by stockholders shall be eligible for election asdirectors only if nominated in accordance with the following procedures. Suchnominations shall be made pursuant to timely notice in writing to our CorporateSecretary. To be timely, a stockholder’s notice shall be delivered to or mailedand received at our principal 

 

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executiveoffices at CLSTHoldings, Inc., 17304 Preston Road, Dominion Plaza, Suite 420 Dallas,Texas 75252 not less than 60days prior to the meeting of the stockholders called for the election ofdirectors; provided, however, that in the event that less than 70 days noticeor prior public disclosure of the date the meeting is given or made tostockholders, such written notice must be so received not later than the closeof business on the tenth day following the day on which such notice of the dateof the meeting was mailed or such public disclosure of the date of the meetingwas made, whichever occurs first. Suchstockholder’s notice to the Corporate Secretary must set forth (a) as tothe stockholder proposing to nominate a person for election or re-election asdirector, (i) the name, business address and residence address of thestockholder who intends to make the nomination and (ii) a representationthat the stockholder is a holder of record of shares of the Company entitled tovote at such meeting and intends to appear in person or by proxy at the meetingto nominate the person or persons specified in the notice, and (b) as tothe nominee, (i) the name, age, business and resident addresses, andprincipal occupation or employment of each nominee; (ii) a description ofall arrangements or understandings between the stockholder and each nominee andany other person or persons (naming such person or persons) pursuant to whichthe nomination or nominations are to be made by the stockholder; (iii) anyother information relating to the nominee that is required to be disclosed insolicitations for proxies for election of directors pursuant to Regulation 14Aunder the Exchange Act; (iv) any other information that is or would berequired to be disclosed in a Schedule 13D promulgated under the Exchange Act,regardless of whether such person would otherwise be required to file aSchedule 13D and (v) the consent of each nominee to serve as a director ofthe Company if so elected.

 

The Board of Directors has not developed specific,minimum qualifications that must be met by a committee recommended director.Neither has the Board of Directors specified a particular set of qualities orskills one or more directors must possess other than the need for the Board toinclude at least one director who is a financial expert. The Board of Directorsdoes not currently utilize the services of any third party search firm toassist in the identification or evaluation of Board member candidates. TheBoard of Directors may engage a third party to provide such services in thefuture, as it deems necessary or appropriate at the time in question. The Boardof Directors determines the required selection criteria and qualifications ofdirector nominees based upon the needs of our Company at the time nominees areconsidered. A candidate must possess the ability to apply good businessjudgment and must be in a position to properly exercise his or her duties ofloyalty and care. Candidates should also exhibit proven leadershipcapabilities, high integrity and experience with a high level of responsibilitywithin their chosen fields, and have the ability to quickly understand complexprinciples of, but not limited to, business and finance. The Board of Directorswill consider these criteria for nominees identified by members of the Board ofDirectors, by stockholders, or through some other source. When current Boardmembers are considered for nomination for reelection, the Board of Directorsalso takes into consideration their prior Board contributions, performance andmeeting attendance records.

 

The Board of Directors conducts a process of makinga preliminary assessment of each proposed nominee based upon resume andbiographical information, an indication of the individual’s willingness toserve and other background information. This information is evaluated againstthe criteria set forth above as well as the specific needs of our Company atthat time. Based upon a preliminary assessment of the candidate(s), those who appearbest suited to meet our needs may be invited to participate in a series ofinterviews, which are used for further evaluation. The Board of Directors usesthe same process for evaluating all nominees, regardless of the original sourceof the recommendation.

 

***Stockholder Communications***

 

We and our Board welcome communications from ourstockholders. Stockholders who wish to communicate with the Board, or one ormore specified directors, may send an appropriately addressed letter to theChairman of the Board, CLSTHoldings, Inc., 17304 Preston Road, Dominion Plaza, Suite 420 Dallas,Texas 75252. The mailing envelopeshould contain a clear notation indicating that the enclosed letter is a “Stockholder-BoardCommunication.” All such letters should identify the author as a securityholder, and, if the author desires for the communication to be forwarded to theentire Board or one or more specified directors, the author should so request,in which case the Chairman will arrange for it to be so forwarded unless thecommunication is irrelevant or improper. Concerns relating to accounting,internal control over financial reporting or auditing matters will beimmediately brought to the attention of the chairman of the Audit Committee.

 

***Code of Ethics***

 

Theinformation required by this item regarding the Company’s code of ethics isprovided under “Item 1, Business — Available Information and Code of Ethics” ofthis Form 10-K/A, which is incorporated herein by reference. We intend tosatisfy the disclosure requirement under Item 5.05 of Form 8-K regardingan amendment to or waiver from a provision of this code of ethics, if any, byposting such information on our website.

 

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**Item 11. ExecutiveCompensation**

 

**Summary Compensation Table.**

 

The following table sets forth certain informationregarding compensation earned by all individuals serving as our Chief ExecutiveOfficer during fiscal year 2008 and our two most highly compensated executiveofficers (other than the Chief Executive Officer) who served as executiveofficers during fiscal year 2008 (the “***Named Executive Officers***”),for each of the last two fiscal years.

 
| **Name and Principal Position**                                            | ** **                   | ** Year ** | ** **                   | ** Salary ($) ** | ** **                   | ** Bonus ($) ** | ** **                   | ** Stock Awards **

**($)(4)** | ** **      | **Option   Awards   ($)(4)** | ** **               | **Nonequity  incentive plan   compensation **

**($)** | ** **               | **Nonqualified  deferred   compensation **

**earnings ($)** | ** **               | **All other   compensation **

**($)** | ** **      | ** Total ($) ** | ** ** |
|--------------------------------------------------------------------------------------|------------------------------|----------------------|------------------------------|---------------------------------|------------------------------|--------------------------------|------------------------------|-----------------------------------------------|-----------------|----------------------------------------|--------------------------|-----------------------------------------------------------------------|--------------------------|-----------------------------------------------------------------------------|--------------------------|-------------------------------------------------------|-----------------|--------------------------------|------------|
| ** **                                                                           | **    ** | ** **           | **    ** | ** **                      | **    ** | ** **                     | **    ** | ** **                                    | ** **      | ** **                             | ** **               | ** **                                                            | ** **               | ** **                                                                  | ** **               | ** **                                            | ** **      | ** **                     | ** ** |
| Robert A. Kaiser, Chairman, Chief Financial Officer  and Chief Executive Officer (1) |                         | 2008                 |                         | $                               | 240,000                      |                           | —                       |                                          | —          |                                   | —                   |                                                                  | —                   |                                                                        | —                   |                                                  | 21,000          | (2)                            | 261,000    |   |
|                                                                                 |                         | 2007                 |                         | 295,250                         |                         | —                         |                         | 627,500                                       | (1)   | 5,300                                  |      | N/A                                                                   |      | N/A                                                                         |      | 3,823,500                                             | (3)   | 4,751,550                      |       |
|                                                                                      |                              |                      |                              |                                 |                              |                                |                              |                                               |                 |                                        |                          |                                                                       |                          |                                                                             |                          |                                                       |                 |                                |            |  |

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(1)                                  Mr. Kaiserserved as President and Chief Executive Officer until March 30, 2007, whenhe resigned in connection with the completion of sale of the Company’s UnitedStates and Miami-based Latin American operations. Mr. Kaiser served asChairman of the Board of Directors until April 17, 2007. Mr. Kaiserwas subsequently reelected as Chairman on August 7, 2007, and ChiefExecutive Officer on September 25, 2007.

 

(2)                                  Includes Boardof Director Fees of $21,000.

 

(3)                                  Includes Companymatching contributions to Mr. Kaiser’s 401(k) plan of $11,250, Changeof Control payments in 2007 of $3.6 million and Board of Director Fees of$25,792.  On August 28, 2007, theBoard authorized the retention of Mr. Kaiser as a consultant to theCompany for the sum of $20,000 per month, on a month-to-month basis, terminableat will by either party. For the year ended November 30, 2007, Mr. Kaiserreceived $84,000 in consultant payments. As of January 1, 2008, Mr. Kaiserbecame an employee of the Company.

 

(4)                                  The amountsreported in the Stock Awards and Option Awards columns reflect the dollaramount, without any reduction for risk of forfeiture, recognized for financialreporting purposes for the fiscal year ended November 30, 2008 and 2007 ofawards of stock options and restricted stock or restricted stock units to theNamed Executive Officer, calculated in accordance with the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (“***SFAS 123(R)***”), and werecalculated using certain assumptions, as set forth in footnote 1 to our auditedfinancial statements for the fiscal year ended November 30, 2008 and 2007,included herein. These amounts include amounts from awards granted in and priorto 2006.

 

**Outstanding Equity Awards at Fiscal Year End November 30,2008.**

 

The following table provides information concerningunexercised options, stock that has not vested and equity incentive plan awardsfor each of the Named Executive Officers as of November 30, 2008.

 
| ** **                                              | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                    | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **Name**                                                | ** ** | **Number of  Securities  underlying  unexercised  options (#)  exercisable** | ** ** | **Number of  securities  underlying  unexercised  options (#)  unexercisable** | ** ** | **Equity  incentive  plan awards:  Number of  securities  underlying  unexercised  unearned  options (#)** | ** ** | **Option  exercise  price ($)** | ** ** | **Option  expiration  date** | ** ** | **Number  of shares  or units  of stock  that have  not vested  (#)** | ** ** | **Market  value of  shares of  units of  stock  that have  not  vested ($)** | ** ** | **Equity  incentive  plan  awards:  Number of  unearned  shares,  units or  other  rights that  have not  vested (#)** | ** ** | **Equity  incentive plan  awards:  Market or  payout value  of unearned  shares, units  or other rights  that have not  vested** | ** ** |
| Robert A. Kaiser, Chairman and Chief Executive  Officer |       | 80,000                                                                                 | (1)        | —                                                                                   |       | — |   | $ | 4.60 |   | 12/21/2011 |   | — | ** ** | **—** |   | — |   | — |   |
|                                                    |       | 50,000                                                                                 | (1)        | —                                                                                   |       | — |   | $ | 5.45 |   | 1/22/2013 |   | — |   | — |   | — |   | — |   |

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(1)                                  The Company’sformer 1993 Plan terminated on December 3, 2003. However, Mr. Kaisercurrently has exercisable options that were granted under the 1993 Plan Mr. Kaiserwas granted options Plan to purchase 80,000 shares of the 

 

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Company’s Common Stock on December 12, 2001, and50,000 shares of the Company’s Common Stock on January 22, 2003. Each ofthese options vested with respect to 25% of the shares covered thereby on eachof the first four anniversaries of the date of grant and expires ten yearsfollowing the date of grant. The exercise price of each option was equal to thefair market value of the Common Stock on the date of grant.

 

**Compensation of Executive Officers.**

 

*Employment Contracts andTermination of Employment and Change in Control Arrangements.*The Companymaintained an employment agreement with Mr. Kaiser (the “ Agreement”).In connection with the sale of the Company’s United States and Miami-basedLatin American operations, the related sale agreement required as a conditionof closing that the Company pay all amounts due Mr. Kaiser under hisAgreement with the Company, including payments due as a result of a change incontrol of the Company resulting from the sale. To receive those payments, Mr. Kaiser’semployment with the Company had to be terminated. Although Mr. Kaiserwould have preferred to remain as Chief Executive Officer and President of theCompany after the closing until he believed he had fulfilled theresponsibilities of those positions, he agreed to resign on March 30,2007, so that the closing could be completed. Mr. Kaiser continued toserve on the Board of Directors throughout 2007, including after his electionto the Board of Directors on August 7, 2007. On August 7, 2007, Mr. Kaiserwas appointed Chairman of the Board. On August 28, 2007, the Board authorizedthe retention of Mr. Kaiser as a consultant to the Company for a sum of$20,000 a month on a month-to-month basis, terminable at will by either party.On September 25, 2007, in addition to his duties as Chairman, he wasappointed Chief Executive Officer, Chief Financial Officer, and Treasurer. Asof January 1, 2008, Mr. Kaiser is now an employee of the Company andreceives $20,000 per month.

 

**Compensation of Directors.**

 

The following table provides information concerningcompensation of the Company’s directors for the fiscal year ended November 30,2008. All compensation received by Mr. Kaiser for fiscal 2008 that is as aresult of his membership on the Board is reflected in the Summary CompensationTable above.

 
| **Name**          | ** ** | **Fees  earned or  paid in  cash ($)** | ** ** | **Stock  awards  ($)** | ** ** | **Option  awards  ($)** | ** ** | **Non-equity  incentive plan  compensation ($)** | ** ** | **Nonqualified  deferred  compensation  earnings ($)** | ** ** | **All other  compensation  ($)** | ** ** | **Total ($)** | ** ** |
|-------------------|------------|-------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
| Timothy S. Durham |       | $                                                     | 17,750     |                   | —     |                    | —     |                                                       | N/A        |                                                        | N/A        |                                  | —     |               | $          | 17,750 |   |
| Manoj Rajegowda   |       | 17,250                                                |       | —                 |       | —                  |       | N/A                                                        |       | N/A                                                         |       | —                                |       | 17,250             |       |
|                   |            |                                                       |            |                        |            |                         |            |                                                            |            |                                                             |            |                                       |            |                    |            |  |  |

 

Historically, we issued shares of restricted stockto our employees and executive officers pursuant to our 2003 Plan. The numberof shares to be granted under the 2003 Plan was determined by the Board at thetime of the grant based upon the pool of shares then available for grant. Theawarded shares vested at the rate of 331/3% per year on each anniversary date of grant and were subject to suchother terms and conditions as may be contained in the form of restricted stockaward agreement generally used by the Company at the time of grant. Asdisclosed in Part II of this Form 10-K/A, under the heading “Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities—Equity Compensation Plan Information,” theCompany’s 2003 Plan was cancelled on September 25, 2007. From November 30,2006 until September 25, 2007, each non-employee director who was thenserving as such received a grant of 4,500 shares of restricted stock. At ameeting of the Board on September 25, 2007, the Board unanimously resolvedto terminate the Company’s 2003 Plan due to the reduction in the Company’sworkforce. As a result of the termination of the 2003 Plan, all outstandingoptions to purchase the equity securities of the Company issued thereunder wereterminated as well.  Therefore, there arecurrently no outstanding options to purchase the Company’s Securities under the2003 Plan. Furthermore, no options or restricted stock were granted todirectors during fiscal year 2008.

 

Subsequent to fiscal 2008, on December 1, 2008,our Board approved the Company’s 2008 Long Term Incentive Plan (the “***2008 Plan***”).  The 2008 Plan,which is administered by the Board, permits the grant of restricted stock,stock options and other stock-based awards to employees, officer, directors,consultants and advisors of the Company and its subsidiaries. The 2008 Planprovides that the administrator of the plan may determine the terms andconditions applicable to each award, and each award will be evidenced by astock option agreement or restricted stock agreement. The aggregate number of shares of CommonStock 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.

 

Inaddition, on December 1, 2008 our Board approved the grant of 300,000 shares ofrestricted stock to each of Timothy S. Durham, Robert A. Kaiser and ManojRajegowda.  Subsequently, on February 24, 2009, Mr. Rajegowdaforfeited 

 

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all stock issuancesprovided to him during the course of his Board membership in connection withhis resignation from the Board. Of each restricted stock grant, 100,000 sharesvested on the date of grant, and the remaining 200,000 of the shares vest intwo equal annual installments on each anniversary of the date of grant. The restrictedstock becomes 100% vested if any of the following occurs: (i) theparticipant’s death or (ii) the disability of the Participant whileemployed or engaged as a director or consultant by the Company.

 

Each of our directors receives an annual retainer of$10,000. In addition, each director receives $750 per Board meeting that he ispresent or $500 if he participates telephonically.

 

All directors of the Company are entitled toreimbursement of their reasonable out-of-pocket expenses in connection withtheir travel to, and attendance at, meetings of the Board or committeesthereof. There were no other arrangements pursuant to which any director wascompensated for any service provided as a director during fiscal 2008, otherthan as set forth above.

 

**Item 12. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

 

**Security Ownership of Certain Beneficial Owners**

 

The following table sets forth information withrespect to the number of shares of Common Stock beneficially owned as of February 27,2008, by each person known by the Company to beneficially own more than 5% ofthe outstanding shares of Common Stock. Unless otherwise noted, the persons named in thetable have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them.

 
| **Name and Address of Beneficial Owner**                                                  | ** ** | **Amount and Nature  of  Beneficial Ownership** | ** ** | **Percent  of  Class(1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------|------------|
| Michael A. Roth and Brian  J. Stark   c/o Stark Investments   3600 South Lake Drive   St. Francis, Wisconsin 53235 |       | 3,267,254                                                      | (2)        | 13.8                      | %          |
| David Sandberg   c/o Red Oak Partners, LLC   145 Fourth Avenue, Suite 15A   New York, NY 10003                |       | 4,561,554                                                      | (3)        | 19.2                      | %          |

----

(1)                                  Based on 23,649,282 sharesoutstanding as of February 27, 2009.

 

(2)                                  Based on anamended Schedule 13G filed with the SEC on February 14, 2007 byMichael A. Roth and Brian J. Stark, filing as joint filers pursuant to Rule 13d-1(k) underthe Securities Exchange Act of 1934, as amended. Mr. Roth and Mr. Starkreported shared voting and dispositive power with respect to all shares shownas beneficially owned in such filing. The 3,267,254 shares of Common Stock andpercentage ownership represent the combined indirect holdings of Michael A.Roth and Brian J. Stark. All of the foregoing represents an aggregate of3,267,254 shares of Common Stock held directly by Stark Master Fund Ltd. (“***Stark***”). The Reporting Persons arethe Managing Members of Stark Offshore Management LLC (“***Stark Offshore***”), which serves asthe investment manager of Stark. Through Stark Offshore, Michael A. Roth andBrian J. Stark share voting and dispositive power over all of the foregoingshares.

 

(3)                                  Based on aSchedule 13D filed with the SEC on February 18, 2009 by DavidSandberg, Red Oak Partners, LLC (“***Red Oak Partners***”),The Red Oak Fund, LP (“***Red Oak Fund***”),Pinnacle Partners, LLC (“***Pinnacle Partners***”),Pinnacle Fund, LLLP (“***Pinnacle Fund***”)and Bear Market Opportunity Fund, L.P. (“***Bear Fund***”).Each of the filers reported shared voting and dispositive power with respect toall shares shown as beneficially owned in such filing. Red Oak Partners, andtherefore Mr. Sandberg, managing member of Red Oak Partners, beneficiallyowns 4,561,554 shares of Common Stock. Red Oak Fund is controlled by Red OakPartners. Red Oak Partners manages Bear Fund and makes its investmentdecisions. Pinnacle Fund is controlled by Pinnacle Partners, which iscontrolled by Red Oak Partners. Therefore, Red Oak Partners may be deemed tobeneficially own (i) the 3,341,106 shares of Common Stock held by Red OakFund, (ii) the 960,448 shares of Common Stock beneficially owned byPinnacle Partners through Pinnacle Fund, and (iii) the 260,000 shares ofCommon Stock held by Bear Fund.

 

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**Security Ownership of Management**

 

The following table sets forth information withrespect to the number of shares of Common Stock beneficially owned as of February 27,2009, by (i) each Named Executive Officer of the Company for whomcompensation was reported under “Item 11, Executive Compensation”; (ii) eachcurrent director of the Company and (iii) all directors and executiveofficers of the Company as a group. Unless otherwise noted, the persons namedin the table have sole voting and investment power with respect to all sharesof Common Stock beneficially owned by them.

 
| **Title of Class**                 | ** ** | **Name of Beneficial  Owner** | ** ** | **Amount and Nature  of Beneficial  Ownership** | ** ** | **Percent of  Class (1)** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------|------------|
| Common Stock                                 |       | Robert A. Kaiser                        |       | 627,423                                                        | (2)        | 2.7                                 | %          |
|                                         |       | Timothy S. Durham                       |       | 3,474,471                                                      | (3)        | 14.7                                | %          |
|                                         |       | David Tornek                            |       | 184,320                                                        | (5)        | *                                   |       |
| Directors and Executive  Officers as a Group |       |                                    |       | 4,286,214                                                      |       | 18.1                                | %          |

----

*                                         Less than 1%.

 

(1)                                  Based on 23,649,282 sharesoutstanding as of February 27, 2009.

 

(2)                                  Includes 36,901shares held in a partnership controlled by Mr. Kaiser and his wife. Alsoincludes options to exercise 130,000 shares of Common Stock, 80,000 of whichexpire on December 12, 2011 and 50,000 of which expire on January 22,2013. Also includes a restricted stock grant, 100,000 shares of which vested onDecember 1, 2008, and the remaining 200,000 of which vest in two equalannual installments on December 1, 2009 and December 1, 2010.

 

(3)                                  Includes arestricted stock grant, 100,000 shares of which vested on December 1,2008, and the remaining 200,000 of which vest in two equal annual installmentson December 1, 2009 and December 1, 2010. Also, this amount includes1,969,077 shares of Common Stock based upon the Schedule 13D filed with the SECon February 27, 2009, by Mr. Durham, DC Investments, LLC, an Indianalimited liability company (“***DC Investments***”),Fair Holdings, Inc., an Ohio corporation and wholly owned subsidiary of DCInvestments (“***Fair Holdings***”) and Fair. Mr. Durhamis the managing member of DC Investments, the Chairman of the Board ofDirectors of Fair Holdings and the Chief Executive Office and a member of theBoard of Directors of Fair, and therefor, Durham may be deemed to beneficiallyown the 1,969,077 shares of Common Stock held by Fair.

 

(4)                                  Represents arestricted stock grant, 100,000 shares of which vested on December 1,2008, and the remaining 200,000 of which vest in two equal annual installmentson December 1, 2009 and December 1, 2010.

 

(5)                                  Mr. DavidTornek’s holdings consist solely of shares of Common Stock.

 

**Equity Compensation Plan Information**

 

The Company’s equity compensation plan informationis provided in Part II of this Form 10-K/A, under the heading “Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities—Equity Compensation Plan Information,” and isincorporated herein by reference.

 

**Changes in Control**

 

To management’s knowledge, there are no arrangementsthe operation of which may at a subsequent date result in a change in controlof the Company.

 

***Rights Plan***

 

On February 5,2009, our Board adopted a rights plan and declared a dividend of one preferredshare purchase right for each outstanding share of Common Stock of the Company.The dividend is payable to our stockholders of record as of February 16,2009. The terms of the rights and the rights plan are set forth in a RightsAgreement, by and between the Company and Mellon Investor Services LLC, asRights Agent (the “***RightsPlan***”).

 

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OurBoard adopted the Rights Plan in an effort to protect stockholder value by****attempting to protect against a possiblelimitation on our ability to use our net operating loss carryforwards (the “***NOLs***”) to reducepotential future federal income tax obligations. We have experienced andcontinue to experience substantial operating losses, and under the InternalRevenue Code and rules promulgated by the Internal Revenue Service, we may“carry forward” these losses in certain circumstances to offset any current andfuture earnings and thus reduce our federal income tax liability, subject tocertain requirements and restrictions. To the extent that the NOLs do nototherwise become limited, we believe that we will be able to carry forward asignificant amount of NOLs, and therefore these NOLs could be a substantialasset to us. However, if we experience an “Ownership Change,” as defined in Section 382of the Internal Revenue Code, our ability to use the NOLs will be substantiallylimited, and the timing of the usage of the NOLs could be substantiallydelayed, which could therefore significantly impair the value of that asset.

 

TheRights Plan is intended to act as a deterrent to any person or group acquiring4.9% or more of our outstanding Common Stock (an “***Acquiring Person***”) without our approval.Stockholders who own 4.9% or more of our outstanding Common Stock as of theclose of business on February 16, 2009 will not trigger the Rights Plan solong as they do not (i) acquire any additional shares of Common Stock or (ii) fallunder 4.9% ownership of Common Stock and then re-acquire 4.9% or more of theCommon Stock. The Rights Plan does not exempt any future acquisitions of CommonStock by such persons. Any rights held by an Acquiring Person are null and voidand may not be exercised. We may, in our sole discretion, exempt any person orgroup from being deemed an Acquiring Person for purposes of the Rights Plan.

 

Therights have certain anti-takeover effects.  The rights will causesubstantial dilution to a person or group who attempts to acquire the Companyon terms not approved by us.  The rights should not interfere with anymerger or other business combination approved by us since we may redeem therights at $0.01 per right at any time until the date on which a person or grouphas become an Acquiring Person.

 

**Item 13. Certain Relationshipsand Related Transactions, and Director Independence**

 

**CLST Asset I, LLC**

 

On November 10,2008, the Company entered into a purchase agreement, through CLST Asset I, awholly owned subsidiary of Financo, which is one of our direct, wholly ownedsubsidiaries, to acquire all of the outstanding equity interests of Trust Ifrom Drawbridge Special Opportunities Fund LP (“***Drawbridge***”) for approximately $41.0million.  Our acquisition of Trust I was financed by approximately $6.1million of cash on hand and by a non-recourse, term loan of approximately $34.9million from Fortress, an affiliate of Drawbridge, pursuant to the terms andconditions set forth in the credit agreement, dated November 10, 2008, byand among the Trust I, Fortress, as the lender and administrative agent, FCCFinance, LLC, as the initial servicer, Lyon Financial Services, Inc., asthe backup servicer, and U.S. Bank National Association, as the collateralcustodian.

 

Pursuant to the Trust ICredit Agreement, Fair, may become the servicer if and only if there occurs anevent of a default by the then current servicer and only if Fair is not then indefault either as a borrower or as a servicer under any credit facility towhich Fortress or any of its affiliates is a party and no change of control ofFair has occurred.  Timothy S. Durham, an officer, director andstockholder of the Company, is Chief Executive Officer and Director of Fair andis also a majority stockholder of Fair. As of the date of this Form 10-K/A,FCC continues to be the servicer of the portfolio and the Company is not awarethat the servicer is in default under the Trust Credit Agreement.  BecauseFair is not currently acting as the servicer of Trust I and Fair could onlybecome a servicer upon certain defaults by the current servicer, it is notcurrently anticipated that Fair will have a direct or indirect materialinterest in the Trust Credit Agreement.  The servicing fee payable to theservicer in any given year under the Trust Credit Agreement is based upon aservice fee rate of 1.5% and the aggregate outstanding receivable balance.

 

**CLST Asset III, LLC**

 

Effective February 13, 2009, we, through AssetIII, a newly formed, wholly owned subsidiary of Financo, which is one of ourdirect, wholly owned subsidiaries, purchased certain receivables, installmentsales contracts and related assets owned by Fair, James F. Cochran, Chairmanand Director of Fair, and by Timothy S. Durham, Chief Executive Officer andDirector of Fair and an officer, director and stockholder of our company. Messrs. Durham and Cochran own all of the outstanding equity ofFair.  In return for assets acquired under the Asset III PurchaseAgreement, Asset III paid the sellers total consideration of $3,594,354 asfollows:

 

(1)          cash in the amount of $1,797,178.00 ofwhich $1,417,737 was paid to Fair, $325,440 was paid to Mr. Durham and$54,000 was paid to Mr. Cochran,

 

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(2)          2,496,077 newly issued shares of ourCommon Stock at a price of $0.36 per share, of which 1,969,077 shares of CommonStock were issued to Fair, 452,000 shares of Common Stock were issued to Mr. Durhamand 75,000 shares of Common Stock were issued to Mr. Cochran and

 

(3)          six promissory notes issued by Asset IIIin an aggregate original stated principal amount of $898,588.00, of which twopromissory notes in an aggregate original principal amount of $708,868 wereissued to Fair, two promissory notes in an aggregate original principal amountof $162,720 were issued to Mr. Durham and two promissory notes in anaggregate original principal amount of $27,000 were issued to Mr. Cochran.

 

We received a fairness opinion of BVA stating that BVA is of the opinionthat the consideration paid by us pursuant to the Asset III Purchase Agreementis fair, from a financial point of view, to our nonaffiliated stockholders. A copy of the fairness opinion was attached to a Current Report on Form 8-Kfiled with the SEC on February 20, 2009.  The shares of Common Stockwere issued by us in a transaction exempt from registration pursuant to Section 4(2) ofthe Securities Act of 1933, as amended.  As additional inducement forAsset III to enter into the Asset III Purchase Agreement, Fair agreed to useits best efforts to facilitate negotiations to add Asset III or one of itsaffiliates as a co-borrower under one of Fair’s existing lines of credit withaccess to at least $15,000,000.00 of credit for our own purposes.

 

**Related Party TransactionPolicy**

 

Our Board recognizes that related party transactionspresent a heightened risk of conflicts of interest and/or improper valuation(or the perception thereof) and therefore has adopted a policy within ourBusiness Ethics Policy which shall be followed in connection with all relatedparty transactions involving the Company. Our Business Ethics Policy can befound at our Internet website at *www.clstholdings.com*.Under this policy, any “Related Party Transaction” shall be consummated orshall continue only if:

 

1.               the Audit Committee shallapprove or ratify such transaction in accordance with the guidelines set forthin the policy and if the transaction is on terms comparable to those that couldbe obtained in arm’s length dealings with an unrelated thirty party;

 

2.               the transaction is approvedby the disinterested members of the Board of Directors; or

 

3.               the transaction involves compensationapproved by the Company’s Compensation Committee.

 

For these purposes, a “Related Party” is:

 

·                  a senior officer (which shall include at aminimum each vice president and Section 16 officer) or director of theCompany

·                  a stockholder owning in excess of fivepercent of the Company (or its controlled affiliates)

·                  a person who is an immediate family member ofa senior officer or director

·                  an entity which is owned or controlled bysomeone listed in 1, 2 or 3 above, or an entity in which someone listed in 1, 2or 3 above has a substantial ownership interest or control of such entity.

 

For these purposes, a “Related Party Transaction” is atransaction between the Company and any Related Party (including anytransactions requiring disclosure under Item 404 of Regulation S-K under theExchange Act), other than:

 

·                  transactions available to all employees generally

·                  transactions involving less than $5,000 whenaggregated with all similar transactions.

 

TheBoard of Directors has determined that the Audit Committee of the Board is bestsuited to review and approve Related Party Transactions. Accordingly, at eachcalendar year’s first regularly scheduled Audit Committee meeting, managementshall recommend Related Party Transactions to be entered into by the Companyfor that calendar year, including the proposed aggregate value of suchtransactions if applicable. After review, the Audit Committee shall approve ordisapprove such transactions and at each subsequently scheduled meeting,management shall update the Audit Committee as to any material change to thoseproposed transactions.

 

In theevent management recommends any further Related Party Transactions subsequentto the first calendar year meeting, such transactions may be presented to theAudit Committee for approval or preliminarily entered into by managementsubject to ratification by the Committee; provided, that if ratification shallnot be forthcoming, management 

 

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shall make all reasonableefforts to cancel or annul such transaction.

 

The Board recognizes that situations exist where asignificant opportunity may be presented to management or a member of the Boardof Directors that may equally be available to the Company, either directly orvia referral. Before such opportunity may be consummated by a Related Party(other than an otherwise unaffiliated 5% stockholder), such opportunity shallbe presented to the Board of Directors of the Company for consideration.

 

All Related Party Transactions are to be disclosedin the Company’s applicable filings as required by the Securities Act and theExchange Act, and related rules. Furthermore, all Related Party Transactionsshall be disclosed to the Audit Committee of the Board and any material RelatedParty Transaction shall be disclosed to the full Board of Directors. Further, management shall assure that all RelatedParty Transactions are approved in accordance with any requirements of theCompany’s financing agreements.

 

**Director Independence**

 

Forinformation on the independence of our directors, please see “Item 10,Directors, Executive Officers and Corporate Governance — Corporate Governance — DirectorIndependence.”

 

**Item 14. Principal AccountingFees and Services**

 

The following table summarizes the fees billed by GrantThornton LLP for services rendered for the fiscal years ended November 30,2008 and November 30, 2007 (in thousands).

 
| ** **            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit Fees(1)         |       | $        | 75         |     | $          | 852 |   |
| Audit-Related Fees(2) |       | —   |       | 26       |       |
| Tax Fees              |       | —   |       | —   |       |
| All Other Fees        |       | —   |       | 20       |       |
| TOTAL                 |       | $        | 75         |     | $          | 898 |   |

----

(1)                                  “Audit Fees”includes fees and expenses billed for the audit of the Company’s annualfinancial statements and review of financial statements included in the Company’squarterly reports on Form 10-Q, and services provided in connection withstatutory and regulatory filings. For fiscal 2007, the amount includesapproximately $0.9 million related to the financial statement audit.

 

(2)                                  “Audit-RelatedFees” includes fees billed for services that are related to the performance ofthe audit or review of the Company’s financial statements (which are notreported above under the caption “Audit Fees”). For fiscal 2007, the amountrelates to an audit of the Company’s 401k plan.

 

The following table summarizes the fees billed byWhitley Penn LLP for services rendered for the fiscal years ended November 30,2008 and November 30, 2007 (in thousands).

 
| ** **            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit Fees(1)         |       | $        | 139        |     | $          | 31 |   |
| Audit-Related Fees(2) |       | 20       |       | —   |       |
| Tax Fees              |       | —   |       | —   |       |
| All Other Fees        |       | —   |       | —   |       |
| TOTAL                 |       | $        | 159        |     | $          | 31 |   |

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(1)                                  “Audit Fees”includes fees and expenses billed for the audit of the Company’s annualfinancial statements and review of financial statements included in the Company’squarterly reports on Form 10-Q, and services provided in connection withstatutory and regulatory filings. For fiscal 2007, the amount relates to thereview of financial statements included in the Company’s quarterly reports on Form 10-Q.For fiscal 2008, the amount includes approximately $139,000  related tothe financial statement audit.

 

(2)                                  “Audit-RelatedFees” includes fees billed for services that are related to the performance ofthe audit or review of 

 

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the Company’s financial statements (which are notreported above under the caption “Audit Fees”). For fiscal 2008, the amountrelates to an audit of the Company’s 401k plan.

 

The Audit Committee has considered whether theprovision of non-audit services by Whitley Penn is compatible with maintainingthe principal accountant’s independence, and has determined that it is. TheAudit Committee has sole authority to engage and determine the compensation ofthe Company’s independent auditor. Pre-approval by the Audit Committee isrequired for any engagement of Whitley Penn, subject to certain de minimisexceptions. Annually, the Audit Committee pre-approves services to be providedby Whitley Penn.

 

**PART IV.**

 

**Item 15.  Exhibits, Financial Statement Schedules**

 

(a)                                  The followingare filed as part of this Annual Report on Form 10-K/A:

 

(1)                                  ConsolidatedFinancial Statements

 

See Index to Consolidated Financial Statements on page F-1of this Form 10-K/A.

 

(2)                                  FinancialStatement Schedules

 

See Index to Consolidated Financial Statements on page F-1of this Form 10-K/A.

 

(3)                                  Exhibits

 

Anindex identifying the exhibits to be filed with this Form 10-K/A isprovided below.

 

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| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                                                                                                 | ** ** | **Previously Filed as an Exhibit to and  Incorporated by Reference From** | ** ** | **Date Filed**                                                                                                              |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|
| 2.1                    |       | Asset Purchase Agreement, dated December 18, 2006, related to  the U.S. Sale (Schedules and exhibits have been omitted, and the Company  agrees to furnish to the Commission supplementally a copy of any omitted  schedules and exhibits upon request).   |       | Current Report on Form 8-K                                                                                        |       | December 19, 2006                                                                                                           |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 2.2                    |       | Stock Purchase Agreement, dated December 18, 2006, related to  the Mexico Sale (Schedules and exhibits have been omitted, and the Company  agrees to furnish to the Commission supplementally a copy of any omitted  schedules and exhibits upon request). |       | Current Report on Form 8-K                                                                                        |       | December 19, 2006                                                                                                           |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 3.1                    |       | Amended and Restated Certificate of Incorporation of CellStar  Corporation dated April 27, 1995 (the “Certificate of Incorporation”).                                                                                                            |       | Form 10-Q for the quarter ended August 31, 1995                                                              |       | October 13, 1995                                                                                                            |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 3.2                    |       | Certificate of Amendment to Certificate of Incorporation, dated  May 19, 1998.                                                                                                                                                                             |       | Form 10-Q for the quarter ended May 31, 1998                                                                 |       | July 14, 1998                                                                                                               |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 3.3                    |       | Certificate of Amendment to Certificate of Incorporation dated as of  February 20, 2002.                                                                                                                                                                   |       | Form 10-K for the fiscal year ended November 30, 2002                                                        |       | February 28, 2003                                                                                                           |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 3.4                    |       | Certificate of Amendment to the Amended and Restated Certificate of  Incorporation dated as of March 30, 2007.                                                                                                                                             |       | Form 10-Q for the quarter ended February 28, 2007                                                            |       | April 9, 2007                                                                                                               |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 3.5                    |       | Amended and Restated Bylaws of CellStar Corporation, effective as of  May 1, 2004.                                                                                                                                                                         |       | Form 10-Q for the quarter ended May 31, 2004.                                                                |       | July 15, 2004                                                                                                               |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 4.1                    |       | Specimen Common  Stock Certificate of CLST Holdings, Inc.                                                                                                                                                                                                  |       | Form 10-K for the fiscal year ended November 30, 2007.                                                       |       | March 12, 2008                                                                                                              |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 4.2                    |       | Rights Agreement, dated as of February 13, 2009, by and between  CLST Holdings, Inc. and Mellon Investor Services LLC, as rights agent.                                                                                                               |       | Form 8-A                                                                                                          |       | February 13, 2009                                                                                                           |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 4.3                    |       | Certificate of Designation of Series B Junior Preferred Stock of  CLST Holdings, Inc., dated as of February 5, 2009.                                                                                                                             |       | Current Report on Form 8-K                                                                                        |       | February 6, 2009                                                                                                            |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 10.1                   |       | Form of  Incentive Stock Option Agreement under 1993 Amended and Restated Long-Term  Incentive Plan.(1)                                                                                                                                                    |       |                                                                                                                   |       | Incorporated by  reference to the identically numbered exhibit to the Original Form 10-K,  to which this amendment applies. |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 10.2                   |       | Form of  Non-Qualified Stock Option Agreement under 1993 Amended and Restated  Long-Term Incentive Plan.(1)                                                                                                                                                |       |                                                                                                                   |       | Incorporated by  reference to the identically numbered exhibit to the Original Form 10-K,  to which this amendment applies. |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 10.3                   |       | Form of Amendment to Restricted Stock Award Agreement under the  CellStar Corporation 2003 Long-Term Incentive Plan.(1)                                                                                                                                    |       | Annual Report on Form 10-K                                                                                        |       | February 12, 2007                                                                                                           |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |
| 10.4                   |       | Employment Agreement, effective as of April 9, 2007, by and  among CLST-NAC, Ltd., formerly known as CellStar, Ltd., and  Sherrian Gunn.(1)                                                                                                      |       | Current Report on Form 8-K                                                                                        |       | April 13, 2007                                                                                                              |
|                   |       |                                                                                                                                                                                                                                                            |       |                                                                                                                   |       |                                                                                                                             |

 

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| 10.5   |   | Indemnification Agreement, effective as of July 5, 2007, by and  between CLST Holdings, Inc. and Sherrian Gunn.(1)                                                                                                                                     |   | Current Report on Form 8-K |   | August 1, 2007                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.6   |   | Settlement Agreement, effective as of February 27, 2007, by and  between CellStar International Corporation\Asia, CellStar Corporation,  CellStar, Ltd., Fine Day Holdings Limited, CellStar (Asia) Corporation  Limited, and Mr. Horng An-Hsien. |   | Current Report on Form 8-K |   | March 5, 2007                                                                                                               |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.7   |   | Trust Purchase Agreement, effective as of November 10, 2008                                                                                                                                                                                                 |   | Current Report on Form 8-K |   | November 17, 2008                                                                                                           |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.8   |   | Trust Credit Agreement, effective as of November 10, 2008 (2)                                                                                                                                                                                               |   | Current Report on Form 8-K |   | November 17, 2008                                                                                                           |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.9   |   | CLST Holdings, Inc. 2008 Long Term Incentive Plan.(1)                                                                                                                                                                                                       |   | Current Report on Form 8-K |   | December 5, 2008                                                                                                            |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.10  |   | Form of Restricted Stock Award Agreement under the CLST  Holdings, Inc. 2008 Long Term Incentive Plan.(1)                                                                                                                                              |   |                            |   | Incorporated by  reference to the identically numbered exhibit to the Original Form 10-K,  to which this amendment applies. |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.11  |   | Trust II Purchase Agreement, effective as of December 10, 2008,                                                                                                                                                                                             |   | Current Report on Form 8-K |   | December 19, 2008, and as amended on March 5, 2009                                                                     |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.12  |   | Trust II Credit Agreement, effective as of December 10, 2008 (2)                                                                                                                                                                                            |   | Current Report on Form 8-K |   | December 19, 2008, and as amended on March 5, 2009 and on  the date of this Form 10-K/A                           |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 10.13  |   | Letter Agreement, effective as of December 10, 2008, by and  between Trust II, Financo, Summit, Summit Alternative Investments, LLC, SSPE,  SSPE Trust and Eric G. Gangloff                                                                                 |   | Current Report on Form 8-K |   | December 19, 2008, and as amended on March 5, 2009                                                                     |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 21.1   |   | Subsidiaries of the Company.                                                                                                                                                                                                                                     |   |                            |   | Incorporated by  reference to the identically numbered exhibit to the Original Form 10-K,  to which this amendment applies. |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 31.1   |   | Certification of the Chief Executive Officer and Chief Financial  Officer pursuant to Rule 13a-14(a) promulgated under the Exchange  Act.                                                                                                              |   |                            |   | Filed herewith.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 32.1   |   | Certification of the Chief Executive Officer and Chief Financial  Officer pursuant to Rule 13a-14(b) promulgated under the Exchange  Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.  |   |                            |   | Filed herewith.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                             |   |                            |   |                                                                                                                             |
| 99.1   |   | Letter from Richards, Layton, & Finger P.A., legal counsel  to Mr. Manoj Rajegowda, dated February 24, 2009.                                                                                                                                  |   |                            |   | Incorporated by  reference to the identically numbered exhibit to the Original Form 10-K,  to which this amendment applies. |

----

(1)                                  The exhibit isa management contract, compensatory plan or agreement.

 

(2)                                  Portions ofthis exhibit have been omitted pursuant to a request for confidential treatmentfiled with the Securities and Exchange Commission.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, as amended, the registranthas 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** |
| ** ** | ** **                   | **Chief Financial Officer** |
| ** ** | ** **                   | ** ** |
| ** ** | ** **                   | **Date:****November 4****, 2009** |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **By**     | **/s/ Robert A. Kaiser**                              |       | **Date:****November 4****, 2009** |
|------------|-------------------------------------------------------|------------|----------------------------------------|
| ** ** | **Robert A. Kaiser**                                  | ** ** | ** **                             |
| ** ** | **Chief Executive Officer and**                       | ** ** | ** **                             |
| ** ** | **Chief Financial Officer**                           | ** ** | ** **                             |
|       |                                                  |       |                                   |
| **By**     | **/s/****Timothy  S. Durham**                         |       | **Date:****November 4****, 2009** |
| ** ** | **Timothy S. Durham**                                 | ** ** | ** **                             |
| ** ** | **Chairman of the Board and  Secretary and Director** | ** ** | ** **                             |
|       |                                                  |       |                                   |
| **By**     | /s/ **David****Tornek**                               |       | **Date:****November 4****, 2009** |
| ** ** | **David****Tornek**                                   | ** ** | ** **                             |
| ** ** | **Director**                                          | ** ** | ** **                             |

 

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**Index to Consolidated Financial Statements**

 
| Report of Independent  Registered Public Accounting Firm                                                                                   |   | 48     |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                       |   |   |
| Consolidated Balance  Sheets as of November 30, 2008 and 2007                                                                         |   | 49     |
|                                                                                                                                       |   |   |
| Consolidated  Statements of Operations for the years ended November 30, 2008 and 2007                                                 |   | 50     |
|                                                                                                                                       |   |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the  years ended November 30, 2008 and 2007 |   | 51     |
|                                                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the years ended November 30, 2008 and 2007                                                 |   | 52     |
|                                                                                                                                       |   |   |
| Notes to  Consolidated Financial Statements                                                                                                |   | 53     |

 

 

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#### **REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

#### ** **

 

Tothe Board of Directors and Stockholders of

CLSTHoldings, Inc.

 

We have audited theaccompanying consolidated balance sheets of CLST Holdings, Inc. andsubsidiaries, as of November 30, 2008 and 2007, and the relatedconsolidated statements of operations, changes instockholders’ equity and comprehensive income (loss), and cash flows for theyears then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of CLST Holdings, Inc. andsubsidiaries as of November 30, 2008 and 2007, and the consolidatedresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

 

/s/Whitley Penn LLP

 

Dallas,Texas

March 2,2009

Exceptfor Notes 1(d) and (n), 3 and 7

asto which the date is November 4, 2009

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

**November 30, 2008 and 2007**

**(In thousands, except share and per share data)**

** **
| ** **                                                                                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                   |       |     |       |     |       |
| Current assets:                                                                                                          |       |     |       |     |       |
| Cash and cash equivalents                                                                                                |       | $        | 9,754      |     | $          | 11,799 |   |
| Notes receivable, net -  current                                                                                         |       | 8,698    |       | —   |       |
| Accounts receivable -  other                                                                                             |       | 893      |       | 5,697    |       |
| Prepaid expenses and other  current assets                                                                               |       | 177      |       | 556      |       |
| Total current assets                                                                                                     |       | 19,522   |       | 18,052   |       |
|                                                                                                                     |       |     |       |     |       |
| Notes receivable, net -  long-term                                                                                       |       | 31,547   |       | —   |       |
| Property and equipment,  net                                                                                             |       | 12       |       | 1        |       |
| Deferred income taxes                                                                                                    |       | 4,786    |       | 4,786    |       |
| Other assets                                                                                                             |       | 863      |       | 1,136    |       |
|                                                                                                                     |       | $        | 56,730     |     | $          | 23,975 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                               |       |     |       |     |       |
| Current liabilities:                                                                                                     |       |     |       |     |       |
| Loan payable - current                                                                                                   |       | $        | 7,436      |     | $          | — |   |
| Accounts payable                                                                                                         |       | 14,512   |       | 14,244   |       |
| Income taxes payable                                                                                                     |       | 207      |       | —   |       |
| Accrued expenses                                                                                                         |       | 473      |       | 868      |       |
| Total current liabilities                                                                                                |       | 22,628   |       | 15,112   |       |
|                                                                                                                     |       |     |       |     |       |
| Loan payable - long term                                                                                                 |       | 26,902   |       | —   |       |
| Total liabilities                                                                                                        |       | 49,530   |       | 15,112   |       |
|                                                                                                                     |       |     |       |     |       |
| 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; 21,187,229 share issued and 20,553,205 shares  outstanding |       | 212      |       | 212      |       |
| Additional paid-in capital                                                                                               |       | 126,034  |       | 126,034  |       |
| Accumulated other  comprehensive income—foreign currency translation adjustments                                    |       | 217      |       | 217      |       |
| Accumulated deficit                                                                                                      |       | (117,616 | )          | (115,953 | )          |
|                                                                                                                     |       | 8,847    |       | 10,510   |       |
| Less: Treasury stock (634,024  shares at cost)                                                                           |       | (1,647   | )          | (1,647   | )          |
|                                                                                                                     |       | 7,200    |       | 8,863    |       |
|                                                                                                                     |       |     |       |     |       |
|                                                                                                                     |       | $        | 56,730     |     | $          | 23,975 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**Years ended November 30, 2008 and 2007**

**(In thousands, except per share data)**

** **
| ** **                                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenues                                                                                  |       |     |       |     |       |
| Interest income                                                                           |       | $        | 467        |     | $          | — |   |
| Other                                                                                     |       | 29       |       | —   |       |
| Total revenues                                                                            |       | 496      |       | —   |       |
|                                                                                      |       |     |       |     |       |
| Loan servicing fees                                                                       |       | 53       |       | —   |       |
| Trust administrative fees                                                                 |       | 13       |       | —   |       |
| Provision for doubtful  accounts                                                          |       | 144      |       | —   |       |
| Interest expense                                                                          |       | 145      |       | —   |       |
| General and administrative  expenses                                                      |       | 2,172    |       | 15,198   |       |
| Operating loss                                                                            |       | (2,031   | )          | (15,198  | )          |
| Other income (expense):                                                                   |       |     |       |     |       |
| Interest expense                                                                          |       | —   |       | (247     | )          |
| Loss on settlement of note  receivable related to sale of Asia-Pacific                    |       | —   |       | (537     | )          |
| Other, net                                                                                |       | 550      |       | 1,243    |       |
| Total other income                                                                        |       | 550      |       | 459      |       |
|                                                                                      |       |     |       |     |       |
| Loss from continuing  operations before income taxes                                      |       | (1,481   | )          | (14,739  | )          |
|                                                                                      |       |     |       |     |       |
| Income tax expense  (benefit)                                                             |       | 192      |       | (11,526  | )          |
|                                                                                      |       |     |       |     |       |
| Loss from continuing  operations, net of taxes                                            |       | (1,673   | )          | (3,213   | )          |
|                                                                                      |       |     |       |     |       |
| Discontinued operations,  net of taxes of $5 thousand for 2008 and $15.9 million for 2007 |       | 10       |       | 29,513   |       |
|                                                                                      |       |     |       |     |       |
| Net income (loss)                                                                         |       | $        | (1,663     | )        | $          | 26,300 |   |
|                                                                                      |       |     |       |     |       |
| Net income (loss) per  share:                                                             |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |
| Basic and diluted:                                                                        |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |
| Loss from continuing  operations, net of taxes                                            |       | $        | (0.08      | )        | $          | (0.16 | ) |
| Discontinued operations,  net of taxes                                                    |       | —   |       | 1.44     |       |
| Net income (loss) per  share                                                              |       | $        | (0.08      | )        | $          | 1.28 |   |
|                                                                                      |       |     |       |     |       |
| Weighted average number of  shares:                                                       |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |
| Basic and diluted                                                                         |       | 20,553   |       | 20,557   |       |

 

See accompanying notes toconsolidated financial statements.

 

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**CLSTHOLDINGS, INC. AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND**

**COMPREHENSIVE INCOME (LOSS)**

**Years ended November 30, 2008 and 2007(In thousands)**

** **
| ** **                                        | ** ** | ** **            | ** ** | ** **              | ** ** | ** **  | ** ** | ** **        | ** ** | ** **      | ** ** | **Accumulated**        | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **              | ** ** | ** **  | ** ** | ** **        | ** ** | **Additional**  | ** ** | **other**              | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **paid-in** | ** ** | **comprehensive** | ** ** | **Accumulated** | ** ** | ** **             | ** ** |
| ** **                                        | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Shares**  | ** ** | **Amount**        | ** ** | **capital**     | ** ** | **income (loss)** | ** ** | **deficit** | ** ** | **Total**  | ** ** |
|                                              |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Balance at November 30,  2006                |       | 21,188                |       | $                       | 212        |        | (29        | )                 | $          | (94             | )          | $                      | 124,346    |        | $          | (8,603     | )          | $ | (99,091 | ) | $ | 16,770 |   |
|                                              |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Comprehensive income:                             |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Net income                                        |       | —                |       | —                  |       | —      |       | —            |       | —          |       | —                 |       | 26,300      |       | 26,300     |       |
| Foreign currency  translation adjustment          |       | —                |       | —                  |       | —      |       | —            |       | —          |       | (434                   | )          | —      |       | (434       | )          |
| Realized foreign currency  translation adjustment |       | —                |       | —                  |       | —      |       | —            |       | —          |       | 9,254                  |       |        |       | 9,254      |       |
| Total comprehensive income                        |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       | 35,120     |       |
| Cancellation of restricted  stock                 |       | (1                    | )          | —                  |       | —      |       | —            |       | —          |       | —                 |       | —      |       | —     |       |
| Amortization of restricted  stock                 |       | —                |       | —                  |       | —      |       | —            |       | 1,677           |       | —                 |       | —      |       | 1,677      |       |
| Stock option expense                              |       | —                |       | —                  |       | —      |       | —            |       | 11              |       | —                 |       | —      |       | 11         |       |
| Cash dividends ($2.10 per   common share)    |       | —                |       | —                  |       | —      |       | —            |       | —          |       | —                 |       | (43,162     | )          | (43,162    | )          |
| Treasury stock                                    |       | —                |       | —                  |       | (605        | )          | (1,553            | )          | —          |       | —                 |       | —      |       | (1,553     | )          |
|                                              |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Balance at  November 30, 2007                |       | 21,187                |       | 212                     |       | (634        | )          | (1,647            | )          | 126,034         |       | 217                    |       | (115,953    | )          | 8,863      |       |
|                                              |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Comprehensive loss                                |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Net loss                                          |       | —                |       | —                  |       | —      |       | —            |       | —          |       | —                 |       | (1,663      | )          | (1,663     | )          |
| Total comprehensive loss                          |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       | (1,663     | )          |
|                                              |       |                  |       |                    |       |        |       |              |       |            |       |                   |       |        |       |       |       |
| Balance at November 30,  2008                |       | 21,187                |       | $                       | 212        |        | (634       | )                 | $          | (1,647          | )          | $                      | 126,034    |        | $          | 217        |       | $ | (117,616 | ) | $ | 7,200 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Yearsended November 30, 2008 and 2007(In thousands)**

** **
| ** **                                                                                                     | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating  activities:                                                                         |       |       |       |       |       |
| Net income (loss)                                                                                              |       | $          | (1,663     | )          | $          | 26,300 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities             |       |       |       |       |       |
| Provision for doubtful  accounts                                                                               |       | 144        |       | —     |       |
| Depreciation and  amortization                                                                                 |       | 2          |       | 22         |       |
| Stock based compensation                                                                                       |       | —     |       | 1,688      |       |
| Non-cash interest expense                                                                                      |       | 3          |       | —     |       |
| Fixed assets impairment                                                                                        |       | —     |       | 14         |       |
| Deferred income taxes                                                                                          |       | —     |       | 2,786      |       |
| Changes in operating  assets and liabilities:                                                                  |       |       |       |       |       |
| Accounts receivable                                                                                            |       | 4,804      |       | 3,365      |       |
| Prepaid expenses and other  current assets                                                                     |       | 379        |       | (210       | )          |
| Notes receivable  collections                                                                                  |       | 665        |       | —     |       |
| Other assets                                                                                                   |       | 447        |       | 1,764      |       |
| Accounts payable                                                                                               |       | 268        |       | (1,373     | )          |
| Accrued expenses                                                                                               |       | (395       | )          | (2,774     | )          |
| Income taxes payable                                                                                           |       | 207        |       | (963       | )          |
| Discontinued operations -  U.S., Miami, Mexico, and Chile operations                                           |       | —     |       | (33,248    | )          |
|                                                                                                           |       |       |       |       |       |
| Net cash provided by (used  in) operating activities                                                           |       | 4,861      |       | (2,629     | )          |
|                                                                                                           |       |       |       |       |       |
| Cash flows from investing  activities:                                                                         |       |       |       |       |       |
| Purchases of property and  equipment                                                                           |       | (13        | )          | (3         | )          |
| Acquisition of new  business                                                                                   |       | (6,157     | )          | —     |       |
| Proceeds from sale of  U.S., Miami, Mexico and Chile operations                                                |       | —     |       | 82,950     |       |
| Proceeds from sale of  fixed assets                                                                            |       | —     |       | 6          |       |
| Discontinued operations -  U.S., Miami, Mexico, and Chile operations                                           |       | —     |       | (150       | )          |
|                                                                                                           |       |       |       |       |       |
| Net cash provided by (used  in) investing activities                                                           |       | (6,170     | )          | 82,803     |       |
|                                                                                                           |       |       |       |       |       |
| Cash flows from financing  activities:                                                                         |       |       |       |       |       |
| Borrowings on notes  payable                                                                                   |       | —     |       | 190,225    |       |
| Payments on notes payable                                                                                      |       | (553       | )          | (223,694   | )          |
| Borrowings on Term Loan                                                                                        |       | —     |       | 1,890      |       |
| Payments on Term Loan                                                                                          |       | —     |       | (12,050    | )          |
| Purchase of treasury stock                                                                                     |       | —     |       | (340       | )          |
| Redemption of 12% Senior  Subordinated Notes                                                                   |       | —     |       | (1,915     | )          |
| Dividend                                                                                                       |       | —     |       | (43,162    | )          |
| Additions to deferred loan  costs                                                                              |       | (183       | )          | (2         | )          |
|                                                                                                           |       |       |       |       |       |
| Net cash used in financing  activities                                                                         |       | (736       | )          | (89,048    | )          |
|                                                                                                           |       |       |       |       |       |
| Net decrease in cash and  cash equivalents                                                                     |       | (2,045     | )          | (8,874     | )          |
| Cash and cash equivalents  at beginning of period                                                              |       | 11,799     |       | 20,673     |       |
|                                                                                                           |       |       |       |       |       |
| Cash and cash equivalents  at end of period                                                                    |       | $          | 9,754      |       | $          | 11,799 |   |
|                                                                                                           |       |       |       |       |       |
| Non-Cash Investing  Activity - accounts receivable other proceeds not yet received from U.S. Sale  transaction |       | $          | —     |       | $          | 4,531 |   |
|                                                                                                           |       |       |       |       |       |
| Non-Cash Financing Activity  - Treasury Stock                                                                  |       | $          | —     |       | $          | 1,213 |   |
|                                                                                                           |       |       |       |       |       |
| Cash paid during the  period for:                                                                              |       |       |       |       |       |
|                                                                                                           |       |       |       |       |       |
| Income taxes                                                                                                   |       | $          | —     |       | $          | 1,104 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1) Summary of Significant Accounting Policies**

 

***(a) ******Basisfor Presentation***

 

CLST Holdings, Inc., formerly CellStarCorporation, and subsidiaries (the “***Company***”),prior to the sale of its operations in March 2007, was a leading providerof distribution and value-added logistics services to the wirelesscommunications industry, with operations in the North American and LatinAmerican Regions. The Company had operations in the European Region until October 2003and in the Asia-Pacific Region until November 2005. The Company providedcomprehensive logistics solutions and facilitated the effective and efficientdistribution of handsets, related accessories and other wireless products fromleading manufacturers to network operators, agents, resellers, dealers andretailers. In some of its markets, the Company provided activation services thatgenerated new subscribers for its wireless carrier customers. All significantintercompany balances and transactions have been eliminated in consolidation.

 

On November 10, 2008, we purchased all of theoutstanding equity interests of FCC Investment Trust I (the “***Trust***”), and on December 12,2008 we purchased all of the outstanding equity interests of anotherentity.  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 ExecutiveOfficer and Director of Fair and an officer, director and stockholder of ourcompany.  Messrs. Durham and Cochranown all of the outstanding equity of Fair. The Board believes that each ofthese acquisitions will be a better investment return for our stockholders whencompared to the recent changes to interest rates and other investmentalternatives. Although we are now engaged in the business of holding andcollecting consumer accounts receivable, we have not abandoned our plan ofliquidation and dissolution. We believe that should we decide that continuingwith the plan of liquidation and dissolution is in the best interest of ourstockholders, we will be able to dispose of these assets on favorable termsprior to the time that we would be in a position to make a final distributionto stockholders and terminate our corporate existence.

 

The Company has reclassified to discontinuedoperations, for all periods presented, the results and related charges for theNorth American and Latin American Regions. (See footnote 2.) Certain prior yearfinancial amounts have reclassified to conform to the current yearpresentation.

 

***(b)  Use of Estimates***

 

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of any contingent assets and liabilities at thefinancial statement date and reported amounts of revenue and expenses duringthe reporting period. On an on-going basis, the Company reviews its estimatesand assumptions. The Company’s estimates were based on its historicalexperience and various other assumptions that the Company believes to bereasonable under the circumstances. Actual results are likely to differ fromthose estimates under different assumptions or conditions.

 

***(c)  Cash and Cash Equivalents***

 

The Company considers all highly liquid investmentswith a maturity of three months or less when purchased to be cash equivalents.At November 30, 2008 and 2007, the Company had no such investments.  The Company maintains deposits primarily inone financial institution, which may at times exceed amounts covered byinsurance provided by the U.S. Federal Deposit Insurance Corporation (“***FDIC***”).  The Company has not experienced any lossesrelated to amounts in excess of FDIC limits. The Company’s cash and cash equivalents are not subject to anyrestriction.

 

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***(d)  Notes Receivable***

 

Notes receivable are recorded at the historical costpaid at the date of acquisition net of any purchase discounts. Subsequent tothe date of acquisition, notes receivable are reduced by any principal paymentsmade by the customer. Purchase discounts are recorded based on the negotiateddifference between the face value and the amount paid for the notes receivable.Purchase discounts are recognized as revenue, using the effective interestmethod, as principal payments are collected.

 

The Company establishes an allowance for doubtfulaccounts for receivables where the customer has not made a payment for the mostrecent 120 day period. The Company may from time to time make additionalincreases to the allowance based on debtor circumstances and economicconditions. Once a note receivable has been reserved due to nonpayment, theCompany will no longer accrue, for financial reporting purposes, interestearned on the note receivable. Should the note receivable return to aperforming status, then the Company will resume accruing interest on the notereceivable. The majority of the notes receivable have collateral in variousforms, which may include a second lien position on the borrower’s home orproperty.  Actual results could differfrom those estimates. Recoveries are recorded against the allowance whenpayments are received.  Recoveries ofnotes receivable, which were previously charged off, are recorded to incomewhen payments are received. Notes receivable are charged off against theallowance after all means of collection have been exhausted and a legaldetermination has been rendered that less than the full amount of the notereceivable will be collected.

 

The following table detailsthe activity in the allowance for doubtful accounts for the year ended November 30,2008:

 
| ** **                                | ** ** | **Year  Ended  November 30,  2008** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
|                                      |       |                                     |       |
| Beginning balance                         |       | $                                        | —     |   |
| Additions to allow for  doubtful accounts |       | 144,000                                  |       |
| Recoveries                                |       | —                                   |       |
| Charge offs                               |       | —                                   |       |
|                                      |       |                                     |       |
| Ending balance                            |       | $                                        | 144,000    |   |

 

***(e)  Property and Equipment***

 

Property and equipment are recorded at cost.Depreciation of equipment is provided over the estimated useful lives of therespective assets, which range from three to thirty years, on a straight-linebasis. Leasehold improvements are amortized over the shorter of their usefullife or the related lease term. Major renewals are capitalized, whilemaintenance, repairs and minor renewals are expensed as incurred.

 

***(f)  Impairment of Long-Lived Assets***

 

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured as the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

 

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***(g)  Revenue Recognition***

 

For the Company’s discontinued operations, revenue wasrecognized on product sales when delivery occured, the customer took title andassumed risk of loss, terms were fixed and determinable, and collectability wasreasonably assured. The Company did not generally grant rights of return. Forthe Company’s continuing operations, revenues will be recorded as earned fromnotes receivable. Revenues will consist of interest earned, late fees and othermiscellaneous charges.  Revenues will notbe accrued on accounts over 120 days without payment activity, unless paymentactivity resumes.

 

***(h)  Net Income (Loss) Per Share***

 

Basic net income (loss) per common share is based onthe weighted average number of common shares outstanding for the relevantperiod. Diluted net income (loss) per common share is based on the weightedaverage number of common shares outstanding plus the dilutive effect ofpotentially issuable common shares pursuant to vesting of restricted stock,stock options, warrants, and convertible instruments. Because of the loss inthe years ended November 30, 2008 and 2007 from continuing operations ineach year, no potentially issuable common shares were included in the dilutedper share computation.  Outstandingoptions to purchase 0.1 million shares of Common Stock at November 30,2008 and 2007, were not included in the computation of diluted earnings pershare because their inclusion would have been anti-dilutive as the exerciseprice was higher than the average market price.

 

***(i)  Income Taxes***

 

Income taxes are accounted for under the asset andliability method. Deferred income tax assets and liabilities are recognized forthe future tax consequences attributable to (i) differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and (ii) operating loss and tax creditcarryforwards. Deferred income tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred income tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Inassessing the realizability of deferred income tax assets, management considerswhether it is more likely than not that the deferred income tax assets will berealized. A valuation allowance is provided when the realization of thedeferred tax asset is not likely.

 

***(j)  Stock Based Compensation***

 

The Company’s former 1993 Long-Term Incentive Plan(the “1993 Plan”) terminated on December 3, 2003. However, Mr. Kaiser,as disclosed in the following footnote, currently has exercisable options thatwere granted under the 1993 Plan. At a meeting of the Board of Directors on September 25,2007, our Board of Directors unanimously resolved to terminate our 2003Long-Term Incentive Plan (the “2003 Plan”) due to the reduction in the Company’sworkforce. As a result of the termination of the 2003 Plan, all outstandingoptions to purchase the equity securities of the Company issued thereunder wereterminated as well. Therefore, there are no currently outstanding options,warrants or other rights to purchase the Company’s securities under the 2003Plan. We have no other equity compensation plans.

 

Mr. Kaiser was grantedoptions under the 1993 Plan to purchase 80,000 shares of the Company’s CommonStock on December 12, 2001, and 50,000 shares of the Company’s CommonStock on January 22, 2003. Each of these options vested with respect to25% of the shares covered thereby on each of the first four anniversaries ofthe date of grant and expires ten years following the date of grant. Theexercise price of each option was equal to the fair market value of the CommonStock on the date of grant. Unexercised options held by Mr. Farrell, Ms. Gunn,Ms. Rodriguez and Mr. Durham pursuant to the 1993 Plan, if any, wouldhave expired upon the termination of the executive officer’s employment withthe Company.

 

Most options vested over afour year period and had an exercise price equal to the fair market value ofthe Company’s Common Stock as of market close on the date of grant. There wereno stock option grants issued in 2008 and 2007.

 

Stock option activity duringthe years ended November 30, 2008 and 2007, was as follows:

 
| ** **                 | ** ** | **2008**      | ** ** | **2007**             | ** ** |
|----------------------------|------------|---------------|------------|----------------------|------------|
| ** **                 | ** ** | **Number of** | ** ** | **Weighted-average** | ** ** | **Number of** | ** ** | **Weighted-average** | ** ** |
| ** **                 | ** ** | **Shares**    | ** ** | **Exercise prices**  | ** ** | **Shares** | ** ** | **Exercise prices** | ** ** |
|                       |       |          |       |                 |       |   |   |   |   |
| Beginning balance          |       | 130,500       |       |                 |       | 467,098 |   |   |   |
| Forfeited                  |       | (500          | )          | 9.38                 |       | (336,598 | ) | 12.95 |   |
| Outstanding, end of year   |       | 130,000       |       | 4.93                 |       | 130,500 |   | 4.94 |   |
| Exercisable, end of year   |       | 130,000       |       | 4.93                 |       | 130,500 |   | 4.94 |   |
| Reserved for future grants |       | —        |       |                 |       | — |   |   |   |

 

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For options that were outstanding and exercisable asof November 30, 2008, the exercise prices and remaining lives were as follows:

 
| **Number**      | ** ** | **Remaining Life** | ** ** | **Exercise** | ** ** | **Number**      | ** ** | **Exercise** | ** ** |
|-----------------|------------|--------------------|------------|--------------|------------|-----------------|------------|--------------|------------|
| **Outstanding** | ** ** | **(in years)**     | ** ** | **Prices**   | ** ** | **Exercisable** | ** ** | **Prices**   | ** ** |
|            |       |               |       |         |       |            |       |         |       |
| 80,000          |       | 3.03               |       | $            | 4.60       |            | 80,000     |         | $          | 4.60 |   |
| 50,000          |       | 4.14               |       | $            | 5.45       |            | 50,000     |         | $          | 5.45 |   |
|            |       |               |       |         |       |            |       |         |       |
| 130,000         |       | 3.46               |       | $            | 4.93       |            | 130,000    |         | $          | 4.93 |   |

 

Prior to fiscal 2006, the Company accounted for itsstock 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

 

Prior to fiscal 2006, the Company accounted for itsstock options under the recognition and measurement provisions of APB Opinion No. 25,“Accounting for Stock Issued to Employees”, and related interpretations. EffectiveDecember 1, 2005, the Company adopted the provisions of SFAS No. 123(Revised 2004), “Share-Based Payments” (SFAS 123(R)), and selected the modifiedprospective method to initially report stock-based compensation amounts in theconsolidated financial statements. The Company used the Black-Scholes optionpricing model to determine the fair value of all option grants. The Company didnot grant any options during the years ended November 30, 2008 and 2007.

 

For the year ended November 30, 2007, the Companyrecorded $11,000 for stock-based compensation expense related to stock optiongrants made in prior years. This amount is included in selling, general andadministrative expenses.

 

On May 2, 2005, RobertA. Kaiser, the Company’s Chief Executive Officer, received a grant of 142,025shares of restricted stock in tandem with the same number of stock appreciationrights pursuant to the terms and conditions of the Plan and a related awardagreement. The stock appreciation rights expired on December 31, 2005. Theshares of restricted stock vested in thirds over a three-year period, beginningon the first anniversary of the grant date and vesting could accelerate uponthe occurrence of events specified in the grant agreement. On May 2, 2006,47,342 shares vested, of which 12,521 were withheld by the Company to paywithholding tax. The total value of the award, $0.3 million, was being expensedover the service period.

 

During 2006, the Company granted shares of restrictedstock to executive officers, directors and certain employees of the Companypursuant to the 2003 Plan. The shares of restricted stock vested in thirds overa three-year period, beginning on the first anniversary of the grant date. Therestricted stock was to become 100% vested if any of the following occurred: (i) theparticipant’s death; (ii) the termination of participant’s service asresult of disability; (iii) the termination of the participant withoutcause; (iv) the participant’s voluntary termination after the attainmentof age 65; or (v) a change in control. The total value of the awards, $2.6million, was being expensed over the service period. The Plan permittedwithholding of shares by the Company upon vesting to pay withholding tax. Thesewithheld shares were considered as treasury stock and were available to bere-issued under the 2003 Plan. During the year ended November 30, 2007,675,700 shares vested, of which 130,635 shares were withheld by the Company topay withholding tax.

 

The following table summarizes the restricted stockactivity for the years ended November 30, 2008 and 2007:

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Balance at beginning of  year |       | —   |       | 676,600  |       |
| Shares granted                |       | —   |       | —   |       |
| Shares vested                 |       | —   |       | (675,700 | )          |
| Shares forfeited              |       | —   |       | (900     | )          |
|                          |       |     |       |     |       |
| Balance at end of year        |       | —   |       | —   |       |

 

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As a result of the U.S. Sale, the balance of unearnedcompensation related to the restricted stock awards of $1.7 million was expensedin 2007 and is included in selling, general and administrative expenses.  The intrinsic value was zero for 2008 and2007 as it related to outstanding stock options.

 

***(k)  Consolidated Statements of CashFlow Information***

 

For purposes of theconsolidated statements of cash flows, the Company considers all investmentswith an original maturity of 90 days or less to be cash equivalents.

 

The Company paidapproximately $2.0 million of interest for the year ended November 30,2007. Most of the interest expense during the year ended 2007 was reclassifiedto discontinued operations. In 2007, it was decided that 90% of the interestexpense would be allocated to discontinued operations based on small amount ofborrowings in the four months before the sale. The total interest expenseallocated to discontinued operations was $2.2 million in 2007. There was nointerest paid in 2008.  The Company paidapproximately $1.1 million of income taxes for the year ended November 30,2007. The Company did not pay any taxes in 2008 but did receive an income taxrefund of $1.0 million in 2008 from taxes paid in 2007.

 

***(l)  Adoption of FIN 48***

 

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”,which clarifies the accounting for uncertainty in tax positions. Thisinterpretation requires that we recognize in our financial statements theimpact of a tax position, if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. The Companyadopted FIN 48 as of December 1, 2007, and the adoption did not have amaterial impact on the Company’s consolidated financial statements or effectivetax rate and did not result in any unrecognized tax benefits. Interest costsand penalties related to income taxes are classified as other expenses in theour consolidated financial statements. For the year ended November 30, 2008, we recognized $12,000 ininterest and penalty fees related to income taxes.  It is determined not to be reasonably likelyfor the amounts of unrecognized tax benefits to significantly increase ordecrease within the next 12 months.  Weare currently subject to a three year statute of limitations by major taxjurisdictions.  We and our subsidiariesfile income tax returns in the U.S. federal jurisdiction.

 

***(m)  Accounting Pronouncements Not YetAdopted***

 

In September 2006, the FASB issued FASB StatementNo. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value,establishes a market-based framework or hierarchy for measuring fair value, andexpands disclosures about fair value measurements. SFAS 157 is applicablewhenever another accounting pronouncement requires or permits assets andliabilities to be measured at fair value and, while not expanding or requiringnew fair value measurements, the application of this statement may changecurrent practices. The requirements of SFAS 157 are effective for the fiscalyear beginning December 1, 2008. However, in February 2008 the FASBdecided that an entity need not apply this standard to nonfinancial assets andliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis until the subsequent year. Accordingly, theadoption of this standard on December 1, 2008 is limited to financialassets and liabilities. The Company is still in the process of evaluating thisstandard and therefore has not yet determined the impact that it will have onour financial statements.

 

In December 2007, theFASB released Statement No. 141 R, “Business Combinations” (“SFAS 141R”),which establishes principles for how the acquirer shall recognize acquiredassets, assumed liabilities and any noncontrolling interest in the acquiree,recognize and measure the acquired goodwill in the business combination, orgain from a bargain purchase, and determines disclosures associated withfinancial statements. This statement replaces SFAS 141 but retains the fundamentalrequirements in SFAS 141 that the acquisition method of accounting (which SFAS141called the purchase method) be used for all business combinations and for anacquirer to be identified for each business combination. The requirements ofSFAS 141R apply to business combinations for which the acquisition date is onor after the beginning of the first annual reporting period beginning on orafter December 15, 2008. Early application is not permitted.

 

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

 

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***(n) Deferred Costs***

 

We have recorded acquisition costs related to thepurchase of certain notes receivables and deferred loan costs associated withcertain Company obligations. The acquisition costs are amortized over theremaining principal balance of the notes receivable and are recorded as contrarevenue. The deferred loan costs are amortized over the remaining outstandingbalance of the Company obligation and are recorded in operating interestexpense. Any impact of prepayment of the balances by either the Company or ourcustomers would be recognized in the period of prepayment.

 

**(2) Discontinued Operations**

 

On December 18, 2006,we entered into a definitive agreement (the “U.S. Sale Agreement”) with awholly owned subsidiary of Brightpoint, Inc., an Indiana corporation (“Brightpoint”),providing for the sale of substantially all of the Company’s United States andMiami-based Latin American operations and for the buyer to assume certainliabilities related to those operations (the “U.S. Sale”). Our operations inMexico and Chile and other businesses or obligations of the Company wereexcluded from the transaction.

 

Our Board of Directors andBrightpoint unanimously approved the proposed transaction set forth in the U.S.Sale Agreement. The purchase price was $88 million in cash, subject toadjustment based on changes in net assets from December 18, 2006 to theclosing date. The U.S. Sale Agreement also required the buyers to deposit $8.8million of the purchase price into an escrow account for a period of six monthsfrom the closing date. As of November 30, 2007, we had receivedapproximately $7.6 million of the amounts held in the escrow account, whichsuch amount includes accrued interest. In January 2008, we receivedapproximately $3.2 million from Brightpoint plus accrued interest and lesstransition expenses, and approximately $1.4 million from the escrow agent.These amounts were the final amounts received under the U.S. Sale Agreement.

 

Also on December 18,2006, we entered into a definitive agreement (the “Mexico Sale Agreement”) withSoluciones Inalámbricas, S.A. de C.V. (“Wireless Solutions”) and Prestadora deServicios en Administración y Recursos Humanos, S.A. de C.V. (“Prestadora”),two affiliated Mexican companies, providing for the sale of all of the Company’sMexico operations (the “Mexico Sale”). The Mexico Sale was a stock acquisitionof all of the outstanding shares of the Company’s Mexican subsidiaries, andincludes our interest in Comunicación Inalámbrica Inteligente, S.A. de C.V. (“CII”),our joint venture with Wireless Solutions. Our Board of Directors unanimouslyapproved the proposed transaction set forth in the Mexico Sale Agreement. Underthe terms of the transaction, we received $20 million in cash, and are toreceive our pro rata share of CII profits from January 1, 2007, up to theconsummation of the transaction, within 150 days from the closing date. We havenot received any pro-rata share of the CII profits and other terms required asof 150 days from the closing date. A demand for payment of up to $1.7 millionand other required terms of the agreement was sent to the purchasers on September 11,2007. While we believe that CII was profitable and therefore the purchasers owethe Company its pro rata share, the purchasers are disputing this claim. Wecontinue to pursue the amounts we believe we are due, but at this time thepurchasers are not responding to or cooperating with our demands. Currently wecannot make any estimates regarding future amounts we may be able to collect orthe 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 ofthe transactions were subject to customary closing conditions and the approvalof our stockholders, and the transactions were not dependent upon each other.The proxy statement also included a plan of dissolution, which provides for thecomplete liquidation and dissolution of the Company after the completion of theU.S. Sale, and a proposal to change the name of the Company from CellStar Corporationto CLST Holdings, Inc.

 

On March 22, 2007, we signed a letter of intentto sell our operations in Chile to a group that includes local management forapproximately book value.

 

On March 28, 2007, ourstockholders approved the U.S. Sale, the Mexico Sale, the plan of dissolution,and the name change to CLST Holdings, Inc. We continue to follow the planof dissolution. Consistent with the plan of dissolution and its fiduciaryduties, our board of directors will continue to consider the proper implementationof the plan of dissolution and the exercise of the authority granted to itthereunder, including the authority to abandon the plan of dissolution.

 

The U.S. Sale closed on March 30,2007. At closing, $53.6 million was received and $4.5 million is included inaccounts receivable—other in the accompanying balance sheet for November 30,2007; $8.8 million had been placed in an escrow account and subject to anyindemnity claims by the buyers of the company’s U.S. business. A portion of theproceeds from the sale was used to pay off the Company’s bank debt (seefootnote 7). We recorded a pre-tax gain of $52.7 million on 

 

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thetransaction during the twelve months ended November 30, 2007. Brightpointasserted total claims for indemnity against the escrow of approximately $1.4million. The Company objected to these claims. Brightpoint also proposednegative adjustments to the net working capital of approximately $1.4 million,which these claims for adjustment were largely the same as the claims forindemnity asserted against the escrow account. As of November 30, 2007, wehad received approximately $7.6 million of the amounts held in the escrowaccount, which such amount included accrued interest. On December 21,2007, we entered into a Letter Agreement (the “Letter Agreement”) withBrightpoint which settled the dispute concerning the additional escrow amount.All currently outstanding disputes between the parties regarding thedetermination of the purchase price under the U.S. Sale Agreement have beenresolved, and payments of funds in respect thereof were made in accordance withthe terms described in the Letter Agreement. Pursuant to the Letter Agreement,in January 2008 we received approximately $3.2 million from Brightpointplus accrued interest and less transition expenses, and approximately $1.4million from the escrow agent. These amounts were the final amounts receivedunder the U.S. Sale Agreement.

 

The Mexico Sale closed on April 12, 2007, and werecorded a loss on the transaction of $7.0 million primarily due to accumulatedforeign currency translation adjustments as well as expenses related to thetransaction. We had approximately $9.1 million of accumulated foreign currencytranslation adjustments related to Mexico. As the proposed sale did not meetthe 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 MexicoSale. Again, as described above, we have sent a demand for payment of up to$1.7 million and other required terms of the agreement to the purchasers, andif such amounts are received an additional gain will be recorded.

 

On June 11, 2007, we completed the sale of ouroperations in Chile. The purchase price and cash transferred from theoperations in Chile prior to closing totaled $2.5 million, and we recorded apre-tax gain of $0.6 million on the transaction as of November 30, 2007.With the completion of the sale of our operations in Chile, we no longer haveany operating locations.

 

The results of discontinuedoperations for U.S., Miami, Mexico, Chile and Asia-Pacific for the years ended November 30,2008 and 2007, as previously reported are as follows (in thousands):

 
| ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Revenues                                      |       | $        | —     |     | $          | 276,334 |   |
| Cost of sales                                 |       | —   |       | 258,234  |       |
| Gross profit                                  |       | —   |       | 18,100   |       |
|                                          |       |     |       |     |       |
| Selling, general and  administrative expenses |       | —   |       | 15,057   |       |
|                                          |       |     |       |     |       |
| Operating income                              |       | —   |       | 3,043    |       |
|                                          |       |     |       |     |       |
| Other income (expense):                       |       |     |       |     |       |
| Interest expense                              |       | —   |       | (2,201   | )          |
| Loss on sale of accounts  receivable          |       | —   |       | (670     | )          |
| Minority interest                             |       | —   |       | (1,420   | )          |
| Gain on sale                                  |       | —   |       | 46,334   |       |
| Other, net                                    |       | 10       |       | 319      |       |
|                                          |       |     |       |     |       |
| Total other income  (expense)                 |       | 10       |       | 42,362   |       |
|                                          |       |     |       |     |       |
| Income before income taxes                    |       | 10       |       | 45,405   |       |
|                                          |       |     |       |     |       |
| Provision for income taxes                    |       | —   |       | 15,892   |       |
|                                          |       |     |       |     |       |
| Discontinued operations                       |       | $        | 10         |     | $          | 29,513 |   |

 

**(3) Acquisition of new business**

 

On November 10,2008, we, through CLST Asset I, LLC, a wholly owned subsidiary of CLST Financo, Inc.(“***Financo***”), whichis one of our direct, wholly owned subsidiaries, entered into a purchaseagreement  to acquire all of theoutstanding equity interests of FCC Investment Trust I (the “***Trust***”) from a third partyfor approximately $41.0 million (the 

 

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“***Trust******Purchase Agreement***”).  Our Board unanimously approved thetransaction.  Our acquisition of theTrust was financed by approximately $6.1 million of cash on hand and by anon-recourse, term loan of approximately $34.9 million by an affiliate of the seller of the Trust, pursuant to the termsand conditions set forth in the credit agreement, dated November 10, 2008,among the Trust, the lender, FCC Finance, LLC, as the initial servicer, thebackup servicer, and the collateral custodian (the “***TrustCredit Agreement***”).  The Company is now responsible for thecollection of the receivables included in the trust through its wholly ownedsubsidiary Financo.

 

Financo has historically conducted our financingbusiness, including ownership of receivables generated by our businesses andproviding internal financing to our other operating subsidiaries. Substantiallyall of the assets acquired by the Trust consisted of a portfolio of homeimprovement consumer receivables, some of which are collateralized or otherwisesecured by interests in real estate. We are engaging in the business of holdingand collecting the receivables with the intention of generating a higher rateof return on our assets than we currently receive on our cash and cashequivalents balances. At the same time, we will continue to review the relativebenefits to our stockholders of continuing to wind down our business pursuantto our plan of dissolution or continuing to do business in one or more of ourhistoric 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 consumernotes receivable, we have not abandoned our plan of dissolution. We believethat should we decide that continuing with the plan of dissolution is in the bestinterest of our stockholders, we will be able to dispose of the Trust, ifproperly marketed, whether through the use of reputable brokers or investmentbankers, through an auction process or other strategies for maximizing proceedsfrom an asset disposition, for the then-currentbook value of the portfolios and within the timeframe necessary tocomplete the winding down of the Company prior to final dissolution of theCompany.

 

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 portfolioconsisted of approximately 6,000 accounts with an aggregate outstanding balanceof approximately $41.5 million and an average outstanding balance per accountof approximately $6,900.  As of October 31,2008, the weighted average interest rate of the portfolio was 14.4%.  We have the right to require the seller torepurchase any accounts, for the original purchase price applicable to suchaccount, that do not satisfy certain specified eligibility requirements set outin the Trust Purchase Agreement.

 

The Trust Credit Agreement provides for anon-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 LIBORRate (as defined in the Trust Credit Agreement).  The obligations under the Trust CreditAgreement are secured by a first priority security interest in substantiallyall of the assets of the Trust, including portfolio collections.

 

The Trust Credit Agreement provides the material termsand conditions for the services to be performed by the servicer.  In return, the Trust pays the servicer amonthly servicing fee equal to 1.5%, per annum of the then aggregateoutstanding principal balance of the receivables.

 

Portfolio collections are distributed on a monthlybasis.  Absent an event of default, afterpayment of the servicing fee and other fees and expenses due under the TrustCredit Agreement and the required principal and interest payments to the lenderunder the Trust Credit Agreement, all remaining amounts from portfoliocollections are paid to the Trust and are available for distribution to CLSTAsset I, LLC and subsequently to Financo.

 

Principal payments on the term loan are due monthly tothe extent that the aggregate principal amount of the term loan outstandingexceeds the sum of (a) the sum for each outstanding receivable of theproduct of (1) 85%, (2) the then-current aggregate unpaid principalbalance of such receivable and (3) a percentage specified in the TrustCredit Agreement based upon the aging of such receivable, and (b) amountson deposit in the collection account for the receivables net of any accrued andunpaid 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 fivebusiness days of any time that the aggregate principal amount of the term loanoutstanding exceeds the Maximum Advance Amount. The remaining outstanding principal amount of the loan plus all accruedinterest, fees and expenses are due on the maturity date.  Interest payments on the term loan are duemonthly.

 

The Trust Credit Agreement contains customary covenantsfor facilities of its type, including among other things covenants thatrestrict the Trust’s ability to incur indebtedness, grant liens, dispose ofproperty, pay dividends, make certain acquisitions or to take actions thatwould negatively affect the Trust’s special purpose vehicle status.  Generally, these covenants do not impact theactivities that may be undertaken by the Company.  The Trust Credit Agreement contains variousevents of default, including failure to pay principal and interest when due,breach of covenants, materially incorrect representations, default undercertain other agreements of the Trust, bankruptcy or insolvency of the Trust,the occurrence of an event which causes a material adverse effect on the Trust,the occurrence of certain defaults by the servicer, entry of certain materialjudgments against the Trust, and the occurrence of a change of control orcertain material events and the 

 

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issuanceof a qualified audit opinion with respect to the Trust’s financials.  In addition, an event of default occurs ifthe three-month rolling average delinquent accounts rate exceeds 10.0% or the three-monthrolling average annualized default rate exceeds 7.0%.  If an event of default occurs, all of theTrust’s obligations under the Trust Credit Agreement could be accelerated bythe lender, causing the entire remaining outstanding principal balance plusaccrued and unpaid interest and fees to be declared immediately due andpayable.

 

The purchase price of $41 million consisted of thefollowing:

 

·                  cash paid to the sellers in the amount of$6.2 million

·                  debt financing of $34.9 million

 

The estimated fair value of the assets is based uponthe acquisition of the Trust being a 1) negotiated transaction betweenindependent third parties, 2) the notes receivable bear market rates ofinterest and 3) purchase discounts are recorded based on the negotiated differencebetween the face value and the amount paid for the notes receivable.  The following table summarizes the fair valueof the assets acquired at the date of acquisition (in thousands):

 
| Notes receivable    |   | $      | 41,572 |   |
|---------------------|--------|--------|--------|--------|
| Purchase discount   |   | (715   | )      |
| Interest receivable |   | 242    |   |
|                |   |   |   |
|                |   | $      | 41,099 |   |

 

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Thefollowing unaudited pro forma information presents the 2007 and 2008 combinedresults of operations of FCC InvestmentTrust I and the Company as if the acquisition had occurred on December 1,2006.  The unaudited pro forma resultsare for informational purposes and are not necessarily indicative of resultsthat would have occurred had the acquisition been in effect for the periodspresented, nor are they necessarily indicative of future results.  The unaudited proforma information wasprepared from the historical financial information of FCC Investment Trust Iand the Company.

 

**(unaudited)**

** **
| ** **                                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                      |       |     |       |     |       |
| Revenues                                                                                  |       |     |       |     |       |
| Interest income                                                                           |       | $        | 8,160      |     | $          | 8,249 |   |
| Other                                                                                     |       | 44       |       | 394      |       |
| Total revenues                                                                            |       | 8,204    |       | 8,643    |       |
|                                                                                      |       |     |       |     |       |
| Loan servicing  fees                                                                      |       | 129      |       | 68       |       |
| Management fees                                                                           |       | 915      |       | 925      |       |
| Interest expense                                                                          |       | 4,604    |       | 4,989    |       |
| General and  administrative                                                               |       | 2,719    |       | 15,715   |       |
| Operating income                                                                          |       | (163     | )          | (13,054  | )          |
|                                                                                      |       |     |       |     |       |
| Other expense:                                                                            |       |     |       |     |       |
| Interest expense                                                                          |       | —   |       | (247     | )          |
| Loss on  settlement of note receivable related to sale of Asia-Pacific                    |       | —   |       | (537     | )          |
| Realized loss on  sale of assets                                                          |       | (4,078   | )          | —   |       |
| Other, net                                                                                |       | 550      |       | 568      |       |
|                                                                                      |       |     |       |     |       |
| Total other  income                                                                       |       | (3,528   | )          | (216     | )          |
|                                                                                      |       |     |       |     |       |
| Loss from  continuing operations before income taxes                                      |       | (3,691   | )          | (13,270  | )          |
|                                                                                      |       |     |       |     |       |
| Income tax  expense (benefit)                                                             |       | 192      |       | (11,526  | )          |
|                                                                                      |       |     |       |     |       |
| Loss from  continuing operations, net of taxes                                            |       | (3,883   | )          | (1,744   | )          |
|                                                                                      |       |     |       |     |       |
| Discontinued  operations, net of taxes of $5 thousand for 2008 and $15.9 million for 2007 |       | 10       |       | 29,513   |       |
|                                                                                      |       |     |       |     |       |
| Net income  (loss)                                                                        |       | $        | (3,873     | )        | $          | 27,769 |   |
|                                                                                      |       |     |       |     |       |
| Net income  (loss) per share:                                                             |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |
| Basic and  diluted:                                                                       |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |
| Net income  (loss) per share                                                              |       | $        | (0.19      | )        | $          | 1.35 |   |
|                                                                                      |       |     |       |     |       |
| Weighted average  number of shares:                                                       |       |     |       |     |       |
|                                                                                      |       |     |       |     |       |
| Basic and  diluted                                                                        |       | 20,553   |       | 20,557   |       |

 

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**(4) Dividends**

 

Prior to the Company’sadoption of the Plan, our policy had been to reinvest earnings to fund futuregrowth. Accordingly, we generally did not pay cash dividends on our CommonStock. However, consistent with the Company’s Plan, the Company paid thefollowing cash distributions, per share, to the holders of its Common Stock infiscal year 2007:

 
| **Date**              | ** ** | **Dividend  Amount** | ** ** |
|-----------------------|------------|----------------------|------------|
|                  |       |                 |       |
| July 19, 2007    |       | $                    | 1.50       |   |
| November 1, 2007 |       | $                    | 0.60       |   |

 

The distributions under the Plan totaled $2.10 pershare or approximately $43.2 million. The Company has determined that61.21% of the distribution will be considered a taxable dividend in accordancewith U.S. Federal income tax rules, and the remaining 38.79% will be considereda non-dividend distribution. This determination was a direct result of theCompany’s earnings and profits of $26.3 million, requiring the first$26.3 million of distributions to be treated as taxable dividends. TheCompany’s status did not affect the tax determination.

 

**(5) Settlement of note receivable related to the sale ofAsia-Pacific**

 

On March 5, 2007, weannounced that we had signed an agreement, effective February 27, 2007,with Fine Day Holdings Limited (“Fine Day”) and Mr. Horng An-Hsien (“Mr. Horng”),the Chairman and sole shareholder of Fine Day, and formerly an executiveofficer of the Company, accepting a settlement of an outstanding notereceivable related to the September 2005 sale of our Hong Kong and People’sRepublic of China (“PRC”) operations.

 

Since September 2,2005, Fine Day had made timely interest payments to us on the promissory note.However, Fine Day informed us in February 2007 that it would not be ableto pay quarterly interest payments or the principal amount of the note atmaturity after the March 1, 2007 interest payment. In settlement of theoutstanding note, we agreed to accept a $650,000 cash payment, along with thetransfer to the Company of all of Mr. Horng’s shares of our Common Stock,approximately 474,000 shares. The carrying value of the note, prior to theagreement, was $2.4 million. As a result of the settlement, we recorded aloss of $0.5 million for the quarter ended February 28, 2007. Theshares of stock were valued at $2.56 per share based on the closing price on April 12,2007. The transaction closed on April 12, 2007, and we recorded anadditional loss of $43,000 during the quarter ended May 31, 2007 toreflect the change in the value of the stock up to the time of closing. At November 30,2008 and 2007, the shares of stock previously owned by Mr. Horng areincluded in treasury stock.

 

**(6) Related Party Transactions**

 

***(a)  Transactions with Motorola***

 

Motorola purchased0.4 million shares of the Company’s Common Stock in July 1995 and hadbeen a major supplier of handsets and accessories to the Company. During 2007our discontinued operations purchased handsets from Motorola.

 

***(b)  Arrangements with Founder Alan H.Goldfield***

 

In July 2001, theCompany entered into a Separation Agreement and release with Mr. Goldfield.Included in the terms of the agreement was a provision whereby if Mr. Goldfieldprovided certain services he would receive certain payments. No payments weremade to Mr. Goldfield for services pursuant to this agreement in 2007.Also included in the agreement was a requirement of the Company to provide Mr. Goldfieldwith certain life and disability insurance through July 5, 2006, and toprovide Mr. Goldfield and his spouse certain medical insurance coveragethroughout their lifetime. For the year ended 2007, the Company paid less than$12,000 under this agreement.

 

On May 31, 2007, theCompany entered a Release Agreement with Mr. Goldfield in which Mr. Goldfieldand his spouse released the Company from all future medical insuranceobligations after July 31, 2007, in exchange for all the Company’s rights,title and interest in Texas Stadium Suite No. 172, including anyoptions to become a suite owner in any new stadium. This release concludes allmedical obligations of the Company to Mr. Goldfield and his spouse underhis separation agreement.

 

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***(c)  Consulting agreement with RobertKaiser***

 

OnAugust 28, 2007, the Board authorized the retention of Mr. Kaiser asa consultant to the Company for the sum of $20,000 per month,on a month to month basis, terminable at will by either party. For the yearended November 30, 2007, Mr. Kaiser had received $84,000 inconsultant payments. As of January 1, 2008, Mr. Kaiser is now anemployee of the Company.

 

**(7) Fair Value of Financial Instruments**

 

The carrying amounts ofaccounts receivable, accounts payable and accrued liabilities as of November 30,2008 and 2007 approximate fair value due to the short maturity of theseinstruments. The carrying value of notes receivable and notes payable alsoapproximate fair value since these instruments bear market rates of interest, and notes receivable are net of allowancesand purchase discounts.

 

**(8) Property and Equipment**

 

Property and equipmentconsisted of the following at November 30, 2008 and 2007 (in thousands):

 
| ** **                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Furniture, fixtures and  equipment (useful life - 3 to 5 years) |       | $          | 14         |       | $          | 1 |   |
|                                                            |       | 14         |       | 1          |       |
| Less accumulated  depreciation and amortization                 |       | (2         | )          | —     |       |
|                                                            |       | $          | 12         |       | $          | 1 |   |

 

**(9) Debt**

 

Debt consisted of thefollowing at November 30, 2008 and 2007 (in thousands):

 
| ** **   | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------|------------|----------|------------|----------|------------|
|         |       |     |       |     |       |
| Note payable |       | $        | 34,338     |     | $          | — |   |
|         |       |     |       |     |       |
| Total debt   |       | $        | 34,338     |     | $          | — |   |

 

On March 30, 2007, the outstanding balances,including accrued interest, under our previous credit facilities were paid offusing the proceeds from the U.S. Sale. An early termination fee of $0.5 millionwas paid in conjunction with the pay off of the Amended Facility and wasrecognized as a charge to earnings in the year ended November 30, 2007. Asof November 30, 2007 the Company did not have any term loans, notes orother forms of long-term debt. The historical term loans or Senior Notes havebeen paid off.

 

On November 10, 2008, we financed approximately$34.9 million of the purchase price of the Trust pursuant to the CreditAgreement more fully described in footnote 3. The Credit Agreement provides for a non-recourse, term loan maturing on November 10,2013, with an annual interest rate of LIBOR (as defined in the CreditAgreement) plus 5%.  Principal andinterest payments on the term loan are due monthly as provided in the CreditAgreement.  Principal payments on theterm loan are due monthly to the extent that the aggregate principal amount ofthe term loan outstanding exceeds the sum of (a) the sum for eachoutstanding receivable of the product of (1) 85%, (2) thethen-current aggregate unpaid principal balance of such receivable and (3) apercentage specified in the Trust Credit Agreement based upon the aging of suchreceivable, and (b) amounts on deposit in the collection account for thereceivables net of any accrued and unpaid interest on the loan and fees due tothe servicer, the backup servicer, the collateral custodian and the ownertrustee (the “***Maximum Advance Amount***”). Principal payments are also due within five business days of any time that theaggregate principal amount of the term loan outstanding exceeds the MaximumAdvance Amount.  The remaining outstanding principal amount of the loanplus all accrued interest, fees and expenses are due on the maturity date.  Interestpayments on the term loan are due monthly. Payments on the term loan are contingent on the collection on the notesreceivable.

 

At November 30, 2008, we had $180,000 of deferredloan costs, net of accumulated amortization which is included in other assetsin the accompanying consolidated balance sheets.  We amortize the deferred loan costs based onthe percentage 

 

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ofreduction of the term loan.  Included inoperating interest expense in the accompanying consolidated statements ofoperations for the year ended November 30, 2008 is $3,000 of amortizationof these deferred loan costs associated with the acquisition of the term loan.

 

**(10) Income Taxes**

 

The Company’s loss fromcontinuing operations before income taxes was comprised of the following forthe years ended November 30, 2008 and 2007 (in thousands):

 
| ** **    | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------|------------|----------|------------|----------|------------|
|          |       |     |       |     |       |
| United States |       | $        | (1,481     | )        | $          | (14,739 | ) |
| International |       | —   |       | —   |       |
|          |       |     |       |     |       |
| Total         |       | $        | (1,481     | )        | $          | (14,739 | ) |

 

Provision (benefit) forincome taxes for the years ended November 30, 2008 and 2007 consisted ofthe following (in thousands):

 
| ** **                         | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                               |       |        |       |         |       |      |       |
| Year ended  November 30, 2008 |       |        |       |         |       |      |       |
| United States:                     |       |        |       |         |       |      |       |
| Federal                            |       | $           | 55         |         | —     |      | 55         |   |
| State                              |       | 137         |       | —       |       | 137       |       |
| International                      |       | —      |       | —       |       | —    |       |
|                               |       |        |       |         |       |      |       |
| Total                              |       | $           | 192        |         | —     |      | 192        |   |
|                               |       |        |       |         |       |      |       |
| Year ended  November 30, 2007 |       |        |       |         |       |      |       |
| United States:                     |       |        |       |         |       |      |       |
| Federal                            |       | $           | —     |         | (11,658    | )         | (11,658    | ) |
| State                              |       | 132         |       | —       |       | 132       |       |
| International                      |       | —      |       | —       |       | —    |       |
|                               |       |        |       |         |       |      |       |
| Total                              |       | $           | 132        |         | (11,658    | )         | (11,526    | ) |

 

Provision (benefit) for income taxes differed from theamounts computed by applying the U.S. Federal income tax rate of 35% to incomebefore income taxes as a result of the following for the years ended November 30,2008 and 2007 (in thousands):

 
| ** **                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                            |       |     |       |     |       |
| Expected tax benefit                                                                            |       | $        | (535       | )        | $          | (5,159 | ) |
|                                                                                            |       |     |       |     |       |
| State income taxes, net of  federal benefits                                                    |       | 92       |       | 86       |       |
| Current year losses not  benefited                                                              |       | 535      |       | 5,159    |       |
| Utilization of deferred  tax assets (including NOLs) previously offset with valuation allowance |       | 100      |       | (11,612  | )          |
|                                                                                            |       |     |       |     |       |
| Actual tax expense                                                                              |       | $        | 192        |     | $          | (11,526 | ) |

 

The tax effect of temporary differences underlyingsignificant portions of deferred income tax assets and liabilities at November 30,2008 and 2007 is presented below (in thousands):

 

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| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Deferred income tax  assets:      |       |     |       |     |       |
| Net operating loss  carryforwards |       | $        | 43,634     |     | $          | 43,722 |   |
| Foreign tax credit  carryforwards |       | —   |       | —   |       |
|                              |       |     |       |     |       |
|                              |       | 43,634   |       | 43,722   |       |
| Valuation allowance               |       | (38,848  | )          | (38,936  | )          |
|                              |       |     |       |     |       |
|                              |       | $        | 4,786      |     | $          | 4,786 |   |

 

In assessing the realizability of deferred income taxassets, management considers whether it is more likely than not that thedeferred income tax assets will be realized. At November 30, 2008, theCompany has deferred income tax assets, net of valuation allowances, of$4.8 million, which relates to net operating loss carryforwards. Theultimate realization of deferred income tax assets is dependent on thegeneration of future taxable income during the periods in which those temporarydifferences are deductible. The valuation allowance for deferred income taxassets as of November 30, 2008 and 2007 was $38.8 million and$38.9 million, respectively. The net change in the total valuationallowance for the years ended November 30, 2008 and 2007 was an decreaseof $0.1 million and a increase of $0.1 million, respectively.Management considers the scheduled reversal of deferred income tax assets,projected future taxable income, and tax planning strategies in determining theamount of the valuation allowance. The most significant factor considered indetermining the realizability of the deferred tax asset was projectedprofitability, including taxable income generated from tax planning strategies,over the next three to five years. The Company needs to generate$13.7 million in pre-tax income over this period to fully utilize the netdeferred tax asset.

 

The amount of the deferredincome tax asset considered realizable, however, could change in the near termif estimates of future taxable income during the relevant carry-forward periodchange or if the number of years considered for these projections change. At November 30,2008, the Company had U.S. Federal net operating loss carryforwards ofapproximately $125 million, which will begin to expire in 2020.

 

The Company was deemed tohave undergone an ownership change for purposes of the Internal Revenue Code asa result of its bond exchange in 2002. Accordingly, the Company may havelimitations on the yearly utilization of its U.S. tax carry-forwards inaccordance with Section 382 of the Internal Revenue Code.

 

Because many types oftransactions are susceptible to varying interpretations under foreign anddomestic income tax laws and regulations, the amounts recorded in theaccompanying consolidated financial statements may be subject to change onfinal determination by the respective taxing authorities. Management believesit has made an adequate tax provision.

 

**(11) Leases**

 

The Company leases certain office facilities andequipment operating leases. Rental expense for operating leases related tocontinuing operations was $31,000 and $53,000 for the years ended November 30,2008 and 2007, respectively. This lease expires on May 31, 2009.

 

**(12) Stockholders’ Equity**

 

***(a)  Stockholder Rights Plan***

 

The Company had a Stockholder Rights Plan (the “***Rights Plan***”), which provides thatthe holders of the Company’s Common Stock receive five-thirds of a right (“***Right***”), as adjusted for prior stocksplits, for each share of the Company’s Common Stock they own. Each Rightentitles the holder to buy one one-thousandth of a share of Series APreferred Stock, par value $.01 per share, at a purchase price of $80.00,subject to adjustment. The Rights would become exercisable if certain eventsoccurred relating to a person or group acquiring or attempting to acquire 15%or more of the outstanding shares of Common Stock of the Company. Under thosecircumstances, the holders of Rights would be entitled to buy shares of theCompany’s Common Stock or stock of an acquirer of the Company at a 50%discount. However, in certain circumstances, the Board could make adetermination that such an acquisition is made inadvertently, in which case theRights Plan would not be triggered. The Rights Plan expired on January 9,2007.

 

On February 5,2009, our Board adopted a rights plan and declared a dividend of one preferredshare purchase right 

 

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for each outstandingshare of Common Stock of the Company. The dividend is payable to ourstockholders of record as of February 16, 2009. The terms of the rightsand the rights plan are set forth in a Rights Agreement, by and between theCompany and Mellon Investor Services LLC, as Rights Agent (the “***Rights Plan***”).

 

OurBoard adopted the Rights Plan in an effort to protect stockholder value by****attempting to protect against a possiblelimitation on our ability to use our net operating loss carryforwards (the “***NOLs***”) to reducepotential future federal income tax obligations. We have experienced andcontinue to experience substantial operating losses, and under the InternalRevenue Code and rules promulgated by the Internal Revenue Service, we may“carry forward” these losses in certain circumstances to offset any current andfuture earnings and thus reduce our federal income tax liability, subject tocertain requirements and restrictions. To the extent that the NOLs do nototherwise become limited, we believe that we will be able to carry forward asignificant amount of NOLs, and therefore these NOLs could be a substantialasset to us. However, if we experience an “Ownership Change,” as defined in Section 382of the Internal Revenue Code, our ability to use the NOLs will be substantiallylimited, and the timing of the usage of the NOLs could be substantiallydelayed, which could therefore significantly impair the value of that asset.

 

TheRights Plan is intended to act as a deterrent to any person or group acquiring4.9% or more of our outstanding Common Stock (an “***Acquiring Person***”) without our approval.Stockholders who own 4.9% or more of our outstanding Common Stock as of theclose of business on February 16, 2009 will not trigger the Rights Plan solong as they do not (i) acquire any additional shares of Common Stock or (ii) fallunder 4.9% ownership of Common Stock and then re-acquire 4.9% or more of theCommon Stock. The Rights Plan does not exempt any future acquisitions of CommonStock by such persons. Any rights held by an Acquiring Person are null and voidand may not be exercised. We may, in our sole discretion, exempt any person orgroup from being deemed an Acquiring Person for purposes of the Rights Plan.

 

*The Rights*. We authorized the issuance of one right per eachoutstanding share of our common stock payable to our stockholders of record asof February 16, 2009. Subject to the terms, provisions and conditions ofthe Rights Plan, if the rights become exercisable, each right would initiallyrepresent the right to purchase from us one ten-thousandth of a share of our Series BJunior Participating Preferred Stock (“***Series B Preferred Stock***”) for apurchase price of $6.01 (the “***Purchase Price***”). If issued, each fractional share of Series BPreferred Stock would give the stockholder approximately the same dividend,voting and liquidation rights as does one share of our common stock. However,prior to exercise, a right does not give its holder any rights as a stockholderof the Company, including without limitation any dividend, voting orliquidation rights.

 

*Series B Preferred StockProvisions.* Each one ten-thousandth of a share of Series B Preferred Stock, if issued:(1) will not be redeemable; (2) will entitle holders to quarterlydividend payments of $0.01 per one ten-thousandth of a share of Series BPreferred Stock, or an amount equal to the dividend paid on one share of commonstock, whichever is greater; (3) will entitle holders upon liquidationeither to receive $1.00 per one ten-thousandth of a share of Series BPreferred Stock or an amount equal to the payment made on one share of commonstock, whichever is greater; (4) will have the same voting power as oneshare of common stock; and (5) if shares of our common stock are exchangedvia merger, consolidation, or a similar transaction, will entitle holders to aper share payment equal to the payment made on one share of common stock. The value of one one-hundredth interest in a Preferred Share should approximatethe value of one share of common stock.

 

*Exercisability*. The rights will not be exercisable until the earlierof (i) 10 business days after a public announcement by us that a person orgroup has become an Acquiring Person and (ii) 10 business days after thecommencement of a tender or exchange offer by a person or group for 4.9% of thecommon stock.

 

Werefer to the date that the rights become exercisable as the “***Distribution Date***.”Until the Distribution Date, our common stock certificates will evidence therights and will contain a notation to that effect. Any transfer of shares ofcommon stock prior to the Distribution Date will constitute a transfer of theassociated rights. After the Distribution Date, the rights may be transferredother than in connection with the transfer of the underlying shares of commonstock.

 

Afterthe Distribution Date, each holder of a right, other than rights beneficiallyowned by the Acquiring Person (which will thereupon become null and void), willthereafter have the right to receive upon exercise of a right and payment ofthe Purchase Price, that number of shares of common stock having a market valueat the time of exercise of two times the Purchase Price.

 

*Exchange*. After the Distribution Date, we may exchange therights (other than rights owned by an Acquiring Person, which will have becomenull and void), in whole or in part, at an exchange ratio of one share ofcommon stock, or a fractional share of Series B Preferred Stock (or of ashare of a similar class or series of the Company’s preferred stock havingsimilar rights, preferences and privileges) of equivalent value, per right(subject to adjustment).

 

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*Expiration*. The rights and the Rights Plan will expire on theearliest of (i) February 13, 2019, (ii) the time at which therights are redeemed pursuant to the Rights Agreement, (iii) the time atwhich the rights are exchanged pursuant to the Rights Agreement, (iv) the****repeal of Section 382 of the Code orany successor statute if we determine that the Rights Agreement is no longernecessary for the preservation of NOLs, and (v) the beginning of a taxableyear of the Company to which we determine that no NOLs may be carried forward.

 

*Redemption*. At any time prior to the time an Acquiring Personbecomes such, we may redeem the rights in whole, but not in part, at a price of$0.01 per right (the “***RedemptionPrice***”). The redemption of the rights may be made effective atsuch time, on such basis and with such conditions as we in our sole discretionmay establish. Immediately upon any redemption of the rights, the right toexercise the rights will terminate and the only right of the holders of rightswill be to receive the Redemption Price.

 

*Anti-Dilution Provisions*. We may adjust the purchase price of the shares of Series BPreferred Stock, the number of shares of Series B Junior Preferred Stockissuable and the number of outstanding rights to prevent dilution that mayoccur as a result of certain events, including among others, a stock dividend,a stock split or a reclassification of the shares of Series B PreferredStock or our common stock. No adjustments to the purchase price of less than 1%will be made.

 

*Amendments*. Before the Distribution Date, we may amend orsupplement the Rights Plan without the consent of the holders of the rights.After the Distribution Date, we may amend or supplement the rights Plan only tocure an ambiguity, to alter time period provisions, to correct inconsistentprovisions, or to make any additional changes to the Rights Plan, but only tothe extent that those changes do not impair or adversely affect any rightsholder.

 

The rights have certain anti-takeover effects. The rights will cause substantial dilution to a person or group who attempts toacquire the Company on terms not approved by us.  The rights should notinterfere with any merger or other business combination approved by us since wemay redeem the rights at $0.01 per right at any time until the date on which aperson or group has become an Acquiring Person.

 

**(13) Commitments and Contingencies**

 

***(a)  Legal Proceedings***

 

We have agreements with oneemployee to assist with the final wind down of our business. Under theagreement the employee is to receive her base salary as well as a bonus uponthe completion of certain objectives during the liquidation process. Theestimated commitment remaining under the agreement at November 30, 2008 is$96,000.

 

The Company has beeninformed of the existence of an investigation that may relate to the Company orits South American operations. Specifically, the Company understands thatauthorities in a foreign country are reviewing allegations from unknown partiesthat remittances were made from South America to Company accounts in the UnitedStates in 1999. The Company does not know the nature or subject of theinvestigation, or the potential involvement, if any, of the Company or itsformer subsidiaries. The Company does not know if allegations of wrongdoinghave been made against the Company, its former subsidiaries or any current orformer Company personnel or if any of them are subjects of the investigation.However, the fact that the Company is aware of an allegation of transfer ofmoney from South America to the United States and may have questioned witnessesabout such alleged transfers means that the Company cannot rule out thepossibility of involvement.

 

On October 30, 2007, Ms. Sherrian Gunn, theformer Chief Executive Officer, filed an Original Petition asserting a claimfor breach of Employment Agreement. On April 9, 2008, we reached anagreement with Ms. Gunn to pay her $447,500 to settle all claims in thematter. This amount has been paid.  In2007, $364,000 had been expensed and recorded in general and administrativeexpenses and in 2008, $83,500 was expensed and recorded in general andadministrative expenses.

 

On February 17, 2009,****wefiled a lawsuit in the United States District Court for the Northern Districtof Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and David Sandbergalleging that defendants engaged in numerous violations of federal securitieslaws in making recent purchases of our common stock. According to a Schedule13D filed by Red Oak Partners, LLC on February 18, 2009, it beneficiallyowned as of that date 22.19% of the Company’s Common Stock. The complaint seeksto enjoin any future unlawful purchases of our stock by the defendants, theiragents, and persons or entities acting in concert with them.

 

We are party to various other claims, legal actionsand complaints arising in the ordinary course of business. Our 

 

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managementbelieves that the disposition of these matters will not have a materiallyadverse effect on our consolidated financial condition or results ofoperations.

 

***(b)  Retirement Plans***

 

The Company established a savings plan for employeesin 1994. Employees are eligible to participate upon completing 90 days ofservice. The plan is subject to the provisions of the Employee RetirementIncome Security Act of 1974. Under provisions of the plan, eligible employeesare allowed to contribute as much as 50% of their compensation, up to theannual maximum allowed by the Internal Revenue Service. The Company may make adiscretionary matching contribution based on the Company’s profitability. TheCompany made contributions of approximately $0.1 million to the plan foreach of the years ended November 30, 2008 and 2007.  The plan was terminated on November 29,2008.

 

**(14) Subsequent Events**

 

Subsequent to the year ended November 30, 2008,on December 12, 2008 we financed approximately $813,000 of the purchaseprice of various assets purchased under the Trust II Purchase Agreementpursuant to the Trust II Credit Agreement. The revolving facility was initiallyestablished by an affiliate of the sellers under the Trust II PurchaseAgreement.  The Trust II has become a co-borrower under that facility andhas pledged its assets to secure performance by the borrowers thereunder. The revolving facility permits an aggregate borrowing of all co-borrowersthereunder of up to $50 million.  Financo has the ability to direct thatnot less than $15 million to be borrowed under the revolving facility beutilized by the Trust II to purchase receivables, installment sales contractsand related assets for the Trust II.  With the consent of itsco-borrowers, the Trust II may utilize more than $15 million of the aggregateavailability under the revolving facility.  Receivables purchased by theTrust II will be owned by the Trust II, and the Trust II will receive thebenefits of collecting them, subject to the third party lender’s rights inthose assets as collateral under the revolving facility. Advances underthe revolver are limited to an amount equal to, net of certain concentrationlimitations set forth in the Trust II Credit Agreement, (a) the lesser of (1) theproduct of 85% and the purchase price being paid for eligible receivables witha credit score greater than or equal to 650 (“***Class A Receivables***”) or (2) the product of80% and the then-current aggregate balance of principal and accrued and unpaidinterest outstanding for Class A Receivables plus (b) the lesser of (1) theproduct of 75% and the purchase price being paid for eligible receivables witha credit score less than 650 (“***Class BReceivables***”) or (2) the product of 50% and thethen-current aggregate balance of principal and accrued and unpaid interestoutstanding for Class B Receivables (“***Maximum Advance***”).

 

Alsosubsequent to the year ended November 30, 2008, on February 13, 2009we financed a portion of our purchase of the assets of Fair through theissuance by Asset III of six promissory notes (the “***Notes***”) in an aggregate original stated principal amountof $898,588.00, of which two promissory notes in an aggregate originalprincipal amount of $708,868 were issued to Fair, two promissory notes in anaggregate original principal amount of $162,720 were issued to Mr. Durhamand two promissory notes in an aggregate original principal amount of $27,000were issued to Mr. Cochran. The Notes issued by Asset III in favor of thesellers are full-recourse with respect to Asset III and are unsecured. The three Notes relating to Portfolio A (the “***Portfolio A Notes***”) are payable in 11 quarterlyinstallments, each consisting of equal principal payments, plus all interestaccrued through such payment date at a rate of 4.0% plus the LIBOR Rate (asdefined in the Portfolio A Notes).  The three Notes relating to PortfolioB (the “***Portfolio B Notes***”)are payable in 21 quarterly installments, each consisting of equal principalpayments, 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).

 

On December 1, 2008,our Board approved the Company’s 2008 Long Term Incentive Plan (the “***2008 Plan***”).  The 2008 Plan,which is administered by the Board, permits the grant of restricted stock,stock options and other stock-based awards to employees, officer, directors,consultants and advisors of the Company and its subsidiaries. The 2008 Planprovides that the administrator of the plan may determine the terms andconditions applicable to each award, and each award will be evidenced by astock option agreement or restricted stock agreement. The aggregate number of shares of CommonStock 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 ofrestricted stock to each of Timothy S. Durham, Robert A. Kaiser and ManojRajegowda.  Of each restricted stock grant, 100,000 shares vested on thedate of grant, and the remaining 200,000 of the shares vest in two equal annualinstallments on each anniversary of the date of grant. Subsequently, on February 24,2009, Mr. Rajegowda forfeited all option issuances provided to him duringthe course of his Board membership in connection with his resignation from theBoard. The restricted stock becomes 100% vested if any of the followingoccurs: (i) the participant’s death or (ii) the disability of theParticipant while employed or engaged as a director or consultant by theCompany. Of the total value of the awards, $198,000, $66,000 was expensed in 

 

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December 2008 and the rest is being expensedover a two year vesting period. The 2008 Plan permits withholding of shares bythe Company upon vesting to pay withholding tax. These withheld shares areconsidered as treasury stock and are available to be re-issued under the 2008Plan.

 

On February 4, 2009, we were notified by Red OakFund, L.P., a fund managed by Red Oak Partners, LLC, that it intended tocommence a tender offer for up to 70% of the outstanding shares of common stockof CLST at a price of $0.25 per share.  On February 5, 2009, CLSTHoldings, Inc., a Delaware corporation (the “***Company***”), adopted a rights plan anddeclared a dividend of one preferred share purchase right for each outstandingshare common stock of the Company. The dividend is payable to our stockholdersof record as of February 16, 2009. The terms of the rights and the rightsplan will be set forth in a Rights Agreement, by and between the Company andMellon Investor Services LLC, as Rights Agent (the “***Rights Plan***”).Subsequently, on February 9, 2009, Red Oak Partners, LLC announced that itwas abandoning its tender offer plans due to the adoption by the Board of theRights Plan.

 

The Rights Plan is intended to act as a deterrent toany person or group acquiring 4.9% or more of our outstanding common stock (an “***Acquiring Person***”)without our approval. Stockholders who own 4.9% or more of our outstandingcommon stock as of the close of business on February 16, 2009 will nottrigger the Rights Plan so long as they do not (i) acquire any additionalshares of common stock or (ii) fall under 4.9% ownership of common stockand then re-acquire 4.9% or more of the common stock. The Rights Plan does notexempt any future acquisitions of common stock by such persons. Any rights heldby an Acquiring Person are null and void and may not be exercised. We may, inits sole discretion, exempt any person or group from being deemed an AcquiringPerson for purposes of the Rights Plan.

 

Richards, Layton, & Finger P.A., legalcounsel to Mr. Manoj Rajegowda, a former member of our Board, sent writtencorrespondence dated February 24, 2009 to the Company in which Mr. Rajegowdaresigned as a director of the Company, effective immediately.  Mr. Rajegowda’s letter of resignation isattached hereto as Exhibit 99.1.

 

On February 13,2009, we issued 2,496,077 shares of Common Stock in connection with our purchaseof assets owned by Fair Finance Company (“***Fair***”), ofwhich 1,969,077 shares of Common Stock were issued to Fair, 452,000 shares ofCommon Stock were issued to Timothy S. Durham, Chief Executive Officer andDirector of Fair and an officer, director and stockholder of our company, and75,000 shares of Common Stock were issued to James F. Cochran, Chairman andDirector of Fair. The issuance of these shares constituted a portion of theconsideration paid for the assets of Fair, and the shares were deemed to have avalue of  $0.36 per share. The shares ofCommon Stock were issued by us in a transaction exempt from registrationpursuant to Section 4(2) of the Securities Act.

 

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