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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                                                                                                               | ** **                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                                                                                                 | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
| ** **                                                                                                                                                                                                                                                        |
| **For the fiscal year ended November 30,  2008**                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                        |
| **OR**                                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                        |
| o                                                                                                                                                                                                                                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                                                              | ** **                                                                                                    |
| **For the transition period from                     to                    ** |

 

**CommissionFile Number 0-22972**

 

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**CLST HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **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’stelephone number including area code: **(972) 267-0500**

 

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Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:

** **

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

(Title ofClass)

 

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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 isnot required 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) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities 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 ofdelinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer ora smaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(check one)

 
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o  (Do not check if a smaller reporting  company) | Smaller reporting company x |
|--------------------------------|--------------------------|------------------------------------------------------------------------------|----------------------------------|

 

             Indicate by check mark whether the registrant isa shell 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 were23,649,282 outstanding shares of common stock, $0.01 par value per share.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None.

 

 

 

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**CLSTHoldings, Inc.**

 

**INDEX TO FORM 10-K**

 
| ** **         | ** **                                                                                                              | **Page  Number** |
|--------------------|-------------------------------------------------------------------------------------------------------------------------|------------------|
| **PART I.**   |                                                                                                                    |             |
| Item 1.       | Business                                                                                                                | 1                |
| Item 1A.      | Risk  Factors                                                                                                           | 7                |
| Item 1B.      | Unresolved Staff Comments                                                                                               | 12               |
| Item 2.       | Properties                                                                                                              | 12               |
| Item 3.       | Legal Proceedings                                                                                                       | 12               |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                                                    | 12               |
| **PART II.**  |                                                                                                                    |             |
| Item 5.       | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 12               |
| Item 6.       | Selected Consolidated Financial Data                                                                                    | 14               |
| Item 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                             | 14               |
| Item 7A.      | Quantitative and Qualitative Disclosures  About Market Risk                                                             | 23               |
| Item 8.       | Financial Statements and Supplementary Data                                                                             | 23               |
| Item 9.       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                                   | 23               |
| Item 9A(T).   | Controls and Procedures                                                                                                 | 23               |
| Item 9B.      | Other Information                                                                                                       | 24               |
| **PART III.** |                                                                                                                    |             |
| Item 10.      | Directors, Executive Officers and Corporate  Governance                                                                 | 27               |
| Item 11.      | Executive Compensation                                                                                                  | 30               |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                         | 33               |
| Item 13.      | Certain Relationships and Related  Transactions, and Director Independence                                              | 35               |
| Item 14.      | Principal Accounting Fees and Services                                                                                  | 36               |
| **PART IV.**  |                                                                                                                    |             |
| Item 15.      | Exhibits and Financial Statement Schedules                                                                              | 38               |
| Signatures         | 41                                                                                                                      |

 

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**PART I.**

 

**Special Cautionary Notice RegardingForward-Looking Statements**

 

Certain of the matters discussed in thisAnnual Report on Form 10-K 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, 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 unanimouslyapproved the proposed transaction set forth in the U.S. Sale Agreement. Thepurchase price was $88 million in cash, subject to the Company’s workingcapital and other terms of the agreement at closing, and also subject toadjustment based on changes in net assets from December 18, 2006 to theclosing date.

 

Also on December 18, 2006, we enteredinto a definitive 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 theSecurities and Exchange 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.At closing, $53.6 million was received and $11.5 million was includedin accounts 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 also proposed negativeadjustments 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 “***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, and we recorded a loss on the transaction of $7.0 million primarilydue to accumulated 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.

 

On March 22, 2007, we signed a letter ofintent to sell our operations in Chile to a group that included localmanagement for approximately book value. On June 11, 2007, we completedthe sale of our operations in Chile. The purchase price and cash transferredfrom the operations in Chile prior to closing totaled $2.5 million, and werecorded a pre-tax gain of $0.6 million on the transaction during thequarter ending August 31, 2007. With the completion of the sale of ouroperations in Chile, we no longer have any operating locations outside of theU.S.

 

**Prior Business**

 

Prior to the sale of our operations andassets through these various transactions, the Company was a leadingdistributor of wireless products and provider of distribution and value-addedlogistics services to the wireless communications industry, serving networkoperators, agents, resellers, dealers, and retailers with operations in theNorth American and Latin American Regions. We provided comprehensive logisticssolutions and facilitated the distribution of handsets, related accessories andother wireless products from leading manufacturers to network operators,agents, resellers, dealers and retailers. We also provided activation servicesin Mexico and Chile that generated new subscribers for wireless carriers. Whenthe Company 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 ondistribution and logistics. We delivered handsets and related accessories fromthe manufacturers to carriers, other distributors, retailers, and consumers. Weassisted the manufacturers in expanding their distribution network and customerbase. Our fulfillment, kitting, packaging, and other services assisted thecarriers in getting the handsets ready for use by their subscribers. Ourdistribution services included purchasing, selling, warehousing, picking,packing, shipping and “just-in-time” delivery of wireless handsets andaccessories. We also offered one of the industry’s first completely integratedasset recovery and logistics services, our Omnigistics® (patent pending) supply chain managementsystem. In addition, we offered value-added services, including Internet-basedsupply chain services via our OrderStar® system (patentpending), Internet-based tracking and reporting, inventory management,marketing, prepaid wireless products, product fulfillment, kitting andcustomized packaging, private labeling, light assembly, accounts receivablemanagement and end-user support services. We also provided wireless activationservices and operated retail 

 

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locations in certain markets from which we sold wireless communicationsproducts and accessories 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***”) andPantech Co., Ltd. (“***Pantech***”).

 

Prior to the sale of our U.S., Mexico andChile operations, 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.

 

**2008Business**

 

For most of 2008, we had no significant operationsand the majority of our efforts were associated with winding down the remainingentities and other activities related to the prior business.  Even though the primary Latin Americanoperations were sold during 2007, in 2008 we collected more than $400,000 froma  previously written-off notereceivable.  The Brightpoint transactionclosed on March 30, 2007, yet in 2008 we resolved all escrow amounts andfinalized all working capital adjustments which resulted in excess of $4.5million of collected cash.  There werenumerous administrative matters related to the prior business that wereresolved favorably during 2008.  We appliedfor and 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 had eight non-operating U.S.entities and four non-operating foreign entities, including one each in theUnited Kingdom, Sweden, the Netherlands, and the Philippines.  The Company also has two dormant entities inEl Salvador and Guatemala that never conducted operations.

 

Dissolution proceedings in foreign countries can becumbersome and lengthy.  We have beendiligently working to resolve outstanding matters and to complete all statutoryand governmental requirements to dissolve our foreign entities.  We dissolved our United Kingdom entity in2008.  Dissolution of our one Swedishentity cannot be commenced until the expiration of a contractual indemnityobligation on December 31, 2009, which arises out of the sale of theassets of this entity in 2002.

 

Dissolution proceedings are now underway in thePhilippines and the Netherlands, where audits, tax claims, and longstandinglawsuits that prevented the commencement of dissolution proceedings have nowbeen resolved.  In the Philippines, wehave resolved two outstanding lawsuits for which official court approval ispending.  We also settled a 1999 taxclaim and have applied for relief from taxes associated with a 2004transaction.  We are working to completeall other governmental requirements for dissolution of the Philippines entityby the end of 2009.  In the Netherlands,we filed for value added tax (VAT) refunds, completed VAT tax audits that wererequired to be filed prior to filing for dissolution, and have recentlycommenced the formal dissolution process.

 

Governmental requirements for closure arecomplicated in El Salvador and Guatemala, where we have one dormant entity ineach country. We are working with local counsel in these countries to completethe process and have been advised to expect closure to take several more monthsor possibly more than one year to complete.

 

We believe at this time that we have resolved allknown liabilities in our foreign entities, and in some cases have collected orwill collect amounts resulting from the successful resolution of tax refunds ofapproximately $35,000 in the Netherlands and the return of the unused portionof a bond of $29,000 in the Philippines. We do not anticipate that the dissolution or closure of any of theremaining foreign entities will result in any significant liabilities.

 

Dissolution of most of our U.S. entities has beendelayed on advice of legal counsel pending resolution of matters unrelated tothe dissolutions. Audiomex Export Corp. is a party to our claim against thepurchasers of our Mexico operations and will not be dissolved until resolutionof that claim.  Commencement of thedissolutions of CLST-NAC, Ltd., CLST Fulfillment, Ltd., CLST Fulfillment, Inc.,and NAC Holdings, Inc. has been delayed pending resolution of a preferenceclaim 

 

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

 

National Auto Center, Inc. directly orindirectly conducted all of our historical discontinued operations, bothforeign 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 International Corporation/SA and CLSTInternational Corporation/Asia, both Delaware corporations, are holdingcompanies for the entities in El Salvador and Guatemala, and the Philippines,respectively.  As such, we believe thatthese two holding companies should not be dissolved or merged out of existenceuntil their subsidiary entities have been dissolved.

 

During 2008 we, in conjunction with our taxaccountants, performed a detailed review and analysis of the Company’shistorical 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***

 

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

 

Thecut-off date for the receivables acquired was October 31, 2008, with allcollections subsequent to that date inuring to our benefit.  As of October 31,2008, the portfolio consisted of approximately 6,000 accounts with an aggregateoutstanding balance of approximately $41.5 million and an average outstandingbalance per account of approximately $6,900.  As of October 31, 2008,the weighted average interest rate of the portfolio was 14.4%.  We havethe right to require the seller to repurchase any accounts, for the originalpurchase price applicable to such account, that do not satisfy certainspecified eligibility requirements set out in the Trust Purchase Agreement.

 

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

 

On December 12,2008, we, through CLST Asset Trust II (the “***Trust II***”), a newly formed trust wholly owned by CLSTAsset II, LLC, a wholly owned subsidiary of Financo, 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 (the “***Trust II Purchase Agreement***”).  The Trust II has committed topurchase, subject to certain limitations, from the sellers on or before February 28,2009 receivables of at least $2 million pursuant to the Trust II Purchase Agreement. We or the sellers under the Trust II Purchase Agreement can terminate the TrustII Purchase Agreement at any time (with notice) after March 29,2009.  We have the right to require the sellers to repurchase anyaccounts, for the original purchase price applicable to such account plusinterest accrued thereon, that do not satisfy certain specified eligibilityrequirements set out in the Trust II 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 theletter agreement, effective as of December 10, 2008, among the Trust II,Financo, the originator, the co-borrowers, the initial servicer, and theguarantor (the “***Trust II Letter Agreement***”).

 

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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.

 

***CLSTAsset 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 $54,000 waspaid to Mr. Cochran,

 

(2)             2,496,077 newly issued shares of our commonstock, 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 aco-borrower under one of Fair’s existing lines of credit with access to atleast $15,000,000 of credit for 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, Fair will continue to act as servicerfor these receivables.  Fair will receive no additional consideration foracting as servicer.

 

Asof February 13, 2009, the portfolios of receivables acquired pursuant tothe Asset III Purchase Agreement collectively consisted of approximately 3,000accounts with an aggregate outstanding balance of approximately $3,709,500 andan average outstanding balance per account of approximately $1,015 forPortfolio A and approximately $5,740 for Portfolio B.  As of February 13,2009, the weighted average interest rate of the portfolios exceeded 18%. The sellers are required to repurchase any accounts, for the outstandingbalance (at the time of repurchase) of such account plus interest accruedthereon, that do not satisfy certain specified eligibility requirements set outin the Asset III Purchase Agreement.  Additionally, each of the sellers isrequired to jointly and severally pay Asset III, up to the aggregate statedprincipal amount of the Notes issued to such seller, the outstanding balance ofany receivable that becomes a defaulted receivable within the parameters of theAsset III Purchase Agreement.

 

***Plan of Dissolution***

The proxy statement we filed with the SEC on February 20, 2007describes a proposal for a plan of dissolution, which provides for the completeliquidation and dissolution of the Company after the completion of the U.S.Sale (subject to abandonment by the Board in the exercise of their fiduciaryduties).  On March 28, 2007, ourstockholders approved the plan of dissolution in addition to the U.S. Sale andthe Mexico Sale.  The amount and timingof any distributions paid to stockholders in connection with the liquidationand dissolution of the Company are subject to uncertainties and depend on theresolution of certain contingencies more fully described in the proxy statementand elsewhere in this Form 10-K.

 

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In the plan of dissolution approved during our Special Meeting ofstockholders on March 28, 2007, we stated that no distribution of proceedsfrom the U.S. Sale and Mexico Sale would be made until the investigation by theSEC was resolved. On June 26, 2007, we received a letter from the staff ofthe SEC giving notice of the completion of their investigation with noenforcement action recommended to the SEC. On June 27, 2007, our Boarddeclared a cash distribution of $1.50 per share on Common Stock to stockholdersof record as of July 9, 2007. On July 19, 2007, we issued the $1.50per share dividend in the total amount of $30.8 million. OnNovember 1, 2007 we paid an additional $0.60 per share dividend tostockholders, which brings the cumulative dividends paid to stockholders to$2.10 per share or approximately $43.2 million.

 

Consistent with the planof dissolution and its fiduciary duties, our Board and the Executive Committeeof our Board will continue to review the relative benefits to our stockholdersof (1) continuing to wind down our businesses pursuant to our plan ofliquidation and dissolution or (2) abandoning our plan of liquidation anddissolution and continuing to do business in one or more of our historic linesof business or related businesses or in a new line of business.  In addition, our Board has in the past yearconsidered whether it is possible, and if it would be in the best interest ofthe Company and its stockholders, to de-register with the SEC and thereby suspendthe Company's responsibilities to file reports with the SEC. Neither our Boardnor our Executive Committee is currently considering de-registering with theSEC, but may consider doing so in the future. Any determination by the Board in the future to take any of theforegoing actions, will require that the Board, in fulfilling its fiduciaryobligations, perform such analysis and consider such information, as providedby management and external consultants, as its deems reasonable and necessaryto come to a determination that is in the best interests of the Company and itsstockholders.  It is unlikely our Boardor the Executive Committee of our Board will make any further distributions tothe Company’s stockholders under the plan of liquidation and dissolution whileit considers the strategic alternatives available to the Company.

 

Although we havepurchased the various assets described above and are now engaged in thebusiness of holding and collecting consumer accounts receivable, we have notabandoned our plan of liquidation and dissolution.  The Board believes that each of theseacquisitions will be a better investment return for our stockholders whencompared to the recent changes to interest rates and other investmentalternatives. Given the time necessary to complete the governmentalrequirements for dissolution, we are engaging in the business of holding andcollecting the receivables with the intention of generating a higher rate ofreturn on our assets than we currently receive on our cash and cash equivalentbalances.  We have continued to wind upaspects of our businesses, including dissolving some of our subsidiaries andcontinuing to try to collect our remaining non cash assets.  In addition, we have continued to review ourliabilities and seek to satisfy or resolve those that we can in a favorablemanner.  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 providefor our liabilities as required by our plan of dissolution and applicablelaw.  We do not now have, and do notbelieve that we will have in the immediate future, sufficient informationregarding all of our liabilities to pay or appropriately provide for them asrequired by our plan of dissolution and applicable law.  We expect that fully implementing our plan ofdissolution may require several years. We believe that should we decide that continuing with the plan ofliquidation and dissolution is in the best interest of the Company and 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.  For further discussion regarding Mr.Rajegowda’s apparent allegations that the Board has abandoned the plan ofdissolution see “Item 9B Other Information—Resignation of Director.”

 

***Governmental Regulations***

 

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 PracticesAct;

·                  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.

 

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**Financial Information**

 

The Company’s consolidated financialstatements and accompanying notes for the last two fiscal years can be found inPart IV of this Annual Report on Form 10-K.

 

**Competition**

 

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

 

·                  otherpurchasers of consumer receivables, including third-party collection companies;and

·                  otherfinancial services companies who purchase consumer receivables.

 

Weare new to the business of purchasing receivables. Many of our competitors arelarger and more established and have substantially greater financial,technological, personnel and other resources than we have, including greateraccess to capital markets.****Companieswith greater financial resources may elect at a future date to enter theconsumer debt collection business, and current debt sellers may changestrategies and cease selling debt portfolios in the future. Furthermore, as theunemployment rate and the number of bankruptcy filings continue to rise, wecould face a more challenging collection environment as debtors have fewerresources available to satisfy their debt.

 

Since most of our receivables were bulk purchases with collateral, wewill face another form of competition, which is some of our customers may beable 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 appliesto our directors, officers and all employees. Our Business Ethics Policy can befound at our Internet website at *www.clstholdings.com*.

 

**Item 1A.  Risk Factors**

 

Our future performance is subject to avariety of risks. If any of the events or circumstances described in thefollowing risk factors actually occurs, our business, financial condition orresults of operations could suffer and the trading price of our CommonStock could be negatively affected. In addition to the followingdisclosures, please refer to the other information contained in this report,including consolidated financial statements and the related notes, andinformation contained in our other SEC filings.

 

***The******Board, in its fiduciary capacity, will continue toconsider abandoning the Company’s plan of liquidation and dissolution, whichwill likely affect whether stockholders receive distributions pursuant to theplan.***

 

Our plan of liquidation and dissolutionprovided for the complete liquidation and dissolution of the Company after thecompletion of the U.S. Sale, but subject to the ability of the Board to abandonthe plan if it deems appropriate. Consistent with its fiduciary duties, theBoard has and will continue to give careful consideration to the strategicalternatives available to the Company, with a view to maximizing stockholdervalue.  We have acquired certainportfolios of receivables and are engaging in the business of holding andcollecting the receivables with the intention of generating a higher rate ofreturn on our assets than we currently receive on our cash and cash equivalentbalances.  Among other matters, the Boardwill continue to review additional potential acquisitions and the value of theCompany’s tax assets. If the Board determines that it is in the best interestof the Company to pursue additional acquisitions, it will likely require theCompany to obtain debt and/or equity 

 

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financing. Even if we obtain access to the necessary capital, we may beunable to identify suitable acquisition opportunities, negotiate acceptableterms or successfully acquire identified targets.

 

It is unlikely the Board will make anyfurther distributions to the Company’s stockholders under the plan while itconsiders the strategic alternatives available to the Company. It is possiblethat the Board will, in the exercise of its fiduciary duty, elect to abandonthe plan for a strategic alternative that it believes will maximize stockholdervalue, and that no further liquidating distributions will be made.  See “Item 1, Business — Plan of Dissolution”,for further discussion regarding our plan of dissolution.

 

***Because the Companyhas been in the process of liquidating its business, it is difficult to secureand retain qualified employees*.**

 

During the last three quarters of fiscal year2007, 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 experiencingsignificant risks 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 tothe requirements of Section 404 of the Sarbanes-Oxley Act. If we areunable to timely comply with Section 404 or if the costs related tocompliance are significant, our profitability, stock price and results ofoperations and financial condition could be materially adversely affected.***

 

We are required to comply with the provisionsof Section 404 of the Sarbanes-Oxley Act of 2002 for this Annual Report onForm 10-K. Section 404 requires that we document and test ourinternal control over financial reporting and issue management’s assessment ofour internal control over financial reporting. This section also requires thatour independent registered public accounting firm opine on those internalcontrols and management’s assessment of those controls beginning with ourfiscal year ending November 30, 2010. We have hired an outside consultingfirm to work with management in assessing our internal controls, and they, withmanagement, have concluded that the internal controls are adequate. During thecourse of our ongoing evaluation and integration of the internal control overfinancial reporting, we may identify areas requiring improvement, and we mayhave to design enhanced processes and controls to address issues identifiedthrough 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.

 

We cannot be certain at this time that ourauditors will not identify material weaknesses in internal control overfinancial reporting. If we fail to comply with the requirements of Section 404or if we or our auditors identify and report such material weakness, theaccuracy and timeliness of the filing of our annual and quarterly reports maybe negatively affected and could cause investors to lose confidence in ourreported financial information, which could have a negative effect on thetrading 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.

 

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***We are subject tothe risks of interest rate fluctuation.***

 

Our net interest income is affected bychanges in market interest rates and other economic factors beyond our control.Interest rates for demand deposits and other short term cash investments in theU.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 haddifficulty collecting 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 lowprices and low volumes and may be subject to certain fraud and abuse in themarket.***

 

Our Common Stock trades at lowprices and relatively low volumes and is not listed on an exchange. As such,the market for Common Stocksuch as ours may be subject to certain patterns of fraud and abuse, similar to Common Stock that is subject to theSEC’s “penny stock” rule, including:

 

·                  controlof the market for the security by one or a few broker-dealers that are oftenrelated to the promoter or issuer;

 

·                  manipulationof prices through prearranged matching of purchases and sales and false andmisleading press releases;

 

·                  “boilerroom” practices involving high-pressure sales tactics and unrealistic priceprojections by inexperienced sales persons;

 

·                  excessiveand undisclosed bid-ask differentials and markups by selling broker-dealers;and

 

·                  thewholesale dumping of the same securities by promoters and broker-dealers afterprices have been manipulated to a desired level, along with the resultinginevitable collapse of those prices and with consequent investor losses.

 

Although we do not expect to be in a positionto dictate the behavior of the market or of broker-dealers who participate inthe market, management will strive within the confines of practical limitationsto prevent the described patterns from being established with respect to our CommonStock. On February 17, 2009, we filed a lawsuit in the UnitedStates District Court for the Northern District of Texas against Red Oak Fund,L.P., Red Oak Partners LLC, and David Sandberg alleging that defendants engagedin numerous violations of federal securities laws in making recent purchases ofour Common Stock. See “Item3, Legal Proceedings,” for further discussion regarding this lawsuit.

 

***Our stock is thinlytraded, so you may be unable to sell at or near ask prices or at all.***

 

The shares of our Common Stockare traded on the Pink Sheets. Shares of our Common Stock are thinly-traded, meaning that the number ofpersons interested in purchasing our common shares at or near ask prices at anygiven time may be relatively small or non-existent. This situation isattributable to a number of factors, including our reclassification todiscontinued operations.

 

As a consequence, our stock price may notreflect an actual or perceived value. Also, there may be periods of severaldays or more when trading activity in our shares is minimal or non-existent, ascompared to a seasoned issuer that has a large and steady volume of tradingactivity that will generally support continuous sales without an adverse effecton share price. A broader or more active public trading market for our commonshares may not develop or if developed, may not be sustained. 

 

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Due to these conditions, you may not be able to sell your shares at ornear ask prices or at all if you need money or otherwise desire to liquidateyour shares.

 

***The financial results of our receivablesbusiness depend on our ability to purchase receivable portfolios on acceptableterms and in sufficient amounts. If we are unable to do so, our business,results of operations and financial condition could be adversely affected.***

 

If we areunable to purchase consumer receivables from credit originators and other debtsellers on acceptable terms and in sufficient amounts, our business, results ofoperations and financial condition could be adversely affected. Theavailability of portfolios that generate an appropriate return on ourinvestment depends on a number of factors both within and beyond our control,including:

 

·                  competition fromother buyers of consumer receivable portfolios;

·                  the growth ofconsumer debt;

·                  continued salesof consumer receivable portfolios by credit originators;

·                  continued growthin the number of industries selling consumer receivable portfolios; and

·                  our ability tocollect upon a sufficient percentage of accounts to satisfy our contractualobligations.

 

At certaintimes the market for acquiring consumer receivable portfolios can become morecompetitive, thereby possibly diminishing our ability to acquire suchreceivables at attractive prices in future periods. The growth in consumer debtmay also be affected by:

 

·                  a slowdown inthe economy;

·                  reductions inconsumer spending;

·                  changes in theunderwriting criteria by originators; and

·                  changes in lawsand regulations governing consumer lending.

 

Any slowing ofthe consumer debt could result in a decrease in the availability of consumerreceivable portfolios for purchase that could affect the purchase prices ofsuch portfolios. 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 resultsmay fluctuate as a result of any of the following:

 

·                  the timing andamount of collections on our consumer receivable portfolios;

·                  our inability toidentify and acquire additional consumer receivable portfolios;

·                  a decline in theestimated value of our consumer receivable portfolio  recoveries;

·                  increases inoperating expenses associated with the growth of our operations; and

·                  general andeconomic market conditions.

 

***We may not be able to recover sufficientamounts on our consumer receivable portfolios to recover the costs associatedwith the purchase of those portfolios and to fund our operations. In order tooperate profitably over the long term, we must continually purchase and collecton a sufficient volume of receivables to generate revenue that exceeds ourcosts.***

 

Our ability torecover on our portfolios and produce sufficient returns can be negativelyimpacted by the quality of the purchased receivables. In the normal course ofour portfolio acquisitions, some receivables may be included in the portfoliosthat fail to conform to certain terms of the purchase agreements, and we mayseek to return these receivables to the seller for payment. However, we cannotguarantee that any of such sellers will be able to meet their paymentobligations to us. Accounts that we are unable to return to sellers may yieldno return. If cash flows from operations are less than anticipated as a resultof our inability to collect sufficient amounts on our receivables, our abilityto satisfy our debt obligations, purchase new portfolios and our future growthand profitability may be materially adversely affected.

 

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***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 competewith other purchasers of consumer receivable portfolios, with third-partycollection agencies and with financial services companies that manage their ownconsumer receivable portfolios. Some of our competitors have greater capital,personnel and other resources than we have. The possible entry of newcompetitors, including competitors that historically have focused on theacquisition of different asset types, and the expected increase in competitionfrom current market participants may reduce our access to consumer receivableportfolios. Aggressive pricing by our competitors could raise the price ofconsumer receivable portfolios above levels that we are willing to pay, whichcould reduce the number of consumer receivable portfolios suitable for us topurchase or 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 collectionagencies to service all our consumer receivable portfolios.***

 

Any failure byour third party recovery partners to adequately perform collection services forus or remit 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 bankruptcyfilings increase.***

 

During timesof economic recession, the amount of defaulted consumer receivables generallyincreases, which contributes to an increase in the amount of personalbankruptcy filings. As of November 10, 2008 our portfolios related to theTrust have accounts over 90 days past due in the amount of approximately$186,000.** **Undercertain bankruptcy filings, a debtor’s assets are sold to repay creditoriginators, but since the defaulted consumer receivables we purchase aregenerally unsecured we often would not be able to collect on those receivables.We cannot assure you that our collection experience would not decline with anincrease in bankruptcy filings. If our actual collection experience withrespect to a defaulted consumer receivables portfolio is significantly lowerthan we projected when we purchased the portfolio, our earnings could benegatively affected.

 

***Government regulations may limit our abilityto recover and enforce the collection of our receivables.***

 

Federal, stateand municipal laws, rules, regulations and ordinances may limit our ability torecover and enforce our rights with respect to the receivables acquired by us.These laws include, but are not limited to, the following federal statutes andregulations promulgated thereunder and comparable statutes in states whereconsumers reside and/or where creditors are located:

 

·                  the Fair DebtCollection Practices Act;

·                  the FederalTrade Commission Act;

·                  theTruth-In-Lending Act;

·                  the Fair CreditBilling Act;

·                  the Equal CreditOpportunity Act; and

·                  the Fair CreditReporting Act.

 

Additionallaws may be enacted that could impose additional restrictions on the servicingand collection of receivables. Such new laws may adversely affect the abilityto collect the receivables. Because the receivables were originated andserviced pursuant to a variety of federal and/or state laws by a variety ofentities and involved consumers which may include all 50 states, the Districtof Columbia and Puerto Rico, there can be no assurance that all originalservicing entities have at all times been in substantial compliance withapplicable law. Additionally, there can be no assurance that we or our recoverypartners have been or will continue to be at all times in substantialcompliance with applicable law. The failure to comply with applicable law couldmaterially adversely affect our ability to collect our receivables and couldsubject us to increased costs and fines and penalties. In addition, ourthird-party recovery partners may be subject to these and other laws and theirfailure to comply with such laws could also materially adversely affect ourrevenues and earnings.

 

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**Item 1B.  Unresolved Staff Comments**

 

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

 

**Item 2.  Properties**

 

In October 2007, we moved from ourprevious corporate headquarters located in Coppell, Texas to a temporary officelocated in Dallas, Texas, upon receipt of notice from Brightpoint that we wererequired to vacate the Coppell office within thirty (30) days of such notice.Our lease in 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 theexistence of an investigation that may relate to the Company or its SouthAmerican operations. Specifically, the Company understands that authorities arereviewing allegations from unknown parties that remittances were made fromSouth America to Company accounts in the United States in 1999. The Companydoes not know the nature or subject of the investigation, or the potentialinvolvement, if any, of the Company or its former subsidiaries. The Companydoes not know if allegations of wrongdoing have been made against the Company,its former subsidiaries or any current or former Company personnel or if any ofthem are subjects of the investigation. However, the fact that theinvestigators are aware of an allegation of transfers of money from SouthAmerica to the United States and may have questioned witnesses about suchalleged transfers means that the Company can not predict whether or not theinvestigation will result in a material adverse effect on the consolidatedfinancial condition or results of operations of the Company.

 

On February 17, 2009,****we filed a lawsuit in the United States District Court forthe Northern District of Texas against Red Oak Fund, L.P., Red Oak Partners,LLC, and David Sandberg alleging that defendants engaged in numerous violationsof federal securities laws in making recent purchases of our CommonStock. According to a Schedule 13D filed by Red Oak Partners, LLC on February 18,2009, it beneficially owned as of that date 22.19% of the Company’s CommonStock. The complaint seeks to enjoin any future unlawful purchases ofour stock by the defendants, their agents, and persons or entities acting inconcert with them.

 

We are party to various claims, legal actionsand complaints arising in the ordinary course of business. Our managementbelieves that the disposition of these matters will not have a materiallyadverse effect on the consolidated financial condition or results of operationsof the Company.

 

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

 

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

 

**PART II.**

 

**Item 5.****           Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

**Market Information**

 

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

 

The following table sets forth, on a pershare basis, high and low prices for our Common Stock for eachquarter of fiscal years 2007 and 2008. Prices are the high and low bidquotations per share for our CommonStock as reported on the OTC market, as compiled by PinkSheets LLC. Such bid quotations reflect inter-dealer prices, withoutretail mark-up, mark-down or commission and may not necessarily representactual transactions.

 

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| ** **                               | ** ** | **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 lastreported price of our Common Stock on the OTC market was $0.21per share. As of February 27, 2009, there were 309 stockholders of record.

 

**Dividends**

 

Prior to the adoption of our plan ofliquidation and dissolution in 2007, our policy had been to reinvest earningsto fund future growth. Accordingly, we generally did not pay cash dividends onour Common Stock. However, consistent with the plan, we paid thefollowing 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 per share or approximately $43.2 million. Approximately 61.21% ofthe distribution was considered a taxable dividend in accordance with U.S.Federal income tax rules, and the remaining 38.79% was considered anon-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. Stockholders areencouraged to contact their tax and financial advisors regarding implicationsand appropriate tax treatment of the distribution.

 

It is unlikely the Board will make anyfurther distributions to the Company’s stockholders under the plan ofliquidation and dissolution while it considers the strategic alternativesavailable to the Company. It is possible that the Board will, in the exerciseof its fiduciary duty, elect to abandon the plan of liquidation and dissolutionfor a strategic alternative that it believes will maximize stockholder value,and that no further liquidating distributions will be made.  See “Item 1, Business — Plan of Dissolution”,for further discussion regarding our plan of dissolution.

 

**Sales of Unregistered Securities**

 

On February 13,2009, we issued 2,496,077 shares of Common Stock in connection with ourpurchase of assets owned by Fair Finance Company (“***Fair***”),of which 1,969,077 shares of Common Stock were issued to Fair, 452,000 sharesof Common 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.

 

Also,on December 1, 2008, we issued 900,000 shares of restricted Common Stockfor no cash consideration to our directors as compensation for services duringthe fiscal year ended November 30, 2008. We granted 300,000 shares of restrictedCommon Stock to each of Timothy S. Durham, Robert A. Kaiser and ManojRajegowda. The shares of Common Stock were issued by us in a transaction exemptfrom registration pursuant to Section 4(2) of the Securities Act. Subsequently,on February 24, 2009, Mr. Rajegowda forfeited all option issuances provided tohim during the course of his Board membership in connection with hisresignation from the Board. See “Item 98, other information—Resignation ofDirector” for more information.

 

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**Issuer Purchases of Equity Securities**

 

We have no programs to repurchase shares ofour Common Stock. Furthermore, we did not repurchase any of our Common Stock during the fourth quarterof 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.  Theplan, which is administered by the Board, permits the grant of restrictedstock, stock options and other stock-based awards to employees, officers,directors, consultants and advisors of the Company and its subsidiaries. Theplan provides 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 aggregatenumber of shares of Common Stock of the Company that may be issued under theplan is 20,000,000 shares. The 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 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 theCompany qualifies as a smaller reporting company.

 

**Item 7.****           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

During 2007 we sold all of our major assets.Our stockholders approved the U.S. Sale, the Mexico Sale, the plan ofdissolution, and the name change to CLST Holdings, Inc. on March 28,2007. Throughout 2008, only a small administrative staff remained to wind upour business, and we continued to follow the plan of dissolution adopted by ourstockholders. However, consistent with the plan of dissolution and itsfiduciary duties, our Board has continued 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. OurBoard has in the past year considered whether it is possible, and if it wouldbe in the 

 

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best interest of the Company, to de-register with the SEC and therebyeliminate the Company’s responsibilities to file reports with the SEC. OurBoard is not currently considering de-registering with the SEC, but mayconsider doing so in the future. In addition, due to the recent economiccrisis, the Board and management has evaluated various alternatives tosafeguard our primary asset, cash, and took several steps in late 2008 toprotect this asset.  Although we believeour cash is now safe from bank failure and other near term economic risks, theeffective interest rates have been reduced substantially due to the U.S. economiccrisis.  As discussed in further detailbelow under “— Recent Developments,” on November 10, 2008, December 12,2008 and February 13, 2009, we consummated three acquisitions ofreceivables portfolios which we believe will provide a better investment returnfor our stockholders when compared to the recent changes to interest rates andother investment alternatives. Although we are now engaged in the business ofholding and collecting consumer accounts receivable, we have not abandoned ourplan of liquidation and dissolution. We believe that should we decide thatcontinuing with the plan of liquidation and dissolution is in the best interestof our stockholders, we will be able to dispose of these assets on favorableterms prior to the time that we would be in a position to make a finaldistribution to stockholders and terminate our corporate existence.  See “Item 1, Business — Plan of Dissolution,”for further discussion regarding our plan of 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,revenue was recognized on product sales when delivery occured, the customer tooktitle and assumed risk of loss, terms were fixed and determinable, andcollectibility was reasonably assured. The Company did not generally grantrights 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 over120 days without payment activity, unless payment activity resumes.

 

***Notes Receivable***

 

In determining the adequacyof the allowance for doubtful accounts, management considers a number offactors including the aging of the receivable portfolio, customer paymenttrends, financial condition of the customer, economic conditions in thecustomer’s country, and industry conditions. Actual results could differ fromthose estimates. We will establish an allowance for doubtful accounts for allreceivables.  The allowance will be basedon “defaulted” receivables as defined in our 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, we will adjust theallowance for doubtful accounts to a minimum amount equal to the defaultedreceivables.  We may from time to timemake additional increases to the allowance based on business circumstances.

 

***Stock-BasedCompensation***

 

Prior to fiscal 2006, the Company accountedfor its stock options under the recognition and measurement provisions of APBOpinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations. Effective December 1, 2005, the Company adopted theprovisions of SFAS No. 123 (Revised 2004), “Share-Based Payments”(SFAS 123(R)), and selected the modified prospective method to initiallyreport stock-based compensation amounts in the consolidated financialstatements. The Company used the Black-Scholes option pricing model to determinethe fair value of all option grants. The Company did not grant any optionsduring 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: 

 

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(i) the participant’s death; (ii) the termination ofparticipant’s service as result of disability; (iii) the termination ofthe participant without cause; (iv) the participant’s voluntarytermination after the attainment of age 65; or (v) a change in control.The total value of the awards, $2.6 million, was being expensed over theservice period. The 2003 Plan permitted withholding of shares by the Companyupon vesting to pay withholding tax. These withheld shares were considered astreasury stock and were available to be re-issued under the 2003 Plan, prior tothe termination of the 2003 Plan on September 25, 2007. Restricted stockissued under the 2003 Plan vested upon the completion of the U.S. Sale and nonew shares will be issued under the 2003 Plan.

 

On December 1, 2008, our Board approvedthe Company’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. The aggregate number of shares of Common Stock of the Companythat 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 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.

 

**Sales Transactions**

 

On December 18, 2006, we entered intothe U.S. Sale Agreement with Brightpoint, providing for the sale ofsubstantially all of our United States and Miami-based Latin Americanoperations and for the buyer to assume certain liabilities related to thoseoperations. Our operations in Mexico and Chile and other businesses orobligations of the Company were excluded from the transaction.

 

Our Board of Directors and Brightpointunanimously approved the proposed transaction set forth in the U.S. SaleAgreement. 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$8.8 million of the purchase price into an escrow account for a period ofsix months from the closing date.

 

Also on December 18, 2006, we enteredthe Mexico Sale Agreement with Wireless Solutions and Prestadora, twoaffiliated Mexican companies, providing for the sale of all of the Company’sMexico operations. The Mexico Sale was a stock acquisition of all of theoutstanding shares of our Mexican subsidiaries, and includes our interest inCII, our joint venture with Wireless Solutions. Under the terms of thetransaction, we received $20 million in cash, and were entitled to receiveour pro rata share of CII profits from January 1, 2007, up to theconsummation of the transaction, within 150 days from the closing date.Our Board unanimously approved the proposed transaction set forth in the MexicoSale Agreement. We have not received any pro-rata share of the CII profits andother terms required as of 150 days from the closing date. A demand forpayment of up to $1.7 million and other required terms of the agreementwas sent to the purchasers on September 11, 2007. While we believe thatCII was profitable and therefore the purchasers owe the Company its pro ratashare, the purchasers are disputing this claim. We continue to pursue theamounts we believe we are due, but at this time the purchasers are notresponding to or cooperating with our demands. Currently we cannot make anyestimates regarding future amounts we may be able to collect or the timing ofany 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 stockholdersapproved the U.S. Sale, the Mexico Sale, the plan of dissolution, and the namechange to CLST Holdings, Inc. We continue to follow the plan ofdissolution. Consistent with the plan of dissolution and its 

 

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fiduciary duties, our Board will continue to consider the properimplementation of the plan of dissolution and the exercise of the authoritygranted to it thereunder, including the authority to abandon the plan ofdissolution.

 

The U.S. Sale closed on March 30, 2007.At closing, $53.6 million was received and $4.5 million is includedin accounts 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 bereceived under the U.S. Sale Agreement.

 

The Mexico Sale closed on April 12,2007, and we recorded a loss on the transaction of $7.0 million primarilydue to accumulated 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. 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.

 

On March 22, 2007, we signed a letter ofintent to sell our operations in Chile to a group that includes localmanagement for approximately book value. On June 11, 2007, we completedthe Chile Sale. The purchase price and cash transferred from the operations inChile prior to closing totaled $2.5 million, and we recorded a gain ofpre-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 receivedapproximately $95,000 from Muniz Ramirez Perez-Taiman representing the finalpayment due the Company from the 2002 sale of our operations in Peru. Theaccounts receivable had been previously fully reserved.

 

**Recent Developments**

 

On November 10, 2008, we acquired all ofthe outstanding equity interest of the Trust. The primary business of the Trust is to hold and collect certainreceivables.  As of November 30,2008, the Trust had an outstanding principal balance of $40.8 millionconsisting of approximately 6,000 accounts with an average weighted interestrate of approximately 14.4%.  For themonth of November the Trust made collections of approximately $1.1 millionconsisting of $600,000 of principal payments and $500,000 of interest and otherfees.  There were $100,000 of defaultsduring the month of November 2008. From the $1.1 million of collections the Trust generated $300,000 of netcash after payment of amount due under the credit agreement, includingprincipal and interest on the term loan and servicing fees.  The net cash of $300,000 was then used to paydown the intercompany debt with the excess cash distributed to its parentcompany Financo.  For the month of November 2008the Trust reported a net income of $140,000.

 

Subsequent to fiscal 2008, we entered intotwo other transactions involving receivables. On December 12, 2008, we,through Trust II, entered into apurchase agreement, effective as of December 10, 2008, to acquire fromtime to time certain receivables, installment sales contracts and relatedassets owned by third parties.  The Trust II has committed to purchase,subject to certain limitations, from the sellers on or before February 28,2009 receivables of at least $2 million.

 

Effective February 13, 2009, we, through Asset III, purchasedcertain receivables, installment sales contracts and related assets owned byFair, James F. Cochran, Chairman and Director of Fair, and by Timothy S.Durham, Chief Executive Officer and Director of Fair and an officer, directorand stockholder of our company.  Additionally, Fair agreed to use its bestefforts to facilitate negotiations to add Asset III or one of its affiliates asa co-borrower under one of Fair’s existing lines of credit with access to atleast $15,000,000.00 of credit for our own purposes. Asof February 13, 2009, the portfolios of receivables acquired collectivelyconsisted of approximately 3,000 accounts with an aggregate outstanding balanceof approximately $3,709,500 and an average outstanding balance per account ofapproximately $1,015 for Portfolio A and 

 

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approximately$5,740 for Portfolio B.  As of February 13, 2009, the weightedaverage interest rate of the portfolios exceeded 18%.

 

**Fiscal 2008 Compared to Fiscal 2007**

 

***Consolidated***

 

*Revenues. *Revenues for 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. *Servicing fees consist of loan servicingfees and trust administration fees.  Theloan servicing fees were $53,000 and the trust administration fees were $13,000for the year ended November 30, 2008. The Trust CreditAgreement provides the material terms and conditions for the services to beperformed 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.

 

*Provision for doubtful accounts. *Provision for doubtful accounts was $144,000for 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 Administrative Expenses.*  Selling, general and administrative expensesfor the twelve months ended November 30, 2008 were approximately $2.2million compared to approximately $15.2 million for the same period in 2007.There was a decrease in payroll from fiscal 2007 due to payments under existingemployment contracts and change of control agreements and vesting of restrictedstock totaling $8.4 million, which such amounts were primarily as a result ofthe 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, we entered into anAmended & 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, theoutstanding balances, 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 AmendedFacility and the Term Loan has been allocated to discontinued operations. In2007, it was determined that 90% of the interest expense would be allocated todiscontinued operations based on the small amount of borrowings in the fourmonths before the sale. The total interest expense allocated to discontinuedoperations was $2.2 million in 2007.

 

*Settlement of note receivable related to thesale of Asia-Pacific.* On March 5, 2007, we announced that we had signed an agreement,effective February 27, 2007, with Fine Day and Mr. Horng, theChairman and sole shareholder of Fine Day, and formerly an executive officer ofthe Company, accepting a settlement of an outstanding note receivable relatedto the September 2005 sale of our Hong Kong and PRC operations.  From September 2, 2005, Fine Day hadmade timely interest payments to us on the promissory note. However, Fine Dayinformed us in February 2007 that it would not be able to pay quarterlyinterest payments or the principal amount of the note at maturity. Insettlement of the outstanding note, we agreed to accept a $650,000 cashpayment, along with the transfer to the Company of all of Mr. Horng’sshares of our

 

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Common Stock, approximately 474,000 shares.The transaction closed on April 12, 2007. The shares of stock were valuedat $2.56 per share based on the closing price on April 12, 2007. Thecarrying value of the note, prior to the agreement, was $2.4 million. As aresult of the settlement, we recorded a loss of $0.5 million for thetwelve months ended November 30, 2007. At November 30, 2008 and 2007,the shares of stock previously owned by Mr. Horng were included intreasury stock.

 

*Income Taxes.*We had income tax expense of$192,000 for the twelve months ended November 30, 2008. We had an incometax benefit from continuing operations of approximately $11.5 million for thetwelve months ended November 30, 2007. Discontinued operations included inthe consolidated statement of operations is shown net of taxes of approximately$15.9 million for the twelve months ended November 30, 2007 reflecting atax rate of 35% on gains on sales. The difference between this amount and theCompany’s consolidated provision has been included as a tax benefit incontinuing operations for the twelve months ended November 30, 2007. In2007, we used the loss from continuing operations as well as net operatinglosses from prior years that previously had valuation allowances to offsetincome from discontinued operations except for certain minimum taxes,withholding taxes and taxes related to CII. The benefit in 2007 was partiallyreduced by the closing of the Mexico Sale which increased the deferred incometax valuation allowance by approximately $2.7 million as no future taxableincome will be generated from the Mexico operations.

 

In assessingthe realizability of deferred income tax assets, management considers whetherit is more likely than not that the deferred income tax assets will berealized. For further discussion, please see footnote 10 of the consolidatedfinancial 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, theCompany recorded earnings from discontinued operations of $29.5 million.During 2007 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.

 

**Liquidityand Capital Resources**

 

The U.S. Saleclosed on March 30, 2007. At closing, $53.6 million was received and$4.5 million is included in accounts receivable—other in the accompanyingbalance sheet for November 30, 2007; $8.8 million had been placed inan escrow account and subject to any indemnity claims by the buyers of theCompany’s U.S. business. A portion of the proceeds from the sale was used topay off the Company’s bank debt (see footnote 7). We recorded a pre-tax gain of$52.7 million on the transaction during the twelve months ended November 30,2007. Brightpoint asserted total claims for indemnity against the escrow ofapproximately $1.4 million. The Company objected to these claims.Brightpoint also proposed negative adjustments to the net working capital ofapproximately $1.4 million, which these claims for adjustment were largelythe same as the claims for indemnity asserted against the escrow account. As ofNovember 30, 2007, we had received approximately $7.6 million of theamounts held in the escrow account, which such amount included accruedinterest. On December 21, 2007, we entered into the Letter Agreement withBrightpoint which settled the dispute concerning the additional escrow amount.All currently outstanding disputes between the parties regarding the determinationof the purchase price under the U.S. Sale Agreement have been resolved, andpayments of funds in respect thereof were made in accordance with the termsdescribed in the Letter Agreement. Pursuant to the Letter Agreement, in January 2008we received approximately $3.2 million from Brightpoint plus accruedinterest and less transition expenses, and approximately $1.4 million fromthe escrow agent. These amounts were the final amounts received under the U.S.Sale Agreement.

 

***Operating Activities***

 

The net cashprovided by or used in operating activities for the year ended November 30,2008 and 2007 was $4.9 million cash received to $2.6 million cash used,respectively. The increase in fiscal year 2008 is primarily a result of thecollection of approximately $7 million from other receivables.

 

***Investing Activities***

 

The net cashused in or received from investing activities for the years ended November 30,2008 and 2007 was $6.1 million cash used to $82.8 million cash received,respectively. The decrease from fiscal 2007 to 2008 is primarily a result ofthe sale of our U.S., Miami, Mexico and Chile operations, for which we receivedproceeds of $83.0 million. We used $6.1 million in cash for the purchase of theTrust on November 10, 2008.

 

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***Financing Activities***

 

On March 30,2007, the outstanding balances, including accrued interest, under our previouscredit facilities were paid off using the proceeds from the U.S. Sale. An earlytermination fee of $0.5 million was paid in conjunction with the pay off of theAmended Facility and was recognized as a charge to earnings in the year ended November 30,2007. As of November 30, 2007 the Company did not have any term loans,notes or other forms of long-term debt. The historical term loans or SeniorNotes have been 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 related to the acquisitionof the term loan under the Trust Credit Agreement discussed in more detailbelow and a November 2008 payment to reduce the outstanding principalbalance.

 

***Liquidity Sources***

 

Subsequent to the sale of our discontinuedoperations in March 2007 and prior to the acquisition of the Trust in November 2008,we met our cash needs with existing funds and interest and investment incomegenerated by the Company’s cash and cash equivalents (“***ExistingFunds***”). At November 30, 2008, we had cash and cashequivalents of approximately $9.8 million. To date, we have financed ouracquisitions of our receivables portfolios with cash, non-recourse debt, andthe issuance of shares of our Common Stock and we expect that any futureportfolio acquisition would be financed with cash on hand and cash fromoperations, non-recourse debt and additional issuance of our Common Stock.

 

*Trust Credit Agreement*

 

On November 10, 2008, the Company financedapproximately $34.9 million of the purchase price of the Trust 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 the Trust, including portfolio collections.

 

The Trust Credit Agreement provides the material termsand conditions for the services to be performed by the servicer.  Inreturn, the Trust 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 the Trust 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 the Trust’s ability to incur indebtedness, grant liens, disposeof property, 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 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 the Trust, bankruptcy or insolvency of the Trust, the occurrenceof an event which causes a material adverse effect on the Trust, the occurrenceof certain defaults by the servicer, entry of certain material judgmentsagainst the Trust, and the occurrence of a change of control or certainmaterial events and the 

 

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issuanceof a qualified audit opinion with respect to the Trust’s financials.  Inaddition, an event of default occurs if the three-month rolling averagedelinquent accounts rate exceeds 10.0% or the three-month rolling averageannualized default rate exceeds 7.0%.  If an event of default  occurs, all of the Trust’s obligations underthe Trust Credit Agreement could be accelerated by the lender, causing theentire remaining outstanding principal balance plus accrued and unpaid interestand fees to be declared immediately due and payable.

 

*Trust II Credit 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 the borrowers thereunder. The revolving facility permits an aggregate borrowing of all co-borrowersthereunder of up to $50,000,000.  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 $15,000,000 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***”).

 

The revolver matures on September 28, 2010.  The revolverbears interest at an annual rate of 4.5% over the LIBOR Rate (as defined in theTrust II Credit 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 loansattributable to the Trust II in excess of $10 million.  In addition, acommitment fee is due to the lender equal to an annual rate of 0.25% of theunused portion of the maximum committed amount.  The obligations under theTrust II Credit Agreement are secured by a first priority security interest insubstantially all of the assets of the Trust II and the co-borrowers, includingportfolio collections.

 

The Trust II Credit Agreement provides the material terms andconditions for the services to be performed by the servicer.  In return,the Trust II pays the servicer a monthly servicing fee equal to 0.5% of thethen aggregate outstanding principal balance of the receivables.

 

Principal payments on the revolver are due monthly to the extent thatthe aggregate principal 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.

 

The Trust II Credit Agreement contains customary covenants forfacilities of its type, including among other things maintenance of the Trust’sspecial purpose vehicle status and covenants that restrict the Trust II’sability to incur indebtedness, grant liens, dispose of property, pay dividends,and make certain acquisitions.  Generally, these covenants do not impactthe activities that may be undertaken by CLST Holdings, Inc.  TheTrust II Credit Agreement contains various events of default, including failureto pay principal and interest when due, breach of covenants, materiallyincorrect representations, default under certain other agreements of the TrustII, 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 or 

 

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12.0%for Class B Receivables.  If an event of default occurs, all of theTrust II’s obligations under the Trust II Credit Agreement could be acceleratedby the lender, causing the entire remaining outstanding principal balance plusaccrued and unpaid interest and fees to be declared immediately due andpayable.

 

*The Notes*

 

Also subsequent to the yearended November 30, 2008, on February 13, 2009 we financed a portionof our purchase of the assets of Fair through the issuance by Asset III of sixpromissory notes (the “***Notes***”)in 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.The Notes issued by Asset III in favor of the sellers are full-recourse withrespect to Asset III and are unsecured.  The three Notes relating toPortfolio A (the “***PortfolioA Notes***”) are payable in 11 quarterly installments, eachconsisting of equal principal payments, plus all interest accrued through suchpayment date at a rate of 4.0% plus the LIBOR Rate (as defined in the PortfolioA Notes).  The three Notes relating to Portfolio B (the “***Portfolio B Notes***”) are payablein 21 quarterly installments, each consisting of equal principal payments, plusall interest accrued through such payment date at a rate of 4.0% plus the LIBORRate (as defined in the Portfolio B Notes).

 

***Contractual Obligations***

 

We have anagreement with one employee to assist with the final wind down of our business.Under the agreement, the employee is to receive her base salary as well as abonus upon the completion of certain objectives during the liquidation process.The maximum payments remaining under the agreement at November 30, 2008 is$96,000, and we expect to pay this amount out of our available cash.

 

Included inaccounts payable at November 30, 2008, is approximately $14.2 millionassociated with liabilities which may be resolved in the liquidation process.In the event these liabilities are resolved for less than book value, netoperating loss carryforwards will be used to offset any tax liabilityassociated with reductions of the recorded liabilities.

 

**AssetQuality**

 

Our delinquency rates reflect, among other factors, the credit risk ofour receivables, the average age of our receivables, the success of ourcollection and recovery efforts, and general economic conditions. The averageage of our receivables affects the stability of delinquency and loss rates ofthe portfolio.

 

***Delinquencies***

 

The following table presents the delinquency trends of our portfoliosat November 10, 2008:

 
| **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**                | **%**      |

 

**NewAccounting Pronouncements**

 

Footnote 1 ofthe Notes to the Consolidated Financial Statements, included in the Company’sAnnual Report on Form 10-K for the year ended November 30, 2008,includes a summary of the significant accounting policies and methods used inthe preparation of our Consolidated Financial Statements. There were no changesduring the year ended November 30, 2008, to the significant accountingpolicies used in the preparation of our Consolidated 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 

 

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costsand penalties related to income taxes are classified as other expenses in ourconsolidated financial statements. For the year ended November 30, 2008,we recognized $12,000 in interest and penalty fees related to income taxes. Itis determined not to be reasonably likely for the amounts of unrecognized taxbenefits to significantly increase or decrease within the next 12 months. Weare currently subject to a three year statute of limitations by major taxjurisdictions. We and our subsidiaries file income tax returns in the U.S.federal jurisdiction.

 

***Accounting Pronouncements Not Yet Adopted***

 

In September 2006,the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“***SFAS 157***”), which defines fairvalue, establishes a market-based framework or hierarchy for measuring fairvalue, and expands disclosures about fair value measurements. SFAS 157 isapplicable whenever another accounting pronouncement requires or permits assetsand liabilities to be measured at fair value and, while not expanding orrequiring new fair value measurements, the application of this statement maychange current practices. The requirements of SFAS 157 are effective forthe 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. 141 R, “Business Combinations” (“***SFAS 141R***”), which establishesprinciples for how the acquirer shall recognize acquired assets, assumedliabilities and any non-controlling interest in the acquiree, recognize andmeasure the acquired goodwill in the business combination, or gain from a bargainpurchase, and determines disclosures associated with financial statements. Thisstatement replaces SFAS 141 but retains the fundamental requirements inSFAS 141 that the acquisition method of accounting (whichSFAS 141called the purchase method) be used for all business combinationsand for an acquirer to be identified for each business combination. Therequirements of SFAS 141R apply to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. Early application is notpermitted.

 

From time totime, new accounting pronouncements are issued by the FASB or other standardssetting bodies which we adopt as of the specified effective date. Unlessotherwise discussed, our management believes the impact of recently issuedstandards which are not yet effective will not have a material impact on ourconsolidated financial statements upon adoption.

 

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

 

Thisinformation has been omitted as the Company qualifies as a smaller reportingcompany.

 

**Item 8.Consolidated Financial Statements and Supplementary Data**

 

See Index toConsolidated Financial Statements on Page F-1 of this Form 10-K.

 

**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

None.

 

**Item 9A(T).Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our ChiefExecutive Officer and Chief Financial Officer has evaluated the effectivenessof the Company’s disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e)) as of the end of the period covered by this report. Basedon that evaluation, our Chief Executive Officer and Chief Financial Officer hasconcluded that the Company’s disclosure controls and procedures were effectiveat November 30, 2008.

 

**Management’sAnnual Report on Internal Control Over Financial Reporting**

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, in accordance with Rules 13a-15and 15d-15 of the Exchange Act. Under the supervision and with theparticipation of the Company’s management, we, in conjunction with anindependent third party, conducted an evaluation of the effectiveness of 

 

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theCompany’s internal control over financial reporting based on the framework setforth by the Committee of Sponsoring Organizations (“***COSO***”)of the Treadway Commission in *Internal Control —Integrated Framework*.

 

Our internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles in the United States of America.The Company’s internal control over financial reporting includes those policiesand procedures that (i) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

All of our financial reporting is carried out by our Chief FinancialOfficer and Controller with the assistance of third parties from time to time. Thelack of accounting staff and dependence on third party assistance results in alack of segregation of duties and at times a lack of sufficient accountingtechnical expertise which could impact the effectiveness of our internalcontrol over financial reporting. In order to mitigate this weakness to thefullest extent possible, all financial reports are reviewed by the Chief FinancialOfficer as well as the Board for reasonableness. All unexpected results areinvestigated. At any time, if it appears that any control can be implemented tocontinue to mitigate such control deficiencies, it is immediately implemented. Assoon as our finances allow, we will hire sufficient accounting staff andimplement appropriate procedures for monitoring and review of work performed byour Chief Financial Officer.

 

Our evaluation of and conclusion on the effectiveness of internalcontrol over financial reporting as of November 30, 2008 did not includethe internal controls of the Trust and related portfolio of receivables becauseof the timing of the acquisition, which was completed in November 2008.For the year ended November 30, 2008, the Trust represented approximately$41.7 million of total assets and $496,000 of total revenues.

 

This Annual Report on Form 10-K does not include an attestationreport of the Company’s independent registered public accounting firm regardinginternal control over financial reporting. Management’s report was not subjectto attestation by the Company’s independent registered public accounting firmpursuant to temporary rules of the SEC that permit the Company to provideonly management’s report in this Annual Report on Form 10-K. Forour fiscal year ended November 30, 2010, we will be required to includethe auditor attestation.

 

This report shall not be deemed to be filedfor purposes of Section 18 of the Securities Exchange Act of 1934, or otherwisesubject to the liabilities of that section, and it is not incorporated byreference into any filing of the Company, whether made before or after the datehereof, regardless of any general incorporation language in such filing.

 

**Changesin Internal Control over Financial Reporting**

 

There have been no other changes in our internal control over financialreporting during the fourth quarter ended November 30, 2008 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Item 9B.Other Information**

 

**Trust Pro Formas**

 

Thefollowing unaudited pro forma information presents the 2007 and 2008 results ofoperations of the Trust and the Company as if the acquisition had occurred on December 1,2006. The unaudited pro forma results 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.

 

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**(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   |       |

 

Theabove financial statement represents pro forma historical results of the Companyand the Trust, which we purchased on November 10, 2008. The aboveinformation is unaudited and therefore should not be relied upon. Readers ofthese financial statements should understand that the historical financials ofthe Trust are not representative of the Trust as of November 10, 2008. Historicalnotes receivable were materially greater in the past than as of our purchasedate. Certain realized losses have been recorded prior to our purchase, whichhave a material impact to the pro forma results. In addition, the historicalexpenses may be materially different than those in future periods due to differencesin the number of notes receivable.

 

**Resignation of Director**

 

On February 24, 2009, our director andmember of our Audit Committee, Manoj Rajegowda, tendered his resignation as amember of our Board, effective immediately, and, as a result, effectivelyresigned from our Audit Committee. Mr. Rajegowda notified us of hisresignation through a letter from his counsel, Richards, Layton, &Finger P.A. A copy 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]been isolated from any meaningful decision making role as a director, and inlight of the fact that the Company has determined to proceed in a manner whichhe considers to be antithetical to the expressed wishes of the majority ofstockholders . . .”

 

We discuss 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:

 

·                  Allegesthat he was not properly notified of a transaction effective February 13,2009 between us, on one hand, and Fair, James Cochran and Timothy Durham, onthe other hand;

 

·                  Allegesthat the transaction with Fair, Mr. Cochran and Mr. Durham was notproperly approved;

 

·                  Statesthat we have failed to provide him with minutes of meetings of the Board andthat we have not submitted draft minutes to the Board for comments and a vote;

 

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·                  Allegesthat the Board has determined to abandon our plan of dissolution; and

 

·                  Allegesthat “the Board’s attempts to continue the business of the Company in the faceof a shareholders’ vote in favor of a prompt liquidation puts the interest ofthe Board ahead of the interests of the shareholders”.

 

On February 3, 2009, the Board, by avote of 3 to 1, with Mr. Rajegowda voting against, created an ExecutiveCommittee of the Board of Directors, having all of the authority of the Board,including all of the authority that the Board had as a committee of the wholewhen serving as a committee of the Board (such as the Audit Committee). OurBoard took this action because members of the Board, other than Mr. Rajegowda,had become concerned that Mr. Rajegowda was unable, because of conflictsof interest between the interests of his employer, MC Investments, and hisduties as a member of our Board, to perform his duties to the our stockholders,or to maintain the confidentiality of our confidential information. Members ofour Board 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’sallegations, and do not believe that they are supported by the facts. Mr. Rajegowdais correct 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 normal processwhile he was a member of the Board.

 

We are not sure what Mr. Rajegowda isreferring to when he says that the Board has “determined to proceed in a mannerwhich he considers to be antithetical to the expressed wishes of the majorityof stockholders.”  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 ofdissolution reserves 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 theconcerns of members of our Board, Mr. Rajegowda was subject to conflictsof interest 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 aremaking in this Item 9B of Form 10-K to Mr. Rajegowda and informed himthat he may furnish the Company as promptly as possible a letter statingwhether he agrees or disagrees with the disclosures made in response to thisItem 9B, and that if he disagrees, then the Company requests that he providethe respects in which he does not agree with the disclosures. We will undertaketo file any letter received from Mr. Rajegowda, if any, as an exhibit to acurrent report on Form 8-K within two business days after receipt.

 

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**PART III**

 

**Item 10.Directors, Executive Officers and Corporate Governance**

 

The followingtable sets forth the names, ages, and titles of executive officers anddirectors 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 ofDirectors named him President and Chief Operating Officer of the Company, whichhe served as 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 consecutively as President and Chief Operating Officer until March 30,2007. Mr. Kaiser also serves as a member of the board of directors andaudit committee chairman for RBC Life Sciences and has served in suchcapacities 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 currently serving as a Class III director of the Company until his successoris duly elected and qualified. Mr. Tornek also serves as a director ofNational Lampoon, 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 yearterm as a Class II director prior to his resignation from the Board on February 24,2009. See “Item 9B, Other Information — Resignation of Director,” forfurther information regarding the circumstances surrounding Mr. Rajegowda’sresignation. 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.

 

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The Companydoes not maintain key man insurance on the life of any officer of the Company.The loss or interruption of the continued full-time service of the Company’sexecutive officers and key employees could have a material adverse impact onthe Company’s business. The inability of the Company to retain such necessary personnelcould also have a material adverse effect on the Company.

 

No family relationshipsexist among our officers or directors. Except as indicated above, no directorof ours is a director of any company with a class of securities registeredpursuant to Section 12 of the Securities Exchange Act of 1934, or subjectto the requirements of Section 15(d) of such Act or any companyregistered as an investment company under the Investment Company Act of 1940.

 

**Section 16(A) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Exchange Act requires the Company’s executive officers, directors, andpersons who beneficially own more than 10% of a registered class of the Company’sequity securities to file with the SEC initial reports of ownership and reportsof changes in ownership of the Company’s Common Stock and otherequity securities of the Company. Such persons are required by SEC regulationsto furnish the Company with copies of all Section 16(a) forms thatthey file.

 

Based solelyon the Company’s review of such forms furnished to the Company, the Companybelieves that all filing requirements applicable to the Company’s executiveofficers, directors, and greater than 10% beneficial owners were complied withfor the Company’s 2008 fiscal year.

 

**CorporateGovernance**

 

***Board of Directors andCommittees***

 

We are managed under thedirection of our Board of Directors. As of November 30, 2008, we had threedirectors, including two non-employee directors.  During the year ended November 30, 2008, therewere no changes to the Company’s Board. Subsequently, on January 16, 2009, the Board increased the size of theBoard from three members to four members and appointed Mr. David Tornek to fillthe vacancy as a Class III director to hold office for the remaining termof the Class III directors until the annual meeting of stockholders in2010 and until his successor is duly elected and qualified. We expect that Mr.Tornek will be named Chairman of the Audit Committee of our Board. On February24, 2009, Mr. Rajegowda tendered his resignation from the Board. Mr. Rajegowda’sletter of resignation is attached hereto as Exhibit 99.1.  See “Item 9B, Other Information – Resignationof Director,” for further information regarding the circumstances surroundingMr. Rajegowda’s resignation.

 

Our Board of Directors isdivided into three classes of directors and each class serves a three yearterm. Our Board of Directors presently has two regular committees, the AuditCommittee and the Executive Committee.  Duringfiscal 2008, the Board met 15 times and the Audit Committee met two times. TheExecutive Committee was formed subsequent to fiscal 2008 and therefore did notmeet in fiscal 2008. 

 

*Executive Committee*

 

The Executive Committee wasestablished by the Board on February 3, 2009 and currently consists of Messrs.Kaiser, Durham and Tornek. Mr. Rajegowda, when he served as a member of ourBoard, was not a member of the Executive Committee.  The Executive Committee has all authority ofthe Board, including all of the authority the Board had as a committee of thewhole when serving as a committee of the Board (such as the Audit Committee).  Please see “Item 9B, Other Information – Resignation of Director” for a discussionconcerning the formation of the Executive Committee and the circumstancessurrounding such formation.

** **

*AuditCommittee*

 

Currently all members of our Board are serving as members of theCompany’s Audit Committee and beginning with the formation of our ExecutiveCommittee on February 3, 2009, all members of our Executive Committee serve asmembers of our Audit Committee.  Theprimary purpose of the Audit Committee is to oversee the accounting andfinancial reporting processes of the Company and the audits of the financialstatements of the Company. The Audit Committee shall fulfill its oversightresponsibilities by reviewing (i) the financial information which will beprovided to the shareholders, potential shareholders, the investment communityand others; (ii) reviewing areas of potential significant financial risk to theCompany including the systems of internal controls and disclosure controls andprocedures which management and the Board have established; (iii) monitoringthe independence and performance of the Company’s independent accountants andinternal audit function; and (iv) reporting on all such matters to the Board.  The Audit Committee adopted and willperiodically review the written charter that specifies the scope of the AuditCommittee’s responsibilities for our Audit Committee is posted on our websiteat *www.clstholdings.com*.

 

Our Audit Committee currently includes one independent member of ourBoard, 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 to abandonthe plan of liquidation and dissolution. 

 

***Director Independence***

 

The Company’s Board ofDirectors has adopted the independence standards of NASDAQ as its independencestandards. In assessing the independence of its directors, the board hasdetermined that Mr. Tornek is an independent director of the Company and thatMessrs. Durham and Kaiser are not independent directors.  In determining the independence of Mr.Tornek, our board of directors considered the fact that both Messrs. Durham andTornek serve on the

 

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board of directors of NationalLampoon, Inc. and concluded that this relationship would not impair Mr.Tornek’s ability to remain independent as a director on our Board.

 

***Nominations to the Board ofDirectors***

 

Wedo not have a Nomination Committee of our Board of Directors.  Our whole Board of Directors performs thefunctions of a Nominating Committee. The Board of Directors will considernominees proposed by stockholders in accordance with guidelines for suchconsideration set forth in our Amended and Restated Certificate of Incorporation dated as of April 27,1995, our Bylaws and any applicable rules and regulations of the SEC. A copy ofour charter and Bylaws is available from our Chief Executive Officer uponwritten request. Requests or proposals should be directed to Robert Kaiser,Chief Executive Officer, CLST Holdings, Inc., 17304 Preston Road, DominionPlaza, Suite 420 Dallas, Texas 75252.  Article II, Section 7 of our Bylaws provides thatpersons nominated by stockholders shall be eligible for election as directorsonly if nominated in accordance with the following procedures. Such nominationsshall be made pursuant to timely notice in writing to our Corporate Secretary.To be timely, a stockholder’s notice shall be delivered to or mailed andreceived at our principal executive offices at CLST Holdings, Inc.,17304 Preston Road, Dominion Plaza, Suite 420 Dallas, Texas 75252 not less than 60 days prior to themeeting of the stockholders called for the election of directors; provided,however, that in the event that less than 70 days notice or prior publicdisclosure of the date the meeting is given or made to stockholders, suchwritten notice must be so received not later than the close of business on thetenth day following the day on which such notice of the date of the meeting wasmailed or such public disclosure of the date of the meeting was made, whicheveroccurs first. Such stockholder’s noticeto the Corporate Secretary must set forth (a) as to the stockholder proposingto nominate a person for election or re-election as director, (i) the name,business address and residence address of the stockholder who intends to makethe nomination and (ii) a representation that the stockholder is a holder ofrecord of shares of the Company entitled to vote at such meeting and intends toappear in person or by proxy at the meeting to nominate the person or personsspecified in the notice, and (b) as to the nominee, (i) the name, age, businessand resident addresses, and principal occupation or employment of each nominee;(ii) a description of all arrangements or understandings between thestockholder and each nominee and any other person or persons (naming suchperson or persons) pursuant to which the nomination or nominations are to bemade by the stockholder; (iii) any other information relating to the nomineethat is required to be disclosed in solicitations for proxies for election ofdirectors pursuant to Regulation 14A under the Exchange Act; (iv) any otherinformation that is or would be required to be disclosed in a Schedule 13Dpromulgated under the Exchange Act, regardless of whether such person wouldotherwise be required to file a Schedule 13D and (v) the consent of eachnominee to serve as a director of the Company if so elected.

 

The Board of Directors has not developedspecific, 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. The Boardof Directors may engage a third party to provide such services in the future,as it deems necessary or appropriate at the time in question. The Board ofDirectors determines the required selection criteria and qualifications ofdirector nominees based upon the needs of our Company at the time nominees are considered.A candidate must possess the ability to apply good business judgment and mustbe in a position to properly exercise his or her duties of loyalty and care.Candidates should also exhibit proven leadership capabilities, high integrityand experience with a high level of responsibility within their chosen fields,and have the ability to quickly understand complex principles of, but notlimited to, business and finance. The Board of Directors will consider thesecriteria for nominees identified by members of the Board of Directors, bystockholders, or through some other source. When current Board members areconsidered for nomination for reelection, the Board of Directors also takesinto consideration their prior Board contributions, performance and meetingattendance records.

 

The Board of Directors conducts a process ofmaking a 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 whoappear best suited to meet our needs may be invited to participate in a seriesof interviews, which are used for further evaluation. The Board of Directorsuses the same process for evaluating all nominees, regardless of the originalsource of the recommendation.

 

***Stockholder Communications***

 

We and our Board welcome communications fromour stockholders. Stockholders who wish to communicate with the Board, or oneor more 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***

 

The information required by this item regarding the Company’s code ofethics is provided under “Item 1, Business – Available Information and Code ofEthics” of this Form 10-K, which is incorporated herein by reference. Weintend to satisfy the disclosure requirement under Item 5.05 of Form 8-Kregarding an amendment to or waiver from a provision of this code of ethics, ifany, by posting such information on our website.

 

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**Item 11.Executive Compensation**

 

**SummaryCompensation Table.**

 

The followingtable sets forth certain information regarding compensation earned by allindividuals serving as our Chief Executive Officer during fiscal year 2008 andour two most highly compensated executive officers (other than the ChiefExecutive Officer) who served as executive officers 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. Kaiser served as President and ChiefExecutive Officer until March 30, 2007, when he resigned in connectionwith the completion of sale of the Company’s United States and Miami-basedLatin American operations. Mr. Kaiser served as Chairman of the Board ofDirectors until April 17, 2007. Mr. Kaiser was subsequently reelectedas Chairman on August 7, 2007, and Chief Executive Officer on September 25,2007.

 

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

 

(3)           Includes Company matching contributions to Mr. Kaiser’s401(k) plan of $11,250, Change of Control payments in 2007 of $3.6 millionand Board of Director Fees of $25,792.  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 amonth-to-month basis, terminable at will by either party. For the year ended November 30,2007, Mr. Kaiser received $84,000 in consultant payments. As of January 1,2008, Mr. Kaiser became an employee of the Company.

 

(4)           The amounts reported in the Stock Awards andOption Awards columns reflect the dollar amount, without any reduction for riskof forfeiture, recognized for financial reporting purposes for the fiscal yearended November 30, 2008 and 2007 of awards of stock options and restrictedstock or restricted stock units to the Named Executive Officer, calculated inaccordance with the provisions of Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (“***SFAS 123(R)***”),and were calculated using certain assumptions, as set forth in footnote 1 toour audited financial statements for the fiscal year ended November 30,2008 and 2007, included herein. These amounts include amounts from awardsgranted in and prior to 2006.

 

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**OutstandingEquity Awards at Fiscal Year End November 30, 2008.**

 

The followingtable provides information concerning unexercised options, stock that has notvested and equity incentive plan awards for each of the Named ExecutiveOfficers 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’s former 1993 Plan terminated onDecember 3, 2003. However, Mr. Kaiser currently has exercisable options thatwere granted under the 1993 Plan Mr. Kaiserwas granted options 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.

 

**Compensationof Executive Officers.**

 

*Employment Contracts and Termination of Employment and Change inControl Arrangements.*The Company maintained anemployment agreement with Mr. Kaiser (the “ Agreement”). In connection with thesale of the Company’s United States and Miami-based Latin American operations,the related sale agreement required as a condition of closing that the Companypay all amounts due Mr. Kaiser under his Agreement with the Company,including payments due as a result of a change in control of the Companyresulting from the sale. To receivethose payments, Mr. Kaiser’s employment with the Company had to beterminated. Although Mr. Kaiser would have preferred to remain as ChiefExecutive Officer and President of the Company after the closing until hebelieved he had fulfilled the responsibilities of those positions, he agreed toresign on March 30, 2007, so that the closing could be completed. Mr. Kaisercontinued to serve on the Board of Directors throughout 2007, including afterhis election to the Board of Directors on August 7, 2007. On August 7,2007, Mr. Kaiser was appointed Chairman of the Board. On August 28,2007, the Board authorized the retention of Mr. Kaiser as a consultant tothe Company for a sum of $20,000 a month on a month-to-month basis, terminableat will by either party. On September 25, 2007, in addition to his dutiesas Chairman, he was appointed Chief Executive Officer, Chief Financial Officer,and Treasurer. As of January 1, 2008, Mr. Kaiser is now an employeeof the Company and receives $20,000 per month.

 

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**Compensationof Directors.**

 

The followingtable provides information concerning compensation of the Company’s directorsfor the fiscal year ended November 30, 2008. All compensation received by Mr. Kaiserfor fiscal 2008 that is as a result of his membership on the Board is reflectedin the Summary Compensation Table 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 stock to our employees and executive officerspursuant to our 2003 Plan. The number of shares to be granted under the 2003Plan was determined by the Board at the time of the grant based upon the poolof shares then available for grant. The awarded shares vested at the rate of 331/3% per year on each anniversary date ofgrant and were subject to such other terms and conditions as may be containedin the form of restricted stock award agreement generally used by the Companyat the time of grant. As disclosed in Part II of this Form 10-K,under the heading “Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities—Equity Compensation PlanInformation,” the Company’s 2003 Plan was cancelled on September 25, 2007.From November 30, 2006 until September 25, 2007, each non-employeedirector who was then serving as such received a grant of 4,500 shares ofrestricted stock. At a meeting of the Board on September 25, 2007, the Boardunanimously resolved to terminate the Company’s 2003 Plan due to the reductionin the Company’s workforce. As a result of the termination of the 2003 Plan,all outstanding options to purchase the equity securities of the Company issuedthereunder were terminated as well.  Therefore,there are currently no outstanding options to purchase the Company’s Securitiesunder the 2003 Plan. Furthermore, no options or restricted stock were grantedto directors during fiscal year 2008.

 

Subsequent tofiscal 2008, on December 1, 2008, our Board approved the Company’s 2008Long Term Incentive Plan (the “***2008 Plan***”). The 2008 Plan, which is administered by the Board, permits the grant ofrestricted stock, stock options and other stock-based awards to employees,officer, directors, consultants and advisors of the Company and itssubsidiaries. The 2008 Plan provides that the administrator of the plan maydetermine the terms and conditions applicable to each award, and each awardwill be evidenced by a stock option agreement or restricted stock agreement. Theaggregate number of shares of Common Stock of the Company that may be issuedunder the 2008 Plan is20,000,000 shares. The 2008 Planwill terminate on December 1, 2018.

 

In addition, on December 1,2008 our Board approvedthe grant of 300,000 shares of restricted stock to each of Timothy S. Durham,Robert A. Kaiser and Manoj Rajegowda.  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. Of each restricted stock grant, 100,000 shares vested on the date ofgrant, and the remaining 200,000 of the shares vest in two equal annualinstallments on each anniversary of the date of grant. Therestricted stock 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 ourdirectors receives an annual retainer of $10,000. In addition, each directorreceives $750 per Board meeting that he is present or $500 if he participatestelephonically.

 

All directorsof the Company are entitled to reimbursement of their reasonable out-of-pocketexpenses in connection with their travel to, and attendance at, meetings of theBoard or committees thereof. There were no other arrangements pursuant to whichany director was compensated for any service provided as a director duringfiscal 2008, other than as set forth above.

 

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**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

**SecurityOwnership of Certain Beneficial Owners**

 

The followingtable sets forth information with respect to the number of shares of CommonStock beneficially owned as of February 27, 2008, by each personknown by the Company to beneficially own more than 5% of the outstanding sharesof Common Stock. Unlessotherwise noted, the persons named in the table have sole voting and investmentpower with respect to all shares of CommonStock 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                      | %          |

 

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

 

(2)                                  Based on an amended Schedule 13G filedwith the SEC on February 14, 2007 by Michael A. Roth and Brian J. Stark,filing as joint filers pursuant to Rule 13d-1(k) under the SecuritiesExchange Act of 1934, as amended. Mr. Roth and Mr. Stark reportedshared voting and dispositive power with respect to all shares shown asbeneficially owned in such filing. The 3,267,254 shares of Common Stock andpercentage ownership represent the combined indirect holdings of Michael A. Rothand Brian J. Stark. All of the foregoing represents an aggregate of 3,267,254shares 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 a Schedule 13D filed with theSEC on February 18, 2009 by David Sandberg, Red Oak Partners, LLC (“***Red Oak Partners***”), The Red OakFund, LP (“***Red Oak Fund***”), PinnaclePartners, LLC (“***Pinnacle Partners***”), PinnacleFund, LLLP (“***Pinnacle Fund***”) and BearMarket 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 investment decisions.Pinnacle Fund is controlled by Pinnacle Partners, which is controlled by RedOak Partners. Therefore, Red Oak Partners may be deemed to beneficially own (i) the3,341,106 shares of Common Stock held by Red Oak Fund, (ii) the 960,448shares of Common Stock beneficially owned by Pinnacle Partners through PinnacleFund, and (iii) the 260,000 shares of Common Stock held by Bear Fund.

 

**SecurityOwnership of Management**

 

The followingtable sets forth information with respect to the number of shares of CommonStock beneficially owned as of February 27, 2009, by (i) eachNamed Executive Officer of the Company for whom compensation was reported under“Item 11, Executive Compensation”; (ii) each current director of theCompany and (iii) all directors and executive officers of the Company as agroup. Unless otherwise noted, the persons named in the table have sole votingand investment power with respect to all shares of Common Stock beneficiallyowned 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                                | %          |

 

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*                                         Less than 1%.

 

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

 

(2)                                  Includes 36,901 shares held in a partnershipcontrolled by Mr. Kaiser and his wife. Also includes options to exercise130,000 shares of Common Stock, 80,000 of which expire on December 12,2011 and 50,000 of which expire on January 22, 2013. Also 

 

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includes a restricted stockgrant, 100,000 shares of which vested on December 1, 2008, and theremaining 200,000 of which vest in two equal annual installments on December 1,2009 and December 1, 2010.

 

(3)                                  Includes a restricted stock grant, 100,000shares of which vested on December 1, 2008, and the remaining 200,000 ofwhich vest in two equal annual installments on December 1, 2009 and December 1,2010. Also, this amount includes 1,969,077 shares of Common Stock based uponthe Schedule 13D filed with the SEC on February 27, 2009, by Mr. Durham,DC Investments, LLC, an Indiana limited liability company (“***DC Investments***”), Fair Holdings, Inc.,an Ohio corporation and wholly owned subsidiary of DC Investments (“***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 a restricted stock grant, 100,000shares of which vested on December 1, 2008, and the remaining 200,000 ofwhich vest in two equal annual installments on December 1, 2009 and December 1,2010.

 

(5)                                  Mr. David Tornek’s holdings consistsolely of shares of Common Stock.

 

**EquityCompensation Plan Information**

 

The Company’sequity compensation plan information is provided in Part II of this Form 10-K,under the heading “Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities—Equity Compensation PlanInformation,” and is incorporated herein by reference.

 

**Changesin Control**

 

To management’sknowledge, there are no arrangements the operation of which may at a subsequentdate result in a change in control of the Company.

 

***Rights Plan***

 

On February 5, 2009, our Board adopted a rights plan and declareda dividend of one preferred share purchase right for each outstanding share ofCommon Stock of the Company. The dividend is payable to our stockholders ofrecord as of February 16, 2009. The terms of the rights and the rightsplan are set forth in a Rights Agreement, by and between the Company and MellonInvestor Services LLC, as Rights Agent (the “***Rights Plan***”).

 

Our Board adopted the Rights Plan in an effort to protect stockholdervalue by****attempting to protectagainst a possible limitation on our ability to use our net operating losscarryforwards (the “***NOLs***”)to reduce potential future federal income tax obligations. We have experiencedand continue 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.

 

The Rights Plan is intended to act as a deterrent to any person orgroup 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, inour sole discretion, exempt any person or group from being deemed an AcquiringPerson for purposes of the Rights Plan.

 

The rights have certain anti-takeover effects.  The rights willcause substantial dilution to a person or group who attempts to acquire theCompany on terms not approved by us.  The rights should not interfere withany merger 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.

 

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

 

**CLST AssetIII, 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,

 

(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 fairnessopinion of BVA stating that BVAis of the 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 was attachedto a Current Report on Form 8-K filed with the SEC on February 20,2009.  The shares of Common Stock were issued by us in a 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 aco-borrower under one of Fair’s existing lines of credit with access to atleast $15,000,000.00 of credit for our own purposes.

 

**RelatedParty Transaction Policy**

 

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 Committeeshall approve or ratify such transaction in accordance with the guidelines setforth in the policy and if the transaction is on terms comparable to those thatcould be obtained in arm’s length dealings with an unrelated thirty party;

2.               the transaction isapproved by the disinterested members of the Board of Directors; or

3.               the transactioninvolves compensation approved by the Company’s Compensation Committee.

 

For these purposes, a “RelatedParty” is:

 

·                  asenior officer (which shall include at a minimum each vice president and Section 16officer) or director of the Company

·                  astockholder owning in excess of five percent of the Company (or its controlledaffiliates)

·                  aperson who is an immediate family member of a senior officer or director

·                  anentity which is owned or controlled by someone listed in 1, 2 or 3 above, or anentity in which someone listed in 1, 2 or 3 above has a substantial ownershipinterest or control of such entity.

 

For these purposes, a “RelatedParty Transaction” is a transaction between the Company and any Related Party(including any transactions requiring disclosure under Item 404 of RegulationS-K under the Exchange Act), other than:

 

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·                  transactionsavailable to all employees generally

·                  transactionsinvolving less than $5,000 when aggregated with all similar transactions.

 

The Board of Directors has determined that the AuditCommittee of the Board is best suited to review and approve Related PartyTransactions. Accordingly, at each calendar year’s first regularly scheduledAudit Committee meeting, management shall recommend Related Party Transactionsto be entered into by the Company for that calendar year, including theproposed aggregate value of such transactions if applicable. After review, theAudit Committee shall approve or disapprove such transactions and at eachsubsequently scheduled meeting, management shall update the Audit Committee asto any material change to those proposed transactions.

 

In the event management recommends any furtherRelated Party Transactions subsequent to the first calendar year meeting, suchtransactions may be presented to the Audit Committee for approval orpreliminarily entered into by management subject to ratification by theCommittee; provided, that if ratification shall not be forthcoming, managementshall make all reasonable efforts to cancel or annul such transaction.

 

The Board recognizes that situations existwhere a significant opportunity may be presented to management or a member ofthe Board of Directors that may equally be available to the Company, eitherdirectly or via referral. Before such opportunity may be consummated by aRelated Party (other than an otherwise unaffiliated 5% stockholder), suchopportunity shall be presented to the Board of Directors of the Company forconsideration.

 

All Related Party Transactions are to bedisclosed in the Company’s applicable filings as required by the Securities Actand the Exchange Act, and related rules. Furthermore, all Related PartyTransactions shall be disclosed to the Audit Committee of the Board and anymaterial Related Party Transaction shall be disclosed to the full Board ofDirectors. Further, management shall assure that all Related PartyTransactions are approved in accordance with any requirements of the Company’sfinancing agreements.

 

**DirectorIndependence**

 

For information on the independence of ourdirectors, please see “Item 10, Directors, Executive Officers and CorporateGovernance — CorporateGovernance — Director Independence.”

 

**Item 14.Principal Accounting Fees and Services**

 

The followingtable summarizes the fees billed by Grant Thornton LLP for servicesrendered 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)                                  “AuditFees” 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 followingtable summarizes the fees billed by Whitley Penn LLP for services renderedfor the fiscal years ended November 30, 2008 and November 30, 2007(in thousands).

 

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

 

----

(1)                                  “AuditFees” 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 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 AuditCommittee has considered whether the provision of non-audit services by WhitleyPenn is compatible with maintaining the principal accountant’s independence,and has determined that it is. The Audit Committee has sole authority to engageand determine the compensation of the Company’s independent auditor.Pre-approval by the Audit Committee is required for any engagement of WhitleyPenn, subject to certain de minimis exceptions. Annually, the Audit Committeepre-approves services to be provided by Whitley Penn.

 

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**PART IV.**

 

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

 
| (a)    | The following are filed as part of this  Annual Report on Form 10-K: |
|--------|---------------------------------------------------------------------------|
|   |                                                                      |   |
|   | (1)                                                                       | Consolidated Financial Statements |
|   |                                                                      |   |
|   |                                                                      | See Index to Consolidated Financial  Statements on page F-1 of this Form 10-K. |
|   |                                                                      |   |
|   | (2)                                                                       | Financial Statement Schedules |
|   |                                                                      |   |
|   |                                                                      | See Index to Consolidated Financial  Statements on page F-1 of this Form 10-K. |
|   |                                                                      |   |
|   | (3)                                                                       | Exhibits |

 

An index identifying the exhibits to be filedwith this Form 10-K is provided below.

 
| **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)                                                                                                                                                     |       |                                                                                                                   |       | Filed  herewith.        |

 

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| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Previously Filed as an Exhibit to and  Incorporated by Reference From** | ** ** | **Date Filed**     |
|------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       |                    |
| 10.2                   |       | Form of Non-Qualified Stock Option Agreement under 1993 Amended  and Restated Long-Term Incentive Plan.(1)                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                   |       | Filed  herewith.        |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       |                    |
| 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    |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       |                    |
| 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                   |       | Purchase Agreement, effective as of  November 10, 2008, by and between ***** and CLST Asset I, LLC.(2)                                                                                                                                                                                                                                                                                                                                                        |       | Current Report on Form 8-K                                                                                        |       | November 17,  2008 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       |                    |
| 10.8                   |       | Credit Agreement, effective as of  November 10, 2008, by and between FCC Finance, LLC, as servicer, FCC  Investment Trust I, as borrower, *****, as lender and administrative agent,  U.S. Bank National Association, as collateral custodian and Lyon Financial  Services, Inc, as backup servicer.(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)                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       | Filed  herewith.        |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       |                    |
| 10.11                  |       | Purchase Agreement, effective as of  December 10, 2008, by and between *****, *****, and CLST Asset Trust  II.(2)                                                                                                                                                                                                                                                                                                                                             |       | Current Report on Form 8-K                                                                                        |       | December 19,  2008 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                   |       |                    |
| 10.12                  |       | Second Amended and Restated Revolving  Credit Agreement, effective as of December 10, 2008, by and between  *****, as originator, *****, as servicer, *****, as LLC borrower, *****, as  trust borrower, CLST Asset Trust II, as Trust II borrower, *****, as  guarantor, *****, as guarantor, *****, as lender and administrative agent,  U.S. Bank National Association, as collateral custodian, and Lyon Financial  Services, Inc, as backup servicer.(2) |       | Current Report on Form 8-K                                                                                        |       | December 19,  2008 |

 

 

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| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                                                                                                  | ** ** | **Previously Filed as an Exhibit to and  Incorporated by Reference From** | ** ** | **Date Filed**     |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
|                   |       |                                                                                                                                                                                                                                                             |       |                                                                                                                   |       |                    |
| 10.13                  |       | Letter Agreement, effective as of  December 10, 2008, by and between CLST Asset Trust II, CLST  Financo, Inc., *****, *****, *****, *****, and *****.(2)                                                                                               |       | Current Report on Form 8-K                                                                                        |       | December 19,  2008 |
|                   |       |                                                                                                                                                                                                                                                             |       |                                                                                                                   |       |                    |
| 21.1                   |       | Subsidiaries of the Company.                                                                                                                                                                                                                                     |       |                                                                                                                   |       | Filed  herewith.        |
|                   |       |                                                                                                                                                                                                                                                             |       |                                                                                                                   |       |                    |
| 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.                                                                                                                                 |       |                                                                                                                   |       | Filed  herewith.        |

 

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(1)                                  Theexhibit is a management contract, compensatory plan or agreement.

 

(2)                                  Portionsof this exhibit have been omitted pursuant to a request for confidentialtreatment filed with the Securities and Exchange Commission.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the registrant has duly caused this report to besigned 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: March 2, 2009** |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **By   ** | **/s/ Robert  A. Kaiser**                  | ** ** | Date: March 2, 2009 |
|--------------------------|--------------------------------------------|------------|--------------------------|
| ** **               | **Robert A.  Kaiser**                      | ** ** |                     |
| ** **               | **Chairman  of the Board and Chief**       | ** ** |                     |
| ** **               | **Executive  Officer and Chief Financial** | ** ** |                     |
| ** **               | **Officer**                                |       |                     |
| ** **               |                                       |       |                     |
| **By**                   | **/s/****Timothy S. Durham**               | ** ** | Date: March 2, 2009 |
| ** **               | **Timothy  S. Durham**                     | ** ** |                     |
| ** **               | **Secretary  and Director**                | ** ** |                     |
| ** **               | ** **                                 | ** ** |                     |
| **By**                   | /s/ **David****Tornek**                    |       | Date: March 2, 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                                                                                   |   | F-2    |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                       |   |   |
| Consolidated Balance  Sheets as of November 30, 2008 and 2007                                                                         |   | F-3    |
|                                                                                                                                       |   |   |
| Consolidated  Statements of Operations for the years ended November 30, 2008 and 2007                                                 |   | F-4    |
|                                                                                                                                       |   |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the  years ended November 30, 2008 and 2007 |   | F-5    |
|                                                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the years ended November 30, 2008 and 2007                                                 |   | F-6    |
|                                                                                                                                       |   |   |
| Notes  to Consolidated Financial Statements                                                                                                |   | F-7    |

 

F-1

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**Report of Independent Registered PublicAccounting Firm**

 

To the Board of Directors and Stockholders of

CLST Holdings, Inc.

 

We have audited the accompanying consolidatedbalance sheets of CLST Holdings, Inc. and subsidiaries, as of November 30,2008 and 2007, and the related consolidated statements of operations, changes in stockholders’equity and comprehensive income (loss), and cash flows for the years thenended.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased 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, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of CLST Holdings, Inc. and subsidiaries as of November 30,2008 and 2007, and the consolidated results of their operations and their cashflows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

/s/ Whitley Penn LLP

Dallas, Texas

March 2, 2009

 

F-2

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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 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-3

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Tableof Contents

 

**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   |       |

 

Seeaccompanying notes to consolidated financial statements.

 

F-4

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND**

**COMPREHENSIVE INCOME (LOSS)**

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

** **
| ** **                                        | ** ** | ** **            | ** ** | ** **              | ** ** | ** **     | ** ** | ** **        | ** ** | ** **               | ** ** | **Accumulated**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|----------------|------------|-------------------|------------|--------------------------|------------|--------------------|------------|-------------|------------|------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **              | ** ** | ** **     | ** ** | ** **        | ** ** | ** **               | ** ** | **other**          | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Additional** | ** ** | **comprehensive** | ** ** | **Accumulated**          | ** ** | ** **         | ** ** |
| ** **                                        | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Shares**     | ** ** | **Amount**        | ** ** | **paid-in 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 toconsolidated financial statements.

 

F-5

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Years ended 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 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-6

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Table of Contents

 

**CLSTHOLDINGS, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1) Summaryof Significant Accounting Policies**

 

***(a)*** ***Basis for Presentation***

 

CLST Holdings, Inc., formerly CellStarCorporation, and subsidiaries (the “***Company***”),prior to the sale of its operations in March 2007, was a leading provider ofdistribution and value-added logistics services to the wireless communicationsindustry, with operations in the North American and Latin American Regions. TheCompany had operations in the European Region until October 2003 and in theAsia-Pacific Region until November 2005. The Company provided comprehensivelogistics solutions and facilitated the effective and efficient distribution ofhandsets, related accessories and other wireless products from leadingmanufacturers to network operators, agents, resellers, dealers and retailers.In some of its markets, the Company provided activation services that generatednew subscribers for its wireless carrier customers. All significantintercompany balances and transactions have been eliminated in consolidation.

 

On November 10,2008, we purchased all of the outstanding equity interests of FCC InvestmentTrust I (the “***Trust***”), andon December 12, 2008 we purchased all of the outstanding equity interests ofanother entity.  Subsequently, on February13, 2009, we purchased assets owned by Fair Finance Company, an Ohiocorporation (“***Fair***”), JamesF. 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.  Messrs. Durham andCochran own all of the outstanding equity of Fair. The Board believes that eachof these acquisitions will be a better investment return for our stockholderswhen compared 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 inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of any contingent assets and liabilitiesat the financial statement date and reported amounts of revenue and expensesduring the reporting period. On an on-going basis, the Company reviews itsestimates and 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 liquidinvestments with a maturity of three months or less when purchased to be cashequivalents. At November 30, 2008 and 2007, the Company had no suchinvestments.  The Company maintainsdeposits primarily in one financial institution, which may at times exceedamounts covered by insurance provided by the U.S. Federal Deposit InsuranceCorporation (“***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.

 

F-7

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(1) Summaryof Significant Accounting Policies (Continued)**

 

***(d)  Notes Receivable***

 

In determining the adequacy of the allowancefor doubtful accounts, management considers a number of factors including theaging of the receivable portfolio, customer payment trends, financial conditionof the customer, economic conditions in the customer’s country, and industryconditions. Actual results could differ from those estimates. The Company willestablish an allowance for doubtful accounts for all receivables.  The allowance will be 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 such circumstances,the remaining balance will not be allowed in the borrowing base which helpsdetermine the amount of allowed borrowings. On a quarterly basis, the Company will adjust the allowance for doubtfulaccounts to a minimum amount equal to the defaulted receivables.  The Company may from time to time makeadditional increases to the allowance based on business circumstances.  Once the note receivable is indefault, the Company will no longer accrue, for financial reporting purposes,interest earned on the note receivable. Should the note receivable return to anon-default 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.

 

***(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 impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset to futurenet cash flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured as theamount by which the carrying amount of the assets exceeds the fair value of theassets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell.

 

***(g)  Revenue Recognition***

 

For the Company’s discontinued operations,revenue was recognized on product sales when delivery occured, the customer tooktitle and assumed risk of loss, terms were fixed and determinable, andcollectability was reasonably assured. The Company did not generally grantrights of return. For the Company’s continuing operations, revenues will berecorded as earned from notes receivable. Revenues will consist of interestearned, late fees and other miscellaneous charges.  Revenues will not be accrued on accounts over120 days without payment activity, unless payment activity resumes.

 

F-8

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(1)****        ****Summary of Significant AccountingPolicies (Continued)**

 

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

 

Basic net income (loss) per common share isbased on the weighted average number of common shares outstanding for therelevant period. Diluted net income (loss) per common share is based on theweighted average number of common shares outstanding plus the dilutive effectof potentially 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 in eachyear, no potentially issuable common shares were included in the diluted pershare computation.  Outstanding optionsto purchase 0.1 million shares of Common Stock at November 30, 2008 and 2007,were not included in the computation of diluted earnings per share becausetheir inclusion would have been anti-dilutive as the exercise price was higherthan the average market price.

 

***(i)  Income Taxes***

 

Income taxes are accounted for under theasset and liability method. Deferred income tax assets and liabilities arerecognized for the future tax consequences attributable to (i) differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases and (ii) operating loss and taxcredit carryforwards. Deferred income tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred income tax assets and liabilities of a change in tax ratesis recognized 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 IncentivePlan (the “1993 Plan”) terminated on December 3, 2003. However, Mr. Kaiser, asdisclosed in the following footnote, currently has exercisable options thatwere granted under the 1993 Plan. At a meeting of the Board of Directors on September25, 2007, our Board of Directors unanimously resolved to terminate our 2003 Long-TermIncentive 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 granted optionsunder the 1993 Plan to purchase 80,000 shares of the Company’s Common Stock on December12, 2001, and 50,000 shares of the Company’s Common Stock on January 22, 2003.Each of these options vested with respect to 25% of the shares covered therebyon each of the first four anniversaries of the date of grant and expires tenyears following the date of grant. The exercise price of each option was equalto the fair market value of the Common Stock on the date of grant. Unexercisedoptions held by Mr. Farrell, Ms. Gunn, Ms. Rodriguez and Mr. Durham pursuant tothe 1993 Plan, if any, would have expired upon the termination of the executiveofficer’s employment with the Company.

 

F-9

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(1) Summaryof Significant Accounting Policies (Continued)**

 

Most options vested over a fouryear period and had an exercise price equal to the fair market value of theCompany’s Common Stock as of market close on the date of grant. There were nostock 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 |       | —        |       |                 |       | — |   |   |   |

 

Foroptions that were outstanding and exercisable as of November 30, 2008, theexercise 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 |   |

 

Priorto fiscal 2006, the Company accounted for its stock options under therecognition and measurement provisions of APB Opinion No. 25, “Accounting forStock Issued to Employees”, and related interpretations. Effective December 1,2005, the Company adopted the provisions of SFAS No. 123

 

Priorto fiscal 2006, the Company accounted for its stock options under therecognition and measurement provisions of APB Opinion No. 25, “Accounting forStock Issued to Employees”, and related interpretations. Effective December 1,2005, the Company adopted the provisions of SFAS No. 123 (Revised 2004), “Share-BasedPayments” (SFAS 123(R)), and selected the modified prospective method toinitially report stock-based compensation amounts in the consolidated financialstatements. The Company used the Black-Scholes option pricing model todetermine the fair value of all option grants. The Company did not grant anyoptions during the years ended November 30, 2008 and 2007.

 

Forthe year ended November 30, 2007, the Company recorded $11,000 for stock-basedcompensation expense related to stock option grants made in prior years. Thisamount is included in selling, general and administrative expenses.

 

On May 2, 2005, Robert A.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.

 

F-10

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(1) Summaryof Significant Accounting Policies (Continued)**

 

During2006, the Company granted shares of restricted stock to executive officers,directors and certain employees of the Company pursuant to the 2003 Plan. Theshares of restricted stock vested in thirds over a three-year period, beginningon the first anniversary of the grant date. The restricted stock was to become100% vested if any of the following occurred: (i) the participant’s death; (ii)the termination of participant’s service as result of disability; (iii) thetermination of the participant without cause; (iv) the participant’s voluntarytermination after the attainment of age 65; or (v) a change in control. Thetotal value of the awards, $2.6 million, was being expensed over the serviceperiod. The Plan permitted withholding of shares by the Company upon vesting topay withholding tax. These withheld shares were considered as treasury stockand were available to be re-issued under the 2003 Plan. During the year ended November30, 2007, 675,700 shares vested, of which 130,635 shares were withheld by theCompany to pay withholding tax.

 

Thefollowing table summarizes the restricted stock activity for the years ended November30, 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       |       | —   |       | —   |       |

 

As aresult of the U.S. Sale, the balance of unearned compensation related to therestricted stock awards of $1.7 million was expensed in 2007 and is included inselling, general and administrative expenses. The intrinsic value was zero for 2008 and 2007 as it related tooutstanding stock options.

 

***(k)  Consolidated Statements of Cash FlowInformation***

 

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 paid approximately$2.0 million of interest for the year ended November 30, 2007. Most of theinterest expense during the year ended 2007 was reclassified to discontinuedoperations. In 2007, it was decided that 90% of the interest expense would beallocated to discontinued operations based on small amount of borrowings in thefour months before the sale. The total interest expense allocated todiscontinued operations was $2.2 million in 2007. There was no interest paid in2008.  The Company paid approximately$1.1 million of income taxes for the year ended November 30, 2007. The Companydid not pay any taxes in 2008 but did receive an income tax refund of $1.0million in 2008 from taxes paid in 2007.

 

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

 

In July2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109”, which clarifies theaccounting for uncertainty in tax positions. This interpretation requires thatwe recognize in our financial statements the impact of a tax position, if thatposition is more likely than not of being sustained on audit, based on thetechnical merits of the position. The Company adopted FIN 48 as of December 1,2007, and the adoption did not have a material impact on the Company’sconsolidated financial statements or effective tax rate and did not result inany unrecognized tax benefits. Interest costs and penalties related to incometaxes are classified as other expenses in the our consolidated financialstatements.  For the year ended November 30,2008, we recognized $12,000 in interest and penalty fees related to incometaxes.  It is determined not to bereasonably likely for the amounts of unrecognized tax benefits to significantlyincrease or decrease within the next 12 months. We are currently subject to a three year statute of limitations by majortax jurisdictions.  We and oursubsidiaries file income tax returns in the U.S. federal jurisdiction.

 

F-11

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

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

 

***(m)  Accounting Pronouncements Not Yet Adopted***

 

InSeptember 2006, the FASB issued FASB Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”), which defines fair value, establishes amarket-based framework or hierarchy for measuring fair value, and expandsdisclosures about fair value measurements. SFAS 157 is applicable wheneveranother accounting pronouncement requires or permits assets and liabilities tobe measured at fair value and, while not expanding or requiring new fair valuemeasurements, the application of this statement may change current practices.The requirements of SFAS 157 are effective for the fiscal year beginning December1, 2008. However, in February 2008 the FASB decided that an entity need notapply this standard to nonfinancial assets and liabilities that are recognizedor disclosed at fair value in the financial statements on a nonrecurring basisuntil the subsequent year. Accordingly, the adoption of this standard on December1, 2008 is limited to financial assets and liabilities. The Company is still inthe process of evaluating this standard and therefore has not yet determinedthe impact that it will have on our financial statements.

 

In December 2007, the FASBreleased Statement No. 141 R, “Business Combinations” (“SFAS 141R”), whichestablishes principles for how the acquirer shall recognize acquired assets,assumed liabilities and any noncontrolling interest in the acquiree, recognizeand measure the acquired goodwill in the business combination, or gain from abargain purchase, and determines disclosures associated with financialstatements. This statement replaces SFAS 141 but retains the fundamentalrequirements in SFAS 141 that the acquisition method of accounting (which SFAS 141calledthe purchase method) be used for all business combinations and for an acquirerto be identified for each business combination. The requirements of SFAS 141Rapply to business combinations for which the acquisition date is on or afterthe beginning of the first annual reporting period beginning on or after December15, 2008. Early application is not permitted.

 

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

 

***(n) Discounts andDeferred Costs***

 

We have recorded assetsrelated to purchase discounts on certain notes receivables, deferredacquisition costs related to the purchase of certain notes receivables anddeferred loan costs associated with certain company obligations.  Both the purchase discounts and the deferredacquisition cost are amortized over the remaining principal balance of thenotes receivable and are recorded as contra revenue.  The deferred loan costs are amortized overthe remaining outstanding balance of the Company obligation and are recorded inoperating interest expense.  Included innotes receivable is $183 thousand of acquisition costs and $702 thousand ofpurchase discount. Included in other assets is $180 thousand of deferred loancosts.  Any prepayment of the balances byeither the Company or our customers would be recognized in the period ofprepayment.

 

**(2) DiscontinuedOperations**

 

On December 18, 2006, weentered into a definitive agreement (the “U.S. Sale Agreement”) with a whollyowned 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 the closingdate. The U.S. Sale Agreement also required the buyers to deposit $8.8 millionof the purchase price into an escrow account for a period of six months fromthe closing date. As of November 30, 2007, we had received approximately $7.6 millionof the amounts held in the escrow account, which such amount includes accruedinterest. In January 2008, we received approximately $3.2 million fromBrightpoint plus accrued interest and less transition expenses, andapproximately $1.4 million from the escrow agent. These amounts were the finalamounts received under the U.S. Sale Agreement.

 

F-12

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(2) DiscontinuedOperations (Continued)**

 

Also on December 18, 2006, weentered 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 September11, 2007. While we believe that CII was profitable and therefore the purchasersowe the 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.

 

Wefiled a proxy statement with the SEC on February 20, 2007, which more fullydescribes the U.S. and Mexico Sale transactions. Both of the transactions weresubject to customary closing conditions and the approval of our stockholders,and the transactions were not dependent upon each other. The proxy statementalso included a plan of dissolution, which provides for the completeliquidation and dissolution of the Company after the completion of the U.S.Sale, and a proposal to change the name of the Company from CellStarCorporation to CLST Holdings, Inc.

 

 On March 22, 2007, we signed a letter ofintent to sell our operations in Chile to a group that includes localmanagement for approximately 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 plan ofdissolution. Consistent with the plan of dissolution and its fiduciary duties,our board of directors will continue to consider the proper implementation ofthe 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 the transactionduring the twelve months ended November 30, 2007. Brightpoint asserted totalclaims for indemnity against the escrow of approximately $1.4 million. TheCompany objected to these claims. Brightpoint also proposed negative adjustmentsto the net working capital of approximately $1.4 million, which these claimsfor adjustment were largely the same as the claims for indemnity assertedagainst the escrow account. As of November 30, 2007, we had receivedapproximately $7.6 million of the amounts held in the escrow account, whichsuch amount included accrued interest. On December 21, 2007, we entered into aLetter Agreement (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.

 

The Mexico Saleclosed on April 12, 2007, and we recorded a loss on the transaction of $7.0 millionprimarily due to accumulated foreign currency translation adjustments as wellas expenses related 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 asa charge upon the closing of the Mexico Sale. Again, as described above, wehave sent a demand for payment of up to $1.7 million and other required termsof the agreement to the purchasers, and if such amounts are received anadditional gain will be recorded.

 

F-13

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(2) DiscontinuedOperations (Continued)**

 

On June 11, 2007, we completed the sale ofour operations 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. Withthe completion of the sale of our operations in Chile, we no longer have anyoperating locations.

 

The results of discontinuedoperations for U.S., Miami, Mexico, Chile and Asia-Pacific for the years ended November30, 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 |   |

 

F-14

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(3) Acquisitionof new business**

 

OnNovember 10, 2008, we, through CLST Asset I, LLC, a wholly owned subsidiary ofCLST Financo, Inc. (“***Financo***”),which is 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 “***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 historicallyconducted our financing business, including ownership of receivables generatedby our businesses and providing internal financing to our other operatingsubsidiaries.  Substantially all of theassets to be acquired by the Trust will consist of a portfolio of homeimprovement consumer receivables, some of which are collateralized or otherwisesecured by interests in real estate.  Weare engaging in the business of holding and collecting the receivables with theintention of generating a higher rate of return on our assets than we currentlyreceive on our cash and cash equivalent balances.  At the same time, we will continue to reviewthe relative benefits to our stockholders of continuing to wind down ourbusiness pursuant to our plan of liquidation and dissolution or continuing todo business in one or more of our historic lines of business or relatedbusinesses or in a new line of business.  Although we are now engaged in the business ofholding and collecting consumer accounts receivable, we have not abandoned ourplan of liquidation and dissolution.  Webelieve that should we decide that continuing with the plan of liquidation anddissolution is in the best interest of our stockholders, we will be able todispose of the Trust on favorable terms prior to the time that we would be in aposition to make a final distribution to stockholders and terminate ourcorporate existence.

 

The cut-off datefor the receivables acquired was October 31, 2008, with all collectionssubsequent 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 such account,that do not satisfy certain specified eligibility requirements set out in theTrust Purchase Agreement.

 

The Trust CreditAgreement 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 rateof 5.0% over the LIBOR Rate (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 CreditAgreement provides the material terms and conditions for the services to beperformed by the servicer.  In return,the Trust pays the servicer a monthly servicing fee equal to 1.5%, per annum ofthe then aggregate outstanding principal balance of the receivables.

 

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

 

Principal paymentson the term loan are due monthly to the extent that the aggregate principalamount of the term loan outstanding exceeds the sum of (a) the sum for eachoutstanding receivable of the product of (1) 85%, (2) the then-currentaggregate unpaid principal balance of such receivable and (3) a percentagespecified 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 withinfive business days of any time that the aggregate principal amount of the termloan outstanding exceeds the Maximum Advance Amount.  The remaining outstanding principal amount ofthe loan plus all accrued interest, fees and expenses are due on the maturitydate.  Interest payments on the term loanare due monthly.

 

F-15

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Table of Contents

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(3) Acquisitionof new business (continued)**

 

The Trust CreditAgreement contains customary covenants for facilities of its type, includingamong other things covenants that restrict the Trust’s ability to incurindebtedness, grant liens, dispose of property, pay dividends, make certainacquisitions or to take actions that would negatively affect the Trust’sspecial 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 issuance of a qualified audit opinion with respectto the Trust’s financials.  In addition,an event of default occurs if the three-month rolling average delinquentaccounts rate exceeds 10.0% or the three-month rolling average annualizeddefault rate exceeds 7.0%.  If an eventof default occurs, all of the Trust’s obligations under the Trust CreditAgreement could be accelerated by the lender, causing the entire remainingoutstanding principal balance plus accrued and unpaid interest and fees to bedeclared immediately due and payable.

 

The purchase priceof $41 million consisted of the following:

 

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

·                  debt financing of $34.9 million

 

The following table summarizes the fair value of the assets acquired atthe date of acquisition (in thousands):

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

 

F-16

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Table of Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(3)****        ****Acquisition of new business(continued)**

 

Thefollowing unaudited pro forma information presents the 2007 and 2008 results ofoperations of FCC Investment Trust I andthe Company as if the acquisition had occurred on December 1, 2006.  The unaudited pro forma results are notnecessarily indicative of results that would have occurred had the acquisitionbeen in effect for the periods presented, nor are they necessarily indicativeof future results.

 

**(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   |       |

 

The abovefinancial statement represents pro forma historical results of the Company andthe Trust, which we purchased on November 10, 2008.  The above information is unaudited andtherefore should not be relied upon. Readers of these financial statements should understand that thehistorical financials of the Trust are not representative of the Trust as of November 10,2008.  Historical notes receivable werematerially greater in the past than as of our purchase date.  Certain realized losses have been recordedprior to our purchase, which have a material impact to the pro formaresults.  In addition, the historicalexpenses may be materially different than those in future periods due todifferences in the number of notes receivable.

 

F-17

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Tableof Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(4) Dividends**

 

Prior to theCompany’s adoption of the Plan, our policy had been to reinvest earnings tofund future growth. Accordingly, we generally did not pay cash dividends on ourCommon Stock. 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, we announced 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.

 

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Tableof Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(6) Related Party Transactions**

 

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

 

Motorolapurchased 0.4 million shares of the Company’s Common Stock in July 1995and had been a major supplier of handsets and accessories to the Company. During2007 our discontinued operations purchased handsets from Motorola.

 

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

 

In July 2001,the Company 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, the Company 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.

 

***(c) Consulting agreement with Robert Kaiser***

 

On August 28, 2007, the Board authorized theretention of Mr. Kaiser as a consultant to the Company for the sumof $20,000 per month, on a month to month basis, terminable at will by eitherparty. For the year ended November 30, 2007, Mr. Kaiser had received$84,000 in consultant payments. As of January 1, 2008, Mr. Kaiser isnow an employee of the Company.

 

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

 

The carryingamounts of accounts 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.

 

**(8) Property and Equipment**

 

Property andequipment consisted of the following at November 30, 2008 and 2007 (inthousands):

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

 

F-19

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Tableof Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(9) Debt**

 

Debt consistedof the following 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. Interest payments on the term loan are due monthly.  Payments on the term loan are contingent onthe collection on the notes receivable.

 

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 of reduction of the term loan. Included in operating interest expense in the accompanying consolidatedstatements of operations for the year ended November 30, 2008 is $3,000 ofamortization of these deferred loan costs associated with the acquisition ofthe term loan.

 

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Tableof Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(10) Income Taxes**

 

The Company’sloss from continuing operations before income taxes was comprised of thefollowing for the 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) for income taxes for the years ended November 30, 2008 and 2007consisted of the 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) forincome taxes differed from the amounts computed by applying the U.S. Federalincome tax rate of 35% to income before income taxes as a result of the followingfor 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 | ) |

 

F-21

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Tableof Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(10) Income Taxes (Continued)**

 

The tax effect of temporarydifferences underlying significant portions of deferred income tax assets andliabilities at November 30, 2008 and 2007 is presented below (inthousands):

 
| ** **                       | ** ** | **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 therealizability of deferred income tax assets, management considers whether it ismore likely than not that the deferred income tax assets will be realized. At November 30,2008, the Company 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, projectedfuture taxable income, and tax planning strategies in determining the amount ofthe valuation allowance. The most significant factor considered in determiningthe realizability of the deferred tax asset was projected profitability,including taxable income generated from tax planning strategies, over the nextthree to five years. The Company needs to generate $13.7 million inpre-tax income over this period to fully utilize the net deferred tax asset.

 

The amount ofthe deferred income tax asset considered realizable, however, could change inthe near term if estimates of future taxable income during the relevantcarry-forward period change or if the number of years considered for theseprojections change. At November 30, 2008, the Company had U.S. Federal netoperating loss carryforwards of approximately $125 million, which willbegin to expire in 2020.

 

The Companywas deemed to have undergone an ownership change for purposes of the InternalRevenue Code as a result of its bond exchange in 2002. Accordingly, the Companymay have limitations on the yearly utilization of its U.S. tax carry-forwardsin accordance with Section 382 of the Internal Revenue Code.

 

Because manytypes of transactions are susceptible to varying interpretations under foreignand domestic 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.

 

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Table of Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(11) Leases**

 

The Company leases certainoffice facilities and equipment operating leases. Rental expense for operatingleases related to continuing operations was $31,000 and $53,000 for the yearsended November 30, 2008 and 2007, respectively. This lease expires on May31, 2009.

 

**(12) Stockholders’ Equity**

 

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

 

The Company had aStockholder Rights Plan (the “***Rights Plan***”),which provides that the holders of the Company’s Common Stock receivefive-thirds of a right (“***Right***”), asadjusted for prior stock splits, for each share of the Company’s Common Stockthey own. Each Right entitles the holder to buy one one-thousandth of a shareof Series A Preferred Stock, par value $.01 per share, at a purchase priceof $80.00, subject to adjustment. The Rights would become exercisable ifcertain events occurred relating to a person or group acquiring or attemptingto acquire 15% or more of the outstanding shares of Common Stock of theCompany. Under those circumstances, the holders of Rights would be entitled tobuy shares of the Company’s Common Stock or stock of an acquirer of the Companyat 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 declareda dividend of one preferred share purchase right for each outstanding share ofCommon Stock of the Company. The dividend is payable to our stockholders ofrecord as of February 16, 2009. The terms of the rights and the rightsplan are set forth in a Rights Agreement, by and between the Company and MellonInvestor Services LLC, as Rights Agent (the “***Rights Plan***”).

 

Our Board adopted the Rights Plan in an effort to protect stockholdervalue by****attempting to protectagainst a possible limitation on our ability to use our net operating losscarryforwards (the “***NOLs***”)to reduce potential future federal income tax obligations. We have experiencedand continue 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.

 

The Rights Plan is intended to act as a deterrent to any person orgroup 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, inour sole discretion, exempt any person or group from being deemed an AcquiringPerson for purposes of the Rights Plan.

 

*The Rights*. We authorized the issuance of one right per each outstanding share ofour common stock payable to our stockholders of record as of February 16,2009. Subject to the terms, provisions and conditions of the Rights Plan, ifthe rights become exercisable, each right would initially represent the rightto purchase from us one ten-thousandth of a share of our Series B JuniorParticipating Preferred Stock (“***Series B Preferred Stock***”) for a purchase price of$6.01 (the “***PurchasePrice***”). 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.

 

F-23

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Table of Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(12) Stockholders’ Equity (continued)**

 

*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 untilthe earlier of (i) 10 business days after a public announcement by us thata person or group has become an Acquiring Person and (ii) 10 business daysafter the commencement of a tender or exchange offer by a person or group for4.9% of the common stock.

 

We refer 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 of commonstock 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.

 

After the Distribution Date, each holder of a right, other than rightsbeneficially owned by the Acquiring Person (which will thereupon become nulland void), will thereafter have the right to receive upon exercise of a rightand payment of the Purchase Price, that number of shares of common stock havinga market value at the time of exercise of two times the Purchase Price.

 

*Exchange*. After the Distribution Date, we may exchange the rights (other thanrights owned by an Acquiring Person, which will have become null and void), inwhole or in part, at an exchange ratio of one share of common stock, or afractional share of Series B Preferred Stock (or of a share of a similarclass or series of the Company’s preferred stock having similar rights,preferences and privileges) of equivalent value, per right (subject toadjustment).

 

*Expiration*. The rights and the Rights Plan will expire on the earliest of (i) February 13,2019, (ii) the time at which the rights are redeemed pursuant to theRights Agreement, (iii) the time at which the rights are exchangedpursuant to the Rights Agreement, (iv) the****repeal of Section 382 of the Code or any successorstatute if we determine that the Rights Agreement is no longer necessary forthe preservation of NOLs, and (v) the beginning of a taxable year of theCompany to which we determine that no NOLs may be carried forward.

 

*Redemption*. At any time prior to the time an Acquiring Person becomes such, wemay redeem the rights in whole, but not in part, at a price of $0.01 per right(the “***Redemption Price***”).The redemption of the rights may be made effective at such time, on such basisand with such conditions as we in our sole discretion may establish.Immediately upon any redemption of the rights, the right to exercise the rightswill terminate and the only right of the holders of rights will be to receivethe Redemption Price.

 

*Anti-Dilution Provisions*. We may adjust the purchase price of theshares of Series B Preferred Stock, the number of shares of Series BJunior Preferred Stock issuable and the number of outstanding rights to preventdilution that may occur as a result of certain events, including among others,a stock dividend, a stock split or a reclassification of the shares of Series BPreferred Stock or our common stock. No adjustments to the purchase price ofless than 1% will be made.

 

*Amendments*. Before the Distribution Date, we may amend or supplement the RightsPlan without the consent of the holders of the rights. After the DistributionDate, we may amend or supplement the rights Plan only to cure an ambiguity, toalter time period provisions, to correct inconsistent provisions, or to makeany additional changes to the Rights Plan, but only to the extent that thosechanges do not impair or adversely affect any rights holder.

 

F-24

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Table of Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(12) Stockholders’ Equity (continued)**

 

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)  LegalProceedings***

 

We haveagreements with one employee to assist with the final wind down of ourbusiness. Under the agreement the employee is to receive her base salary aswell as a bonus upon the completion of certain objectives during theliquidation process. The estimated commitment remaining under the agreement at November 30,2008 is $96,000.

 

The Companyhas been informed of the existence of an investigation that may relate to theCompany or its South American operations. Specifically, the Company understandsthat authorities in a foreign country are reviewing allegations from unknownparties that remittances were made from South America to Company accounts inthe United States in 1999. The Company does not know the nature or subject ofthe investigation, 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 of money fromSouth America to the United States and may have questioned witnesses about suchalleged transfers means that the Company cannot rule out the possibilityof 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 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 asavings plan for employees in 1994. Employees are eligible to participate uponcompleting 90 days of service. The plan is subject to the provisions ofthe Employee Retirement Income Security Act of 1974. Under provisions of theplan, eligible employees are allowed to contribute as much as 50% of theircompensation, up to the annual maximum allowed by the Internal Revenue Service.The Company may make a discretionary matching contribution based on the Company’sprofitability. The Company made contributions of approximately$0.1 million to the plan for each of the years ended November 30,2008 and 2007.  The plan was terminatedon November 29, 2008.

 

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Table of Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(14) Subsequent Events**

 

Subsequent to the year endedNovember 30, 2008, on December 12, 2008 we financed approximately$813,000 of the purchase price of various assets purchased under the Trust IIPurchase Agreement pursuant to the Trust II Credit Agreement. The revolvingfacility was initially established by an affiliate of the sellers under theTrust II Purchase Agreement.  The Trust II has become a co-borrower underthat facility and has pledged its assets to secure performance by the borrowersthereunder.  The revolving facility permits an aggregate borrowing of allco-borrowers thereunder of up to $50 million.  Financo has the ability todirect that not less than $15 million to be borrowed under the revolvingfacility be utilized by the Trust II to purchase receivables, installment salescontracts and 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***”).

 

Also subsequent to the year ended November 30, 2008, on February 13,2009 we 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 aggregatenumber of shares of Common Stock of the Company that may be issued under the 2008Plan is 20,000,000 shares. The 2008Plan will terminate on December 1,2018.

 

In addition, on December 1,2008 our Board approvedthe grant of 300,000 shares of restricted stock to each of Timothy S. Durham,Robert A. Kaiser and Manoj Rajegowda.  Of each restricted stock grant,100,000 shares vested on the date of grant, and the remaining 200,000 of theshares vest in two equal annual installments on each anniversary of the date ofgrant. 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. 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. Of the totalvalue of the awards, $198,000, $66,000 was expensed in December 2008 andthe 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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Table of Contents

 

**CLST HOLDINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

 

**(14) Subsequent Events****(continued)**

 

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 intendedto act as a deterrent to any person or group acquiring 4.9% or more of ouroutstanding common stock (an “***Acquiring Person***”) without our approval. Stockholderswho own 4.9% or more of our outstanding common stock as of the close ofbusiness on February 16, 2009 will not trigger the Rights Plan so long asthey 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 its sole discretion, exempt any person orgroup from being deemed an Acquiring Person for purposes of the Rights Plan.

 

Richards, Layton, & Finger P.A.,legal counsel to Mr. Manoj Rajegowda, a former member of our Board, sentwritten correspondence 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 2,496,077shares of Common Stock in connection with our purchase of assets owned by FairFinance Company (“***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.

 

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