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**UNITEDSTATES**

**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, 2009**                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                             |
| **OR**                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                             |
| **o**                                                                                                                                                                                                                                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                             |   |
| **For the transition period from                      to                  ** |
|                                                                                                                                                                                                                                                                  |  |  |

 

**Commission File Number 0-22972**

 

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**CLST HOLDINGS, INC.**

(Exact name of registrant asspecified 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’s telephone numberincluding area code: **(972) 267-0500**

 

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

 

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

 

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

 

**Common Stock, par value $0.01 per share**

(Title of Class)

 

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Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.   Yes o  No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act.  Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

The aggregate market value ofthe registrant’s common stock held by non-affiliates of the registrant as of May 29,2009, based on the closing sale price of $0.14 asreported on the OTC market, as compiled by Pink Sheets LLC, on May 29,2009, was approximately $1,632,996.40.

 

On March 1, 2010, therewere 23,949,282 outstanding shares of common stock, $0.01 par value per share.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

 

 

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**CLST Holdings, Inc.**

 

**INDEX TO FORM 10-K**

 
| ** **         | ** **                                                                                                               | **Page  Number** |
|--------------------|--------------------------------------------------------------------------------------------------------------------------|------------------|
| **PART I.**   |                                                                                                                     |             |
| Item 1.       | Business                                                                                                                 | 1                |
| Item 1A.      | Risk Factors                                                                                                             | 11               |
| Item 1B.      | Unresolved  Staff Comments                                                                                               | 19               |
| Item 2.       | Properties                                                                                                               | 19               |
| Item 3.       | Legal  Proceedings                                                                                                       | 20               |
| Item 4.            | Reserved                                                                                                                 | 26               |
| **PART II.**  |                                                                                                                     |             |
| Item 5.       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 26               |
| Item 6.       | Selected  Consolidated Financial Data                                                                                    | 29               |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 29               |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 43               |
| Item 8.       | Financial  Statements and Supplementary Data                                                                             | 43               |
| Item 9.       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                    | 44               |
| Item 9A(T).   | Controls  and Procedures                                                                                                 | 44               |
| Item 9B.      | Other  Information                                                                                                       | 46               |
| **PART III.** |                                                                                                                     |             |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                                                  | 46               |
| Item 11.      | Executive  Compensation                                                                                                  | 52               |
| Item 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                         | 55               |
| Item 13.      | Certain  Relationships and Related Transactions, and Director Independence                                               | 57               |
| Item 14.      | Principal  Accountant Fees and Services                                                                                  | 61               |
| **PART IV.**  |                                                                                                                     |             |
| Item 15.      | Exhibits  and Financial Statement Schedules                                                                              | 63               |
| Signatures         |                                                                                                                     | 66               |

 

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**PART I.**

 

**Special Cautionary Notice Regarding Forward-LookingStatements**

 

Certainof the matters discussed in this Annual Report on Form 10-K for the fiscalyear ended November 30, 2009 (“***Form 10-K***”)may constitute “forward-looking” statements for purposes of the Securities Actof 1933, as amended (as so amended the “***Securities Act***”),and the Securities Exchange Act of 1934, as amended (as so amended the “***Exchange Act***”), and, as such, mayinvolve known and unknown risks, uncertainties and other factors that may causethe actual results, performance, litigation results or achievements of theCompany to be materially different from future results, performance orachievements expressed or implied by such forward-looking statements. When usedin this report, the words “anticipates,” “estimates,” “believes,” “continues,” “expects,”“intends,” “may,” “might,” “could,” “should,” “likely,” and similar expressionsare intended to be among the statements that identify forward-lookingstatements. When we make forward-looking statements, we are basing them on ourmanagement’s beliefs and assumptions, using information currently available tous. Although we believe that the expectations reflected in the forward-lookingstatements are reasonable, these forward-looking statements are subject torisks, uncertainties and assumptions. Statements of various factors that couldcause the actual results, performance or achievements of the Company or futureevents relating to 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**

 

CLSTHoldings, 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 ofOperations in Fiscal 2007**

 

On December 18, 2006,we entered into a definitive agreement (the “***U.S.Sale Agreement***”) with a wholly owned subsidiary of Brightpoint, Inc.,an Indiana corporation (“***Brightpoint***”),providing for the sale of substantially all of our United States andMiami-based Latin American operations (the “***U.S.Sale***”) and for the buyer to assume certain liabilities relatedto those operations. Our operations in Mexico and Chile and other businesses orobligations of the Company 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 adjustment based onchanges in net assets from December 18, 2006 to the closing date. The U.S.Sale Agreement also required the buyers to deposit $8.8 million of thepurchase price into an escrow account for a period of six months from theclosing date.

 

Also on December 18,2006, we entered into a definitive agreement (the “***MexicoSale Agreement***”) with Soluciones Inalámbricas, S.A. de C.V.(“***Wireless Solutions***”) and Prestadorade Servicios en Administración y Recursos Humanos, S.A. de C.V. (“***Prestadora***”), two affiliated Mexicancompanies, providing for the sale of all of the Company’s Mexico operations(the “***Mexico Sale***”). The MexicoSale was structured as the sale of all of the outstanding shares of our Mexicansubsidiaries, and included our interest in Comunicación Inalámbrica Inteligente, S.A. deC.V. (“***CII***”), our joint venture withWireless Solutions. Under the terms of the transaction, we received$20 million in cash, and were entitled to receive our pro rata share ofCII profits for the first quarter 2007 

 

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and up to the consummation of the transaction,within 150 days from the closing date. Our Board unanimously approved theproposed transaction set forth in the Mexico Sale Agreement. We had notreceived any pro rata share of the CII profits and other terms required as of150 days from the closing date. A demand for payment of up to$1.7 million, the amount we believe is our pro rata share of CII profitsfor such period, was sent to the purchasers on September 11, 2007, as wellas a demand that the sellers comply with other required terms of the agreement.While we believe that CII was profitable and therefore the purchasers owe theCompany its pro rata share, the purchasers are disputing this claim. Therefore, we are pursuing claims againstthe buyers from the Mexico Sale in an ICC arbitration proceeding.  The arbitration proceedingwas held in Mexico City, Mexico in October 2009 and the arbitration panelhas up to six months from the date of the arbitration proceeding to issue theirconclusion.  As of the date of this Form 10-K, thearbitration panel has not issued their conclusion.  We cannot make any estimatesregarding future amounts that we may be able to collect or the timing of anycollections on this matter.

 

We filed a proxy statementwith the Securitiesand Exchange Commission (“***SEC***”) on February 20,2007, which more fully describes the U.S. and Mexico Sale transactions. Both ofthe transactions were subject to customary closing conditions and the approvalof our stockholders, and the transactions were not dependent upon each other.The proxy statement also included a plan of dissolution, which provides for thecomplete liquidation and dissolution of the Company after the completion of theU.S. Sale, and a proposal to change the name of the Company from CellStarCorporation to CLST Holdings, Inc.

 

On March 28, 2007, our stockholders approved the U.S. Sale, theMexico Sale, the plan of dissolution, and a name change from CellStarCorporation to CLST Holdings, Inc. We continue to follow the plan ofdissolution. Consistent with the plan of dissolution and its fiduciary duties,our Board will continue to consider the proper implementation of the plan ofdissolution and the exercise of the authority granted to it thereunder, includingthe authority to abandon the plan of dissolution.

 

The U.S. Sale closed on March 30,2007. At closing we received cash of approximately $53.6 million and$4.5 million was recorded as a receivable. The buyer of our 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 millionfrom the escrow agent. These are the final amounts to be received under theU.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 ASC 360 (formerly SFAS No. 144), “Accounting for the Impairmentor Disposal of Long-Lived Assets”, as of February 28, 2007, we recognizedthe $9.1 million as a charge upon the closing of the Mexico Sale. Asdisclosed above, we have not received any pro-rata share of profits and otherterms required as of 150 days from the closing date under the Mexico Sale.

 

OnMarch 22, 2007, we signed a letter of intent to sell our operations inChile (the “***Chile Sale***”) to a group thatincluded local management for approximately book value. On June 11, 2007,we completed the Chile Sale. The purchase price and cash transferred from theoperations in Chile prior to closing totaled $2.5 million, and we recordeda pre-tax gain of $0.6 million on the transaction during the quarter endedAugust 31, 2007. With the completion of the Chile Sale, we no longer haveany operating locations outside of the U.S. Currently, only a smalladministrative staff remains to wind up our business.

 

**PriorBusiness**

 

Prior to the sale of ouroperations and assets through these various transactions, the Company was aleading distributor of wireless products and provider of distribution andvalue-added logistics services to the wireless communications industry, servingnetwork operators, agents, resellers, dealers, and retailers with operations inthe 

 

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North American and Latin American Regions. Weprovided comprehensive logistics solutions and facilitated the distribution ofhandsets, related accessories and other wireless products from leadingmanufacturers to network operators, agents, resellers, dealers and retailers.We also provided activation services in Mexico and Chile that generated newsubscribers for wireless carriers. When the Company was operating in thewireless communications industry, we derived substantially all of our revenuesfrom net product sales, which included sales of handsets and other wirelesscommunications products. We also derived revenues from value-added services,including activations, residual commissions, and prepaid wireless services.Value-added service revenues include fulfillment service fees, handling fees andassembly revenues.

 

Our business concentratedprimarily on distribution and logistics. We delivered handsets and relatedaccessories from the manufacturers to carriers, other distributors, retailers,and consumers. We assisted the manufacturers in expanding their distributionnetwork and customer base. Our fulfillment, kitting, packaging, and otherservices assisted the carriers in getting the handsets ready for use by theirsubscribers. Our distribution services included purchasing, selling,warehousing, picking, packing, shipping and “just-in-time” delivery of wirelesshandsets and accessories. We also offered one of the industry’s firstcompletely integrated asset recovery and logistics services, our Omnigistics® (patent pending) supply chain management system.In addition, we offered value-added services, including Internet-based supplychain services via our OrderStar® system(patent pending), 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 locations in certain markets from which we sold wirelesscommunications products and accessories directly to the public. BothOmnigistics® and OrderStar® were includedin the U.S. sale to Brightpoint.

 

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

 

Prior to the sale of ourU.S., Mexico and Chile operations, our customer base consisted of DobsonCellular Systems, Inc., Telefonica Moviles Colombia, S.A., RadioMovil Dipsa S.A. de C.V. and Claro Chile S.A. as well as manufacturerssuch as Motorola, LG, Nokia, Kyocera and Palm.

 

**Net Operating Loss Carry Forwards**

 

During 2008 we, performed a detailed review andanalysis of the Company’s historical tax net operating loss carryforwards (the “***NOLs***”).  Webelieve in many circumstances the NOLs, which amount to approximately $126million at November 30, 2009 and begin to expire after November 30,2020, can be utilized to offset future income. However, in the event of a change in control, the NOLs would be impairedand result in only a fraction of their otherwise future potential taxsavings.  As of November 30, 2009,approximately 40% of the change in control had occurred historically.  If an additional approximate 10% change incontrol occurs in the future, as determined by IRS regulations, the Companycould lose substantially all of the potential value of the NOLs.

 

**2009 Business**

 

Formost of 2009, we had no significant operations other than our effortsassociated with winding down the remaining entities and other activitiesrelated to the prior business, managing our receivable portfolios andsignificant management time overseeing the litigation with Red Oak Fund, L.P.and certain of its affiliates (“***Red Oak***”or the “***Red Oak Group***”).  We are working steadily tocomplete a long list of actions necessary to complete the wind down of ourhistorical business in an orderly fashion. Completing the wind down is a cumbersome task that requires many stepsand may take a significant amount of time. These steps include dissolvingnumerous subsidiaries, resolving pending litigation and completing variousregulatory filings and other requirements. We 

 

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cannotpredict how long, how time-consuming or how costly resolution of the litigationmatters will be. To date, we have completed and filed final sales tax returnsand franchise tax returns for most of our entities. We have also completed therequirements to withdraw most of our entities from doing business in multiplestate jurisdictions in the U.S. Furthermore, we are continuing to dissolve ourforeign and domestic subsidiaries pursuant to the plan of dissolution.

 

However,in order to protect the Company’s cash and other assets from any actual orpotential liabilities of the Company’s direct and indirect subsidiaries, wewill not dissolve our inactive direct or indirect domestic or foreignsubsidiaries until the actual and contingent liabilities of each such subsidiaryhave been resolved or contingency reserves have been set aside sufficient topay or make reasonable provision to pay all such subsidiary’s claims andobligations in accordance with applicable law. Specifically, we will notdissolve AudiomexExport Corp., National Auto Center, Inc. and CLST-NAC, Ltd., which aredirect parties to, and NAC Holdings, Inc., which is an indirect party to,the arbitration proceeding for our claim in Mexico against the purchasers ofthe Mexico Sale, until the final resolution of that claim.  The arbitration proceedingwas held in Mexico City, Mexico in October 2009 and the arbitration panelhas up to six months from the date of the arbitration proceeding to issue theirconclusion.  As of the date of this Form 10-K, the arbitrationpanel has not issued their conclusion.

 

Incertain jurisdictions, the dissolution process is an extended one.** **We completed thedissolution of our subsidiaries in the United Kingdom and Guatemala in February 2008and March 2009, respectively, and of CLST-NAC Fulfillment, Ltd., a Texaslimited partnership and indirect subsidiary of the Company, in September 2009.  Furthermore, we completed the merger of CLSTFulfillment, Inc., a Delaware corporation, into its parent, National AutoCenter, Inc., a Delaware corporation and our wholly owned subsidiary,effective September 10, 2009. In addition we have made demands on thepurchaser of our former Colombian subsidiary for the documents needed to divestour remaining minority interest in that subsidiary.  Further, we have submitted documents toseveral governmental authorities in El Salvador as required to dissolve ourdormant entity in El Salvador.

 

Duringthe second quarter of 2009 we collected $61,000, representing the final paymentof the original note amount of $720,869 from the 2004 sale of our Columbianoperations. The note had been fully reserved and the payment received wasrecorded in general and administrative expenses. We are now in the process ofreleasing the 19% interest that we retained in the Colombia operation, per theterms of the purchase agreement.

 

TheCompany made substantial progress in dissolving its subsidiaries during January 2010.  In January 2010, the Company dissolvedeach of CLST International Corporation/Asia, a Delaware corporation, CellStarPhilippines, Inc., a Philippines corporation, and CellStar NetherlandsHoldings, B.V, a Netherlands company.  Asa result of the Company’s progress, as of the date of the filing of this Form 10-K,the Company had five non-operating U.S. entities and one non-operating foreignentity, remaining to be dissolved.  TheCompany also had one dormant entity in El Salvador that never conductedoperations.

 

***CLST Asset I, LLC***

 

On November 10, 2008,our Board unanimously approved the acquisition of all of the outstanding equityinterest of FCC Investment Trust I (“***Trust I***”)from Drawbridge Special Opportunities Fund LP (“***Drawbridge***”)through CLST Asset I, LLC (“***CLST Asset I***”),a wholly owned subsidiary of CLST Financo, Inc. (“***Financo***”), which is one of our direct, wholly ownedsubsidiaries through entry into a purchase agreement to acquire all of theoutstanding equity interests of Trust I from a third party (the “***Trust I Purchase Agreement***”).  The purchase price was approximately $41.0million, which was financed by $6.1 million of cash on hand and by a non-recourse, term loan ofapproximately $34.9 million byan affiliate of the seller of Trust I, pursuant to the terms and conditions setforth in the credit agreement, dated November 10, 2008, among Trust I,Fortress Credit Co LLC, as lender (“***Fortress***”),FCC Finance, LLC (“***FCC***”), as the initialservicer, the backup servicer, and the collateral custodian (the “***Trust I Credit Agreement***”). The primary business ofTrust I is to hold and collect certain receivables.

 

The approximate 6,000receivables included in CLST Asset I are all consumer home improvement, repairand other related loans to homeowners. All loans represent loans to singlefamily dwellings. As of the purchase date, approximately 63% of the loans weresecured through a second lien on the property, with the remainder beingunsecured.  Approximately 89% of theloans are in the Northeastern part of the United States with the remainder inTexas, Georgia and Missouri, and at the time of purchase of the portfolio, theremaining time to maturity was in a 

 

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range of 8-10 years, not including prepayments, ifany. The purchase price reflects an approximately $0.7 million discount and, asof the purchase date, the receivables had an average outstanding principalbalance of approximately $6,900 and an average interest rate of 14.4%.

 

The following tablereflects the loan origination year as of the purchase date:

 
| **Year  of origination** | ** ** | **% of CLST Asset I** | ** ** |
|--------------------------|------------|-----------------------|------------|
| 2000  – 2004        |       | 8.4                   | %          |
| 2005                     |       | 8.1                   | %          |
| 2006                     |       | 17.3                  | %          |
| 2007                     |       | 36.4                  | %          |
| 2008                     |       | 29.8                  | %          |
| Total                    |       | 100.0                 | %          |

 

For CLST Asset I, there were no loans originated in2009, as this was the purchase of a historical portfolio.

 

On October 16,2009, we received a notice of default from Fortress stating that an event ofdefault has occurred and is continuing under the Trust I Credit Agreement. TheFortress notice states that the three-month rolling average annualized defaultrate of the Trust I portfolio has exceeded 7.0%. As a result of the default,pursuant to the Trust I Credit Agreement, the interest rate payable by Trust Ihas increased by an additional 2% per annum, and all collections by Trust Iabove amounts retained to pay interest, fees, principal amortizations, andother charges that are normally remitted to the Company, are instead beingapplied to outstanding principal under the Trust I Credit Agreement until theamount due has been reduced to zero.  Inaddition, Fortress is entitled to foreclose on the assets of Trust I and sellthem to satisfy amounts due it under the Trust I Credit Agreement.  Only Trust I is liable for amounts dueFortress under the Trust I Credit Agreement. Thus, although the Company could lose some or all of its investment inTrust I, the Company will not be obligated to pay any amounts due Fortressunder the Trust I Credit Agreement.  AllTrust I collections are being retained by Fortress and applied to pay interestand reduce indebtedness while the Company discusses amending the Trust I CreditAgreement, but Fortress has not sought to foreclose on the assets of TrustI.  Those discussions are ongoing.  The Company does not expect that Fortresswill foreclose on the assets of Trust I while negotiations are proceeding.

 

The Company believes that between $1.3 million and$2.2 million of receivables purchased were ineligible, as defined in the TrustI Purchase Agreement, at the time of purchase. Of these potentially ineligiblereceivables, approximately $574,000 have become defaulted receivables. TheCompany has notified Fortress of these potentially ineligible receivables anddiscussions with Fortress are ongoing. The Company cannot predict when or ifthese matters will be resolved favorably or at all.

 

***CLST Asset II, LLC***

 

On December 12, 2008,we, through CLST Asset TrustII (“***Trust II***”), a newly formed trustwholly owned by CLST Asset II, LLC (“***CLST Asset II***”),a wholly owned subsidiary of Financo, entered into a purchaseagreement, effective as of December 10, 2008 (the “***TrustII Purchase Agreement***”), to acquire from time to time certainreceivables, installment sales contracts and related assets owned by SSPE Investment Trust I (the “***SSPE******Trust***”) and SSPE, LLC (“***SSPE***”).  The Board unanimously approved the establishment ofthe Trust II and the Trust II Purchase Agreement.Under the terms of a non-recourse, revolving loan,which Trust II entered into with Summit Consumer Receivables Fund, L.P. (“***Summit***”), as originator, andSSPE and SSPE Trust, as co-borrowers, Summit and Eric J. Gangloff, asGuarantors, Fortress Credit Corp. (“***Fortress Corp***.”),as the lender, Summit Alternative Investments, LLC, as the initial servicer,and various other parties (“***Trust II Credit Agreement***”),Trust II committed to purchase receivables of at least $2.0 million.  In conjunction with this agreement, Trust IIbecame a co-borrower under a $50 million credit agreement that permits Trust IIto use more than $15 million of the aggregate availability under the revolvingfacility.  Trust II’s commitment topurchase $2.0 million of receivables was fulfilled in the first quarter of2009, when Trust II purchased $5.8 million of receivables, with an aggregatepurchase discount of $0.5 million, that are typically secured by a secondmortgage or the personal property itself. These receivables represent primarilyhome improvement loans originated through FCC, the service provider of CLSTAsset I. The loans represent new originations with an average term of 9 yearsand a current average interest rate of 14.7%.** **Since these are new loans, theCompany has managed the originations such that almost 65% of the new loans hadcredit 

 

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scores higher than 680, with a portfolio average of676. As of June 2009, the Company is no longer originating new loans underthe credit agreement.  Approximately 54% of these loans were securedthrough a second lien on the property, with the remainder being unsecured.   The loans are through the 48 mainland stateswith the top five concentration as follows:

 
| **State**     | ** ** | **Percentage** | ** ** |
|---------------|------------|----------------|------------|
|          |       |           |       |
| Michigan      |       | 23             | %          |
| Ohio          |       | 19             | %          |
| Massachusetts |       | 7              | %          |
| Florida       |       | 5              | %          |
| Pennsylvania  |       | 5              | %          |

 

During the second quarterof 2009 we were informed by Summit that the credit facility we entered intowith Trust II, Summit and various other parties had been reduced by $20 millionto $30 million.  Summit did not indicatethe specific reasons for the reduction in the credit facility other than it waspart of a negotiation with Fortress Corp. regarding a default on another Summitportfolio.  This reduction has no impacton the Company because during the third quarter of 2009, we ceased purchasingany new receivables under the facility and are no longer originating new loansunder the credit agreement and, as a result, the Company is no longer drawingadditional funds under the credit agreement. Because we are no longer originating new loans under this creditagreement, FCC is no longer providing origination services to the Company. Theorigination services performed by FCC included loan documentation, collateraldocumentation where applicable, credit verification, and other requiredactivities to secure loan approval per the Company’s standards.  FCC was paid a one-time fee of 2% of theoriginal principal amount of loans originated for performing theseservices.  Once a loan was approved, FCCwould perform the monthly servicing activities, which would includecollections, reporting, lock box services, customer service, and other relatedservices. FCC was paid 1.5%, per annum, of the outstanding principal balancefor these services.  As of November 30,2009, total borrowings under the Trust II Credit Agreement were $15.1 million,of which $5.0 million was attributable to Trust II.

 

We received anotice of default dated December 2, 2009 from Fortress Corp. (“***Default Notice***”) stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair Finance Company, an Ohio corporation (“***Fair***”),in its capacity as a sub-servicer for assets held by the SSPE Trust, has failedto perform its servicing duties with respect to that portion of the receivablesportfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We also receiveda notice of default dated February 8, 2010 from Fortress Corp. (“***Second Default Notice***”) stating thatan additional event of default has occurred and is continuing under the TrustII Credit Agreement because the three-month rolling average annualized defaultrate of the Class A receivables in the Trust II portfolio had exceeded5.0% as of January 31, 2010. On February 26, 2010, the parties to theTrust II Credit Agreement entered into a wavier and release agreement (the “***Fortress Waiver***”) whereby 1) eachevent of default declared in the Default Notice and the Second Default Noticewas waived, 2) Trust II became the sole borrower under the Trust II CreditAgreement, 3) the outstanding borrowings attributable to SSPE Trust were paidin full, 4) SSPE Trust and their affiliates were released from all furtherobligations under the Trust II Credit Agreement, and 5) the SSPE Trust assetswere removed as pledged collateral for the Trust II Credit Agreement. TheFortress Waiver also amended certain terms of the Trust II Credit Agreementincluding the elimination of Trust II’s right to further borrowings and therequirement for Trust II to pay an unused commitment fee.

 

***CLST Asset III, LLC***

 

EffectiveFebruary 13, 2009, we, through CLST Asset III, LLC (“***CLSTAsset III***”), a newly formed, wholly owned subsidiary of Financo,purchased certain receivables, installment sales contracts and related assetsowned by Fair, James F. Cochran, Chairman and Director of Fair, and Timothy S.Durham, Chief Executive Officer and Director of Fair and an officer, directorand stockholder of our Company (the “***Trust III Purchase***

 

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***Agreement***”).  Messrs. Durham and Cochranown all of the outstanding equity of Fair. In return for assets acquired underthe Trust III Purchase Agreement, CLST Asset III paid the sellers totalconsideration of $3,594,354, consisting of cash, common stock of the Companyand six promissory notes. Additionally, Fair agreed to use its best efforts tofacilitate negotiations to add CLST 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. To date, we have not beenadded as a co-borrower. Substantiallyall of the assets acquired by CLST Asset III are in one of two portfolios.Portfolio A is a mixed pool of receivables from several asset classes,including health and fitness club memberships, resort memberships, receivablesassociated with campgrounds and timeshares, in-home food sales and services,buyers clubs, delivered products, home improvements and tuitions. Portfolio B is made up entirely of receivables related to the sale of tanningbed products. Only 2% of these portfolios are home improvement loans and noneof the loans are secured.  The loans arethrough the 48 mainland states with the top five concentration as follows:

 
| **State**    | ** ** | **Percentage** | ** ** |
|--------------|------------|----------------|------------|
|         |       |           |       |
| Ohio         |       | 17             | %          |
| Florida      |       | 8              | %          |
| Colorado     |       | 8              | %          |
| Texas        |       | 6              | %          |
| Pennsylvania |       | 6              | %          |

 

During the secondquarter of 2009 we began implementing the servicing, collection and otherprocedures relating to management of CLST Asset III contemplated by theagreements between us and the servicer of the portfolio. Fair was the servicerof the CLST Asset III portfolio and is an affiliate of Mr. Durham. Theimplementation of the procedures required several meetings with the servicerand were implemented during the third quarter of 2009 with the exception ofsecuring a lock box to receive payments, which we expected to have in placeduring the fourth quarter of 2009.

 

During the fourth quarter of 2009, unexpectedly to the Company, theFederal Bureau of Investigation (“***FBI***”) andother government agencies seized certain assets of Fair, including theirservers, computers and other items used by Fair in the servicing of our CLSTAsset III portfolio. Due to these and other facts, we understand Fair wasclosed for a period of time and was unable to fully service our CLST Asset IIIportfolio for an extended period of time. As a result, we have moved theservicing of our CLST Asset III portfolio to an alternate servicer. Effective February 1,2010, Highlands Premier Acceptance Corp. and Highlands Financial Services, LLC(collectively referred to herein as “***Highlands***”)assumed all servicing functions previously performed by Fair. Highlands isfully independent of Fair and the Company, and there are no related partyrelationships of any nature among Fair, Highlands or the Company. Fair had beenfully co-operating with the logistics of the transfer of the servicing of theCLST Asset III portfolio to Highlands, however, in February 2010 Faircommenced bankruptcy proceedings, which may negatively impact the timing andcompleteness of this transfer.

 

Our agreement with Highlands calls for an initial term of six monthsand is automatically renewed in one year increments unless cancelled in writingby either party in accordance with the terms of the agreement. We will incurservicing fees at market rates and per the terms of the agreement. Highlands isrequired to make daily remittances of our collected accounts.

 

At this time, we believe thatwe have a right of recoupment against Fair for payments it has received on ourbehalf and not remitted, and expect to exercise that right by withholding suchamounts from any money due to Fair. However, there can be no assurance that Fair will not challenge ourrecoupment right, or what the ultimate outcome of that challenge might be. On March 1,2010 approximately $73,000****was due toFair and the other sellers which has not been paid.

 

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Nowthat the Company has acquired each of these three receivable portfolios, mostof the activities of the Company with respect to the portfolios are conductedon its behalf by the servicers of these portfolios.  The servicers receive payments from accountdebtors and pursue other collection activities with respect to the receivables,monitor collection disputes with individual account debtors, prepare and submitclaims to the account debtors, maintain servicing documents, books and recordsrelating to the receivables and prepare and provide reports to the lenders andthe Company with respect to the receivables and related activity, maintain thesecurity interest of the lenders in the receivables, and direct the collateralcustodian to make payments out of the proceeds of the portfolios to, among others,the Company, the lenders, the servicers and/or backup servicers, and thecollateral custodians pursuant to the terms of the relevant servicingagreements.

 

**Plan of Dissolution**

 

Aswe have previously disclosed, the proxy statement we filed with the SEC on February 20,2007 describes a proposal for a plan of dissolution, which provides for thecomplete liquidation and dissolution of the Company after the completion of theU.S. Sale (subject to abandonment by the Board in the exercise of theirfiduciary duties).  On March 28,2007, our stockholders approved the plan of dissolution in addition to the U.S.Sale and the Mexico Sale.  In the plan ofdissolution approved by our stockholders, we stated that no distribution ofproceeds from the U.S. Sale and Mexico Sale would be made until theinvestigation by the SEC was resolved. On June 26, 2007, we received aletter from the staff of the SEC giving notice of the completion of theirinvestigation with no enforcement action recommended to the SEC. Therefore, on June 27,2007, our Board declared a cash distribution of $1.50 per share on our commonstock to stockholders of record as of July 9, 2007. On July 19, 2007,we issued the $1.50 per share dividend in the total amount of$30.8 million. Then, on November 1, 2007 we paid an additional $0.60per share dividend to stockholders which brings the cumulative dividends paidto stockholders to $2.10 per share or approximately $43.2 million. Theamount and timing of any additional distributions paid to stockholders in connectionwith the liquidation and dissolution of the Company are subject touncertainties and depend on the resolution of certain contingencies more fullydescribed in this Form 10-K.

 

Wehave continued to wind down aspects of our businesses, including dissolvingsome of our subsidiaries and continuing to try to collect our remainingnon-cash assets.  In addition, we havecontinued to review our liabilities and seek to satisfy or resolve those thatwe can in a favorable manner.  See “2009Business” above for further discussion with respect to our activities in thisregard.  We expect that it could takeseveral years to implement the plan of dissolution because of the lengthyprocess of obtaining sufficient information regarding all of our liabilities topay and appropriately provide for them as required under the plan ofdissolution*.*  Given this and the time necessary to completethe governmental requirements for dissolution, our Board focused on ways togenerate higher returns on the Company’s cash and other assets in order tobetter offset the Company expenses and to take advantage of the favorable taxtreatment provided by our NOL’s.  Section 3of the plan of dissolution states that we may not engage in any businessactivities except to the extent necessary to preserve the value of the Company’sassets, wind up the Company’s affairs, and distribute the Company’sassets.  As further described above under“2009 Business,” our Boarddetermined to acquire several portfolios of receivables with the intention ofgenerating a higher rate of return on our assets than we were receiving on ourcash and cash equivalents balances which were held in money market accounts orshort term certificates of deposit, earning approximately 1% (current interestrates are now close to 0%).  Our Boardbelieved that each of these acquisitions would provide a better investmentreturn for our stockholders when compared to the low interest rates availableon our cash investments and other investment alternatives although theacquisition would involve a higher risk profile than traditional cash depositsand other cash equivalents positions.  Atthe time we began looking at purchasing these portfolios during the second andthird quarters of 2008, the credit markets became significantly impaired, andthe viability of many banks and other financial institutions was inquestion.  The Company’s cash was held inone bank subject to the limited protection of FDIC coverage.  The Board considered, among other things,spreading the Company’s cash among over a dozen financial institutions.  However, the Board did not believe spreadingthe Company’s cash among many different banks to be practical or costefficient.  In addition, the Boardconsidered various cash strategies including investing in a “ladder” of U.S.Treasury securities (securities of varying maturities) which would haveresulted in higher yields than cash deposits, but would have required theCompany to hold those securities in a brokerage firm and pay that firm a fee toarrange the transactions.  The Board didnot believe that the increased yield provided by a ladder of U.S. Treasurysecurities, after associated fees and administrative costs, was likely to besignificantly better than that of cash deposits, and did not believe thatinterest from U.S. Treasury securities would allow the Company to use its NOLsto shield income from taxes.  Finally,the Board was unsure how to assess the brokerage and custody risks

 

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associatedwith holding a ladder of U.S. Treasury securities through third parties, andfelt that the risk was similar to that associated with commercial banks at thetime.

 

OurBoard understood that to obtain higher returns on its investments, the Companywould have to assume a higher risk of loss. The Board believed that the opportunity offered by these purchases toearn higher returns than offered by cash and demand deposits, would offset theincreased risks, and offer the Board a way of maximizing the value of theCompany for the stockholders.  Inaddition, these investments offered the Company an opportunity to utilize itsNOLs if the returns resulted in positive income for the Company.  The purchases the Company made utilizedborrowed money.  Using borrowed money topurchase an income generating asset increases the return on investment, butincreases the risk of loss on that investment. The Board carefully considered the amount of leverage in each of itspurchases, believing each investment would be able to generate sufficientincome to pay interest and principal on the debt, and still produce anattractive return for the Company and its stockholders.  In considering the risk associated withleverage, the Board considered a number of different scenarios for performanceof the investments, including the risk associated with increased defaultrates.  The Board did not expect defaultrates to increase to current levels, but did consider that and otherpossibilities.  In addition, the Boardconsidered the costs associated with investments in our portfolios, includingthe ongoing costs of paying a servicer to service the portfolio, as part of itsconsideration of the overall potential return associated with thoseinvestments.

 

Whenwe purchased Trust I, the historical default rate for the previous three yearsfor the portfolio was approximately 4%, which was the basis for assessing thecreditworthiness of the assets included in CLST Asset I.  Beginning in the third quarter of 2009 andcontinuing through the fourth quarter of 2009, we saw the default rate increaseto the 7-8% range; accordingly, we have been increasing our allowances toreflect this change.

 

Uponexamination of Trust II and CLST Asset III, we believe that the circumstancesof these portfolios are different from those of Trust I.  As of the date we acquired Trust I,approximately 39% of the receivables in the Trust I portfolio had credit scoreshigher than 676.  Trust II contains neworiginations with higher credit requirements than the requirements for theTrust I portfolio.  Since Trust II iscomprised of new loans, the Company has managed the originations such thatalmost 65% of the new loans have credit scores higher than 680.  Further, we acquired the Trust I portfolio ata discount of approximately 1.7% and acquired the Trust II portfolio at adiscount of approximately 8.7%. The difference in the purchase discountsbetween CLST Asset I and CLST Asset II was impacted by the tightening of thecredit markets between the time of these two acquisitions. Therefore the TrustII portfolio has a very different risk profile when compared to Trust I becauseof the better customer credit profile of Trust II customers and the largerpurchase discount received. The sellers of the CLST Asset III portfolio haveretained the risk of collectability of the receivables in that portfolio for upto an amount equal to the currently outstanding principal amount of the notes issuedby the Company to the sellers.  At thetime of the closing of the acquisition of the CLST Asset III portfolio, thenotes issued to the sellers represented approximately 25% of the total purchaseprice of the portfolio of approximately $3.6 million.  Since the principal balance of the notesdeclines over time as payments are made by the Company to the sellers, futuredefaulted receivables can be offset only against the then remaining balance ofthe notes issued to the sellers.

 

TheCompany has not performed a market check and, as a result, cannot give anyassurance that the portfolios can be sold on favorable terms or within anyparticular time frame given the risk and uncertainties associated with currenteconomic conditions.  Our Board believesthat a quick sale of our portfolio assets at the current time is unlikely toyield the same value to the Company as a sale in an orderly course in thefuture.  Among other things, our Boardbelieves economic conditions will improve in the future, along with creditmarket conditions and conditions affecting consumer default rates.  Because the Company’s winding up could takeseveral years, the Company has the ability to wait until economic conditionsimprove before it sells its portfolio assets. For the same reason, the Company has the ability to market those assets,in the future, in an orderly fashion designed to enhance any sales proceedsover what could be received in a quicker sale at the current time.  While the Company continues its winding upactivities, it will receive collections on the portfolios, and its overall bookinvestment in the portfolios will decline. At the same time, the size of the portfolios and the debt associatedwith them will also decline as the assets and related indebtedness liquidate themselves.  For those reasons, the Board believes that,based upon the assumptions above, a sale of the Company’s portfolio assets inthe future will likely result in greater value to the Company than a rapid saleat the current time.

 

In a Current Report on Form 8-Kfiled with the SEC on February 9, 2010, the Company announced that,pursuant to the plan of dissolution, the Company planned to file a certificateof dissolution with the Delaware Secretary of State on February 26,2010.  Immediately after the close ofbusiness on February 26, 2010, the 

 

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Company intended to closeits stock transfer books and expected that the trading of its stock on the PinkSheets would cease at the same time. However, on February 18, 2010, Red Oak filed an Application forTemporary Restraining Order and Motion for Expedited Discovery and a BriefingSchedule for a Temporary Injunction (“***Application for TRO***”),pursuant to which it sought to prevent the Company from filing a certificate ofdissolution with the Delaware Secretary of State on February 26,2010.  The hearing on Plaintiffs’Application for TRO was held on February 23, 2010.  On February 24, 2010, the Court grantedRed Oak’s Application for TRO and, pursuant to the Temporary Restraining Orderand Order Granting Motion for Expedited Discovery (the “***TRO***”),the Court ordered, among other things, that the defendants (CLST Holdings, Inc.,Robert Kaiser, Timothy Durham, and David Tornek) and their agents arerestrained from filing the certificate of dissolution for the Company on orbefore midnight on Wednesday, March 10, 2010, or until further order ofthe Court.

 

Due to the Court’sissuance of the TRO, the Company was not able to file a certificate dissolutionwith the Delaware Secretary of State on February 26, 2010.  Accordingly, the trading of the Company’sstock on the Pink Sheets did not cease on the close of business on February 26,2010, as the Company had previously announced. However, on March 2, 2010, the Company entered into the Stipulationand Agreed Temporary Injunction (the “***Dissolution Stipulation***”)with Red Oak which provides, among other things, that, on or before March 5,2010, the Company would send notice of its intent to file a certificate ofdissolution with the Delaware Secretary of State on March 26, 2010, andthat the notice would indicate that the certificate of dissolution will not beeffective until June 24, 2010.** **Accordingly, in a press releaseissued on March 5, 2009, the Company announced that it intended to file acertificate of dissolution with the Delaware Secretary of State on March 26,2010 and that such certificate of dissolution would not be effective until June 24,2010.  If a certificate of dissolution isfiled in accordance with the Dissolution Stipulation, then immediately afterthe close of business on June 24, 2010, the Company will close its stocktransfer books; accordingly it is expected that the trading of its stock on thePink Sheets will cease at the same time.

 

Under the Company’s planof dissolution, the certificate of dissolution must be filed on or before March 28,2010.  If the Company does not file itscertificate of dissolution on or before March 28, 2010, the Companybelieves it is likely that dissolution and winding up of the Company willrequire a stockholder’s meeting to authorize a new plan of dissolution.

 

**GovernmentalRegulations**

 

Federal, state andmunicipal 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 Debt Collection Practices Act;

·                  the Federal Trade Commission Act;

·                  the Truth-In-Lending Act;

·                  the Fair Credit Billing Act;

·                  the Equal Credit Opportunity Act; and

·                  the Fair Credit Reporting Act.

 

**FinancialInformation**

 

TheCompany’s consolidated financial statements and accompanying notes for the lasttwo fiscal years can be found in Part IV of this Form 10-K.

 

**Competition**

 

Asthe unemployment 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 competition as some of our customers may be able to secure a lowercost loan from other sources.  In thesecases, our customers will prepay our accounts at the higher interest rate byborrowing from lenders at lower rates. Our receivables in general allow customers to prepay their 

 

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accountwithout significant prepayment charges. Although under these circumstances we will receive payment of ourprincipal, these prepayments will result in lower returns as we will collectless interest on the accounts.

 

**Employees**

 

As of March 1, 2010,the Company had only a small administrative staff, consisting of threefull-time employees, which includes the recent addition of a Chief FinancialOfficer, one part-time employee and one regular contractor.

 

**AvailableInformation and Code of Ethics**

 

We maintain an Internetwebsite at *www.clstholdings.com*.Our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and any amendments to these reports will bemade available, free of charge, at our website as soon as reasonablypracticable after we electronically file such reports with or furnish them tothe SEC.

 

We have adopted a code ofethics that applies to our directors, officers and all employees. Our BusinessEthics Policy can be found at our Internet website at *www.clstholdings.com*.

 

**Item 1A.  Risk Factors**

 

Our future performance issubject to a variety of risks. If any of the events or circumstances describedin the following risk factors actually occurs, our business, financialcondition or results of operations could suffer and the trading price of theCompany’s common stock could be negatively affected. In addition to thefollowing disclosures, please refer to the other information contained in this Form 10-K,including consolidated financial statements and the related notes, andinformation contained in our other SEC filings.

 

***Our ability touse our net operating losses to offset our future taxable income may beseverely limited under Section 382 of the Internal Revenue Code.***

 

Section 382generally limits the ability of a corporation that undergoes an “ownershipchange” to utilize NOLs against future post-ownership income. The limitation isgenerally equal to the product of (a) the fair market value of thecorporation’s outstanding stock immediately prior to the ownership change and (b) thelong-term tax exempt rate (i.e., a rate of interest established by the InternalRevenue Service that fluctuates from month to month). We believe in manycircumstances the NOLs, which amount to approximately $126 million and begin toexpire after November 30, 2020, can be utilized to offset future income,if any.  However, in the event of achange in control, the NOLs would be impaired and result in only a fraction oftheir otherwise future potential tax savings. As of November 30, 2009, approximately 40% of the change in controlhad occurred historically.  If additionalapproximate 10% change in control occurs in the future, as determined by IRSregulations, the Company could lose substantially all of the potential value ofthe NOLs.  In general, an “ownershipchange” occurs whenever the percentage of the stock of a corporation owned,directly or indirectly, by “5-percent stockholders” (within the meaning of Section 382of the Internal Revenue Code) increases by more than 50 percentage points overthe lowest percentage of the stock of such corporation owned, directly or indirectly,by such “5-percent stockholders” at any time over the preceding three years.Issuances of our stock, sales or other dispositions of our stock by certainsignificant stockholders, certain acquisitions of our stock and issuances,sales or other dispositions or acquisitions of interests in certain significantstockholders could cause an “ownership change,” and we will have little or nocontrol over any such events in the future.

 

***Because theCompany has been in the process of liquidating its business, it is difficult tosecure and retain qualified employees*****.**

 

During the last threequarters of fiscal year 2007, the Company began reducing its employee base,consistent with the Company’s plan to liquidate and dissolve. However, theCompany still requires the service of some employees for handling routinematters. Retaining employees who are knowledgeable of the Company’s activitiesand background has proven to be difficult while the Company has been windingdown its business. Furthermore, it is difficult to hire and train new employeeswhen the Company is already working with a reduced 

 

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staff, and new employees may see little incentive inworking for a Company with a plan of liquidation and dissolution.  William E. Casper started as the Company’sChief Financial Officer on January 18, 2010 and resigned less than onemonth later on February 10, 2010 to pursue another position.

 

***We areexperiencing significant risks related to information technology*****.**

 

Although the Company hasoutsourced certain information 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.

 

***Conditions existwhich cause substantial doubt about our ability to continue as a going concern*****.**

 

The report of our independent registeredpublic accounting firm with respect to our financial statements as of November 30,2009 and for the year then ended contains an explanatory paragraph with respectto our ability to continue as a going concern. This concern has been raised due to the higher thananticipated defaults on the notes receivable included in CLST Asset I which hasresulted in a default under the Trust I Credit Agreement and an approximately$3.5 million increase in the allowance for doubtful accounts during the twelvemonths ended November 30, 2009. As a result of the Company’s default underthe Trust I Credit Agreement, the amount due to Fortress under this agreementhas been classified as current as of November 30, 2009. The Company hasalso been engaged in several lawsuits which have resulted in the Companyincurring significant legal fees. The combination of the increase in theallowance for doubtful accounts and high legal fees has resulted in the Companyincurring a net loss of approximately $5.2 million during the twelve monthsended November 30, 2009. The Company is continuing discussions to resolvethe default under the Trust I Credit Agreement. The Company has made a claimunder its directors and officers liability insurance policy for reimbursementof legal fees incurred in excess of our $1.0 million self retention amount. Itis uncertain whether the Company can continue as a going concern if itcontinues to incur net losses and if the Company loses the CLST Asset Iconsumer receivables as a result of the default under the Trust I CreditAgreement.

 

***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 to complianceare significant, our profitability, stock price and results of operations andfinancial condition could be materially adversely affected.***

 

We are required to complywith the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 forthis Form 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 our internal control over financial reportingis not adequate. We have identified two deficiencies that constitute material weaknesses: (1) theCompany has not required SAS 70 reports and is not receiving timely auditedfinancial statements from the servicers of the Company’s consumer receivableportfolios, and (2) the Company lacks adequate supervision, segregation ofduties, and technical accounting expertise necessary for an effective system ofinternal control and timely financial reporting.****During thecourse of our ongoing evaluation and integration of the internal control overfinancial reporting, we may identify additional areas requiring improvement,and we may have to design enhanced processes and controls to address issuesidentified through this review.

 

We believe that theout-of-pocket costs, the diversion of management’s attention from running theday-to-day operations and operational changes caused by the need to comply withthe requirements of Section 404 of the Sarbanes-Oxley Act could besignificant. If the time and costs associated with such compliance exceed ourcurrent expectations, our profitability, cash flow and financial conditioncould be negatively affected.

 

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We cannot be certain at thistime that our auditors will not identify material weaknesses in internalcontrol over financial reporting. If we fail to comply with the requirements ofSection 404 or if we or our auditors identify and report such materialweakness, the accuracy and timeliness of the filing of our annual and quarterlyreports may be negatively affected and could cause investors to lose confidencein our reported financial information, which could have a negative effect onthe trading price of our common stock. In addition, a material weakness in theeffectiveness of our internal control over financial reporting could result inan increased chance of fraud and reduce our ability to detect and preventfraud, reduce our ability to obtain financing and require additionalexpenditures to comply with these requirements, each of which could negativelyimpact our business, profitability and financial condition.

 

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

 

Our net interest income isaffected by changes in market interest rates and other economic factors beyondour control. Interest rates for demand deposits and other short term cash investmentsin the U.S. have dropped significantly in the past year. A material portion ofthe Company’s assets consists of cash. As of November 30, 2009, our cashand cash equivalents were $4.8 million. As a result, declines in such interestrates will reduce the Company’s income and directly and adversely affect theCompany’s budget. The majority of our cash is invested in Texas Capital Bank,N.A. at a variable interest rate and in government repurchase contracts, wherewe are earning less than 1% per year. Each deposit of our cash is FDIC insuredor government insured.

 

***The Company hashad difficulty collecting money it is due from some purchasers of itsoperations.***

 

We are owed amounts from thesales of our non-U.S. operations. Collection proceedings outside of the U.S.tend to be cumbersome and expensive. We believe we are owed as much as $1.7million from the Mexico Sale.  Due to thedifficulty of collecting money from Mexico, we cannot predict an outcome atthis time. However, we are pursuing various strategies to collect what webelieve is owed to us. The cost of collecting the amount from Mexico that webelieve is owed may be significant and may exceed the value of the amount atissue.

 

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

 

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

 

·                  control of the market forthe security by one or a few broker-dealers that are often related to thepromoter or issuer;

 

·                  manipulation of pricesthrough prearranged matching of purchases and sales and false and misleadingpress releases;

 

·                  “boiler room” practicesinvolving high-pressure sales tactics and unrealistic price projections byinexperienced sales persons;

 

·                  excessive and undisclosedbid-ask differentials and markups by selling broker-dealers; and

 

·                  the wholesale dumping of thesame securities by promoters and broker-dealers after prices have beenmanipulated to a desired level, along with the resulting inevitable collapse ofthose prices and with consequent investor losses.

 

Although we do not expect tobe in a position to dictate the behavior of the market or of broker-dealers whoparticipate in the market, management will strive within the confines ofpractical limitations to prevent the described patterns from being establishedwith respect to our commonstock.

 

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

 

The shares of our common stock are traded on the PinkSheets. Shares of our commonstock are thinly-traded, meaning that the number of persons interested inpurchasing our common shares at or near ask prices at any given time may berelatively small or non-existent. This situation is attributable to a number offactors, including our reclassification to discontinued operations.

 

As a consequence, our stockprice may not reflect an actual or perceived value. Also, there may be periodsof several days or more when trading activity in our shares is minimal ornon-existent, as compared to a seasoned issuer that has a large and steadyvolume of trading activity that will generally support continuous sales withoutan adverse effect on share price. A broader or more active public tradingmarket for our common shares may not develop or if developed, may not besustained.  Due to these conditions, youmay not be able to sell your shares at or near ask prices or at all if you needmoney or otherwise desire to liquidate your shares.

 

The Company has entered into the DissolutionStipulation which provides, among other things, that, on or before March 5,2010, the Company will send notice of its intent to file a certificate ofdissolution with the Delaware Secretary of State on March 26, 2010, andthat the notice shall indicate that the certificate of dissolution will not beeffective until June 24, 2010. Accordingly, in a press release issued on March 5, 2009, theCompany announced that it intended to file a certificate of dissolution withthe Delaware Secretary of State on March 26, 2010 and that suchcertificate of dissolution would not be effective until June 24,2010.  If a certificate of dissolution isfiled in accordance with the Dissolution Stipulation, then immediately afterthe close of business on June 24, 2010, the Company will close its stocktransfer books; accordingly it is expected that the trading of its stock on thePink Sheets will cease at the same time.

 

***Because of the nature of our assets, our quarterlyoperating results may fluctuate.***

 

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

 

·                  the timing and amount ofcollections on our consumer receivable portfolios;

·                  a decline in the estimatedvalue of our consumer receivable portfolio recoveries;

·                  increases in operatingexpenses; and

·                  general and economic marketconditions.

 

***We may not be able to recover sufficient amounts onour consumer receivable portfolios to recover the costs associated with thepurchase of those portfolios and to fund our operations.***

 

Our ability to recover onour portfolios and produce sufficient returns can be negatively impacted by thequality of the purchased receivables. In the normal course of our portfolioacquisitions, some receivables may be included in the portfolios that fail toconform to certain terms of the purchase agreements, and we may seek to returnthese receivables to the seller for payment. However, we cannot guarantee thatany of such sellers will be able to meet their payment obligations to us.Accounts that we are unable to return to sellers may yield no return. If cashflows from operations are less than anticipated as a result of our inability tocollect sufficient amounts on our receivables it could materially affect ourability to satisfy our debt obligations and our future operating costs.

 

***We are dependent upon outside collection agencies toservice all our consumer receivable portfolios.***

 

Any failure by our thirdparty recovery partners to adequately perform collection services for us orremit such collections to us could materially reduce our revenues and ourprofitability. In addition, our revenues, cash flow and profitability could bematerially adversely affected if we are not able to secure replacement recoverypartners and redirect payments from the debtors to our new recovery partnerpromptly in the event our agreements with our third-party recovery partners areterminated, our third-party recovery partners fail to adequately perform theirobligations or if our relationships with such recovery partners adverselychange.

 

We received theDefault Notice dated December 2, 2009 from Fortress Corp. stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the 

 

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SSPE Trust, has failed toperform its servicing duties with respect to that portion of the receivablesportfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We alsoreceived a Second Default Notice dated February 8, 2010 from FortressCorp. stating that an additional event of default has occurred and iscontinuing under the Trust II Credit Agreement because the three-month rollingaverage annualized default rate of the Class A receivables in the TrustII  portfolio had exceeded 5.0% as of January 31,2010. On February 26, 2010, the parties to the Trust II Credit Agreemententered into the Fortress Waiver whereby 1) each event of default declared inthe Default Notice and the Second Default Notice was waived, 2) Trust II becamethe sole borrower under the Trust II Credit Agreement, 3) the outstandingborrowings attributable to SSPE Trust were paid in full, 4) SSPE Trust andtheir affiliates were released from all further obligations under the Trust IICredit Agreement, and 5) the SSPE Trust assets were removed as pledgedcollateral for the Trust II Credit Agreement. The Fortress Waiver also amendedcertain terms of the Trust II Credit Agreement including the elimination ofTrust II’s right to further borrowings and the requirement for Trust II to payan unused commitment fee.

 

Also, during the fourth quarter of 2009, unexpectedly to the Company,the FBI and other government agencies seized certain assets of Fair, includingtheir servers, computers and other items used by Fair in the servicing of ourCLST Asset III portfolio. Due to these and other facts, we understand Fair wasclosed for a period of time and was unable to fully service our CLST Asset IIIportfolio for an extended period of time. As a result, we have moved theservicing of our CLST Asset III portfolio to an alternate servicer. Effective February 1,2010, Highlands assumed all servicing functions previously performed by Fair.Highlands is fully independent of Fair and the Company, and there are norelated party relationships of any nature among Fair, Highlands or the Company.Fair had been fully co-operating with the logistics of the transfer of theservicing of the CLST Asset III portfolio to Highlands, however, in February 2010Fair commenced bankruptcy proceedings, which may negatively impact the timingand completeness of this transfer.

 

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

 

During times of economicrecession, the amount of defaulted consumer receivables generally increases,which contributes to an increase in the amount of personal bankruptcy filings.As of November 30, 2009 our portfolios related to Trust I, Trust II andTrust III have accounts over 90 days past due in the amount of approximately$3,350,000, $63,000 and $29,000, respectively.** **Under certain bankruptcy filings,a debtor’s assets are sold to repay credit originators, but since the defaultedconsumer receivables we purchase are generally unsecured or second liens weoften would not be able to collect on those receivables. We cannot assure youthat our collection experience would not decline with an increase in bankruptcyfilings. If our actual collection experience with respect to a defaultedconsumer receivables portfolio is significantly lower than we projected when wepurchased the portfolio, our earnings, liquidity and the value of our consumer receivableassets could be negatively affected.

 

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

 

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

 

·                  the Fair DebtCollection Practices Act;

·                  the FederalTrade Commission Act;

·                  theTruth-In-Lending Act;

·                  the Fair CreditBilling Act;

·                  the EqualCredit Opportunity Act; and

·                  the Fair CreditReporting Act.

 

Additional laws may beenacted that could impose additional restrictions on the servicing andcollection of 

 

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receivables.Such new laws may adversely affect the ability to collect the receivables.Because the receivables were originated and serviced pursuant to a variety offederal and/or state laws by a variety of entities and involved consumers whichmay include all 50 states, the District of Columbia and Puerto Rico, there canbe no assurance that all original servicing entities have at all times been insubstantial compliance with applicable law. Additionally, there can be noassurance that we or our recovery partners have been or will continue to be atall times in substantial compliance with applicable law. The failure to complywith applicable law could materially adversely affect our ability to collectour receivables and could subject us to increased costs and fines andpenalties. In addition, our third-party recovery partners may be subject tothese and other laws and their failure to comply with such laws could alsomaterially adversely affect our revenues and earnings.

 

***Weare party to litigation that distracts our management, is expensive to conductand seeks damage awards against us.***

 

OnFebruary 13, 2009, we filed a lawsuit, the Federal Court Action, againstthe Red Oak Group alleging that the defendants have engaged in numerousviolations of federal securities laws in making purchases of our common stockand sought to enjoin any future unlawful purchases of our stock by them. On March 2, 2009, certain of ourstockholders, including the Red Oak Group, filed a derivative action, the StateCourt Action, alleging that Messrs. Kaiser, Durham, and Tornekentered into self-dealing transactions at the expense of the Company and itsstockholders and violated their fiduciary duties. Although we have directors and officers liabilityinsurance, it is uncertain whether the insurance will be sufficient to cover alldamages, if any, that we may be required to pay in the State Court Action. Inaddition, both lawsuits have distracted the attention of our management and areexpensive to conduct. Our Board and management have expended a substantialamount of time in connection with these matters, diverting resources andattention that would otherwise have been directed toward our portfolios ofreceivables, our plan of dissolution, and other important matters.  We have incurred substantial legal and otherprofessional service costs in connection with these lawsuits, approximately$3.0****million as of November 30, 2009.Because of the costs and distractions associated with the further prosecutionof the Federal Court Action, the Board, as an exercise of its business judgment,determined that the action should be dismissed, and the Company has filed amotion to that effect, which the Red Oak Group has opposed.We expect to continue to spend additionaltime and incur additional professional fees, expenses and other costs with respectto the Federal Court Action and State Court Action, all of which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Weare subject to certain default provisions under our loan agreements related tothe acquisitions by CLST Asset I and CLST Asset II that may be triggered byevents over which we have no control, and the assets of CLST Asset I and CLSTAsset II may be foreclosed upon; furthermore, the credit facility that CLSTAsset II currently has access to has been reduced and will expire in September 2010.***

 

**CLST Asset I**

 

The loan obligations ofTrust I under the Trust I Credit Agreement are secured by a first prioritysecurity interest in substantially all of the assets of Trust I, includingportfolio collections. The loan is a non-recourse term loan.  The Trust I Credit Agreement containscustomary covenants and events of default for facilities of its type, includingamong other things, limitations on the delinquent accounts rate and defaultrates of the notes receivable accounts, as more fully described in Footnote 3of the notes to the consolidated financial statements.  A copy of the Trust I Credit Agreement wasfiled as an exhibit to the Company’s Current Report on Form 8-K filedNovember 17, 2008, as amended to date.

 

If an event of defaultoccurs under the Trust I Credit Agreement, whether or not the default ismaterial to the loan as a whole, the lender has various remedies, includingamong other things, raising the interest rate payable on the loan andaccelerating all of the obligations of Trust I under the Trust I CreditAgreement, which would cause the entire remaining outstanding principal balanceplus accrued and unpaid interest and fees to be declared immediately due andpayable.

 

In addition, the Companyhas no control over the delinquency or default rates of the notes receivableaccounts now held by Trust I. An event of default occurs if the three-monthrolling average delinquent accounts rate exceeds 10.0% or the three-monthrolling average annualized default rate exceeds 7.0%.  On October 16, 2009, we received anotice of default from Fortress stating that an event of default has occurredand is continuing under the 

 

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Trust I Credit Agreement.The Fortress notice states that the three-month rolling average annualizeddefault rate of the Trust I portfolio has exceeded 7.0%. As a result of the default,pursuant to the Trust I Credit Agreement, the interest rate payable by Trust Ihas increased by an additional 2% per annum, and Fortress is entitled toforeclose on the assets of Trust I and sell them to satisfy amounts due itunder the Trust I Credit Agreement. Fortress has not yet sought to foreclose on the assets of Trust I,however, if it does so, the Company may lose some or all of its investment inTrust I.

 

The Companybelieves that between $1.3 million and $2.2 million of receivables purchasedwere ineligible, as defined in the Trust I Purchase Agreement, at the time ofpurchase. Of these potentially ineligible receivables, approximately $574,000have become defaulted receivables. The Company has notified Fortress of thesepotentially ineligible receivables and discussions with Fortress are ongoing. The Company cannot predict whenor if these matters will be resolved favorably or at all.

 

**CLSTAsset II**

 

TrustII is a party to a non-recourse, revolving loan agreement between Trust II,Summit, SSPE and SSPETrust, as co-borrowers, Summit and Eric J. Gangloff, as Guarantors, FortressCorp., as the lender, and Summit Alternative Investments, LLC, as the initialservicer, pursuant to which Trust II purchased $9.6 million of receivables with an aggregate purchasediscount of $0.8 million during the twelve months ended November 30, 2009.  In conjunction with this loan agreement,Trust II borrowed $6.4 million to purchase the consumer receivables and becamea co-borrower under the Trust II Credit Agreement that permits Trust II to usemore than $15 million of the aggregate availability under the revolvingfacility. A copy of the Trust II Credit Agreement was filed as an Exhibit tothe Company’s Current Report on Form 8-K filed December 19, 2008, asamended to date.

 

Advancesunder the revolver are limited to an amount equal to, net of certainconcentration limitations set forth in the Trust II Credit Agreement, (a) thelesser of (1) the product of 85% and the purchase price being paid foreligible receivables with a credit score greater than or equal to 650 (“***Class A Receivables***”) or(2) the product of 80% and the then-current aggregate balance of principaland accrued and unpaid interest outstanding for Class A Receivables plus (b) thelesser of (1) the product of 75% and the purchase price being paid foreligible receivables with a credit score less than 650 (“***Class B Receivables***”) or(2) the product of 50% and the then-current aggregate balance of principaland accrued and unpaid interest outstanding for Class B Receivables.

 

During the second quarter of 2009 we were informed bySummit that the $50 million credit facility we entered into with Trust II,Summit and various other parties had been reduced by $20 million to $30million.  Summit did not indicate thespecific reasons for the reduction in the credit facility other than it waspart of a negotiation with Fortress regarding a default on another Summitportfolio.  This reduction has no impacton the Company because during the third quarter of 2009, we ceased purchasingany new receivables under the facility and are no longer originating new loansunder the credit agreement and, as a result, the Company is no longer drawingadditional funds under the credit agreement. Because we are no longer originating new loans under this creditagreement, FCC is no longer providing origination services to the Company. Theorigination services performed by FCC included loan documentation, collateraldocumentation where applicable, credit verification, and other requiredactivities to secure loan approval per the Company’s standards.  FCC was paid a one-time fee of 2% of theoriginal principal amount of loans originated for performing theseservices.  Once a loan was approved, FCCwould perform the monthly servicing activities, which would includecollections, reporting, lock box services, customer service, and other relatedservices. FCC was paid 1.5%, per annum, of the outstanding principal balancefor these services.  As of November 30,2009, total borrowings under the Trust II Credit Agreement were $15.1 million,of which $5.0 million was attributable to Trust II.

 

TheTrust II Credit Agreement contains customary covenants and events of defaultfor facilities of its type, including among other things, limitations on thedelinquent accounts rate and default rates of the consumer receivable accounts,as more fully described in Footnote 3 of the notes to the consolidatedfinancial statements.  If an event ofdefault occurs, whether or not the default is material to the loan as a whole,the lender has various remedies, including among other things, raising theinterest rate payable on the loan and accelerating all of Trust II’sobligations under the Trust II Credit Agreement, which would cause the entireremaining outstanding principal balance plus accrued and unpaid interest andfees to be declared immediately due and payable.

 

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Furthermore,the Company has no control over the delinquency or default rates of theconsumer receivable accounts that the Trust II acquires.  An event of default occurs if the three-monthrolling average delinquent accounts rate exceeds 15.0% for Class A Receivablesor 30.0% for Class B Receivables, or the three-month rolling averageannualized default rate exceeds 5.0% for Class A Receivables or 12.0% for Class BReceivables. As of November 30, 2009, defaulted receivables totaled$58,000. There can be no assurance that these delinquency or default rates willnot result in an event of default for Trust II, which would allow the lenderto, among other things, raise the interest rate payable on the loan, accelerateall of Trust II’s obligations under the Trust II Credit Agreement, and sell allthe assets of Trust II to satisfy the amounts due.

 

We received theDefault Notice dated December 2, 2009 from Fortress Corp. stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the SSPE Trust, hasfailed to perform its servicing duties with respect to that portion of thereceivables portfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We alsoreceived a Second Default Notice dated February 8, 2010 from FortressCorp. stating that an additional event of default has occurred and iscontinuing under the Trust II Credit Agreement because the three-month rollingaverage annualized default rate of the Class A receivables in the TrustII  portfolio had exceeded 5.0% as of January 31,2010. On February 26, 2010, the parties to the Trust II Credit Agreemententered into the Fortress Waiver whereby 1) each event of default declared inthe Default Notice and the Second Default Notice was waived, 2) Trust II becamethe sole borrower under the Trust II Credit Agreement, 3) the outstandingborrowings attributable to SSPE Trust were paid in full, 4) SSPE Trust andtheir affiliates were released from all further obligations under the Trust IICredit Agreement, and 5) the SSPE Trust assets were removed as pledgedcollateral for the Trust II Credit Agreement. The Fortress Waiver also amendedcertain terms of the Trust II Credit Agreement including the elimination ofTrust II’s right to further borrowings and the requirement for Trust II to payan unused commitment fee.

 

***Weintend to cease filing reports with the SEC.***

 

We currently filecurrent and periodic reports under the Exchange Act. In order to eliminate theexpenses we incur to comply with the reporting requirements of the ExchangeAct, and to the extent the Company is able under applicable law, we intend tocease/suspend filing current and periodic reports under the Exchange Act withthe SEC.

 

**TheFollowing Three Risk Factors May Arise If or When The Company Files ItsCertificate of Dissolution:**

 

***Stockholderswill not be able to buy or sell shares of our common stock after we dissolve.***

 

We intend todiscontinue trading of our stock on the Pink Sheets on, or as soon as possibleafter, the date on which we file our certificate of dissolution with theSecretary of State of the State of Delaware. After this time, there will be no further trading of our stock on thePink Sheets or otherwise and we will not record any further transfers of ourstock on our books except by will, intestate succession, or operation oflaw.  Therefore, shares of our stock willlikely not be freely transferable nor issuable upon exercise of outstandingoptions after the date of filing of a certificate of dissolution with theSecretary of State of the State of Delaware. All liquidating distributions, if any, from us after the date of filingof our certificate of dissolution with the Secretary of State of the State ofDelaware will be made to our stockholders pro rata according to theirrespective holdings of stock as of the date of filing of the certificate ofdissolution.

 

***Wecannot be certain of the amount, if any, or the timing of the distributions toour stockholders under the plan of dissolution.***

 

Liquidation anddissolution may not create value to our stockholders or result in any remainingcapital for distribution to our stockholders. Claims, liabilities and expensesfrom operations (including, but not limited to, operating costs such assalaries, directors’ fees, directors’ and officers’ insurance, payroll andlocal taxes, legal and

 

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accounting fees andmiscellaneous office expenses) will continue to be incurred as we seek to winddown operations in dissolution.  Inaddition, we expect to continue to incur significant costs associated with theRed Oak litigation.  If claims,liabilities and expenses are greater than expected, that will reduce the amountavailable for distribution to our stockholders.

 

Additionally, weare currently unable to predict the precise timing of any liquidatingdistributions. The timing of such distributions will depend on and could bedelayed by, among other things, the resolution of the Company’s outstandinglitigation matters, the timing of sales of our non-cash assets and claimsettlements with creditors. Additionally, a creditor could seek an injunction against the making ofsuch distributions to our stockholders on the ground that the amounts to bedistributed were needed to provide for the payment of our liabilities andexpenses. Any action of this type could delay or substantially diminish theamount available for such distribution to our stockholders.

 

***Ifthe Company’s assets are distributed to stockholders without payment of orappropriate provision being made for all the Company’s liabilities inconnection with the winding up of its affairs, stockholders could be liable foramounts distributed to them.***

 

Under Delawarelaw, if we fail to pay or provide adequately for the Company’s liabilities andobligations in connection with the winding up of the Company, for a period ofthree years following the filing by the Company of its certificate ofdissolution, a stockholder of the Company could be held liable to creditors ofthe Company for his or her pro rata portion (based on ownership of common stockas of the record date for the distribution) of any such liability, limited tothe amount previously received by the stockholder in distributions from theCompany under the plan of dissolution. We do not plan to make any distributionpursuant to the plan of dissolution without payment or adequate provisionhaving been made for all the Company’s liabilities.

 

***RedOak is attempting to nominate a slate of directors to the Company’s Board.***

 

Red Oak isattempting to nominate two individuals for election to our Board at the nextannual meeting.  Although an annualmeeting is not currently scheduled, if Red Oak is successful and its directorsare elected to our Board, they may disagree with the other directors regardingthe conduct and actions of the Company. Because the Board would then be evenly divided between Red Oak’snominees on the one hand and Mr. Durham and Mr. Tornek on the other,the Board might find itself unable to take action.  This may negatively affect the Company’sability to effectively and timely implement our plan of dissolution.

 

**Item 1B.  Unresolved Staff Comments**

 

The Company received commentletters from the staff of the Division of Corporation Finance of the SEC. Thecomments from the staff were issued with respect to its review of our AnnualReport on Form 10-K, and related amendments, for the year ended November 30,2008 and review of our Quarterly Reports on Form 10-Q, and relatedamendments, for the quarterly periods ended February 28, 2009, May 31,2009 and August 31, 2009.  In its responseto the SEC’s comments, the Company has included additional disclosures inamendments to its periodic filings, however, there remains an unresolvedcomment related to the Company’s inability to disclose audited financialstatements and pro forma financial information on Trust I.  To date, the Company has not been able toprepare historical financial statements for Trust I, conduct audits of suchhistorical financial statements, or to prepare related pro forma financial information,in either case, satisfying the requirements of Rule 8-04 and 8-05 ofRegulation S-X as the seller of Trust I did not initially provide the Companyand its auditors with access to historical books and records, or supportingmaterials, relating to Trust I necessary to prepare such historical financialsor to conduct an audit thereof.  On January 26,2010, the seller provided to the Company certain historical financialinformation for Trust I. The Company is evaluating this information and attemptingto compile the historical financial statements that can be audited.

 

**Item 2.  Properties**

 

In October 2007, wemoved from our previous corporate headquarters located in Coppell, Texas to atemporary office located in Dallas, Texas, upon receipt of notice fromBrightpoint that we were required to vacate the Coppell office within thirty(30) days of such notice. Our lease in the temporary office expired on March 31,

 

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2008. On April 1, 2008, we moved into ourcurrent location at 17304 Preston Road, Dallas, TX 75252.  We believe the new office space is in areasonable location and adequately suits our needs. Our lease expires in June 2011.We neither own nor lease any other properties at this time.

 

**Item 3.  Legal Proceedings**

 

**Introduction**

 

The Company has expendeda significant amount of management time and resources in connection with theFederal Court Action and the State Court Action (as defined below). The Companyhas had settlement discussions with Red Oak regarding the Federal Court Actionand the State Court Action, but those discussions have not been successful andare not ongoing.  The Company may have further settlement discussions withRed Oak in the future.  No assurance can be given that any settlementagreement could be reached if the Company undertakes further discussions or, ifa settlement agreement is entered into, that the terms of any settlement wouldnot have a material adverse effect on the Company, its financial position, orits results of operations.

 

**Federal Court Action**

 

In December 2008,David Sandberg of the Red Oak Group placed a telephone call to Robert Kaiserexpressing interest in the Red Oak Group making a minority investment in theCompany and obtaining control of the Company. Our Board responded by suggestingthat the Red Oak Group and the Company discuss the Red Oak Group’s desire tomake a minority investment and obtain control after the Company filed itsAnnual Report on Form 10-K for the fiscal year ended November 30,2008 with the SEC and made its results of operations available to the Company’sstockholders.

 

On January 15, 2009,the Red Oak Group acquired 5,000 shares of our common stock in secondary marketand privately negotiated transactions.  On or about January 30, 2009,the Red Oak Group requested that the Company provide a stockholder list andsecurity position listings, which it said it would use to make a tender offer. On February 3, 2009, the Red Oak Group announced its plan to commence atender offer to acquire up to 70% of our outstanding shares of common stock at$0.25 per share.  On February 5, 2009, we adopted the Rights Planwhich became effective on February 16, 2009.  Stating the Company’sRights Plan as its reason, the Red Oak Group announced on February 9, 2009that it had abandoned its intention to make a tender offer.  Nevertheless,the Red Oak Group continued through February 13, 2009 to acquire shares ofour common stock in the secondary market and privately negotiated transactionsresulting in its beneficial ownership of 4,561,554 shares of our common stock(according to the Red Oak Group’s Schedule 13D filed with the SEC on February 18,2009), representing approximately 19.05% of our outstanding common stock as ofthe record date. The Red Oak Group made its purchases of our common stock inopen-market and privately negotiated transactions, not by means of tender offermaterials filed with the SEC.

 

On February 13,2009, we filed a lawsuit in the United States District Court for the NorthernDistrict of Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and DavidSandberg (the “***FederalCourt Action***”).  Our Original Complaint and Application forInjunctive Relief alleges that Red Oak engaged in numerous violations offederal securities laws in making purchases of our common stock and sought toenjoin any future unlawful purchases of our stock by them, their agents, andpersons or entities acting in concert with them. We believe Red Oak violatedfederal securities laws as follows:

 

(i)                                     violating Rule 14(e)-5 of theExchange Act by not truly abandoning its tender offer and instead directly orindirectly purchasing or arranging to purchase shares not in connection withits tender offer and without complying with the procedural, disclosure andanti-fraud requirements applicable to tender offers regulated under Section 14of the Exchange Act;

 

(ii)                                  violating Exchange Act Rule 14d-5(f) byfailing to return the Company’s stockholder list, which we provided to Red Oakupon its request, and by using such list for a purpose other than in connectionwith the dissemination of tender offer materials in connection with its tenderoffer;

 

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(iii)                               violating Exchange Act Rule 14(d)-10by purchasing shares pursuant to its tender offer at varying prices rather thanpaying consideration for securities tendered in the tender offer at the highestconsideration paid to any stockholder for securities tendered; and

 

(iv)                              violating Section 13(d) of theExchange Act by not timely filing a Schedule 13D and disclosing the informationrequired therein.

 

On March 13, 2009,we announced that we would hold our Annual Meeting of Stockholders on May 22,2009 in Dallas, Texas, and that the close of business on April 2, 2009would be the record date for the determination of stockholders entitled toreceive notice of, and to vote at, the Annual Meeting or any adjournments orpostponements thereof.

 

On March 18, 2009,the Red Oak Group sent a letter to us demanding to inspect and copy certain ofour books and records.  We have taken the position that the Red Oak Groupdid not comply with state law requirements applicable to stockholders seekingsuch information.

 

On March 19, 2009,the Red Oak Group sent a letter to us stating its intention to put forthseveral precatory proposals including stockholder votes for: approval toproceed with the 2007 shareholder-approved plan of dissolution; approval of theNovember 10, 2008 transaction whereby CLST Asset I, a wholly ownedsubsidiary of Financo, entered into a purchase agreement to acquire all of theoutstanding equity interests of Trust I from a third party for approximately$41.0 million; approval of the 2008 Long Term Incentive Plan (“***2008 Plan***”) pursuant to which theBoard approved the new issuance to themselves of up to 20 million shares ofcommon stock, or just over 97% of the common stock outstanding at the time thisplan was approved; approval of the December 12, 2008 transaction wherebyTrust II, a newly formed trust wholly owned by CLST Asset II, a wholly ownedsubsidiary of Financo entered into a purchase agreement, effective as of December 10,2008, to acquire (i) on or before February 28, 2009 receivables of atleast $2 million, subject to certain limitations and (ii) from time totime certain other receivables, installment sales contracts, and related assets;and approval of the February 13, 2009 transaction whereby CLST Asset III,a newly formed, wholly owned subsidiary of Financo, which is one of CLST’sdirect, wholly owned subsidiaries, purchased certain receivables, installmentsales contracts, and related assets owned by Fair, which is partly owned byTimothy S. Durham, an officer and director of CLST. On the same day, the RedOak Group sent a letter to us stating its intention to nominate a slate ofdirectors to our Board.

 

On April 6, 2009, wenotified the Red Oak Group that our Board rejected the Red Oak Group’snominations for Class I and Class II seats, as the nominations werenot in accordance with our certificate of incorporation.  In addition, wealso rejected the Red Oak Group’s proposals because they were not proper inform or substance under federal and state law to come before an AnnualMeeting.  We offered to discuss the Red Oak Group’s concerns, directornominations, and stockholder proposals provided that (1) the Red Oak Groupand the Company enter into a confidentiality and standstill agreement, (2) theRed Oak Group appropriately make publicly available disclosures regarding itsrapid accumulation of the Company’s shares and its intentions to acquirecontrol of the Company that are required by the federal securities laws,including in a Report on Schedule 13D, and (3) the Red Oak Group not votethe shares that the Company believes it to have acquired in violation ofapplicable law, including the tender offer rules and other rules regulatingsuch accumulation of shares under the federal securities laws, at the AnnualMeeting.

 

Also on April 6,2009, we filed our First Amended Complaint and Application for InjunctiveRelief in the Federal Court Action adding Red Oak’s affiliates (Pinnacle Partners,LLC; Pinnacle Fund, LLLP; and Bear Market Opportunity Fund, L.P.) asdefendants, alleging the same and other violations of federal securities laws,including:

 

(i)                                     filing a materially false and misleadingSchedule 13D and failing to amend the same after delivering to the Company aNotice of Director Nominations and proposal for business at the Annual Meeting;

 

(ii)                                  violating Section 14(d) of theExchange Act by engaging in fraudulent, deceptive and manipulative acts inconnection with its tender offer by failing to abide by Section 14(d)’stiming requirements and by failing to make required filings with the SEC; and

 

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(iii)                               that any attempt to solicit proxies fromour stockholders with respect to director nominations or notice of businesswould be misleading in light of the defendants’ illegal activities inaccumulating Company stock.

 

Through this action, weseek to obtain various declaratory judgments that the defendants have failed tocomply with federal securities laws and to enjoin the defendants from, amongother things, further violating federal securities laws and from voting any andall shares or proxies acquired in violation of such laws.

 

Also on April 6,2009, because, among other reasons, we did not expect the litigation, whichbears directly upon our Annual Meeting of stockholders, to be resolved for somemonths, our Board postponed the Annual Meeting of stockholders previouslyscheduled for May 22, 2009 until September 25, 2009.

 

 On April 15,2009, the Red Oak Group submitted another letter to the Company, providingadditional information regarding the stockholder proposals it intends to bringbefore the Annual Meeting and revising those proposals to: request the Board tocomplete the dissolution approved at the stockholder meeting held in 2007;advise the Board that the stockholders do not approve of the transactionpurportedly entered into as of November 10, 2008 whereby CLST Asset I, awholly owned indirect subsidiary of the Company, entered into a purchaseagreement to acquire the outstanding equity interest in Trust I and request thedirectors to take any available and appropriate actions; disapprove the 2008Plan adopted by the Board and request the Board not to issue any additionalshare grants or option grants under such plan and request that the directorsrescind their approval of such plan; advise the Board that the stockholdersdisapprove of the transaction purportedly entered into as of December 12,2008 pursuant to which CLST Asset II, an indirect wholly owned subsidiary ofthe Company, entered into a purchase agreement to acquire certain receivableson or before February 28, 2009 and request the directors to take anyavailable and appropriate actions; and advise the Board that the stockholdersdisapprove of the transaction purportedly entered into as of February 13,2009 whereby CLST Asset III, an indirect wholly owned subsidiary of the Companypurchased certain receivables, installment contracts and related assets ownedby Fair and request the directors to take any available and appropriateactions.

 

On July 24, 2009, wefiled our Brief in Support of Application for Preliminary Injunction.  The Red Oak Group filed its Opposition on August 7,2009, and we filed our Reply Brief in Support on August 14, 2009. On October 14,2009, the Court denied the Company’s Application for Preliminary Injunction.

 

On December 30,2009, the Company voluntarily filed a Motion to Dismiss the Federal CourtAction (“***Motion to Dismiss***”).  As an exercise of itsbusiness judgment, CLST’s board of directors has decided not to pursue CLST’sclaims against the Red Oak Group beyond the preliminary injunction stage.

 

On January 20, 2010,the Red Oak Group filed its Combined Motion for Leave to Amend, to Join ThirdParties, to Vacate Scheduling Order and to Continue the Trial Date (“***Motion for Leave***”) and its Motionfor Attorneys’ Fees under Rule 11 of the Federal Rules of CivilProcedure (“***Rule 11 Motion***”).  By its Motion for Leave, RedOak sought to join Messrs. Durham, Kaiser, and Tornek as defendants and toadd claims against them and CLST respectively for alleged violations ofSections 13(d), 14(a), and 10(b) of the Exchange Act and certain rules promulgatedthereunder.  By its Rule 11 Motion,the Red Oak Group sought to recover all of its “attorneys’ fees and costs indefending this action” from CLST based on the legal contention that injunctiverelief is not available for a violation of Section 13(d) of theExchange Act.

 

OnMarch 2, 2010, the Court denied the Company’s Motion to Dismiss andgranted the Red Oak Group’s Motion for Leave. The Court also denied the Red Oak Group’s Rule 11 Motion.

 

TheFederal Court Action remains pending.

 

**State Court Action**

 

On March 2, 2009,certain members of the Red Oak Group (namely, Red Oak Partners, LLC; PinnacleFund, LLP; and Bear Market Opportunity Fund, L.P.) and Jeffrey S. Jones (“***Jones***”) (the Red OakGroup and Jones may be collectively referred to below as “***Plaintiffs***”)filed a derivative lawsuit against Robert A. Kaiser, Timothy S. Durham, andDavid Tornek in the 134th District Court of Dallas County, Texas (the “***State Court Action***”).The 

 

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petition alleges that Messrs. Kaiser,Durham, and Tornek entered into self-dealing transactions at the expense of theCompany and its stockholders and violated their fiduciary duties of loyalty,independence, due care, good faith, and fair dealing. The petition asksthe Court to order, among other things, a rescission of the allegedself-interested transactions by Messrs. Kaiser, Durham, and Tornek; anaward of compensatory and punitive damages; the removal of Messrs. Kaiser,Durham, and Tornek from the Board; and that the Company hold an Annual Meetingof stockholders, or that the Company appoint a conservator to oversee andimplement the dissolution plan approved by stockholders in 2007.

 

On March 13, 2009,we announced that we would hold our Annual Meeting of Stockholders on May 22,2009 in Dallas, Texas, and that the close of business on April 2, 2009would be the record date for the determination of stockholders entitled toreceive notice of, and to vote at, the Annual Meeting or any adjournments orpostponements thereof.

 

On March 18, 2009,the Red Oak Group sent a letter to us demanding to inspect and copy certain ofour books and records.  We have taken the position that the Red Oak Groupdid not comply with state law requirements applicable to stockholders seekingsuch information.

 

On March 19, 2009,the Red Oak Group sent a letter to us stating its intention to put forthseveral precatory proposals including stockholder votes for: approval toproceed with the 2007 shareholder-approved plan of dissolution; approval of theNovember 10, 2008 transaction whereby CLST Asset I, a wholly ownedsubsidiary of Financo, entered into a purchase agreement to acquire all of theoutstanding equity interests of Trust I from a third party for approximately$41.0 million; approval of the 2008 Plan pursuant to which the Board approvedthe new issuance to themselves of up to 20 million shares of common stock, orjust over 97% of the common stock outstanding at the time this plan wasapproved; approval of the December 12, 2008 transaction whereby Trust II,a newly formed trust wholly owned by CLST Asset II, a wholly owned subsidiaryof Financo entered into a purchase agreement, effective as of December 10,2008, to acquire (i) on or before February 28, 2009 receivables of atleast $2 million, subject to certain limitations and (ii) from time totime certain other receivables, installment sales contracts and related assets;and approval of the February 13, 2009 transaction whereby CLST Asset III,a newly formed, wholly owned subsidiary of Financo, which is one of CLST’sdirect, wholly owned subsidiaries, purchased certain receivables, installmentsales contracts and related assets owned by Fair, which is partly owned byTimothy S. Durham, an officer and director of CLST. On the same day, the RedOak Group sent a letter to us stating its intention to nominate a slate ofdirectors to our Board.

 

On April 6, 2009, wenotified the Red Oak Group that our Board rejected the Red Oak Group’snominations for Class I and Class II seats, as the nominations werenot in accordance with our certificate of incorporation.  In addition, wealso rejected the Red Oak Group’s proposals because they were not proper inform or substance under federal and state law to come before an AnnualMeeting.  We offered to discuss the Red Oak Group’s concerns, directornominations, and stockholder proposals provided that (1) the Red Oak Groupand the Company enter into a confidentiality and standstill agreement, (2) theRed Oak Group appropriately make publicly available disclosures regarding itsrapid accumulation of the Company’s shares and its intentions to acquirecontrol of the Company that are required by the federal securities laws,including in a Report on Schedule 13D, and (3) the Red Oak Group not votethe shares that the Company believes it to have acquired in violation ofapplicable law, including the tender offer rules and other rules regulatingsuch accumulation of shares under the federal securities laws, at the AnnualMeeting.

 

Also on April 6,2009, because, among other reasons, we did not expect the litigation, whichbears directly upon our Annual Meeting of stockholders, to be resolved for somemonths, our Board postponed the Annual Meeting of stockholders previouslyscheduled for May 22, 2009 until September 25, 2009.

 

On April 15, 2009,the Red Oak Group submitted another letter to the Company, providing additionalinformation regarding the stockholder proposals it intends to bring before theAnnual Meeting and revising those proposals to: request the Board to completethe dissolution approved at the stockholder meeting held in 2007; advise theBoard that the stockholders do not approve of the transaction purportedlyentered into as of November 10, 2008 whereby CLST Asset I, a wholly ownedindirect subsidiary of the Company, entered into a purchase agreement toacquire the outstanding equity interest in Trust I and request the directors totake any available and appropriate actions; disapprove the 2008 Plan adopted bythe Board and request the Board not to issue any additional share 

 

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grants or option grantsunder such plan and request that the directors rescind their approval of suchplan; advise the Board that the stockholders disapprove of the transactionpurportedly entered into as of December 12, 2008 pursuant to which CLSTAsset II, an indirect wholly owned subsidiary of the Company, entered into apurchase agreement to acquire certain receivables on or before February 28,2009 and request the directors to take any available and appropriate actions;and advise the Board that the stockholders disapprove of the transactionpurportedly entered into as of February 13, 2009 whereby CLST Asset III,an indirect wholly owned subsidiary of the Company purchased certainreceivables, installment contracts and related assets owned by Fair and requestthe directors to take any available and appropriate actions.

 

On April 30, 2009,the Red Oak Group and Jones amended their petition in the State CourtAction.  In addition to the relief already requested, the petition soughtto compel the Company to hold its 2008 and 2009 annual stockholders’ meetingswithin sixty days; to enjoin Messrs. Kaiser, Durham, and Tornek from anyinterference or hindrance of such meetings or the election of directors; toenjoin Messrs. Kaiser, Durham, and Tornek from voting any shares of stockacquired in the alleged self-interested transactions; and to appoint a specialmaster.  On June 3, 2009 and again on June 12, 2009, pursuant tocourt order, the Red Oak Group and Jones amended their petition to, among otherthings, remove Bear Market Opportunity Fund, L.P. as a plaintiff and add RedOak Fund, L.P. as a plaintiff.

 

 On May 5,2009, the Red Oak Group and Jones filed a motion seeking to compel the Companyto hold its 2008 and 2009 stockholders’ meetings on June 30, 2009 and toappoint a special master and requested an expedited hearing on both. Hearings were held on May 8, 2009 and May 29, 2009, but no ruling wasreached.

 

On August 14, 2009,our Board postponed the Annual Meeting of stockholders from September 25,2009 to October 27, 2009.

 

On August 24, 2009,the Red Oak Group resubmitted its director nomination letter and its letterstating its intention to put forth the stockholder proposals, as mentioned inthe March 19, 2009 and April 15, 2009 letters.

 

On August 25, 2009,the Court set an evidentiary hearing on the Plaintiffs’ Application forTemporary Injunction, which had yet to be filed, for October 7 and 8,2009.  Plaintiffs’ request for injunctiverelief concerned Messrs. Kaiser, Durham, and Tornek voting any shares ofstock acquired in the alleged self-interested transactions.

 

On August 28, 2009,the parties executed a Stipulation Regarding the Company’s Annual Meeting ofStockholders (“***Stipulation***”). The Court approved the Stipulation the same day and entered an Order identicalto the Stipulation’s terms.  Pursuant to the Stipulation, absent adetermination by the Court of good cause shown, the Company must hold itsannual stockholders’ meeting for the election of one Class I director andone Class II director and consideration of any properly submittedproposals that are proper subjects for consideration at an annual meeting on October 27,2009, with a record date for that meeting of September 25, 2009. Good cause for delaying the Annual Meeting beyond October 27, 2009, andcorrespondingly amending the September 25, 2009 record date, includesamong other things, situations where reasonable delay is necessary: (1) forthe Board to avoid breaching any of their fiduciary duties to the Company orthe Company’s stockholders; (2) to assure compliance with the Company’scertificate of incorporation and bylaws; (3) for the Company or the Boardto comply with state or federal law; or (4) to assure compliance with anyorder of any court or regulatory authority having jurisdiction over the Companyor members of its Board.

 

We received a letterdated September 22, 2009 from the Red Oak Group seeking, pursuant to Section 220of the Delaware General Corporation Law, to inspect the books and records ofthe Company, including among other things a stockholder list as of the recorddate. The letter states that the purpose of such request is to enable the RedOak Group to solicit proxies to elect directors at the 2009 Annual Meeting andto communicate with stockholders. Our counsel responded by letter dated September 30,2009 that the Company was aware of its obligations under Section 220 ofthe Delaware General Corporation Law but believed that the demand letter didnot comply with the inspection requirements under Section 220. We receivedanother letter dated September 29, 2009 from the Red Oak Group pursuant toSection 220 of the Delaware General Corporation Law in which the Red OakGroup requests to inspect the books and records of the Company pertaining to,among other things, all analyses performed with respect to our net operatinglosses and a list of all business ventures and dealings Messrs. Tornek andDurham have evaluated or commenced in the past ten years and a list of allinvestments they currently share. Our counsel 

 

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responded by letter datedOctober 6, 2009 that (i) the commencement of the Red Oak Group’sderivative action bars it from using a Section 220 demand as a substitutefor discovery permissible in litigation; (ii) the stated purposes of thedemand letter do not constitute proper purposes under Section 220; and (iii) thescope of information requested in the demand letter is overly broad and notlimited to books and records that are “essential and sufficient” to accomplishthe Red Oak Group’s stated purposes.

 

On October 9, 2009,the Court denied Plaintiffs’ application for injunctive relief, which sought toenjoin Messrs. Kaiser, Durham, and Tornek from voting certain shares atthe CLST annual shareholders’ meeting currently scheduled for October 27,2009.   Further, the Court granted Defendants’ plea to thejurisdiction, granted Defendants’ motion to disqualify Plaintiffs, anddismissed Plaintiffs’ derivative claims.  Beyond that, the Court grantedDefendants’ amended motion to stay, thereby staying all remaining direct claimsasserted by Plaintiffs.   Defendants’ motion to disqualify Plaintiffswas based on Plaintiffs’ lack of adequacy to pursue derivative claims on thefollowing grounds: (1) that Red Oak improperly brought derivative claimsto advance its own personal interests; (2) that Red Oak had engaged inillegal conduct by violating federal securities laws; and (3) that Joneswas only a tag-along plaintiff and therefore suffered the same adequacyproblems as Red Oak, the driving force behind the State Court Action.  TheCourt reached each of these rulings after the two-day evidentiary hearing.

 

On October 15, 2009,we applied to the Court, on an emergency basis, for an order to: (1) reopenthis case for the limited purpose of modifying the Court’s Order RegardingAnnual Meeting of Stockholders entered on August 28, 2009 (the “***Annual Meeting Order***”); (2) modifyits Annual Meeting Order to prevent CLST from alternatively being in violationof (a) federal securities law, Delaware statutory law, and its Bylaws or (b) theAnnual Meeting Order; (3) nullify the current September 25, 2009record date; and (4) grant an emergency hearing as soon as possible. A hearing was held on CLST’s emergency motion on October 16, 2009. The Court continued the hearing until a time agreeable to the parties and theCourt on or before October 26, 2009.

 

On October 29, 2009, Plaintiffs filed theirMotion and Memorandum to Reopen Case And To Reconsider (“***Motion to Reconsider***”)concerning the Court’s Order of October 9, 2009, which granted Defendants’Plea to the Jurisdiction and Motion to Disqualify Plaintiffs and dismissedPlaintiffs’ derivative claims.   On December 10,2009, Plaintiffs filed their Motion and Memorandum to Reopen Case and CompelAnnual Stockholders’ Meeting (“***Motion to Compel***”).

 

On November 12, 2009, the parties executed aSecond Stipulation and Order Setting and Regarding an Annual Meeting ofStockholders of the Company (the “***Second Stipulation***”).  The Court approved the Second Stipulation on November 13,2009 and entered an Order identical to the Second Stipulation’s terms.  The Second Stipulation provides that theCompany must hold its annual stockholders’ meeting on December 15, 2009and that the record date for that meeting must be set as October 30, 2009.

 

At the December 15, 2009 hearing on Plaintiffs’Motion to Reconsider, Plaintiffs’ counsel stated on the record that Plaintiffs’Motion to Compel had not been properly noticed and therefore was not before theCourt.  The Court denied Plaintiffs’Motion to Reconsider on December 21, 2009.

 

On January 15, 2010,Plaintiffs filed their Motion for Summary Relief, Summary Judgment, andApplication for Injunctive Relief to Compel the Company’s Annual Stockholders’Meeting (“***Motion forSummary Relief***”).  Bytheir Motion for Summary Relief, Plaintiffs sought for the Company to hold itsannual stockholders’ meetings for 2008, 2009, and 2010 on March 25,2010.  On February 15, 2010, theCourt heard Plaintiffs’ Motion for Summary Relief and, in part, granted therelief requested.  Specifically, theCourt ordered, pursuant to its Order and Interlocutory Partial Summary Judgment(the “***Second Annual Meeting Order***”)as follows: (1) Absent a determination by the Court for good cause shown,the Company shall hold its annual stockholders’ meeting on March 23, 2010(the “***Annual Meeting***”); the AnnualMeeting satisfies the Company’s requirement to hold its 2008 and 2009 annualstockholders’ meetings; the record date for the Annual Meeting shall be March 8,2010; and the Company shall provide notice in accordance with applicableDelaware law to all CLST stockholders on or before March 12, 2010 for theAnnual Meeting.  By the same order, theCourt also appointed IVS Associates, Inc. to be the independent inspectorof elections to oversee the voting process of the Annual Meeting, tabulateproxies, and certify the election results. By separate order dated February 15, 2010, and upon its own motion,the Court ordered that the State Court Action is reopened and reinstated on atwo-week trial docket beginning June 1, 2010.

 

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On February 18,2010, the Red Oak Group filed its Application for TRO and sought to prevent theCompany from filing a certificate of dissolution with the Delaware Secretary ofState on February 26, 2010, as the Company had disclosed in its Form 8-Kfiled on February 9, 2010.  Thehearing on the Application for TRO was held on February 23, 2010.  On February 24, 2010, the Court grantedRed Oak’s Application for TRO and, pursuant to the TRO, ordered, among otherthings, that the defendants (namely, CLST Holdings, Inc., Robert Kaiser,Timothy Durham, and David Tornek) and their agents be restrained from filingthe certificate of dissolution for the Company on or before midnight onWednesday, March 10, 2010, or until further order of the Court.

 

On March 2, 2010,the Court signed the order upon the Dissolution Stipulation, which provides,among other things, that, on or before March 5, 2010, the Company willsend notice of its intent to file a certificate of dissolution with theDelaware Secretary of State on March 26, 2010, and that the notice shallindicate that the certificate of dissolution will not be effective until June 24,2010.  Accordingly, in a press releaseissued on March 5, 2009, the Company announced that it intended to file acertificate of dissolution with the Delaware Secretary of State on March 26,2010 and that such certificate of dissolution would not be effective until June 24,2010.

 

After the Second AnnualMeeting Order issued, the Company filed an emergency motion for temporaryrelief (“***Motion for Relief***”)requesting that the Fifth District Court of Appeals of Texas at Dallas (the “***Court of Appeals***”) void the SecondAnnual Meeting Order.  On March 3,2010, the Court of Appeals issued a memorandum opinion in which the Court ofAppeals granted the Company’s Motion for Relief and voided the Second AnnualMeeting Order.  The Court of Appeals’judgment taxes all costs of the appeal against the Red Oak Group.  On March 4, 2010, the trial courtentered its Order dissolving the Second Annual Meeting Order.  For these reasons, there is currently noscheduled annual stockholders’ meeting.

 

**Item 4.  Reserved**

 

**PART II.**

 

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

 

**Market Information**

 

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

 

The following table setsforth, on a per share basis, high and low prices for our common stock for each quarter of fiscalyears 2008 and 2009. Prices are the high and low bid quotations per share forour common stock as reported onthe OTC market, as compiled by Pink Sheets LLC. Such bid quotationsreflect inter-dealer prices, without retail mark-up, mark-down or commissionand may not necessarily represent actual transactions.

 
| ** **                               | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal Year ended November 30, 2009 |       |     |       |    |       |
| Quarter Ended:                           |       |     |       |    |       |
| February 28, 2009                   |       | $        |  0.40 |    | $          |  0.07 |   |
| May 31, 2009                        |       | 0.30     |       | 0.12    |       |
| August 31, 2009                     |       | 0.18     |       | 0.12    |       |
| November 30, 2009                   |       | 0.21     |       | 0.09    |       |
|                                     |       |     |       |    |       |
| 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    |       |

 

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The Company has enteredinto the Dissolution Stipulation which provides, among other things, that, onor before March 5, 2010, the Company will send notice of its intent tofile a certificate of dissolution with the Delaware Secretary of State on March 26,2010, and that the notice shall indicate that the certificate of dissolutionwill not be effective until June 24, 2010. Accordingly, in a press release issued on March 5, 2009, the Companyannounced that it intended to file a certificate of dissolution with theDelaware Secretary of State on March 26, 2010 and that such certificate ofdissolution would not be effective until June 24, 2010.  If a certificate of dissolution is filed inaccordance with the Dissolution Stipulation, then immediately after the closeof business on June 24, 2010, the Company will close its stock transferbooks; accordingly it is expected that the trading of its stock on the PinkSheets will cease at the same time.

 

**Holders**

 

As of March 1, 2010,the last reported price of our common stock on the OTC market was $0.09per share. As of March 1, 2010, there were slightly less than 300stockholders of record of the Company’s common stock.

 

**Dividends**

 

Prior to the adoption of ourplan of liquidation and dissolution in 2007, our policy had been to reinvestearnings to fund future growth. Accordingly, we generally did not pay cashdividends on our commonstock. However, consistent with the plan, we paid the following cashdistributions 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 theplan totaled $2.10 per share or approximately $43.2 million. Approximately61.21% of the distribution was considered a taxable dividend in accordance withU.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.

 

The timing of any future liquidating distributions isunknown and is dependent upon the winding up of the Company’s business underthe plan of dissolution.  See “Item 1,Business — Plan of Dissolution”, for further discussion regarding our plan ofdissolution.

 

**Sales of Unregistered Securities**

 

On February 13, 2009, we issued 2,496,077 sharesof our common stock in connection with our purchase of assets owned by Fair, ofwhich 1,969,077 shares of common stock were issued to Fair, 452,000 shares ofcommon stock were issued to Timothy S. Durham, Chief Executive Officer andDirector of Fair and an officer, director and stockholder of our company, and75,000 shares of common stock were issued to James F. Cochran, Chairman andDirector of Fair. The issuance of these shares constituted a portion of theconsideration paid for the assets of Fair, and the shares were deemed to have avalue of $0.36 per share. The shares of common stock were issued by us in a transactionexempt from registration pursuant to Section 4(2) of the SecuritiesAct.

 

OnDecember 1, 2008 and March 5, 2009 our Board approved grants ofrestricted stock to our directors as discussed below in “—Equity CompensationPlan Information.”  These shares ofrestricted stock were issued by us in a transaction exempt from registrationpursuant to Section (4)(2) of the Securities Act.

 

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**IssuerPurchases of Equity Securities**

 

We have no programs torepurchase shares of our common stock. Furthermore, we did not repurchase any of our common stock during the fourth quarterof the last fiscal year.

 

**EquityCompensation Plan Information**

 

Our former 1993 Long-TermIncentive Plan (the “***1993 Plan***”)terminated on December 3, 2003. However, as disclosed in “Item 11,Executive Compensation,” Mr. Kaiser currently has exercisable options thatwere granted under the 1993 Plan. At a meeting of the Board of Directors on September 25,2007, our Board unanimously resolved to terminate our 2003 Long-Term IncentivePlan (the “***2003 Plan***”) due to thereduction in the Company’s workforce. As a result of the termination of the2003 Plan, all outstanding options to purchase the equity securities of theCompany issued thereunder were terminated as well. Therefore, there are nocurrently outstanding options to purchase the Company’s securities under the2003 Plan.

 

The following table providesthe number of securities to be issued upon the exercise of outstanding options,warrants and rights as of November 30, 2009:

 

**Equity Compensation 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 |       | —                                                                                                                                                 |       | —                                                                                                        |           | —                                                                                                                                                                                                      |       |
| **Total**                                                   | ** ** | **130,000**                                                                                                                                            | ** ** | **$**                                                                                                         | ** 4.93** | ** **                                                                                                                                                                                                  | **0**      | ** ** |

 

Subsequent to fiscal 2008,on December 1, 2008, our Board approved the 2008 Plan, and subsequentlyamended and restated on September 11, 2009 to decrease the number ofshares of common stock of the Company that may be issued under the 2008 Planfrom 20,000,000 to 2,000,000.  The plan, which is administered by theBoard, permits the grant of restricted stock, stock options and otherstock-based awards to employees, officers, directors, consultants and advisorsof the Company and its subsidiaries. The 2008 Plan provides that theadministrator of the 2008 Plan may determine the terms and conditionsapplicable to each award, and each award will be evidenced by a stock optionagreement or restricted stock agreement. The 2008 Plan will terminate on December 1, 2018.

 

On December 1, 2008 our Board approved the grant of 300,000 shares ofrestricted stock under the 2008 Plan to each of Timothy S. Durham, Robert A.Kaiser and Manoj Rajegowda.  For each restricted stock grant, 100,000shares vested on the date of grant and the remaining 200,000 of the shares vestin two equal annual installments on each anniversary of the date ofgrant. Subsequently, on February 24, 2009, Mr. Rajegowdaforfeited all stock issuances provided to him during the course of his Boardmembership in connection with his resignation from the Board. On March 5,2009, our Board approved the grant of 300,000 shares of restricted stock toDavid Tornek, our director who was appointed to fill the vacancy on the Board.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. The total value of the awards granted under the 2008 Plan using pricesdetermined as of the grant date were $0.22 per share for 600,000 shares granted on December 1, 2008 and$0.16 per share for 300,000 shares granted on March 5, 2009. As a resultof these grants, $180,000 will be expensed over the vesting periods.

 

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

 

This information has beenomitted as the Company qualifies as a smaller reporting company.

 

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

 

**Overview**

 

During 2007 we sold all ofour major assets. Our stockholders approved the U.S. Sale, the Mexico Sale, theplan of dissolution, and the name change to CLST Holdings, Inc. on March 28,2007. Throughout 2008 and 2009, only a small administrative staff remained towind up our business, and we continued to follow the plan of dissolutionadopted by our stockholders. However, consistent with the plan of dissolutionand its fiduciary duties, our Board has continued to consider the properimplementation of the plan of dissolution and the exercise of the authoritygranted to it thereunder. Our Board has in the past year considered whether itis possible, and if it would be in the best interest of the Company, tode-register with the SEC and thereby eliminate the Company’s responsibilitiesto file reports with the SEC.  Inaddition, due to the recent economic crisis, the Board and management hasevaluated various alternatives to safeguard our primary asset, cash, and tookseveral steps in late 2008 to protect this asset.  Although we believe our cash is now safe frombank failure and other near term economic risks, the effective interest rateshave been reduced substantially due to the U.S. economic crisis.  As discussed in further detail below under “—Recent Developments,” on November 10, 2008, December 12, 2008 and February 13,2009, we consummated three acquisitions of receivables portfolios which webelieve will provide a better investment return for our stockholders whencompared to the recent changes to interest rates and other investmentalternatives. Although we hold and collect consumer accounts receivable, wehave not abandoned our plan of liquidation and dissolution.** **See “Item 1, Business — Plan ofDissolution,” for further discussion regarding our plan of dissolution.

 

**Discussionof Critical Accounting Policies**

 

Our discussion and analysisof our financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting policies that are described in the Notes to the ConsolidatedFinancial Statements. The preparation of the consolidated financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. We continually evaluate our judgments andestimates in determination of our financial condition and operating results.Estimates are based on information available as of the date of the financialstatements and, accordingly, actual results could differ from these estimates,sometimes materially. Critical accounting policies and estimates are defined asthose that are both most important to the portrayal of our financial conditionand operating results and require management’s most subjective judgments. Themost critical accounting policies and estimates are described below.

 

***Revenue Recognition***

 

For the Company’s discontinuedoperations, revenue was recognized on product sales when delivery occurred, thecustomer took title and assumed risk of loss, terms were fixed anddeterminable, and collectability was reasonably assured. The Company did notgenerally grant rights of return.

 

For the Company’s continuingoperations, revenues will be recorded as earned from notes receivable.  Revenues consist of interest earned, latefees and other miscellaneous charges. Revenues are not accrued on accounts over 120 days without paymentactivity, unless payment activity resumes.

 

***Notes Receivable***

 

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

 

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The Company establishes an allowance for doubtfulaccounts for receivables where the customer has not made a payment for the mostrecent 120 day period.  The Companyspecifically analyzes notes receivable using historical activity, currenteconomic trends, changes in its customer payment terms, recoveries of previouslyreserved notes and collection trends when evaluating the adequacy of itsallowance for doubtful accounts. Any change in the assumptions used inanalyzing a specific note receivable may result in an additional allowance fordoubtful accounts being recognized in the period in which the changeoccurs.  The Company may from time totime make additional increases to the allowance based on the foregoing factors.Once a note receivable has been reserved due to nonpayment, the Company will nolonger accrue, for financial reporting purposes, interest earned on the notereceivable. Should the note receivable return to a performing status, then theCompany will resume accruing interest on the note receivable. The majority ofthe notes receivable have collateral in various forms, which may include asecond lien position on the borrower’s home or property.  Actual results could differ from thoseestimates. Recoveries are recorded against the allowance when payments arereceived.  Recoveries of notesreceivable, which were previously charged off, are recorded to income whenpayments are received. Notes receivable are charged off against the allowanceafter all means of collection have been exhausted and a legal determination hasbeen rendered that less than the full amount of the note receivable will becollected.

 

***Stock-Based Compensation***

 

On December 1, 2008, our Board approved the 2008Plan. Effective September 11, 2009, the Board amended and restated the2008 Plan to decrease the number of shares of common stock of the Company thatmay be issued under the 2008 Plan from 20,000,000 to 2,000,000. The followingis a brief description of the material terms of the 2008 Plan:

 

·                  The plan is administered by the Board ofthe Company.

 

·                  The plan 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.

 

·                  The aggregate number of shares of commonstock of the Company that may be issued under the plan is 2,000,000 shares.

 

·                  The plan provides that the administratorof the 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 plan will terminate on December 1,2018.

 

In addition, on December 1, 2008 the Boardapproved the grant of 300,000 shares of restricted stock to each of Timothy S.Durham, Robert A. Kaiser and Manoj Rajegowda. On February 24, 2009, Mr. Rajegowdaforfeited all stock issuances provided to him during the course of his Boardmembership in connection with his resignation from the Board. On March 5,2009, our Board approved the grant of 300,000 shares of restricted stock toDavid Tornek, our director who was appointed to fill the vacancy on the Board. Of each restricted stock grant, 100,000 shares vested on the date ofgrant and the remaining 200,000 of the shares vest in two equal annual installmentson each anniversary of the date of grant. The total value of the awards using agrant date price of $0.22 per share for 600,000 shares and $0.16 per share for300,000 shares is $180,000 and will be expensed over the vesting period.

 

For the twelve months ended November 30, 2009,the Company recognized $115,000, of expense related to the restricted stockgrants.

 

**RecentDevelopments**

 

***CLSTAsset I***

 

On November 10, 2008,our Board unanimously approved the acquisition of all of the outstanding equityinterest of Trust I from Drawbridge through CLST Asset I, a wholly ownedsubsidiary of Financo, which is one of 

 

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our direct, wholly owned subsidiaries through entryinto the Trust I Purchase Agreement to acquire all of the outstanding equityinterests of Trust I from a third party. The purchase price was approximately $41.0 million, which was financedby $6.1 million of cash on hand and by a non-recourse, term loan of approximately$34.9 million by an affiliate ofthe seller of Trust I, pursuant to the terms and conditions set forth in theTrust I Credit Agreement, dated November 10, 2008, among Trust I, Fortress,as lender, FCC, as the initial servicer, the backup servicer, and thecollateral custodian. The primary business of Trust I is to hold andcollect certain receivables.

 

The approximate 6,000receivables included in CLST Asset I are all consumer home improvement, repairand other related loans to homeowners. All loans represent loans to singlefamily dwellings. As of the purchase date, approximately 63% of the loans weresecured through a second lien on the property, with the remainder beingunsecured.  Approximately 89% of theloans are in the Northeastern part of the United States with the remainder inTexas, Georgia and Missouri, and at the time of purchase of the portfolio, theremaining time to maturity was in a range of 8-10 years, not including prepayments,if any. The purchase price reflects an approximately $0.7 million discount andas of the purchase date, the receivables had an average outstanding principalbalance of approximately $6,900 and an average interest rate of 14.4%.

 

Thefollowing table reflects the loan origination year as of the purchase date:

 
| **Year of origination** | ** ** | **% of CLST Asset I** | ** ** |
|-------------------------|------------|-----------------------|------------|
| 2000 – 2004        |       | 8.4                   | %          |
| 2005                    |       | 8.1                   | %          |
| 2006                    |       | 17.3                  | %          |
| 2007                    |       | 36.4                  | %          |
| 2008                    |       | 29.8                  | %          |
| Total                   |       | 100.0                 | %          |

 

For CLST Asset I, there were no loans originated in2009, as this was the purchase of a historical portfolio.

 

On October 16, 2009, we received a notice ofdefault from Fortress stating that an event of default has occurred and iscontinuing under the Trust I Credit Agreement. The Fortress notice states thatthe three-month rolling average annualized default rate of the Trust Iportfolio has exceeded 7.0%. As a result of the default, pursuant to the TrustI Credit Agreement, the interest rate payable by Trust I has increased by anadditional 2% per annum, and all collections by Trust I above amounts retainedto pay interest, fees, principal amortizations, and other charges that arenormally remitted to the Company, are instead being applied to outstandingprincipal under the Trust I Credit Agreement until the amount due has beenreduced to zero.  In addition, Fortressis entitled to foreclose on the assets of Trust I and sell them to satisfyamounts due it under the Trust I Credit Agreement.  Only Trust I is liable for amounts dueFortress under the Trust I Credit Agreement. Thus, although the Company could lose some or all of its investment inTrust I, the Company will not be obligated to pay any amounts due Fortressunder the Trust I Credit Agreement.  AllTrust I collections are being retained by Fortress and applied to pay interestand reduce indebtedness while the Company discusses amending the Trust I CreditAgreement, but Fortress has not sought to foreclose on the assets of TrustI.  Those discussions are ongoing.  The Company does not expect that Fortresswill foreclose on the assets of Trust I while negotiations are proceeding.

 

The Company believes that between $1.3 million and$2.2 million of receivables purchased were ineligible, as defined in the TrustI Purchase Agreement, at the time of purchase. Of these potentially ineligiblereceivables, approximately $574,000 have become defaulted receivables. TheCompany has notified Fortress of these potentially ineligible receivables anddiscussions with Fortress are ongoing. The Company cannot predict when or if thesematters will be resolved favorably or at all.

 

***CLSTAsset II***

 

On December 12, 2008,we, through Trust II,a newly formed trust wholly owned by CLST Asset II, a wholly owned subsidiaryof Financo, entered into the Trust II Purchase Agreement, effective as of December 10,2008, to acquire from time to time certain receivables, installment salescontracts and related assets owned by SSPE Trust and SSPE.  The Board unanimously approved theestablishment of the Trust II and the Trust II Purchase Agreement.Under the terms of the Trust II CreditAgreement, which Trust II entered into with Summit, as originator, and SSPE andSSPE Trust, as co-borrowers, Summit and Eric J. Gangloff, as Guarantors,Fortress Corp., 

 

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asthe lender, Summit Alternative Investments, LLC, as the initial servicer, andvarious other parties, Trust II committed to purchase receivables of at least$2.0 million.  In conjunction with thisagreement, Trust II became a co-borrower under a $50 million credit agreementthat permits Trust II to use more than $15 million of the aggregateavailability under the revolving facility. Trust II’s commitment to purchase $2.0 million of receivables wasfulfilled in the first quarter of 2009, when Trust II purchased $5.8 million ofreceivables, with an aggregate purchase discount of $0.5 million, that aretypically secured by a second mortgage or the personal property itself. Thesereceivables represent primarily home improvement loans originated through FCC,the service provider of CLST Asset I. The loans represent neworiginations with an average term of 9 years and a current average interestrate of 14.7%.** **Sincethese are new loans, the Company has managed the originations such that almost65% of the new loans had credit scores higher than 680, with a portfolioaverage of 676. As of June 2009, the Company is no longer originating newloans under the credit agreement.  Approximately 54% of these loans weresecured through a second lien on the property, with the remainder beingunsecured.   The loans are through the 48mainland states with the top five concentration as follows:

 
| **State**     | ** ** | **Percentage** | ** ** |
|---------------|------------|----------------|------------|
|          |       |           |       |
| Michigan      |       | 24             | %          |
| Ohio          |       | 21             | %          |
| Massachusetts |       | 6              | %          |
| Florida       |       | 6              | %          |
| New York      |       | 4              | %          |

 

Duringthe second quarter of 2009 we were informed by Summit that the credit facilitywe entered into with Trust II, Summit and various other parties had beenreduced by $20 million to $30 million. Summit did not indicate the specific reasons for the reduction in thecredit facility other than it was part of a negotiation with Fortress Corp.regarding a default on another Summit portfolio.  This reduction has no impact on the Companybecause during the third quarter of 2009, we ceased purchasing any newreceivables under the facility and are no longer originating new loans underthe credit agreement and, as a result, the Company is no longer drawingadditional funds under the credit agreement. Because we are no longer originating new loans under this creditagreement, FCC is no longer providing origination services to the Company. Theorigination services performed by FCC included loan documentation, collateraldocumentation where applicable, credit verification, and other requiredactivities to secure loan approval per the Company’s standards.  FCC was paid a one-time fee of 2% of theoriginal principal amount of loans originated for performing theseservices.  Once a loan was approved, FCC wouldperform the monthly servicing activities, which would include collections,reporting, lock box services, customer service, and other related services. FCCwas paid 1.5%, per annum, of the outstanding principal balance for theseservices.  As of November 30, 2009,total borrowings under the Trust II Credit Agreement were $15.1 million, ofwhich $5.0 million was attributable to Trust II.

 

We received the Default Notice dated December 2,2009 from Fortress Corp. stating that a servicer default had occurred and wascontinuing under the Trust II Credit Agreement, as a result of a materialadverse effect with respect to the servicer. The Default Notice states that Fair, in its capacity as a sub-servicerfor assets held by the SSPE Trust, has failed to perform its servicing dutieswith respect to that portion of the receivables portfolio owned by SSPE Trustfor which Fair has been retained as a sub-servicer by the SSPE Trust.  This failure, the Default Notice asserts, resultsfrom the ongoing federal investigation of Fair and Timothy Durham, andconstitutes a material adverse effect with respect to the servicer and thus abreach of a covenant under the Trust II Credit Agreement.  We also received a Second Default Notice datedFebruary 8, 2010 from Fortress Corp. stating that an additional event ofdefault has occurred and is continuing under the Trust II Credit Agreementbecause the three-month rolling average annualized default rate of the Class Areceivables in the Trust II  portfoliohad exceeded 5.0% as of January 31, 2010. On February 26, 2010, theparties to the Trust II Credit Agreement entered into the Fortress Waiverwhereby 1) each event of default declared in the Default Notice and the SecondDefault Notice was waived, 2) Trust II became the sole borrower under the TrustII Credit Agreement, 3) the outstanding borrowings attributable to SSPE Trustwere paid in full, 4) SSPE Trust and their affiliates were released from allfurther obligations under the Trust II Credit Agreement, and 5) the SSPE Trustassets were removed as pledged collateral for the Trust II Credit Agreement.The Fortress Waiver also amended certain terms of the Trust II Credit Agreementincluding the elimination of Trust II’s right to further borrowings and therequirement for Trust II to pay an unused commitment fee.

 

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***CLSTAsset III***

 

EffectiveFebruary 13, 2009, we, through CLST Asset III, a newly formed, whollyowned subsidiary of Financo, purchased certain receivables, installment salescontracts and related assets owned by Fair, James F. Cochran, Chairman andDirector of Fair, and Timothy S. Durham, Chief Executive Officer and Directorof Fair and an officer, director and stockholder of our Company under the TrustIII Purchase Agreement.  Messrs. Durham and Cochran own all of theoutstanding equity of Fair. In return for assets acquired under the Trust IIIPurchase Agreement, CLST Asset III paid the sellers total consideration of$3,594,354, consisting of cash, common stock of the Company and six promissorynotes. Additionally, Fair agreed to use its best efforts to facilitatenegotiations to add CLST Asset III or one of its affiliates as a co-borrowerunder one of Fair’s existing lines of credit with access to at least$15,000,000 of credit for our own purposes. To date, we have not beenadded as a co-borrower. Substantiallyall of the assets acquired by CLST Asset III are in one of two portfolios.Portfolio A is a mixed pool of receivables from several asset classes,including health and fitness club memberships, resort memberships, receivablesassociated with campgrounds and timeshares, in-home food sales and services,buyers clubs, delivered products, home improvements and tuitions. Portfolio B is made up entirely of receivables related to the sale of tanningbed products. Only 2% of these portfolios are home improvement loans and noneof the loans are secured.  The loans arethrough the 48 mainland states with the top five concentration as follows:

 
| **State**    | ** ** | **Percentage** | ** ** |
|--------------|------------|----------------|------------|
|         |       |           |       |
| Ohio         |       | 17             | %          |
| Florida      |       | 8              | %          |
| Colorado     |       | 8              | %          |
| Texas        |       | 6              | %          |
| Pennsylvania |       | 6              | %          |

 

During the second quarter of 2009 we beganimplementing the servicing, collection and other procedures relating tomanagement of CLST Asset III contemplated by the agreements between us and theservicer of the portfolio. Fair was the servicer of the CLST Asset IIIportfolio and is an affiliate of Mr. Durham. The implementation of theprocedures required several meetings with the servicer and were implementedduring the third quarter of 2009 with the exception of securing a lock box toreceive payments, which we expected to have in place during the fourth quarterof 2009.

 

During the fourth quarter of2009, unexpectedly to the Company, the FBI and other government agencies seizedcertain assets of Fair, including their servers, computers and other items usedby Fair in the servicing of our CLST Asset III portfolio. Due to these andother facts, we understand Fair was closed for a period of time and was unableto fully service our CLST Asset III portfolio for an extended period of time.As a result, we have moved the servicing of our CLST Asset III portfolio to analternate servicer. Effective February 1, 2010, Highlands assumed allservicing functions previously performed by Fair. Highlands is fullyindependent of Fair and the Company, and there are no related partyrelationships of any nature among Fair, Highlands or the Company. Fair had beenfully co-operating with the logistics of the transfer of the servicing of theCLST Asset III portfolio to Highlands, however, in February 2010 Faircommenced bankruptcy proceedings, which may negatively impact the timing andcompleteness of this transfer.

 

Our agreement with Highlandscalls for an initial term of six months and is automatically renewed in oneyear increments unless cancelled in writing by either party in accordance withthe terms of the agreement. We will incur servicing fees at market rates andper the terms of the agreement. Highlands is required to make daily remittancesof our collected accounts.

 

At this time, we believe that we have aright of recoupment against Fair for payments it has received on our behalf andnot remitted, and expect to exercise that right by withholding such amountsfrom any money due to Fair.  However,there can be no assurance that Fair will not challenge our recoupment right, orwhat the ultimate outcome of that challenge might be. On March 1, 2010approximately $73,000****was due toFair and the other sellers which has not been paid.

 

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

 

**Red Oak Litigation**

 

The Company has expended asignificant amount of management time and resources in connection with FederalCourt Action and the State Court Action.  Although we have directors and officers liability insurance, it isuncertain whether the insurance will be sufficient to cover all expenses anddamages, if any, that we may be required to pay in the State Court Action. Inaddition, both lawsuits have distracted the attention of our management and areexpensive to conduct. Our Board and management have expended a substantialamount of time in connection with these matters, diverting resources andattention that would otherwise have been directed toward our portfolios ofreceivables, our plan of dissolution, and other important matters.  We have incurred substantial legal and otherprofessional service costs in connection with these lawsuits, approximately$3.0****million as of November 30, 2009.Because of the costs and distractions associated with the further prosecutionof the Federal Court Action, the Board, as an exercise of its businessjudgment, determined that the action should be dismissed, and the Company hasfiled a motion to that effect, which the Red Oak Group has opposed. We expectto continue to spend additional time and incur additional professional fees,expenses and other costs with respect to the Federal Court Action and State CourtAction, all of which could have a material adverse effect on our business,financial condition and results of operations.

 

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**Results of Operations**

 

The Company reported a net loss of $5.2 million or$0.23 per basic and diluted share, for the twelve months ended November 30,2009, compared to a net loss of $1.7 million, or $0.08 per basic and dilutedshare for the prior year. The increased loss is primarily attributable to theactions taken by Red Oak, which has led to the costs incurred in connectionwith the Federal Court Action and State Court Action, offset slightly by theincome (net of expenses) generated by our portfolios.

 

The following table shows certain information as of November 30,2009 for each of CLST Asset I, CLST Asset II and CLST Asset III.   A more detailed description of the resultsfor each of these entities is provided below.   Amounts presented are in thousands, except for the approximate number ofcustomer accounts and the average outstanding principal balance per account.

 
| ** **                                         | ** ** | **CLST Asset I**      | ** ** | **CLST Asset II** | ** ** | **CLST Asset III**    | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **Principal Balance** | ** ** | **% of Total**    | ** ** | **Principal Balance** | ** ** | **% of Total** | ** ** | **Principal Balance** | ** ** | **% of Total** | ** ** |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Receivables  Aging (Principal)                     |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Current 0-30  Days                                 |       | $                     | 29,335     |              | 85.2       | %                     | $          | 7,181 |   | 97.9 | % | $ | 1,691 |   | 93.9 | % |
| 31 - 60 Days                                       |       | 1,205                 |       | 3.5               | %          | 52                    |       | 0.7 | % | 34 |   | 1.9 | % |
| 61 - 90 Days                                       |       | 556                   |       | 1.6               | %          | 39                    |       | 0.5 | % | 46 |   | 2.6 | % |
| 91 + 120                                           |       | 452                   |       | 1.3               | %          | 12                    |       | 0.2 | % | 29 |   | 1.6 | % |
| 120+                                               |       | 2,898                 |       | 8.4               | %          | 51                    |       | 0.7 | % | — |   | 0.0 | % |
| Total  Receivables                                 |       | 34,446                |       | 100.0             | %          | 7,335                 |       | 100.0 | % | 1,800 |   | 100.0 | % |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Allowance for  doubtful Accts                      |       | (3,610                | )          | -10.5             | %          | (58                   | )          | -0.8 | % | — |   | 0.0 | % |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Net Receivables                                    |       | 30,836                |       | 89.5              | %          | 7,277                 |       | 99.2 | % | 1,800 |   | 100.0 | % |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Discount                                           |       | (531                  | )          | -1.5              | %          | (630                  | )          | -8.6 | % | (55 | ) | -3.1 | % |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Acquisition fees                                   |       | 168                   |       | 0.5               | %          | 26                    |       | 0.4 | % | 41 |   | 2.3 | % |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Total                                              |       | $                     | 30,473     |              | 88.5       | %                     | $          | 6,673 |   | 91.0 | % | $ | 1,786 |   | 99.2 | % |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Accounts  Receivable Other                         |       | $                     | 2,010      |              |       |                  | $          | — |   |   |   | $ | — |   |   |   |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Notes Payable  and Loans Outstanding               |       | $                     | 28,666     |              |       |                  | $          | 4,997 |   |   |   | $ | 498 |   |   |   |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Approximate  Number of Customer Accounts           |       | 5,139                 |       |              |       | 981                   |       |   |   | 1,676 |   |   |   |
|                                               |       |                  |       |              |       |                  |       |   |   |   |   |   |   |
| Average Outstanding  Principal Balance per Account |       | $                     | 6,703      |              |       |                  | $          | 7,477 |   |   |   | $ | 1,074 |   |   |   |

 

**Fiscal 2009Compared to Fiscal 2008**

 

***Consolidated***

 

*Revenues. *Revenues,which primarily consist of interest and other charges earned from the Company’sreceivable portfolios, were $6.7 million for the twelve months ended November 30,2009 compared to $0.5 million  for thetwelve months ended November 30, 2008. Revenues forthe twelve months ended November 30, 2009 included $5.2 million from CLST Asset I, $1.2 million from CLST Asset IIand $0.3 million from CLST Asset III. Revenue for the twelve months ended November 30, 2008 included $0.5million from CLST Asset I.

 

*LoanServicing Fees. *Loan servicing fees, which primarily consist of loan servicing fees andtrust administration fees, were $0.8 millionfor the twelve months ended November 30, 2009 compared to $0.1million  for the twelve months ended November 30,2008 and represented 1.76% and 1.90% of the average annual aggregate

 

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outstanding principalbalances of receivables, respectively. Loan servicing fees for the twelve months ended November 30, 2009were $0.7 million forCLST Asset I, $0.1 million for CLST Asset II and none for CLST Asset III.

 

*Provisionfor doubtful accounts. *Provision for doubtful accounts was $3.5 million for the twelvemonths  ended November 30, 2009compared to $0.1 million for the twelve months ended November 30, 2008.The increase is primarily the result of an increase in the provision fordoubtful accounts for CLST Asset I of $3.4 million during the twelve monthsended November 30, 2009 as a result of an increase in the default ratesexperienced during the third and forth quarters of fiscal 2009.  The increases in the provision for doubtfulaccounts for the twelve months ended November 30, 2009 also included $0.1million for CLST Asset II and no provision for CLST Asset III.  Both of these portfolios were acquired duringthe twelve months ended November 30, 2009 and therefore did not have anyprovisions during the twelve months ended November 30, 2008.

 

*InterestExpense.*  Interestexpense is incurred from borrowings under the credit facilities of CLST Asset Iand CLST Asset II and the notes issued in connection with the CLST Asset IIIacquisition. Interest expense was $2.1million for the twelve months ended November 30, 2009 compared to $0.1million  for the twelve months ended November 30,2008 and represented 31.7% and 29.2% of revenue, respectively.  Interest expense for the twelve months ended November 30,2009 was $1.9 million for CLST Asset I, $238,000 for CLST Asset II and $26,000for CLST Asset III.

 

*General and AdministrativeExpenses.*  Selling,general and administrative expenses were$5.4 million for the twelve months ended November 30, 2009 compared to$2.2 million for the twelve months ended November 30, 2008.  The increase is primarily the resultof increased legal and professional fees. Our legal and professionalexpenses during the twelve months ended November 30, 2009 were $4.7million compared to $1.8 million during the twelve months ended November 30,2008.  Those fees relate primarily todefending against claims brought by the Red Oak Group against us and ourdirectors in the State Court Action.  Wealso incurred substantial professional fees in 2009 relating to the FederalCourt Action and to our arbitration claims against Wireless Solutions formonies we believe are due to us from the Mexico Sale.  We have made a claim under our directors andofficers liability insurance policy for reimbursement of amounts we areobligated under our certificate of incorporation and bylaws to advance to ourdirectors for their defense costs in the State Court Action.  Our carrier has agreed to reimburse us forthose expenses in excess of our $1 million self retention under the policy,subject to certain reservations of rights. The Company believes that we have exceeded our self retention amountduring the fourth quarter of 2009 and the carrier should begin to reimburse usfor amounts advanced to Messrs. Durham, Kaiser and Tornek in connectionwith their defense against claims brought by the Red Oak Group. Anyreimbursements received will offset the legal expenses incurred in general andadministrative expenses.  With respectto the Mexico Sale, we believe that Wireless Solutions owes us amounts relatingto the sale of our interest in CII. Therefore, we are pursuing claims against the buyers from the MexicoSale in an ICC arbitration proceeding. The arbitration proceeding was held in Mexico City, Mexico in October 2009and the arbitration panel has up to six months from the date of the arbitrationproceeding to issue their conclusion.  As of the dateof this Form 10-K, the arbitration panel has not issued theirconclusion.  We believe we are owed up to$1.7 million from the Mexico Sale, which has not been accrued and included inthe Company’s financial statements as of November 30, 2009.

 

*IncomeTaxes.*We had income tax expense of $26,000 for the twelve months ended November 30,2009 compared to $192,000 for the twelve months ended November 30, 2008.

 

*DiscontinuedOperations.*During fiscal year 2007, we sold all of our U.S. operations, including ourMiami-based Latin American operations, Mexico operations and Chile operations.For more information on these transactions, please see the Company’s AnnualReport on Form 10-K/A for the fiscal year ended November 30, 2008.

 

***CLSTAsset I***

 

Forthe twelve months ended November 30, 2009, collections for CLST Asset Iwere $11.7 million, representing $6.5 million of principal payments and $5.2million of interest and payments and other charges compared to collections of$1.1 million, representing $0.6 million of principal payments and $0.5 millionof interest and payments and other charges during the twelve months ended November 30,2008.  As of November 30, 2009, 

 

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theaggregate outstanding principal balance of the notes receivables net ofreserves and excluding certain accrued interest and deferred cost was $30.8million, which represents 75.1% of the original purchase price of $41.0 million.The ending balance consists of approximately 5,139 customer accounts, with anaverage outstanding principal balance per account of approximately $6,703.  The average interest rate for these accountswas 14.32% during the twelve months ended November 30, 2009.

 

Totalrevenues for the twelve months ended November 30, 2009 were approximately$5.2 million which primarily consisted of interest income collected from thenotes receivable.  Operating expenses forthis period were $6.0 million, which included a $3.5 million provision fordoubtful accounts, $1.9 million of interest expense to Fortress, our lender,and $0.7 million of servicing expense to FCC.

 

As of November 30, 2009, Trust Iowed $28.7 million to Fortress, representing 82.2% of the original loan amount.On October 16, 2009, we received a notice of default from Fortress statingthat an event of default has occurred and is continuing under the Trust ICredit Agreement. The Fortress notice states that the three-month rollingaverage annualized default rate of the Trust I portfolio has exceeded 7.0%. Asa result of the default, pursuant to the Trust I Credit Agreement, the interestrate payable by Trust I has increased by an additional 2% per annum, andFortress is entitled to foreclose on the assets of Trust I and sell them tosatisfy amounts due it under the Trust I Credit Agreement.  Fortress has not yet sought to foreclose onthe assets of Trust I, however, if it does so, the Company may lose some or allof its investment in Trust I. Beginning in October 2009, all receipts ofcustomer payments for CLST Asset I are being held in trust pending a resolutionto this matter. As of November 30, 2009 $2.0 million of net customerreceipts are held in this trust account and have been included in accountsreceivable other.

 

***CLSTAsset II***

 

Forthe twelve months ended November 30, 2009, collections for CLST Asset IIwere $3.2 million, representing $2.3 million of principal payments and $0.9million of interest and payments and other charges. There were no revenues orexpenses for CLST Asset II during the twelve months ended November 30,2008 as this portfolio was acquired in fiscal 2009.  As of November 30, 2009, the aggregateoutstanding principal balance of the notes receivables net of reserves andexcluding certain accrued interest and deferred cost was $7.3 million, whichrepresents 76.0% of the original purchase price of $9.6 million. The endingbalance consists of approximately 981customer accounts, with an averageoutstanding principal balance per account of approximately $7,477.  The average interest rate for these accountswas 14.7% during the twelve months ended November 30, 2009.

 

Totalrevenues for the twelve months ended November 30, 2009 were approximately$1.2 million which primarily consisted of interest income collected from thenotes receivable.  Operating expenses forthis period were $503,000, which included a $58,000 provision for doubtfulaccounts, $238,000 of interest expense to Fortress Corp., our lender, and$119,000 of servicing expense to FCC.

 

As of November 30,2009, CLST Asset II owed $5.0 million to Fortress Corp., representing 78.4% ofthe original loan amount. We received the Default Notice dated December 2, 2009 fromFortress Corp. stating that a servicer default had occurred and was continuingunder the Trust II Credit Agreement, as a result of a material adverse effectwith respect to the servicer.  TheDefault Notice states that Fair, in its capacity as a sub-servicer for assetsheld by the SSPE Trust, has failed to perform its servicing duties with respectto that portion of the receivables portfolio owned by SSPE Trust for which Fairhas been retained as a sub-servicer by the SSPE Trust.  This failure, the Default Notice asserts,results from the ongoing federal investigation of Fair and Timothy Durham, andconstitutes a material adverse effect with respect to the servicer and thus abreach of a covenant under the Trust II Credit Agreement.  We also received a Second Default Noticedated February 8, 2010 from Fortress Corp. stating that an additionalevent of default has occurred and is continuing under the Trust II CreditAgreement because the three-month rolling average annualized default rate ofthe Class A receivables in the Trust II portfolio had exceeded 5.0% as of January 31, 2010. On February 26,2010, the parties to the Trust II Credit Agreement entered into the FortressWaiver whereby 1) each event of default declared in the Default Notice and theSecond Default Notice was waived, 2) Trust II became the sole borrower under theTrust II Credit Agreement, 3) the outstanding borrowings attributable to SSPETrust were paid in full, 4) SSPE Trust and their affiliates were released fromall further obligations under the Trust II Credit Agreement, and 5) the SSPETrust assets were removed as pledged collateral for the Trust II CreditAgreement. The Fortress Waiver also amended certain terms of the Trust IICredit Agreement 

 

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includingthe elimination of Trust II’s right to further borrowings and the requirementfor Trust II to pay an unused commitment fee.

 

***CLSTAsset III***

 

Thereceivables included in CLST Asset III were purchased on February 13,2009. For the twelve months ended November 30, 2009, collections for CLSTAsset III were $2.0 million, representing $1.7 million of principal paymentsand $0.3 million of interest and payments and other charges.  As of November 30, 2009, the aggregate outstandingprincipal balance of the notes receivables net of reserves and excludingcertain accrued interest and deferred cost was $1.8 million, which represents48.6% of the original purchase price of $3.7 million. The ending balanceconsists of approximately 1,676 customer accounts, with an average outstandingprincipal balance per account of approximately $1,074.  The average interest rate for these accountswas 16.9% during the twelve months ended November 30, 2009.

 

Total revenues for the twelve months ended November 30,2009 were approximately $328,000 and primarily consisted of interest incomecollected from the notes receivable. Operating expenses for this period consisted of interest expense of$26,000, related to the seller notes delivered as part of the Trust IIIPurchase Agreement. Defaults of $208,000 during the twelve months ended November 30,2009 were applied to the notes payable to the sellers per the Trust IIIPurchase Agreement. At this time, we believe that we have aright of recoupment against Fair for payments it has received on our behalf andnot remitted, and expect to exercise that right by withholding such amountsfrom any money due to Fair.  However,there can be no assurance that Fair will not challenge our recoupment right, orwhat the ultimate outcome of that challenge might be. On March 1, 2010approximately $73,000****was due toFair and the other sellers which has not been paid.

 

**Liquidityand Capital Resources**

 

Subsequent to the sale ofour discontinued operations in March 2007 and prior to the acquisition ofTrust I in November 2008, we met our cash needs with existing funds andinterest and investment income generated by our cash and cash equivalents.  As of November 30, 2009, we had cash andcash equivalents of approximately $4.8 million, down from $9.8 million at November 30,2008. Historically, we have invested our cash and cash equivalents in eithermoney market accounts or short term Certificate of Deposits. The majority ofour cash is invested in Texas Capital Bank, N.A. at a variable interest rateand in government repurchase contracts, where we are earning less than 1% peryear. Each deposit of our cash is FDIC insured or government insured.  We financed our acquisitions of our receivablesportfolios with cash, non-recourse debt, and the issuance of shares of ourcommon stock.  Since the acquisitions ofour receivable portfolios, we also use the income generated from thesereceivable portfolios to meet our cash needs.

 

The report of ourindependent registered public accounting firm with respect to our financialstatements as of November 30, 2009 and for the year then ended contains anexplanatory paragraph with respect to our ability to continue as a goingconcern. This concernhas been raised due to the higher than anticipated defaults on the notesreceivable included in CLST Asset I which has resulted in a default under theTrust I Credit Agreement and an approximately $3.5 million increase in theallowance for doubtful accounts during the twelve months ended November 30,2009. As a result of the Company’s default under the Trust I Credit Agreement,the amount due to Fortress under this agreement has been classified as currentas of November 30, 2009. The Company has also been engaged in severallawsuits which have resulted in the Company incurring significant legal fees.The combination of the increase in the allowance for doubtful accounts and highlegal fees has resulted in the Company incurring a net loss of approximately$5.2 million during the twelve months ended November 30, 2009. The Companyis continuing discussions to resolve the default under the Trust I CreditAgreement. The Company has made a claim under its directors and officersliability insurance policy for reimbursement of legal fees incurred in excess ofour $1.0 million self retention amount. It is uncertain whether the Company cancontinue as a going concern if it continues to incur net losses and if theCompany loses the CLST Asset I consumer receivables as a result of the defaultunder the Trust I Credit Agreement.

 

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***OperatingActivities***

 

Thenet cash used in operating activities for the twelve months ended November 30,2009 was $3.8 million compared to cash received of $4.0 million for the twelvemonths ended November 30, 2008. The primary reason for this decrease wasthe collection of $4.7 million of accounts receivable from Brightpoint (thepurchaser of our U.S. and Miami operations) in 2008 and increased operatingexpenses in 2009 primarily related to the cost incurred in connection with theFederal Court Action and State Court Action, offset slightly by the income (netof expenses) generated by our consumer receivable portfolios. Our legal andprofessional expenses for the twelve months ended November 30, 2009 were$4.7 million compared to $1.8 million for the twelve months ended November 30,2008.  Those fees relate primarily todefending against claims brought by the Red Oak Group against us and ourdirectors in the State Court Action.  Wealso incurred substantial professional fees in the third quarter of 2009relating to the Federal Court Action and to our arbitration claims againstWireless Solutions for monies we believe are due to the Company from the MexicoSale.  We have made a claim under ourdirectors and officers liability insurance policy for reimbursement of amountswe are obligated to advance under our certificate of incorporation and bylawsto our directors for their defense costs in the State Court Action.  Our carrier has agreed to reimburse us forthose expenses in excess of our $1 million self retention amount under thepolicy, subject to certain reservations of rights.  The Company believes that we have exceededour self retention amount during the fourth quarter of 2009 and the carriershould begin to reimburse us for amounts advanced to Messrs. Durham,Kaiser and Tornek in connection with their defense against claims brought bythe Red Oak Group.  The Company hasexpended a significant amount of management time and resources in connectionwith Federal Court Action and the State Court Action. The Company has hadsettlement discussions with certain of the plaintiffs regarding the FederalCourt Action and the State Court Action.  The Company may have further settlementdiscussions in the future.  No assurance can be given that any settlementagreement could be reached if the Company undertakes further discussions or, ifa settlement agreement is entered into, that the terms of any such settlementwould not have a material adverse effect on the Company, its financial positionor its results of operations.

 

***InvestingActivities***

 

The net cash provided byinvesting activities for the twelve months ended November 30, 2009 was$6.0 million compared to $5.5 million of cash used by investing activitiesduring the twelve months ended November 30, 2008.  The increase in 2009 from 2008 is primarily aresult of the collection of consumer receivable portfolio principal of $10.2 million during the twelvemonths ended November 30, 2009 offset in part by (i) cash of $4.0 million used to fund theacquisitions of the CLSTAsset II and CLSTAsset III portfolios and (ii) $0.2 million in acquisition costs during thetwelve months ended November 30, 2009. During the twelve months ended November 30,2008 the Company used available cash of $6.1 million to fund in part itsacquisition of the CLST Asset I portfolio.

 

***FinancingActivities***

 

The net cash used in financing activities for thetwelve months ended November 30, 2009 was $7.2 million compared to $0.6million for the twelve months ended November 30, 2008.  The cash used in financing activities  was used to reduce the outstanding debtprincipal balance under the Trust I Credit Agreement, Trust II Credit Agreementand seller notes associated with the Trust III Purchase Agreement.

 

***LiquiditySources***

 

CLST Asset I. Our acquisition of Trust I was financed by approximately $6.1 million ofcash on hand and by a non-recourse, term loan of approximately $34.9 million to Trust I by an affiliate of theseller of Trust I, pursuant to the terms and conditions set forth in the TrustI Credit Agreement.  The loan matures on November 10,2013 and bears interest at an annual rate of 5.0% over the LIBOR Rate (asdefined in the Trust I Credit Agreement). Under the terms of the Trust I Credit Agreement, the net cash proceedsfrom the collection of consumer receivables held by Trust I in any particularmonth are remitted to the Company on or about the 20th day of the followingmonth.  As of November 30, 2009, theoutstanding balance of our term loan was $28.7 million, representing 82.2% ofour original balance. During fiscal 2009, we retired approximately $6.2 millionof our obligation to Fortress, and paid $1.8 million in interest expense, allfrom customer collections.

 

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The obligationsunder the Trust I Credit Agreement are secured by a first priority securityinterest in substantially all of the assets of Trust I, including portfoliocollections.  An event of default occursunder the Trust I Credit Agreement if the three-month rolling averagedelinquent accounts rate exceeds 10.0% or the three-month rolling averageannualized default rate exceeds 7.0%. For the fourth quarter of 2009, thesedefault rates were 7.43% and 8.45%, respectively.  Please see “Item 7, Recent Developments —CLST Asset I” above for information regarding the default notice the Companyreceived with regards to the Trust I Credit Agreement.

 

We have the rightto require the seller to repurchase any accounts, for the original purchaseprice applicable to such account, that do not satisfy certain specifiedeligibility requirements set out in the Trust I Purchase Agreement. If it isdiscovered by a party that a receivable account was not an “Eligible Receivable”as of the cut-off date of October 31, 2008, the seller is required torepurchase such receivable account unless such breach is remedied within thirtybusiness days of notice of such breach. An account is not an EligibleReceivable if, as of October 31, 2008, such receivable account is, amongother things, a defaulted receivable, subject to litigation, dispute or rightsof rescission, setoff or counterclaim, or is not subject to a duly recorded andperfected lien, the seller must repurchase the account.  The Company believes that between $1.3million and $2.2 million of receivables purchased were ineligible, as definedin the Trust I Purchase Agreement, at the time of purchase. Of thesepotentially ineligible receivables, approximately $574,000 have becomedefaulted receivables. The Company has notified Fortress of these potentiallyineligible receivables and  discussionswith Fortress are ongoing. The Company cannot predict when or if these matterswill be resolved favorably or at all.

 

CLSTAsset II. The Trust II has become a co-borrower under a $50 million creditagreement, which was reduced to a $30 million commitment during the second quarterof 2009, that permits Trust II to use more than $15 million of the aggregateavailability under the revolving facility to purchase receivables. The Trust IICredit Agreement is effective as of December 10, 2008, and was enteredinto among the Trust II, FCC, the originator, SSPE Trust and SSPE, theco-borrowers (who are the sellers under the Trust II Purchase Agreement),Fortress Corp., the lender, FCC, the initial servicer, Lyons Financial Services, Inc.,the backup servicer, Eric J. Gangloff, the guarantor, and U.S. Bank NationalAssociation, the collateral custodian. The non-recourse revolvingfacility was initially established by Summit, an affiliate of the sellers underthe Trust II PurchaseAgreement.  The revolver matures on September 28, 2010. Therevolver bears interest at an annual rate of 4.5% over the LIBOR Rate (asdefined in the Trust 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 obligationsunder the Trust 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.  An event ofdefault occurs under the Trust II Credit Agreement if the three-month rollingaverage delinquent accounts rate exceeds 15.0% for Class A Receivables or30.0% for Class B Receivables, or the three-month rolling averageannualized default rate exceeds 5.0% for Class A Receivables or 12.0% for Class BReceivables.  As of November 30,2009, there was a provision of $58,000 for customer accounts greater than 90days past due.  Please see “Item 7,Recent Developments — CLST Asset II” above for information regarding thedefault notice the Company received with regards to the Trust II CreditAgreement.

 

On February 26,2010, the parties to the Trust II Credit Agreement entered into the FortressWaiver whereby 1) each event of default declared in the Default Notice and theSecond Default Notice was waived, 2) Trust II became the sole borrower underthe Trust II Credit Agreement, 3) the outstanding borrowings attributable toSSPE Trust were paid in full, 4) SSPE Trust and their affiliates were releasedfrom all further obligations under the Trust II Credit Agreement, and 5) theSSPE Trust assets were removed as pledged collateral for the Trust II CreditAgreement. The Fortress Waiver also amended certain terms of the Trust IICredit Agreement including the elimination of Trust II’s right to furtherborrowings and the requirement for Trust II to pay an unused commitment fee.

 

We have the rightto require the sellers to repurchase any accounts, for the original purchaseprice applicable to such account plus interest accrued thereon, that do notsatisfy certain specified eligibility requirements set out in the Trust IICredit Agreement as of the purchase date. If it is discovered by a party that areceivable account was not an “Eligible Receivable” as of the purchase date,the seller is required to repurchase such receivable 

 

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account. An account isnot an Eligible Receivable if, as of the purchase date, such receivable accountis, among other things, a defaulted receivable, a delinquent receivable,subject to litigation, dispute or rights of rescission, setoff or counterclaim,or is not subject to a duly recorded and perfected lien, as the terms aredefined in the Trust II Credit Agreement, the seller must repurchase theaccount.  For the twelve months ended November 30,2009, there had not been a determination that any receivables failed to meetthe eligibility requirements set out in the Trust II Credit Agreement.

 

CLST Asset III. The consideration paid by CLST AssetIII in return for assets acquired under the Trust III Purchase Agreement, wasfinanced in part by the issuance of common stock and promissory notes to thesellers.  We issued 2,496,077 shares of our common stock at aprice of $0.36 per share.  In addition,we issued the sellers six promissory notes with an aggregate original statedprincipal amount of $898,588 (the “***Notes***”), ofwhich two promissory notes in an aggregate original principal amount of$708,868 were issued to Fair, two promissory notes in an aggregate originalprincipal amount of $162,720 were issued to Mr. Durham and two promissorynotes in an aggregate original principal amount of $27,000 were issued to Mr. Cochran.The Notes are full-recourse with respectto CLST Asset III and are unsecured.  The three Notes relating toPortfolio A (the “***PortfolioA Notes***”)  are payable in11 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 A Notes).  The three Notes relating toPortfolio B (the “***PortfolioB Notes***”) are payable in 21 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 PortfolioB Notes).

 

We have the rightto require the seller to repurchase any accounts, for the original purchaseprice applicable to such account, that do not satisfy certain specifiedeligibility requirements set out in the Trust III Purchase Agreement. If it isdiscovered by a party that a receivable account was not an “Eligible Receivable”as of February 13, 2009, the closing date of the acquisition, the selleris required to repurchase such receivable account. An account is not anEligible Receivable if, as of February 13, 2009, such receivable accountis a delinquent receivable, a defaulted receivable subject to litigation,dispute or rights of rescission, setoff or counterclaim, or is not subject to aduly recorded and perfected lien, the seller must repurchase the account.  For the twelve months ended November 30,2009, there had not been a determination that any receivables failed to meetthe eligibility requirements set out in the Trust III Purchase Agreement.

 

Additionally, the Trust III Purchase Agreementprovides that each of the sellers jointly and severally guarantee to CLST AssetIII, up to the aggregate stated principal amount of the Notes issued to suchseller, that the outstanding receivable balance of each receivable as of theclosing date will be collectible in full. For each receivable that becomes a defaulted receivable following theclosing date, the sellers are obligated to pay to CLST Asset III an amountequal to the outstanding receivable balance of such receivable and CLST AssetIII has the right to offset such amount against the amount due to the sellerunder the promissory notes issued to the sellers on the closing date.  The aggregate amount of each seller’sguarantee obligation is limited to the aggregate stated principal amount of thepromissory note issued to such seller representing approximately 25% of thetotal purchase price of the portfolio of approximately $3.6 million.  Since the principal balance of the notesdeclines over time as payments are made by the Company to the sellers, futuredefaulted receivables can be offset only against the then remaining balance ofthe notes issued to the sellers. In February 2010, Fair commencedbankruptcy proceedings which may limit the Company’s ability to continue tooffset future receivable defaults against the notes payable to Fair, but shouldnot impact the Company’s rights to continue to offset defaults of receivablesagainst the other remaining seller notes. Defaults of $208,000 during thetwelve months ended November 30, 2009 were offset against the notespayable to the sellers.The remaining obligation to the sellers, as of November 30, 2009,was $498,000 after interest was accrued and delinquent receivables wererecorded. At this time, we believe that we have a right of recoupmentagainst Fair for payments it has received on our behalf and not remitted, andexpect to exercise that right by withholding such amounts from any money due toFair.  However, there can be no assurancethat Fair will not challenge our recoupment right, or what the ultimate outcomeof that challenge might be. On March 1, 2010 approximately $73,000****was due to Fair and the other sellers which has not beenpaid.

 

***ContractualObligations***

 

Included in accounts payable at November 30,2009, is approximately $14.2 million associated with liabilities which accruedin periods 2002 and earlier, and which has been in dispute since 2001. TheCompany now 

 

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believesthat the statute of limitations on this trade payable may have expired. TheCompany is reviewing these liabilities, and considering appropriate steps toresolve them. In addition, the Company has contacted the vendor in questionseveral times during the second quarter of 2009 regarding this matter with noresults. The Company expects that the liabilities may be resolved at less thanthe book value thereof, but can not provide assurances as to the amount ortiming of any adjustments. In the event that the Company is able to settle thedispute with no payment, the settlement would result in $14.2 million of incometo the Company for federal income tax purposes, and therefore the deferredincome tax asset will be realized.  Ifthe Company is able to settle the dispute for any amount between $1 and $14.2million, the deferred tax asset will be adjusted accordingly.

 

**AssetQuality**

 

Our delinquency ratesreflect, among other factors, the credit risk of our receivables, the averageage of our receivables, the success of our collection and recovery efforts, andgeneral economic conditions.  The averageage of our receivables affects the stability of delinquency and loss rates ofthe portfolio. The table previously presented in “Item 7 Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Results of Operations” contains performance information for thereceivables as of and for the twelve months ended November 30, 2009 (the “***Asset Receivable Table***”).  The composition of the portfolios is expectedto change over time.  The futureperformance of the receivables in the portfolios may be different from thehistorical performance set forth in the Asset Receivable Table.  The Asset Receivable Table also sets forthour aging and the aggregate delinquency and loss experience for the accounts inthe portfolios as of and for the twelve months ended November 30,2009.  The global and economic crisis hashad and could continue to have an adverse effect on the portfolio.  The current deep economic recession andrising unemployment have contributed to the significant increases indelinquencies for 2009 compared to historical performance.  Our net losses and delinquencies may continueto correlate with declines in the general economy and increases inunemployment. Increases in net losses and delinquencies could continue,particularly if conditions in the general economy further deteriorate.  We cannot assure you that the futuredelinquency and loss experience for the receivables will be similar to thehistorical experience set forth on the Asset Receivable Table.

 

Anaccount is contractually delinquent if we do not receive the monthly payment bythe specified due date. After accounts are delinquent for 120 days forreceivables in CLST Asset I and for 90 days for receivables in CLST Asset II, aprovision (reserve) is made for the account balance. As of November 30,2009, the allowance for doubtful accounts recorded for CLST Asset I and CLSTAsset II is $3.6 million and $0.1 million, respectively.  The allowance for CLST Asset I and CLST AssetII is expensed in provision for doubtful accounts. For CLST Asset III,delinquent receivables are charged against the notes payable to the sellers perthe terms of the CLST III Purchase Agreement. Defaults of $208,000 during the twelve months ended November 30,2009 were offset against the notes payable to the sellers.

 

**NewAccounting Pronouncements**

 

Footnote 1 of the Notes tothe Consolidated Financial Statements, included in the Company’s Form 10-K,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, 2009, to the significant accountingpolicies used in the preparation of our Consolidated Financial Statements.

 

In December 2007, Financial AccountingStandards Board (the “***FASB***”) issued ASC 805-20 (formerly SFAS 141 (R)),“Business Combinations” which clarifies the accounting for a businesscombination and requires an acquirer to recognize the assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date, measured at their fair values as of that date. Therequirements of ASC 805-20 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.

 

In September 2006,the FASB issued ASC 820 (formerly SFAS 157), *FairValue Measurements and Disclosures*(“***ASC820***”), which clarifies the definition of fair value, establishesa framework for measuring fair value in GAAP, and expands disclosures aboutfair value measurement. ASC 820 does not require any new fair valuemeasurements and eliminates inconsistencies in guidance found in various prioraccounting pronouncements. The Company adopted ASC 820 as of December 1,2008 and it had no material impact on its consolidated financial statements.

 

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InApril 2009, the FASB issued ASC 825 (formerly FSP FAS 107-1), “*Interim Disclosures about Fair Value of FinancialInstruments”* ASC 825 requires disclosures about the fair value offinancial instruments whenever a public company issues financial informationfor interim reporting periods. ASC 825 is effective for interim reportingperiods ending after June 15, 2009. The Company adopted this staffposition upon its issuance, and it had no material impact on its consolidatedfinancial statements.

 

In June 2009, the FASBissued ASC 105-10 (formerly SFAS 168), *“TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles.” ASC 105-10* identifies the FASB AccountingStandards Codification as the authoritative source of**generally accepted accounting principles (“***GAAP***”) in the United States. Rules andinterpretive releases of the SEC under federal securities laws are also sources of authoritative GAAPfor SEC registrants. ASC 105-10 is**effectivefor financial statements issued for interim and annual periods ending after September 15,2009. The Companyadopted the provisions of ASC 105-10 as of November 30, 2009. The adoptionof these provisions did not have a significant impact on the Company’sconsolidated financial statements.

 

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.

 

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

 

This information has beenomitted as the Company qualifies as a smaller reporting company.

 

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

 

See Index to ConsolidatedFinancial Statements on Page F-1 of this Form 10-K.

 

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

 

None.

 

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

 

**Evaluationof Disclosure Controls and Procedures**

 

Disclosure controls and procedures are controls andprocedures designed to ensure that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms and include controls and procedures designed to ensure that informationwe are required to disclose in such reports is accumulated and communicated tomanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure. Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof our disclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) promulgated under the Exchange Act, as of the end of the periodcovered by this Form 10-K. Based on such evaluation, our Chief ExecutiveOfficer and Chief Financial Officer has concluded that, as of the end of theperiod covered by its Form 10-K, our disclosure controls and proceduresare not effective.  During the fiscalperiod ended November 30, 2009, the Company received comment letters fromthe staff of the Division of Corporation Finance of the SEC. The comments fromthe staff were issued with respect to its review of our Annual Report on Form 10-K,and related amendments, for the year ended November 30, 2008 and review ofour Quarterly Reports on Form 10-Q, and related amendments, for thequarterly periods ended February 28, 2009, May 31, 2009 and August 31,2009.  In its response to the SEC’scomments, the Company has included additional disclosures in amendments to itsperiodic filings, however, there remains an unresolved comments related to theCompany’s inability to disclose audited financial statements and pro formafinancial information on Trust I. To date, the Company is not able preparehistorical financial statements for Trust I, conduct audits of such historicalfinancial statements, or to prepare related pro forma financial information, ineither case, satisfying the requirements of Rule 8-04 and 8-05 ofRegulation S-X as the seller of Trust I has been unable or unwilling to providethe Company and its auditors with access to historical books and records, orsupporting materials, relating to Trust I necessary to prepare such historicalfinancials or to conduct an audit thereof. On January 26, 2010, theseller provided to the Company certain historical financial information forTrust I. The Company is evaluating this information and attempting to compilethe historical financial statements that can be audited.  Wewill remedy this disclosure failure if and when we can complete the audit andthe pro-forma financial statement for Trust I for the twelve months ended November 30,2008. Additionally, on March 1, 2010, the Company filed its Form 12b-25to notify the SEC that its Form 10-K would be filed late.  In addition, we have identified certainmaterial weaknesses discussed further below.

 

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

 

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.Internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that in reasonabledetail accurately and fairly reflect the transactions and dispositions of theassets of the Company; (ii) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

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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.

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the Company’sinternal control over financial reporting as of November 30, 2009. Inmaking this assessment, our management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission in InternalControl — Integrated Framework. Based on this evaluation and those criteria,our management, with the participation of our Chief Executive Officer and ChiefFinancial Officer, concluded that, as of November 30, 2009, our internalcontrol over financial reporting was not effective.

 

Our management has identified two deficiencies that constitute materialweaknesses: (1) the Company has not required SAS 70 reports and is notreceiving timely audited financial statements from the servicers of the Company’sconsumer receivable portfolios, and (2) the Company lacks adequatesupervision, segregation of duties,  andtechnical accounting expertise necessary for an effective system of internalcontrol and timely financial reporting. In an effort to mitigate these material weaknesses, the Company’smanagement has conducted tests to determine the accuracy and completeness ofthe Company’s consumer receivable portfolios. The Company also receivesdetailed reports at least monthly from the companies servicing these receivableportfolios. The Chief Executive Officer, Chief Financial Officer and SeniorAccountant all review these reports for any unusual items and meet withrepresentatives of the servicers to review the status of the portfolios anddiscuss any unusual items. All of our financial reporting is carried out by ourChief Financial Officer and Senior Accountant with the assistance of thirdparties from time to time. The lack of accounting staff and dependence on thirdparty assistance results in a lack of segregation of duties and at times a lackof sufficient accounting technical expertise which could impact our financialreporting function. In order to mitigate this control deficiency to the fullestextent possible, all financial reports are reviewed by the Chief ExecutiveOfficer, Chief Financial Officer as well as the Board for reasonableness. Allunexpected results are investigated. At any time, if it appears that anycontrol can be implemented to continue to mitigate such control deficiencies ina cost effective manner, the Company will attempt to implement the control.

 

This Form 10-K does not include an attestation report of theCompany’s independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject toattestation 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 Form 10-K. For our fiscal year ended November 30,2010, we will be required to include the auditor attestation under existingrules.

 

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

 

**Changesin Internal Control over Financial Reporting**

 

We have implementedadditional controls and procedures designed to ensure that the disclosureprovided by the Company meets the then current requirements of the applicablefiling made under the Exchange Act. To address the Company’s lack of sufficientaccounting technical expertise, during 2009, the Company brought in additionalaccounting technical expertise as needed. However, the material weaknessesreported above continue to exist. There have been no changes in our internalcontrol over financial reporting during the fourth quarter ended November 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting except that, in September 2009the Company decided to separate the Chief Executive Officer role from the ChiefFinancial Officer role and began a search for a Chief Financial Officer. On January 8,2010, the Board of Directors elected William E. Casper as Vice President, ChiefFinancial Officer and Treasurer of the Company, subject to his acceptance ofthose positions.  On January 18,2010, Mr. Casper accepted these positions and was appointed VicePresident, Chief Financial Officer and Treasurer of the Company.  Mr. Casper replaced Robert A. Kaiser inthese positions. Mr. Kaiser continues to serve as the Company’s ChiefExecutive Officer. On February 10, 2010, Mr. Casper resigned as VicePresident, Chief Financial Officer and Treasurer of the

 

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Company.  On February 11, 2010, Jerome L. TrojanIII was retained as the Vice President, Chief Financial Officer and Treasurerof the Company, replacing Mr. Casper in these positions.

 

**Item 9B. Other Information**

 

None.

 

**PART III**

 

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

 

The following table setsforth the names, ages, and titles of executive officers and directors of theCompany:

 
| **Name**             | ** ** | **Age** | ** ** | **Director/Officer  Since** | ** ** | **Class**               | ** ** | **Position(s) Held**                                                                                                                      |
|----------------------|------------|---------|------------|-----------------------------|------------|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| Robert A. Kaiser     |       | 55      |       | May 2, 2005            |       | Class I Director   |       | Director, Chief Executive Officer, President; Member of Executive  Committee, Nominating Committee and Audit Committee                         |
| Timothy S. Durham    |       | 46      |       | August 7, 2007         |       | Class III Director |       | Director, Chairman, Secretary; Member of Executive Committee, Nominating  Committee, Audit Committee and Compensation Committee                |
| David Tornek         |       | 48      |       | January 16, 2009       |       | Class III Director |       | Director; Member of Executive Committee, Chairman of Nominating  Committee, Chairman of Compensation Committee and Chairman of Audit Committee |
| Jerome L. Trojan III |       | 44      |       | February 11, 2010      |       | N/A                     |       | Vice President, Chief Financial Officer and Treasurer                                                                                          |

 

Robert A. Kaiser, 55, currently serves as a Class Idirector and as Chief Executive Officer and President, which positions he waselected to on September 25, 2007. Mr. Kaiser’s primary businessaddress is the Company’s address. Mr. Kaiser served as Senior VicePresident and Chief Financial Officer of the Company from December 21,2001 until October 2, 2003 and again from September 25, 2007 until January 18,2010.  Mr. Kaiser served his firststint as Chief Executive Officer starting on May 1, 2004, with which heserved consecutively as President and Chief Operating Officer until March 30,2007, when he resigned in connection with the completion of the sale ofsubstantially all of the Company’s assets. Mr. Kaiser has served as a director of the Company since May 2,2005 and also previously served as Chairman of the Board from May 2, 2005until his resignation on April 17, 2007 and again from August 7, 2007until September 11, 2009. Mr. Kaiser’s second stint as a director ofthe Company began when he was elected to the Board on August 7, 2007, andhe was to have served a one-year term; however, because the Company did nothave an annual meeting of stockholders in 2008 or 2009, he has continued toserve as director. Mr. Kaiser also serves as a member of the board ofdirectors and audit committee chairman for RBC Life Sciences and has served insuch capacities since September 2008.

 

Timothy S. Durham, 46, is currently serving athree-year term as a Class III director and the Company’s Chairman of theBoard, which he was elected to on September 11, 2009 and as Secretary,which he was elected to on August 7, 2007. Mr. Durham is the Chairmanand Chief Executive Officer of Obsidian Enterprises, Inc. (“***Obsidian***”), a private holdingcompany that invests in small and mid cap companies in basic industries such asmanufacturing and transportation. As Chief Executive Officer of Obsidian, Mr. Durhamis responsible for strategic direction and financial issues. Mr. Durhamalso serves as Chairman of Fair Holdings, Inc. (“***FairHoldings***”), a financial services company, where hisresponsibilities include strategic direction and financial issues.  During the fourth quarter of 2009, the FBIand other government agencies seized certain assets of Fair and began a federalinvestigation of Fair and Mr. Durham. The investigation of Fair and Mr. Durham has been previouslydisclosed in the Company’s Form 8-K filed on December 1, 2009.  Mr. Durham has held his positions withObsidian and Fair 

 

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Holdingsfor more than five years. In February of 2010, Fair commenced bankruptcyproceedings.  Mr. Durham also servesas a director of National Lampoon, Inc. and has done so since 2002.

 

David Tornek, 48, is currently serving as a Class IIIdirector of the Company until his successor is duly elected and qualified. Mr. Tornekalso serves as a director of National Lampoon, Inc., and has served inthat capacity since December 22, 2008. Mr. Tornek is currentlyOwner/Operator of Touch Catering, Kosher Touch Catering, and Meat Market MiamiSteakhouse, all Miami area restaurants and catering companies. Prior to hiswork in the food services industry, Mr. Tornek worked as Chief FinancialOfficer and Chief Operating Officer of Century Management Group from 1995 to2004. Mr. Tornek received a B.S. in accounting from Metropolitan StateCollege in 1983. Mr. Tornek also serves as a director of National Lampoon, Inc.and has done so since December 22, 2008.

 

Jerome L. Trojan III, 44,joined the Company on February 11, 2010 and is currently serving as VicePresident, Chief Financial Officer and Treasurer of the Company.  For the past 11 years, Mr. Trojan hasserved as a Chief Financial Officer for private and public companies withannual revenues of approximately $35 million to $130 million.  Prior to his employment as the Company’sChief Financial Officer, Mr. Trojan served as the Vice President ofFinance and Chief Financial Officer of Palm Beach Tan, Inc., a Dallas,Texas based owner and franchisor of retail tanning salons located throughoutthe United States, from June 2005 until April 2009.  Mr. Trojan also served as Vice Presidentof Finance and Chief Financial Officer for Moll Industries, Inc., aDallas-based custom plastics injection molder/manufacturer, from November 2004until June 2005.  Prior to workingwith Moll Industries, Inc., Mr. Trojan was employed by VLPS LightingServices International, Inc., beginning in May 1995, ultimatelyserving as Vice President of Finance and Chief Financial Officer.  Mr. Trojan is licensed as a CertifiedPublic Accountant in the state of Texas. He graduated from the University of Texas at Austin in 1987 with aBachelors of Business Administration in Accounting and from Southern MethodistUniversity in 1995 with a Masters of Business Administration.

 

The Company does notmaintain key man insurance on the life of any officer of the Company. The lossor interruption of the continued full-time service of the Company’s executiveofficers and key employees could have a material adverse impact on the Company’sbusiness. The inability of the Company to retain such necessary personnel couldalso have a material adverse effect on the Company.

 

No family relationships exist among our officers ordirectors. Except as indicated above, no director of ours is a director of anycompany with a class of securities registered pursuant to Section 12 ofthe Exchange Act, or subject to the requirements of Section 15(d) ofthe Exchange Act or any company registered as an investment company under theInvestment 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 other equity securitiesof the Company. Such persons are required by SEC regulations to furnish theCompany with copies of all Section 16(a) forms that they file.

 

Based solely on our reviewof the copies of such forms received by us with respect to 2008 and 2009, orwritten representations from certain reporting persons, we believe that allfiling requirements applicable to our directors, executive officers and personswho own more than 10% of a registered class of our equity securities have beencomplied with during fiscal 2008 and 2009. However, during 2009, the Red Oak Group, which reported it was thebeneficial owner of 4,561,554 shares of our common stock in a Schedule 13Dfiled with the SEC on February 18, 2009, as amended by an Amended Schedule13D filed with the SEC on March 4, 2009, did not timely file a Form 4with respect to acquisitions of our stock on February 10, 2009, February 11,2009, February 12, 2009 and February 13, 2009.  Also, Mr. Tornek, one of our directors,did not timely file a Form 4 with respect to acquisitions of our stock on September 17,2009.

 

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**CorporateGovernance**

 

***DirectorIndependence***

 

Our Board of Directorshas adopted the independence standards of The NASDAQ Stock Market, Inc.,or NASDAQ, as its independence standards (the “***NASDAQStandards***”). Our Board of Directors has determined that Mr. Tornekqualifies as an independent director and that Messrs. Durham and Kaiserare not independent directors.  Indetermining the independence of Mr. Tornek, our Board of Directorsconsidered the fact that both Messrs. Durham and Tornek serve on the Boardof Directors of National Lampoon, Inc. and concluded that thisrelationship would not impair Mr. Tornek’s ability to remain independentas a director on our Board of Directors.

 

Mr. Durham serves onthe Executive Committee, Audit Committee, Compensation Committee, andNominating Committee of our Board of Directors, but does not qualify asindependent under the NASDAQ independence standards for such committees. Mr. Kaiserserves on the Executive Committee, Audit Committee and Nominating Committee ofour Board of Directors but does not qualify as independent under the NASDAQindependence standards for such committees.

 

***BoardMeetings and Attendance***

 

We are managed under thedirection of our Board of Directors. As of November 30, 2008, we had threedirectors, including two non-employee directors — Robert A. Kaiser, Timothy S.Durham and Manoj Rajegowda. During the year ended November 30, 2008, therewere no changes to our Board of Directors. Subsequently, on January 16,2009, the Board of Directors increased the size of the Board of Directors fromthree members to four members and appointed Mr. David Tornek to fill thevacancy as a Class III director to hold office for the remaining term ofthe Class III directors until the Annual Meeting of stockholders in 2010and until his successor is duly elected and qualified.  Mr. Tornek was appointed by the Board toserve as Chairman of the Audit Committee, the Nominating Committee and theCompensation Committee on September 11, 2009.  On February 24, 2009, Mr. Rajegowdatendered his resignation from the Board of Directors. Mr. Rajegowda’sletter of resignation is attached as Exhibit 99.1 to our Annual Report on Form 10-Kfor the year ended November 30, 2008, filed with the SEC on March 2,2009. We strongly encourage all members of the Board of Directors to attendAnnual Meetings each year.  For theAnnual Meeting held on July 31, 2007, four directors were in attendance;the only director not to attend was Da Hsuan Feng.

 

Our Board of Directors isdivided into three classes of directors and each class serves a three yearterm.  Our Board of Directors had onlytwo regular committees, the Audit Committee and the Executive Committee, until September 11,2009, when it formed a Compensation Committee, and a Nominating Committee,neither of which have met as of the date of this Form 10-K.  During the 2008 Fiscal Year, the Board ofDirectors met 15 times and the Audit Committee met two times.  During the 2009 Fiscal Year, the Board of Directorsmet 21 times and the Audit Committee met 2 times.  The Executive Committee was formed in February 2009and has met 3 time(s) during the 2009 Fiscal Year.  No director attended (whether in person,telephonically, or by written consent) less than 75% of all meetings heldduring the period of time he or she served as director during the 2009 FiscalYear or during the 2008 Fiscal Year.

 

***ExecutiveCommittee***

 

The Executive Committeewas established by the Board on February 3, 2009 and currently consists ofMessrs. Kaiser, Durham, and Tornek. The Executive Committee has all authority of the Board, including all ofthe authority the Board had as a committee of the whole when serving as acommittee of the Board (such as the Audit Committee).

 

***NominatingCommittee***

 

Since August of2007, the Board has not had a separately functioning Nominating Committee, and,during this period, our entire Board of Directors performed the functions of aNominating Committee.  In this capacity,the Board of Directors did not develop specific, minimum qualifications to bemet by a committee-recommended director, nor did it specify a particular set ofqualities or skills that one or more directors needed to possess, other

 

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than the need for anaudit committee financial expert. However, as of September 11, 2009, our Board of Directors hasformed a Nominating Committee consisting of Messrs. Durham, Kaiser, andTornek, with Mr. Tornek serving as chair. Our Nominating Committeecurrently includes one independent member of our Board of Directors, Mr. Tornek,as such independence is defined in the Nominating Committee charter.  Our Nominating Committee charter requiresthat all members of the Nominating Committee be independent. The NominatingCommittee’s charter can be accessed at *www.clstholdings.com/corpdocs.asp*.

 

Previously the Boardconsidered, and after September 11, 2009 the Nominating Committeeconsiders, nominees proposed by stockholders in accordance with guidelines forsuch consideration set forth in our Amended and Restated Certificate ofIncorporation dated as of April 27, 1995, our Bylaws and any applicable rules andregulations of the SEC. A copy of our charter and Bylaws is available from ourChief Executive Officer upon written request. Requests or proposals should bedirected to Robert Kaiser, Chief Executive Officer, CLST Holdings, Inc.,17304 Preston Road, Dominion Plaza, Suite 420 Dallas, Texas 75252. Article II,Section 7 of our Bylaws provides that persons nominated by stockholdersare eligible for election as directors only if nominated in accordance with thefollowing procedures. Such nominations shall be made pursuant to timely noticein writing to our Corporate Secretary. To be timely, a stockholder’s noticemust be delivered to or mailed and received at our principal executive officesat CLST Holdings, Inc., 17304 Preston Road, Dominion Plaza, Suite 420Dallas, Texas 75252 not less than 60 days prior to the meeting of thestockholders called for the election of directors; provided, however, in theevent that less than 70 days notice or prior public disclosure of the date themeeting is given or made to stockholders, such written notice must be soreceived not later than the close of business on the tenth day following theday on which such notice of the date of the meeting was mailed or such publicdisclosure of the date of the meeting was made, whichever occurs first. Suchstockholder’s notice to the Corporate Secretary must set forth (a) as tothe stockholder proposing to nominate a person for election or re-election asdirector, (i) the name, business address and residence address of thestockholder who intends to make the nomination and (ii) a representationthat the stockholder is a holder of record of shares of the Company entitled tovote at such meeting and intends to appear in person or by proxy at the meetingto nominate the person or persons specified in the notice, and (b) as tothe nominee, (i) the name, age, business and resident addresses, andprincipal occupation or employment of each nominee; (ii) a description ofall arrangements or understandings between the stockholder and each nominee andany other person or persons (naming such person or persons) pursuant to whichthe nomination or nominations are to be made by the stockholder; (iii) anyother information relating to the nominee that is required to be disclosed insolicitations for proxies for election of directors pursuant to Regulation 14Aunder the Exchange Act; (iv) any other information that is or would berequired to be disclosed in a Schedule 13D promulgated under the Exchange Act,regardless of whether such person would otherwise be required to file aSchedule 13D and (v) the consent of each nominee to serve as a director ofthe Company if so elected.

 

The Nominating Committeeconsiders, at a minimum, the following factors in recommending to the Boardpotential new Board members, or the continued service of existing members:

 

1. the member’s/potentialmember’s demonstrated character, judgment, relevant business, functional andindustry experience, and degree of acumen;

 

2. whether themember/potential member assists in achieving a Board that represents anappropriate mix of background and specialized experience;

 

3. the member’s/potentialmember’s independence, as defined in the NASDAQ Standards;

 

4. whether themember/potential member would be considered a “financial expert” or “financiallyliterate” as described in NASDAQ Standards, legislation or NASDAQ AuditCommittee guidelines;

 

5. the extent of themember’s/potential member’s business experience, technical expertise, orspecialized skills or experience;

 

6. whether themember/potential member, by virtue of particular experience relevant to theCompany’s current or future business, will add specific value as a Boardmember; and

 

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7. any factors related tothe ability and willingness of a new member to serve, or an existing member tocontinue his/her service.

 

Previously the Board didnot use, and after September 11, 2009 the Nominating Committee does notuse, the services of any third-party search firm to assist in theidentification or evaluation of candidates. The Nominating Committee may engagea third party to provide such services in the future, as it deems necessary orappropriate at the time in question. Previously the Board determined therequired selection criteria and qualifications of director nominees based uponthe Company’s needs at the time nominees are considered; going forward, theNominating Committee will serve this role. A candidate must possess the abilityto apply good business judgment and must be in a position to properly exercisehis or her duties of loyalty and care. Candidates should also exhibit provenleadership capabilities, high integrity and experience with a high level ofresponsibility within their chosen fields, and have the ability to quicklyunderstand complex principles of, but not limited to, business and finance.Just as the Board has done in the past, the Nominating Committee will considerthese criteria for nominees identified by its committee members, bystockholders, or through some other source. When current Nominating Committeemembers are considered for nomination for reelection, the Nominating Committeealso takes into consideration their prior contributions, performance andmeeting attendance records.

 

As the Board has done inthe past, the Nominating Committee will conduct a process of making apreliminary assessment of each proposed nominee based upon resume andbiographical information, an indication of the individual’s willingness toserve and other background information. This information will be evaluatedagainst the criteria set forth above as well as the Company’s specific needs atthat time. Based upon a preliminary assessment of the candidates, those whoappear best suited to meet our needs may be invited to participate in a seriesof interviews, which are used for further evaluation. The Nominating Committeeuses the same process for evaluating all nominees, regardless of the originalsource of the recommendation.

 

***AuditCommittee***

 

Until September 11,2009, all members of our Board of Directors served as members of our AuditCommittee, and beginning with the formation of our Executive Committee on February 3,2009, all members of our Executive Committee served as members of our AuditCommittee. However, as of September 11, 2009, our Board of Directors hasformed an Audit Committee consisting of Messrs. Durham, Kaiser and Tornek,with Mr. Tornek serving as chair. Our Audit Committee currently includesone independent member of our Board of Directors, Mr. Tornek, as suchindependence is defined under the NASDAQ Standards. Mr. Tornek also servesas the audit committee financial expert, as such term is defined in Item 407(d)(5) ofRegulation S-K.  Our Audit Committeecharter requires that all members of the Audit Committee be independent.  The Audit Committee’s charter can be accessedat *www.clstholdings.com/corpdocs.asp*.

 

The primary purpose ofthe Audit Committee is to oversee the accounting and financial reportingprocesses of the Company and the audits of the financial statements of theCompany. In fulfilling its oversight duties, the Audit Committee shall have thefollowing responsibilities:

 

·              Inquiring of management, the internal auditor and theindependent registered public accountants about significant risks or exposuresand assessing the steps management has taken to minimize such risk to theCompany.

 

·              Considering with management and the independentregistered public accountants the rationale for employing audit firms otherthan the principal independent registered public accountants.

 

·              Considering and reviewing with management, theindependent registered public accountants and the internal auditor: theadequacy of the Company’s internal controls and disclosure controls andprocedures, including the adequacy of controls and security for managementinformation systems and other information technology, and any relatedsignificant findings and recommendations of the independent registered public accountantsand internal audit together with management’s responses thereto.

 

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·              Reviewing filings with the SEC and other publisheddocuments containing the Company’s financial statements and considering whetherthe information contained in these documents is consistent with the informationcontained in the financial statements.

 

·              Reviewing the Company’s policies relating tocompliance with laws and regulations; the Company’s code of conduct; ethics;officers’ expense accounts, perquisites, and use of corporate assets; conflictof interest and the investigation of misconduct or fraud.

 

·              Determining the extent to which the planned auditscope of the internal auditor and independent registered public accountants canbe relied on to detect fraud.

 

·              Reviewing legal and regulatory matters that may have amaterial impact on the financial statements, the Company’s related compliancepolicies and programs and reports received from regulators.

 

·              Reporting actions of the Audit Committee to the Boardof Directors with such recommendations as the Audit Committee may deemappropriate.

 

·              Providing a report of the Audit Committee’s activitiesto the Board at regular intervals.

 

·              Reviewing and approving all related-partytransactions, or designate a comparable body of the Board of Directors toreview and approve all related-party transactions.

 

·              Performing such other functions as set forth in theAudit Committee’s charter.

 

***CompensationCommittee***

 

Since August of2007, the Board has not had a separately functioning Compensation Committee,and during this period our entire Board of Directors performed the functions ofa Compensation Committee, with compensation payable to our executive officersbeing determined by our Board of Directors as a group. Robert A. Kaiser was,and continues to be, our only director who receives compensation as anexecutive officer.  However, as of September 11,2009, our Board of Directors has formed a Compensation Committee consisting of Messrs. Durhamand Tornek, with Mr. Tornek serving as chair. Our Compensation Committeecurrently includes one independent member of our Board of Directors, Mr. Tornek,as such independence is defined in the Compensation Committee charter. OurCompensation Committee charter requires that all members of the CompensationCommittee be independent.  TheCompensation Committee’s charter can be accessed at*****www.clstholdings.com/corpdocs.asp*.

 

The CompensationCommittee serves the Board of Directors and is subject to their control anddirection. The Board may, however, at its discretion, delegate authority to theChairman of the Compensation Committee to approve specific actions that fallwithin established program guidelines approved by the Board or the CompensationCommittee or to other officers of the Company to approve specific actionswithin such guidelines as permitted by this Charter, the Company’s charter andbylaws, and applicable law.

 

The CompensationCommittee has the authority, acting alone, to retain special legal, accounting,human resources, or other consultants to advise the Committee on theperformance of its duties. The Compensation Committee may request that anyofficer or employee of the Company or the Company’s outside counsel orindependent registered public accountants attend a meeting of the CompensationCommittee or meet with any member of, or consultant to, the Compensation Committee.The Compensation Committee shall have the authority to delegate responsibilityfor the day-to-day administration of executive compensation payable to theofficers of the Company.

 

***StockholderCommunications with the Board of Directors***

 

We and our Board ofDirectors welcome communications from our stockholders. Stockholders who wishto communicate with the Board of Directors, or one or more specified directors,may send an appropriately addressed letter to the Chairman of the Board ofDirectors, CLST Holdings, Inc., 17304 Preston Road, Dominion Plaza, Suite

 

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420 Dallas, Texas 75252.The mailing envelope should contain a clear notation indicating that theenclosed letter is a “Stockholder-Board Communication.” All such letters shouldidentify the author as a security holder, and, if the author desires for thecommunication to be forwarded to the entire Board of Directors or one or morespecified directors, the author should so request, in which case the Chairmanwill arrange for it to be so forwarded unless the communication is irrelevantor improper. Concerns relating to accounting, internal control over financialreporting or auditing matters will be immediately brought to the attention ofthe Chairman of the Audit Committee.

 

***Codeof Ethics***

 

We have established aBusiness Ethics Policy for our chief executive officer, senior finance officersand all other employees. A current copy of this code is available on our website at *www.clstholdings.com*. If we amend theBusiness Ethics Policy or grant a waiver of a provision of the Business EthicsPolicy, we will disclose such amendment or waiver on our website within fourbusiness days following such amendment or waiver. Such information will remainavailable on our website for at least twelve months following the date of suchdisclosure.

 

**Item 11.Executive Compensation**

 

**SummaryCompensation Table.**

 

The following table setsforth certain information regarding compensation earned by all individualsserving as our Chief Executive Officer during fiscal year 2009 and our two mosthighly compensated executive officers (other than the Chief Executive Officer)who served as executive officers during fiscal year 2009 (the “***Named Executive Officers***”), for eachof the last two fiscal years.

 
| **Name and Principal  Position**                                   | ** ** | **Year**   | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)(1)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **Nonequity  incentive  plan  compensation  ($)** | ** ** | **Nonqualified  deferred  compensation  earnings  ($)** | ** ** | **All other  compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|----------------|------------|---------------------------|------------|----------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| ** **                                                                   | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **                                        | ** ** | ** **                                              | ** ** | ** **                            | ** ** | ** **     | ** ** |
| Robert  A. Kaiser,   Chief Financial Officer and Chief Executive Officer (2) |       | 2009       |       | $               | 240,000    |           | —     |                      | $          | 44,000                     |       | —                                            |       | —                                                  |       | —                                |       | $              | 25,750     |   | $ | 309,750 |   |
|                                                                         |       | 2008       |       | $               | 240,000    |           | —     |                      | —     |                       | —     |                                              | —     |                                                    | —     |                                  | $          | 21,000         | (3)        | $ | 261,000 |   |
|                                                                              |            |            |            |                 |            |                |            |                           |            |                            |            |                                                   |            |                                                         |            |                                       |            |                |            |  |  |  |  |

 

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(1)           The amounts reported in theStock Awards column does not reflect compensation actually received.  Rather this amount represents the aggregateexpense recognized by the Company for financialstatement reporting purposes for the fiscal year ended November 30,2009 in accordance with AccountingStandards Codification (“***ASC***”)718, *Stock Compensation*, for restricted stockgranted in fiscal year 2009, and was calculated using certainassumptions, as set forth in footnote 1 to our audited financial statements forthe fiscal year ended November 30, 2009, included herein.

 

(2)           Mr. Kaiser served asPresident and Chief Executive Officer until March 30, 2007, when heresigned in connection with the completion of sale of the Company’s UnitedStates and Miami-based Latin American operations. Mr. Kaiser served asChairman of the Board of Directors until April 17, 2007 and again from August 7,2007 until September 11, 2009. Mr. Kaiser was subsequently reelectedas Chief Executive Officer and served again as Chief Financial Officer from September 25,2007 to January 18, 2010.

 

(3)           Consists of Board ofDirector Fees.

 

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**OutstandingEquity Awards at Fiscal Year End November 30, 2009.**

 

The following table providesinformation concerning unexercised options, stock that has not vested andequity incentive plan awards for each of the Named Executive Officers as of November 30,2009.

 
| ** **                                 | ** ** | **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, Chief Executive Officer |       | —                                                                                 |       | —                                                                                   |       | — |   | — |   | — |   | 200,000 | (2) | $ | 18,000 | (3) | — |   | — |   |
|                                       |       | 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 1993Plan terminated on December 3, 2003. However, Mr. Kaiser currently has exercisable options that weregranted 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.  The exercise price of each option was equalto the fair market value of the common stock on the date of grant.

 

(2)          Mr. Kaiser received arestricted stock grant of 300,000 shares on December 1, 2008, 100,000shares of which vested on December 1, 2008, and the remaining 200,000 ofwhich 100,000 shares vest on December 1, 2009 and 100,000 shares vest on December 1,2010.

 

(3)          Market values of therestricted stock unit awards shown in this table are based on the closingmarket price of our common stock as of November 30, 2009, which was $0.09,and assumes the satisfaction of the applicable vesting conditions.

 

**Compensationof Executive Officers.**

 

*Employment Contracts and Termination of Employmentand Change in Control Arrangements.*The Company maintained anemployment agreement with Mr. Kaiser (the “***Agreement***”) prior to March 30,2007.  In connection with the sale of theCompany’s United States and Miami-based Latin American operations, the relatedsale agreement required as a condition of closing that the Company pay allamounts due Mr. Kaiser under his Agreement with the Company, includingpayments due as a result of a change in control of the Company resulting fromthe sale.  To receive those payments, Mr. Kaiser’semployment with the Company had to be terminated. Although Mr. Kaiserwould have preferred to remain as Chief Executive Officer and President of theCompany after the closing until he believed he had fulfilled theresponsibilities of those positions, he agreed to resign on March 30,2007, so that the closing could be completed. Mr. Kaiser continued toserve on the Board of Directors throughout 2007, including after his electionto the Board of Directors on August 7, 2007.  On August 7, 2007, Mr. Kaiser wasappointed Chairman of the Board and served until September 11, 2009, atwhich time Timothy S. Durham was appointed Chairman of the Board. On August 28,2007, the Board of Directors authorized the retention of Mr. Kaiser as aconsultant to the Company for a sum of $20,000 a month on a month-to-monthbasis, terminable at will by either party. On September 25, 2007, inaddition to his duties as Chairman, he was appointed Chief Executive Officer,Chief Financial Officer, and Treasurer. On January 18, 2010, Mr. Kaiser resigned as Vice President,Chief Financial Officer and Treasurer and now serves only as President andChief Executive Officer.  As of January 1,2008, Mr. Kaiser is an employee of the Company and receives $20,000 permonth.

 

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**Compensation of Directors.**

 

Thefollowing table provides information concerning compensation of the Company’sdirectors for the fiscal year ended November 30, 2009. All compensationreceived by Mr. Kaiser for fiscal 2009 that is as a result of his membershipon the Board is reflected in the Summary Compensation Table above.

 
| **Name**            | ** ** | **Fees  earned or  paid in  cash ($)** | ** ** | **Stock  awards  ($)(1)** | ** ** | **Option  awards  ($)(1)** | ** ** | **Non-equity  incentive plan  compensation ($)** | ** ** | **Nonqualified  deferred  compensation  earnings ($)** | ** ** | **All other  compensation  ($)** | ** ** | **Total ($)** | ** ** |
|---------------------|------------|-------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
| Timothy S. Durham   |       | $                                                     | 21,250     |                      | $          | 44,000                     |       | —                                                     |       | N/A                                                         |       | N/A                                   |       | —             |       | $ | 65,250 |   |
| David Tornek        |       | $                                                     | 18,500     |                      | $          | 28,000                     |       | —                                                     |       | N/A                                                         |       | N/A                                   |       | —             |       | $ | 46,500 |   |
| Manoj Rajegowda (2) |       | $                                                     | 4,500      |                      | —     |                       | —     |                                                       | N/A        |                                                        | N/A        |                                  | —     |               | $          | 4,500 |   |

 

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(1)           The amounts reported in theStock Awards column does not reflect compensation actually received.  Rather this amount represents the aggregateexpense recognized by the Company for financialstatement reporting purposes for the fiscal year ended November 30,2009 in accordance with ASC 718, *Stock Compensation*, for restricted stock granted in fiscalyear 2009, and was calculated using certain assumptions, as set forth infootnote 1 to our audited financial statements for the fiscal year ended November 30,2009, included herein.

 

(2)          On February 24, 2009,our director and member of our Audit Committee, Manoj Rajegowda, tendered hisresignation as a member of our Board of Directors, effective immediately.

 

Historically, we issuedshares of restricted stock to our employees and executive officers pursuant toour 2003 Plan. The number of shares to be granted under the 2003 Plan wasdetermined by the Board at the time of the grant based upon the pool of sharesthen available for grant. The awarded shares vested at the rate of 331/3% per year oneach anniversary date of grant and were subject to such other terms andconditions as may be contained in the form of restricted stock award agreementgenerally used by the Company at the time of grant. As disclosed in Part IIof this Form 10-K, under the heading “Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of EquitySecurities—Equity Compensation Plan Information,” the Company’s 2003 Plan wascancelled on September 25, 2007. From November 30, 2006 until September 25, 2007, eachnon-employee director who was then serving as such received a grant of 4,500shares of restricted stock. At a meeting of the Board on September 25,2007, the Board unanimously resolved to terminate the Company’s 2003 Plan dueto the reduction in the Company’s workforce. As a result of the termination ofthe 2003 Plan, all outstanding options to purchase the equity securities of theCompany issued thereunder were terminated as well.  Therefore, there are currently no outstandingoptions to purchase the Company’s Securities under the 2003 Plan.

 

Subsequent to fiscal 2008,on December 1, 2008, our Board approved the Company’s 2008 Plan, andsubsequently amended and restated on September 11, 2009 to decrease thenumber of shares of common stock of the Company that may be issued under the2008 Plan from 20,000,000 to 2,000,000.  The 2008 Plan, which isadministered by the Board, permits the grant of restricted stock, stock optionsand other stock-based awards to employees, officer, directors, consultants andadvisors of the Company and its subsidiaries. The 2008 Plan provides that theadministrator of the plan may determine the terms and conditions applicable toeach award, and each award will be evidenced by a stock option agreement orrestricted stock agreement. The 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.  Subsequently, on February 24, 2009, Mr. Rajegowdaforfeited all stock issuances provided to him during the course of his Boardmembership in connection with his resignation from the Board. Of eachrestricted stock grant, 100,000 shares vested on the date of grant, and the remaining200,000 of the shares vest in two equal annual installments on each anniversaryof the date of grant. The restricted stock becomes 100% vested ifany of the following occurs: (i) the participant’s death or (ii) thedisability of the Participant while employed or engaged as a director orconsultant by the Company.  On March 5,2009, our Board of Directors approved the grant of 300,000 shares of restrictedstock to David Tornek, of which 100,000 shares vested on the date of grant, andthe remaining 200,000 of the shares vest in two equal annual installments oneach anniversary of the date of grant.

 

Each of our directorsreceives an annual retainer of $10,000. In addition, each director receives$750 per 

 

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Board meeting that he is present or $500 if heparticipates telephonically.

 

All directors of the Companyare entitled to reimbursement of their reasonable out-of-pocket expenses inconnection with their travel to, and attendance at, meetings of the Board orcommittees thereof. There were no other arrangements pursuant to which anydirector was compensated for any service provided as a director during fiscal 2009,other than as set forth above.

 

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

 

**Security Ownership of Certain Beneficial Owners**

 

Thefollowing table sets forth information with respect to the number of shares ofthe Company’s common stock beneficially owned as of March 1, 2010, by (a) eachperson who is known by us to be the beneficial owner of more than 5% of theoutstanding shares of our common stock, (b) each of our directors, (c) eachof our executive officers named in the Summary Compensation Table above under “ExecutiveCompensation,” and (d) all of our executive officers and directors as agroup. Unless otherwise indicated, we believe that each person or entity namedbelow has sole voting and investment power with respect to all shares shown asbeneficially owned by such person or entity, subject to community property lawswhere applicable and the information set forth in the footnotes to the tablebelow.

** **
| **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)        | 13.6                                | %          |
| David  Sandberg c/o Red Oak Partners, LLC  145 Fourth Avenue, Suite 15A  New York, NY 10003                |       | 4,561,554                                                                | (3)        | 19.0                                | %          |
| Timothy  S. Durham                                                                                              |       | 3,474,471                                                                | (4)        | 14.5                                | %          |
| Robert  A. Kaiser                                                                                               |       | 640,413                                                                  | (5)        | 2.7                                 | %          |
| David  Tornek                                                                                                   |       | 932,323                                                                  | (6)        | 3.9                                 | %          |
| Jerome  L. Trojan                                                                                               |       | —                                                                   |       | —                              |       |
| Directors  and executive officers as a group                                                                    |       | 5,047,207                                                                |       | 21.0                                | %          |

 

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(1)      Based on 23,949,282 shares of our common stockoutstanding as of March 1, 2010.

 

(2)      Based on an amended Schedule 13G filed with the SEC onFebruary 14, 2007 by Michael A. Roth and Brian J. Stark, filing as jointfilers pursuant to Rule 13d-1(k) under the Exchange Act. Mr. Rothand Mr. Stark reported shared voting and dispositive power with respect toall shares shown as beneficially owned in such filing. The 3,267,254 shares ofcommon stock and percentage ownership represent the combined indirect holdingsof Michael A. Roth and Brian J. Stark. All of the foregoing represents anaggregate of 3,267,254 shares of common stock held directly by Stark MasterFund Ltd. (“***Stark***”). The ReportingPersons are the 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 the SEC on February 18,2009, as amended by Amendment #1 to the Schedule 13D filed with the SEC on March 4,2009 and Amendment #2 to the Schedule 13D filed with the SEC on April 28,2009, by David Sandberg, David Sandberg, Red Oak Partners, Red Oak Fund,Pinnacle 

 

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Partners, Pinnacle Fund and Bear Fund. Each of thefilers reported shared voting and dispositive power with respect to all sharesshown as beneficially owned in such filing. Red Oak Partners, and therefore Mr. Sandberg,managing member of Red Oak Partners, beneficially owns 4,561,554 shares ofcommon stock. Red Oak Fund is controlled by Red Oak Partners. Red Oak Partners managesBear Fund and makes its investment decisions. Pinnacle Fund is controlled byPinnacle Partners, which is controlled by Red Oak Partners. Therefore, Red OakPartners may be deemed to beneficially own (i) the 3,341,106 shares ofcommon stock held by Red Oak Fund, (ii) the 960,448 shares of common stockbeneficially owned by Pinnacle Partners through Pinnacle Fund, and (iii) the260,000 shares of common stock held by Bear Fund. Please refer to “Item 3—LegalProceedings” above for more information regarding a lawsuit we filed againstRed Oak Partners on February 13, 2009 and a derivative lawsuit filed byRed Oak Partners against Messrs. Kaiser, Durham and Tornek on March 2,2009.

 

(4)      Includes a restricted stock grant, 200,000 shares ofwhich vested on December 1, 2008 and December 1, 2009, and theremaining 100,000 of which vest on December 1, 2010. Also, this amountincludes 1,969,077 shares of common stock based upon the Schedule 13D filedwith the SEC on February 27, 2009, by Mr. Durham, DC Investments,LLC, an Indiana limited liability company (“***DCInvestments***”), Fair Holdings and Fair. Mr. Durham is themanaging member of DC Investments, the Chairman of the Board of Directors ofFair Holdings and the Chief Executive Office and a member of the Board ofDirectors of Fair, and therefore, Durham may be deemed to beneficially own the1,969,077 shares of common stock held by Fair. Mr. Durham reported sharedvoting and dispositive power with respect to such 1,969,077 shares.  In February 2010, Fair commencedbankruptcy proceedings which may impact Mr. Durham’s beneficial interestto the 1,969,077 shares owned by Fair.

 

(5)      Includes 73,676 shares held in a partnershipcontrolled by Mr. Kaiser and his wife, as well as a restricted stockgrant, 200,000 shares of which vested on December 1, 2008 and December 1,2009, and the remaining 100,000 of which vest on December 1, 2010. Alsoincludes options to purchase 130,000 shares of common stock, 80,000 of whichexpire on December 12, 2011 and 50,000 of which expire on January 22,2013. Also includes 12,990 shares of common stock acquired in a privatelynegotiated purchase on September 23, 2009.

 

(6)      Includes a restricted stock grant, 100,000 shares ofwhich vested on March 5, 2009, 100,000 of which vested on March 5, 2010and the remaining 100,000 of which vest on March 5, 2011. Also includes30,000 shares of common stock acquired in open market purchases on September 17,2009, and 418,003 shares of common stock acquired in a privately negotiatedpurchase on September 24, 2009.

 

**EquityCompensation Plan Information**

 

The Company’s equitycompensation 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.

 

**Changes inControl**

 

To management’s knowledge,there are no arrangements the operation of which may at a subsequent dateresult in a change in control of the Company.

 

***Rights Plan***

 

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

 

OurBoard adopted the Rights Plan in an effort to protect stockholder value by****attempting to protect against a possiblelimitation on our ability to use our NOL’s to reduce potential future federalincome tax obligations. We have experienced and continue to experiencesubstantial operating losses, and under the Internal Revenue Code and 

 

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rules promulgated bythe Internal Revenue Service, we may “carry forward” these losses in certaincircumstances to offset any current and future earnings and thus reduce ourfederal income tax liability, subject to certain requirements and restrictions.To the extent that the NOLs do not otherwise become limited, we believe that wewill be able to carry forward a significant amount of NOLs, and therefore theseNOLs could be a substantial asset to us. However, if we experience an “OwnershipChange,” as defined in Section 382 of the Internal Revenue Code, ourability to use the NOLs will be substantially limited, and the timing of theusage of the NOLs could be substantially delayed, which could thereforesignificantly impair the value of that asset.

 

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

 

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

 

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

 

**Review,Approval, or Ratification of Transactions with Related Persons.**

 

Our Board ofDirectors recognizes that related party transactions present a heightened riskof conflicts of interest and/or improper valuation (or the perception thereof)and therefore has adopted a policy within our Business Ethics Policy whichshall be followed in connection with all related party transactions involvingthe Company. Our Business Ethics Policy can be found at our Internet website at*www.clstholdings.com*. Under thispolicy, any “***Related Party Transaction***”shall be consummated or shall continue only if:

 

1.     the Audit Committee shall approve or ratify suchtransaction in accordance with the guidelines set forth in the policy and ifthe transaction is on terms comparable to those that could be obtained in arm’slength dealings with an unrelated third party;

 

2.     the transaction is approved by the disinterestedmembers of the Board of Directors; or

 

3.     the transaction involves compensation approved by theCompany’s Compensation Committee.

 

For these purposes, a “***Related Party***”is:

 

# ·      a senior officer (which shall include at a minimum each vicepresident and Section 16 officer) 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 “***Related Party Transaction***”is a transaction between the Company and any Related Party (including anytransactions requiring disclosure under Item 404 of Regulation S-K under theExchange Act), other than:

 

# ·      transactionsavailable to all employees generally

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

 

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

 

In the event managementrecommends any further Related Party Transactions subsequent to the firstcalendar year meeting, such transactions may be presented to the AuditCommittee for approval or preliminarily entered into by management subject toratification by the Committee; provided, that if ratification shall not beforthcoming, management shall make all reasonable efforts to cancel or annul suchtransaction.

 

The Board of Directorsrecognizes that situations exist where a significant opportunity may bepresented to management or a member of the Board of Directors that may equallybe available to the Company, either directly or via referral. Before suchopportunity may be consummated by a Related Party (other than an otherwiseunaffiliated 5% stockholder), such opportunity shall be presented to the Boardof Directors of the Company for consideration.

 

AllRelated Party Transactions are to be disclosed in the Company’s applicablefilings as required by the Securities Act and the Exchange Act, and relatedrules. Furthermore, all Related Party Transactions shall be disclosed to theAudit Committee of the Board of Directors and any material Related PartyTransaction shall be disclosed to the full Board of Directors. Further,management shall assure that all Related Party Transactions are approved inaccordance with any requirements of the Company’s financing agreements.

 

**RelatedParty Transactions.**

 

***CLST Asset I***

 

On November 10,2008, the Company entered into a purchase agreement, through CLST Asset I, awholly owned subsidiary of Financo, which is one of our direct, wholly ownedsubsidiaries, to acquire all of the outstanding equity interests of Trust Ifrom Drawbridge for approximately $41.0 million under the Trust I PurchaseAgreement.  Our acquisition of Trust I was financed by approximately $6.1million of cash on hand and by a non-recourse, term loan of approximately $34.9million from Fortress, an affiliate of Drawbridge, pursuant to the terms andconditions set forth in the Trust I Credit Agreement, dated November 10,2008, by and among the Trust I, Fortress, as the lender and administrativeagent, FCC, as the initial servicer, Lyon Financial Services, Inc., as thebackup servicer, and U.S. Bank National Association, as the collateralcustodian.

 

Pursuant to the Trust ICredit Agreement, Fair, may become the servicer if and only if there occurs anevent of a default by the then current servicer and only if Fair is not then indefault either as a borrower or as a servicer under any credit facility towhich Fortress or any of its affiliates is a party and no change of control ofFair has occurred.  Timothy S. Durham, anofficer, director and stockholder of the Company, is Chief Executive Officerand Director of Fair and is also a majority stockholder of Fair. As of the dateof this Form 10-K, FCC continues to be the servicer of the CLST Asset Iportfolio, and the Company is not aware that the servicer is in default underthe Trust I Credit Agreement.  BecauseFair is not currently acting as the servicer of CLST Asset I and Fair couldonly become a servicer upon certain defaults by the current servicer, it is notcurrently anticipated that Fair will have a direct or indirect materialinterest in the Trust I Credit Agreement. The servicing fee payable to the servicer in any given year under theTrust I Credit Agreement is based upon a service fee rate of 1.5% and theaggregate outstanding receivable balance. In February 2010, Fair commenced bankruptcy proceedings, which mayimpact Fair’s ability to ultimately act as the servicer of the CLST Asset Iportfolio if there was a need to change from the current servicer.

 

***CLST Asset II***

 

On December 12, 2008,the Company entered into the Trust II Purchase Agreement, through Trust II, a newly formed trust wholly owned byCLST Asset II, a wholly owned subsidiary of Financo, effective as of December 10,2008, to acquire from time to time certain receivables, installment salescontracts and related assets owned by SSPE Trust and SSPE.  Under the terms of the Trust II CreditAgreement, a non-recourse, revolving loan, which Trust II entered into withSummit, as originator, and SSPE and SSPE Trust, as co-borrowers, Summit and

 

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EricJ. Gangloff, as Guarantors, Fortress Corp., as the lender, Summit AlternativeInvestments, LLC, as the initial servicer, and various other parties, Trust II committedto purchase receivables of at least $2.0 million.  In conjunction with the Trust II CreditAgreement, Trust II became a co-borrower under a $50 million credit agreementthat permits Trust II to use more than $15 million of the aggregate availabilityunder the revolving facility.

 

Fair is a sub-servicer ofthe CLST Asset II portfolio and is an affiliate of Mr. Durham, a directorof the Company.  Fair has been retainedas a sub-servicer for assets held by the SSPE Trust.  The Company has not made any payments to Fairin connection with its services as a sub-servicer for CLST Asset II portfolioassets held by the SSPE Trust. In February 2010, Fair commenced bankruptcyproceedings, which may impact Fair’s ability to ultimately act as the servicerof the CLST Asset II portfolio if there was a need to change from the currentservicer.

 

We received theDefault Notice dated December 2, 2009 from Fortress Corp. stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the SSPE Trust, hasfailed to perform its servicing duties with respect to that portion of thereceivables portfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We alsoreceived a Second Default Notice dated February 8, 2010 from FortressCorp. stating that an additional event of default has occurred and iscontinuing under the Trust II Credit Agreement because the three-month rollingaverage annualized default rate of the Class A receivables in the TrustII  portfolio had exceeded 5.0% as of January 31,2010. On February 26, 2010, the parties to the Trust II Credit Agreemententered into the Fortress Waiver whereby 1) each event of default declared inthe Default Notice and the Second Default Notice was waived, 2) Trust II becamethe sole borrower under the Trust II Credit Agreement, 3) the outstandingborrowings attributable to SSPE Trust were paid in full, 4) SSPE Trust andtheir affiliates were released from all further obligations under the Trust IICredit Agreement, and 5) the SSPE Trust assets were removed as pledgedcollateral for the Trust II Credit Agreement. The Fortress Waiver also amendedcertain terms of the Trust II Credit Agreement including the elimination ofTrust II’s right to further borrowings and the requirement for Trust II to payan unused commitment fee.

 

***CLST Asset III***

 

Effective February 13,2009, we, through CLST Asset III, a newly formed, wholly owned subsidiary ofFinanco, which is one of our direct, wholly owned subsidiaries, 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 under the Trust III Purchase Agreement. Messrs. Durhamand Cochran own all of the outstanding equity of Fair. In return for assetsacquired under the Trust III Purchase Agreement, CLST Asset III paid thesellers total consideration of $3,594,354 as follows:

 

(1)            cash in the amount of $1,797,178 of which $1,417,737 was paid to Fair, $325,440was paid to Mr. Durham and $54,000 was paid to Mr. Cochran,

 

(2)            2,496,077 newly issued shares of our common stock at a price of $0.36 pershare, of which 1,969,077 shares of common stock were issued to Fair, 452,000shares of common stock were issued to Mr. Durham and 75,000 shares ofcommon stock were issued to Mr. Cochran and

 

(3)            six promissory Notes issued by CLST Asset III in an aggregate original statedprincipal amount of $898,588, of which two promissory notes in an aggregateoriginal principal amount of $708,868 were issued to Fair, two promissory notesin an aggregate original principal amount of $162,720 were issued to Mr. Durhamand two promissory notes in an aggregate original principal amount of $27,000 wereissued to Mr. Cochran.

 

We received afairness opinion of BVA stating that BVA is of the opinion that theconsideration paid by us pursuant to the Trust III Purchase Agreement is fair,from a financial point of view, to our nonaffiliated stockholders.  A copyof the fairness opinion was filed as an exhibit to our Current Report on Form 8-Kfiled with 

 

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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.  As additional inducement for CLST Asset III to enter into the TrustIII Purchase Agreement, Fair agreed to use its best efforts to facilitatenegotiations to add CLST Asset III or one of its affiliates as a co-borrowerunder one of Fair’s existing lines of credit with access to at least$15,000,000 of credit for our own purposes. To date we have not been added as a co-borrower.

 

Substantially allof the assets acquired by CLST Asset III are in one of two portfolios.Portfolio A is a mixed pool of receivables from several asset classes,including health and fitness club memberships, resort memberships, receivablesassociated with campgrounds and timeshares, in-home food sales and services,buyers clubs, delivered products, home improvements and tuitions. Portfolio B is made up entirely of receivables related to the sale of tanningbed products.  Fair initially continued to act as the servicer of thesereceivables for no additional consideration.

 

As of February 13,2009, the portfolios of receivables acquired pursuant to the Trust III PurchaseAgreement collectively consisted of approximately 3,000 accounts with anaggregate outstanding balance of approximately $3,709,500, a weighted averageinterest rate greater than 18% and an average outstanding balance per accountof approximately $1,015 for Portfolio A and approximately $5,740 for PortfolioB.  The receivables were recorded at thefair value based on an evaluation prepared by BVA upon which we relied.  All the loans were originated by Fair betweenNovember 1998 and August 2009 and are unsecured loans.  None of the loans purchased were in default.

 

We have the rightto require the seller to repurchase any accounts, for the original purchaseprice applicable to such account, that do not satisfy certain specifiedeligibility requirements set out in the Trust III Purchase Agreement.  If it is discovered by a party that areceivable account was not an “Eligible Receivable” as of February 13,2009, the closing date of the acquisition, the seller is required to repurchasesuch receivable account.  An account isnot an Eligible Receivable if, as of February 13, 2009, such receivableaccount is a delinquent receivable, a defaulted receivable subject tolitigation, dispute or rights of rescission, setoff or counterclaim, or is notsubject to a duly recorded and perfected lien, the seller must repurchase the account.  For the twelve months ended November 30,2009, there had not been a determination that any receivables failed to meetthe eligibility requirements set out in the Trust III Purchase Agreement.

 

Additionally, theTrust III Purchase Agreement provides that each of the sellers jointly andseverally guarantee to CLST Asset III, up to the aggregate stated principalamount of the Notes issued to such seller, that the outstanding receivablebalance of each receivable as of the closing date will be collectible infull.  For each receivable that becomes adefaulted receivable following the closing date, the sellers are obligated topay to CLST Asset III an amount equal to the outstanding receivable balance ofsuch receivable and CLST Asset III has the right to offset such amount againstthe amount due to the seller under the promissory notes issued to the sellerson the closing date.  The aggregateamount of each seller’s guarantee obligation is limited to the aggregate statedprincipal amount of the promissory note issued to such seller representingapproximately 25% of the total purchase price of the portfolio of approximately$3.6 million.  Since the principalbalance of the notes declines over time as payments are made by the Company tothe sellers, future defaulted receivables can be offset only against the thenremaining balance of the notes issued to the sellers.  In February 2010, Fair commencedbankruptcy proceedings which may limit the Company’s ability to continue tooffset future receivable defaults against the notes payable to Fair, but shouldnot impact the Company’s rights to continue to offset defaults of receivablesagainst the other remaining seller notes. Defaults of $208,000 during thetwelve months ended November 30, 2009 were offset against the notespayable to the sellers.The remaining obligation to the sellers, as of November 30, 2009,was $498,000 after interest was accrued and delinquent receivables wererecorded. At this time, we believe that we have a right of recoupment againstFair for payments it has received on our behalf and not remitted, and expect toexercise that right by withholding such amounts from any money due toFair.  However, there can be no assurancethat Fair will not challenge our recoupment right, or what the ultimate outcomeof that challenge might be. On March 1, 2010 approximately $73,000****was due to Fair and the other sellers which has not beenpaid.

 

The Notes issuedby CLST Asset III in favor of the sellers are full-recourse with respect toCLST Asset III and are unsecured.  The three Portfolio A Notes are payablein 11 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 A Notes).  The three Portfolio B Notesare payable in 21 quarterly installments, each 

 

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consisting of equalprincipal payments, plus all interest accrued through such payment date at arate of 4.0% plus the LIBOR Rate (as defined in the Portfolio B Notes).

 

For the twelvemonths ended November 30, 2009, Fair, as a servicer for CLST Asset III,remitted approximately $2.0 million to the Company.

 

During the secondquarter of 2009 we began implementing the servicing, collection and otherprocedures relating to management of CLST Asset III contemplated by theagreements between us and the servicer of the portfolio. Fair was the servicerof the CLST Asset III portfolio and is an affiliate of Mr. Durham. Theimplementation of the procedures required several meetings with the servicerand were implemented during the third quarter of 2009 with the exception ofsecuring a lock box to receive payments, which we expected to have in placeduring the fourth quarter of 2009.

 

During the fourth quarter of 2009, unexpectedly to the Company, the FBIand other government agencies seized certain assets of Fair, including theirservers, computers and other items used by Fair in the servicing of our CLSTAsset III portfolio. Due to these and other facts, we understand Fair wasclosed for a period of time and was unable to fully service our CLST Asset IIIportfolio for an extended period of time. As a result, we have moved theservicing of our CLST Asset III portfolio to an alternate servicer. Effective February 1,2010, Highlands assumed all servicing functions previously performed by Fair.Highlands is fully independent of Fair and the Company, and there are norelated party relationships of any nature among Fair, Highlands or the Company.Fair had been fully co-operating with the logistics of the transfer of theservicing of the CLST Asset III portfolio to Highlands, however, Fair’sbankruptcy proceedings may negatively impact the timing and completeness ofthis transfer.

 

**Director Independence**

 

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

 

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

 

The following table summarizes the fees billed by Whitley Penn LLPfor services rendered during the fiscal years ended November 30, 2009 and November 30,2008 (in thousands).

 
| ** **            | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit Fees(1)         |       | $        | 140        |     | $          | 115 |   |
| Audit-Related Fees(2) |       | 19       |       | 18       |       |
| Tax Fees(3)           |       | 2        |       | 9        |       |
| All Other Fees(4)     |       | 78       |       | 25       |       |
| TOTAL                 |       | $        | 239        |     | $          | 167 |   |

 

----

(1)                                  “Audit Fees”includes fees and expenses billed for the audit of the Company’s annualfinancial statements and review of financial statements included in the Company’squarterly reports on Form 10-Q, and other regulatory filings.

 

(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 and 2009, theamount relates to an audit of the Company’s 401k plan.

 

(3)                                  “Tax fees”relate to various tax planning consultations.

 

(4)                                  “Other fees”include fees billed for services related to the Company’s acquisition of TrustI and review of the Company’s proxy statement and SEC comment letters.

 

TheAudit Committee has considered whether the provision of non-audit services byWhitley Penn is compatible with maintaining the principal accountants’independence, and has determined that it is. The Audit 

 

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Committeehas sole authority to engage and determine the compensation of the Company’sindependent registered public accountants. Pre-approval by the Audit Committeeis required for any engagement of Whitley Penn, subject to certain *de minimis* exceptions. Annually, the Audit Committeepre-approves services to be provided by Whitley Penn.****Allof the services described herein were approved by the Audit Committee pursuantto its pre-approval policies.

 

Noneof the hours expended on the independent registered public accounting firm’sengagement to audit our financial statements for the most recent fiscal yearwere attributed to work performed by persons other than the independentregistered public accounting firm’s full-time permanent employees.

 

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**PART IV.**

 

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

 

(a)            The following are filed as part of this AnnualReport on Form 10-K:

 

(1)            Consolidated FinancialStatements

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

 

(2)            Financial StatementSchedules

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

 

(3)            Exhibits

 

An index identifying the exhibits to be filed withthis 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.                                                                                                                                                                                                   |       |                                                                                                                   |       | Filed herewith.        |
|                   |       |                                                                                                                                                                                                                                                             |       |                                                                                                                   |       |                   |
| 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 Restricted Stock  Award Agreement under the CLST                                                                                                                                                                                                    |       | Previously filed as an exhibit to                                                                                      |       | March 2, 2009     |

 

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|       |   | Holdings, Inc. 2008 Long  Term Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                             |   | our company’s Annual Report Form on  Form 10-K/A for the fiscal year ended November 30, 2008 and  incorporated herein by reference. |   |                                                                                                             |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.2       |   | First  Amendment to Credit Agreement, dated as of May 20, 2009 by and among  CLST Asset Trust II, SSPE Investment Trust I and SSPE, LLC, as borrowers,  Summit Consumer Receivables Fund, L.P., as the originator and as a guarantor,  Summit Alternative Investments, LLC, as the servicer, Eric J. Gangloff, as a  guarantor, Fortress Credit Opportunities I L.P., as a lender and Fortress  Credit Corp., as the administrative agent. |   | Form 10-Q/A  for the quarter ended May 31, 2009                                                                                               |   | January 29,  2010                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.3† |   | CLST  Holdings, Inc. Amended and Restated 2008 Long Term Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                   |   | Previously filed as  Annex B to our Preliminary Proxy Statement on Schedule 14A, as amended, and  incorporated herein by reference.                     |   | September 11,  2009                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.4† |   | Indemnification  Agreement, effective as of July 5, 2007, by and between CLST  Holdings, Inc. and Sherrian Gunn.                                                                                                                                                                                                                                                                                                                      |   | Current  Report on Form 8-K                                                                                                                        |   | August 1,  2007                                                                                             |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.5       |   | 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                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.6       |   | Trust  I Purchase Agreement, effective as of November 10, 2008                                                                                                                                                                                                                                                                                                                                                                             |   | Current  Report on Form 8-K                                                                                                                        |   | November 17,  2008, and as amended on March 5, 2009 and September 3, 2009                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.7*      |   | Trust  I Credit Agreement, effective as of November 10, 2008                                                                                                                                                                                                                                                                                                                                                                               |   | Current  Report on Form 8-K                                                                                                                        |   | November 17,  2008, and as amended on March 5, 2009, September 3, 2009 and  November 5, 2009 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.8† |   | CLST  Holdings, Inc. 2008 Long Term Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                        |   | Current  Report on Form 8-K                                                                                                                        |   | December 5,  2008                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.9† |   | Form of Restricted  Stock Award Agreement under the CLST Holdings, Inc. 2008 Long Term  Incentive Plan.                                                                                                                                                                                                                                                                                                                               |   | Form 10-K for the  fiscal year ended November 30, 2008.                                                                                       |   | March 2, 2009                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.10      |   | Trust  II Purchase Agreement, effective as of December 10, 2008                                                                                                                                                                                                                                                                                                                                                                            |   | Current  Report on Form 8-K                                                                                                                        |   | December 19,  2008, and as amended on March 5, 2009 and September 3, 2009                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.11*     |   | Trust  II Credit Agreement, effective as of December 10, 2008                                                                                                                                                                                                                                                                                                                                                                              |   | Current  Report on Form 8-K                                                                                                                        |   | December 19,  2008, and as amended on March 5, 2009, September 3, 2009 and  November 5, 2009 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.12      |   | Letter  Agreement, effective as of December 10, 2008, by and between Trust II,  Financo, Summit, Summit Alternative Investments, LLC, SSPE, SSPE Trust and  Eric G. Gangloff                                                                                                                                                                                                                                                               |   | Current  Report on Form 8-K                                                                                                                        |   | December 19,  2008, and as amended on March 5, 2009                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                    |   |                                                                                                             |
| 10.13      |   | Notice  of default dated December 2, 2009 from Fortress Credit Corp.                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                    |   | Filed  herewith.                                                                                                 |

 

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| 10.14  |   | Notice  of default dated February 8, 2010 from Fortress Credit Corp.                                                                                                                                                                                        |   | Current  Report on Form 8-K |   | March 8,  2010 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------|
|   |   |                                                                                                                                                                                                                                                             |   |                             |   |                |
| 10.15  |   | Waiver  and Release to Revolving Credit Agreement dated February 26, 2010.                                                                                                                                                                                  |   | Current  Report on Form 8-K |   | March 8,  2010 |
|   |   |                                                                                                                                                                                                                                                             |   |                             |   |                |
| 21.1   |   | Subsidiaries of the  Company.                                                                                                                                                                                                                                    |   |                             |   | Filed herewith.     |
|   |   |                                                                                                                                                                                                                                                             |   |                             |   |                |
| 31.1   |   | Certification  of the Chief Executive Officer pursuant to Rule 13a-14(a) promulgated  under the Exchange Act.                                                                                                                                          |   |                             |   | Filed  herewith.    |
|   |   |                                                                                                                                                                                                                                                             |   |                             |   |                |
| 31.2   |   | Certification  of the 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.    |

 

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†              Management contract, compensatory plan or arrangement.

*                                         Portions of this exhibithave been omitted pursuant to a request for confidential treatment filed withthe SEC.

 

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**SIGNATURES**

 

Pursuantto the 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 President** |
| ** ** | ** ** | ** **                    | ** ** |
| ** ** | ** ** | ** **                    | **Date:  March 12, 2010** |
| ** ** | ** ** | ** **                    | ** ** |
| ** ** | ** ** | ** **                    | ** ** |
| ** ** | ** ** | **By:**                       | **/s/  Jerome L. Trojan III** |
| ** ** | ** ** | ** **                    | **Jerome  L. Trojan III** |
| ** ** | ** ** | ** **                    | **Chief  Financial Officer, Vice President and Treasurer** |
| ** ** | ** ** | ** **                    | ** ** |
| ** ** | ** ** | ** **                    | **Date:  March 12, 2010** |

 

 

KNOWALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Robert A. Kaiser and Jerome L. Trojan III, and each ofthem, his or her true and lawful attorneys-in-fact, each with full power ofsubstitution, for him or her in any and all capacities, to sign any amendmentsto this report on Form 10-K and to file the same, with exhibits theretoand other documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of saidattorneys-in-fact or their substitute or substitutes may do or cause to be doneby virtue hereof. Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.

 
| **By**     | **/s/ Robert A. Kaiser**                                      |   | **Date: March 12, 2010** |
|------------|---------------------------------------------------------------|--------|-------------------------------|
| ** ** | **Robert A. Kaiser**                                          |   |                          |
| ** ** | **Chief Executive Officer and President**                     |   |                          |
| ** ** |                                                          |   |                          |
| **By**     | **/s/****Timothy  S. Durham**                                 |   | **Date: March 12, 2010** |
| ** ** | **Timothy S. Durham**                                         |   |                          |
| ** ** | **Chairman of the Board,  Secretary and Director**            |   |                          |
|       |                                                          |   |                          |
| **By**     | /s/ **David****Tornek**                                       |   | **Date: March 12, 2010** |
| ** ** | **David****Tornek**                                           |   |                          |
| ** ** | **Director**                                                  |   |                          |
| ** ** | ** **                                                    |   |                          |
| **By**     | **/s/ Jerome L. Trojan III**                                  |   | **Date: March 12, 2010** |
| ** ** | **Jerome L. Trojan III**                                      |   |                          |
| ** ** | **Chief Financial Officer, Vice  President and****Treasurer** |   |                          |

 

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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, 2009 and 2008                                                                | F-3    |
|                                                                                                                              |   |
| Consolidated  Statements of Operations for the years ended November 30, 2009 and 2008                                        | F-4    |
|                                                                                                                              |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Loss for the years ended  November 30, 2009 and 2008 | F-5    |
|                                                                                                                              |   |
| Consolidated  Statements of Cash Flows for the years ended November 30, 2009 and 2008                                        | F-6    |
|                                                                                                                              |   |
| Notes to  Consolidated Financial Statements                                                                                       | F-7    |

 

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#### **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

#### ** **

Tothe Board of Directors and Stockholders of

CLSTHoldings, Inc.

 

We have audited the accompanying consolidatedbalance sheets of CLST Holdings, Inc. and subsidiaries, as of November 30,2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensiveloss, and cash flows for the years then ended. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of CLST Holdings, Inc. and subsidiaries as of November 30,2009 and 2008, 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.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, theCompany has incurred net losses in the past two years, has a working capitaldeficit at November 30, 2009, is in default related to its CLST Asset Idebt obligation as of November 30, 2009 and continues to incur significantgeneral and administrative expenses related to its ongoing litigation. Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern. These consolidated financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classifications of liabilities thatmay result from the outcome of this uncertainty.

 

 

/s/Whitley Penn LLP

 

 

Dallas,Texas

March 12,2010

 

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**CLSTHOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**November 30,2009 and 2008**

**(Inthousands, except share and per share data)**

** **
| ** **                                                                                                                                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                                                                               |       |     |       |     |       |
| Current assets:                                                                                                                                                                      |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                                                                           |       | $        | 4,761      |     | $          | 9,754 |   |
| Notes receivable, net -  current                                                                                                                                                     |       | 6,473    |       | 8,698    |       |
| Accounts receivable -  other                                                                                                                                                         |       | 2,741    |       | 893      |       |
| Prepaid expenses and  other current assets                                                                                                                                           |       | 414      |       | 177      |       |
| Total current assets                                                                                                                                                                 |       | 14,389   |       | 19,522   |       |
|                                                                                                                                                                                 |       |     |       |     |       |
| Notes receivable, net -  long-term                                                                                                                                                   |       | 32,459   |       | 31,547   |       |
| Property and equipment,  net                                                                                                                                                         |       | 7        |       | 12       |       |
| Deferred income taxes                                                                                                                                                                |       | 4,786    |       | 4,786    |       |
| Other assets                                                                                                                                                                         |       | 721      |       | 863      |       |
|                                                                                                                                                                                 |       | $        | 52,362     |     | $          | 56,730 |   |
|                                                                                                                                                                                 |       |     |       |     |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                           |       |     |       |     |       |
| Current liabilities:                                                                                                                                                                 |       |     |       |     |       |
| Accounts payable                                                                                                                                                                     |       | $        | 14,705     |     | $          | 14,512 |   |
| Accrued expenses                                                                                                                                                                     |       | 377      |       | 473      |       |
| Income taxes payable                                                                                                                                                                 |       | 99       |       | 207      |       |
| Loans payable - current                                                                                                                                                              |       | 33,663   |       | 7,436    |       |
| Notes payable - related  parties - current                                                                                                                                           |       | 107      |       | —   |       |
| Total current  liabilities                                                                                                                                                           |       | 48,951   |       | 22,628   |       |
|                                                                                                                                                                                 |       |     |       |     |       |
| Loans payable - long  term                                                                                                                                                           |       | —   |       | 26,902   |       |
| Notes payable - related  parties - long term                                                                                                                                         |       | 391      |       | —   |       |
| Total liabilities                                                                                                                                                                    |       | 49,342   |       | 49,530   |       |
|                                                                                                                                                                                 |       |     |       |     |       |
| Commitments and  contingencies                                                                                                                                                       |       |     |       |     |       |
|                                                                                                                                                                                 |       |     |       |     |       |
| Stockholders’ equity:                                                                                                                                                           |       |     |       |     |       |
| Preferred stock, $.01  par value, 5,000,000 shares authorized; none issued                                                                                                           |       | —   |       | —   |       |
| Common stock, $.01 par  value, 200,000,000 shares authorized; 24,583,306 and 21,187,229 shares issued,  respectively, and 23,949,282 and 20,553,205 shares outstanding, respectively |       | 246      |       | 212      |       |
| Additional paid-in  capital                                                                                                                                                          |       | 127,014  |       | 126,034  |       |
| Accumulated other  comprehensive income-foreign currency translation adjustments                                                                                                     |       | 217      |       | 217      |       |
| Accumulated deficit                                                                                                                                                                  |       | (122,810 | )          | (117,616 | )          |
|                                                                                                                                                                                 |       | 4,667    |       | 8,847    |       |
| Less: Treasury stock  (634,024 shares at cost)                                                                                                                                       |       | (1,647   | )          | (1,647   | )          |
|                                                                                                                                                                                 |       | 3,020    |       | 7,200    |       |
|                                                                                                                                                                                 |       | $        | 52,362     |     | $          | 56,730 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**Yearsended November 30, 2009 and 2008**

**(Inthousands, except per share data)**

** **
| ** **                                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenues:                                                    |       |     |       |     |       |
| Interest income                                              |       | $        | 6,330      |     | $          | 467 |   |
| Other                                                        |       | 366      |       | 29       |       |
| Total revenues                                               |       | 6,696    |       | 496      |       |
|                                                         |       |     |       |     |       |
| Loan servicing fees                                          |       | 846      |       | 53       |       |
| Trust administrative  fees                                   |       | 12       |       | 13       |       |
| Provision for doubtful  accounts                             |       | 3,456    |       | 144      |       |
| Interest expense                                             |       | 2,124    |       | 145      |       |
| General and  administrative expenses                         |       | 5,435    |       | 2,172    |       |
| Operating loss                                               |       | (5,177   | )          | (2,031   | )          |
|                                                         |       |     |       |     |       |
| Other income                                                 |       | 9        |       | 550      |       |
|                                                         |       |     |       |     |       |
| Loss from continuing  operations before income taxes         |       | (5,168   | )          | (1,481   | )          |
|                                                         |       |     |       |     |       |
| Income tax expense                                           |       | 26       |       | 192      |       |
|                                                         |       |     |       |     |       |
| Loss from continuing  operations, net of income taxes        |       | (5,194   | )          | (1,673   | )          |
|                                                         |       |     |       |     |       |
| Discontinued  operations, net of income taxes of $5 for 2008 |       | —   |       | 10       |       |
|                                                         |       |     |       |     |       |
| Net loss                                                     |       | $        | (5,194     | )        | $          | (1,663 | ) |
|                                                         |       |     |       |     |       |
| Net loss per share:                                          |       |     |       |     |       |
|                                                         |       |     |       |     |       |
| Basic and diluted:                                           |       |     |       |     |       |
|                                                         |       |     |       |     |       |
| Loss from continuing  operations, net of taxes               |       | $        | (0.23      | )        | $          | (0.08 | ) |
| Discontinued  operations, net of taxes                       |       | —   |       | —   |       |
|                                                         |       |     |       |     |       |
| Net loss per share                                           |       | $        | (0.23      | )        | $          | (0.08 | ) |
|                                                         |       |     |       |     |       |
| Weighted average number  of shares:                          |       |     |       |     |       |
|                                                         |       |     |       |     |       |
| Basic and diluted                                            |       | 22,833   |       | 20,553   |       |

 

See accompanying notes toconsolidated financial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE LOSS**

**Yearsended November 30, 2009 and 2008(In thousands)**

** **
| ** **                           | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** | **Accumulated  other** | ** ** | ** **                      | ** ** | ** **             | ** ** |
|--------------------------------------|------------|------------------|------------|--------------------|------------|------------|------------|------------------------|------------|---------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **Shares**       | ** ** | **Amount**         | ** ** | **Shares** | ** ** | **Amount**             | ** ** | **Additional  paid-in capital** | ** ** | **comprehensive loss** | ** ** | **Accumulated  deficit** | ** ** | **Total** | ** ** |
| ** **                           |       |             |       |               |       |       |       |                   |       |                            |       |                   |       |   |   |   |   |
| 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 |   |
|                                 |       |             |       |               |       |       |       |                   |       |                            |       |                   |       |   |   |   |   |
| Comprehensive loss:                  |       |             |       |               |       |       |       |                   |       |                            |       |                   |       |   |   |   |   |
| Net loss                             |       | —           |       | —             |       | —     |       | —                 |       | —                          |       | —                 |       | (5,194 | ) | (5,194 | ) |
| Total comprehensive loss             |       |             |       |               |       |       |       |                   |       |                            |       |                   |       |   |   | (5,194 | ) |
| Grant of restricted  stock           |       | 1,200            |       | 12                 |       | —     |       | —                 |       | (12                             | )          | —                 |       | — |   | — |   |
| Cancellation of restricted  stock    |       | (300             | )          | (3                 | )          | —     |       | —                 |       | 3                               |       | —                 |       | — |   | — |   |
| Amortization of  restricted stock    |       | —           |       | —             |       | —     |       | —                 |       | 115                             |       | —                 |       | — |   | 115 |   |
| Stock issuance for notes  receivable |       | 2,496            |       | 25                 |       | —     |       | —                 |       | 874                             |       | —                 |       | — |   | 899 |   |
|                                 |       |             |       |               |       |       |       |                   |       |                            |       |                   |       |   |   |   |   |
| Balance at  November 30, 2009   |       | 24,583           |       | $                  | 246        |       | (634       | )                      | $          | (1,647                          | )          | $                      | 127,014    |   | $ | 217 |   | $ | (122,810 | ) | $ | 3,020 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Years ended November 30, 2009 and 2008(In thousands)**

 
| ** **                                                                                 | ** ** | **2009**   | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
|                                                                                       | ** ** | ** ** |       |     |       |
| Cash flows from  operating activities:                                                     |       |       |       |     |       |
| Net loss                                                                                   |       | $          | (5,194     | )        | $          | (1,663 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |       |       |     |       |
| Stock based  compensation                                                                  |       | 115        |       | —   |       |
| Provision for doubtful  accounts                                                           |       | 3,456      |       | 144      |       |
| Depreciation                                                                               |       | 5          |       | 2        |       |
| Non-cash interest  expense                                                                 |       | 93         |       | 3        |       |
| Amortization of notes  receivable acquisition costs                                        |       | 106        |       | —   |       |
| Changes in operating  assets and liabilities:                                              |       |       |       |     |       |
| Accounts receivable -  other                                                               |       | (2,184     | )          | 4,804    |       |
| Prepaid expenses and  other current assets                                                 |       | (237       | )          | 379      |       |
| Other assets                                                                               |       | 49         |       | 264      |       |
| Accounts payable                                                                           |       | 193        |       | 268      |       |
| Income taxes payable                                                                       |       | (108       | )          | 207      |       |
| Accrued expenses                                                                           |       | (96        | )          | (395     | )          |
|                                                                                       |       |       |       |     |       |
| Net cash provided by  (used in) operating activities                                       |       | (3,802     | )          | 4,013    |       |
|                                                                                       |       |       |       |     |       |
| Cash flows from  investing activities:                                                     |       |       |       |     |       |
| Purchases of property  and equipment                                                       |       | —     |       | (13      | )          |
| Notes receivable  collections                                                              |       | 10,232     |       | 665      |       |
| Acquisition of notes  receivable                                                           |       | (4,028     | )          | —   |       |
| Additions to notes  receivable acquisition costs                                           |       | (155       | )          | (6,157   | )          |
|                                                                                       |       |       |       |     |       |
| Net cash provided by  (used in) investing activities                                       |       | 6,049      |       | (5,505   | )          |
|                                                                                       |       |       |       |     |       |
| Cash flows from  financing activities:                                                     |       |       |       |     |       |
| Payments on notes  payable                                                                 |       | (7,240     | )          | (553     | )          |
|                                                                                       |       |       |       |     |       |
| Net cash used in  financing activities                                                     |       | (7,240     | )          | (553     | )          |
|                                                                                       |       |       |       |     |       |
| Net decrease in cash  and cash equivalents                                                 |       | (4,993     | )          | (2,045   | )          |
| Cash and cash  equivalents at beginning of year                                            |       | 9,754      |       | 11,799   |       |
|                                                                                       |       |       |       |     |       |
| Cash and cash  equivalents at end of year                                                  |       | $          | 4,761      |     | $          | 9,754 |   |
|                                                                                       |       |       |       |     |       |
| Non-Cash Investing and  Financing Activities:                                              |       |       |       |     |       |
|                                                                                       |       |       |       |     |       |
| Acquisition of notes  receivable for common stock                                          |       | $          | 899        |     | $          | — |   |
|                                                                                       |       |       |       |     |       |
| Acquisition of notes  receivable for debt                                                  |       | $          | 7,273      |     | $          | 34,891 |   |
|                                                                                       |       |       |       |     |       |
| Acquisition of notes  receivable for accounts receivable, other                            |       | $          | 336        |     | $          | — |   |
|                                                                                       |       |       |       |     |       |
| Returned notes  receivable in exchange for reduction of debt                               |       | $          | 208        |     | $          | — |   |

 

See accompanying notes to consolidated financial statements.

 

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**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1) Summaryof Significant Accounting Policies**

 

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

 

On March 28, 2007, our stockholders approvedthe plan of dissolution which provides that CLST Holdings, Inc., formerlyCellStar Corporation, and its subsidiaries (the “***Company***”)may not engage in any business activities except to the extent necessary topreserve the value of the Company’s assets, wind up the Company’s affairs, anddistribute the Company’s assets. The amount and timing of any distributionspaid to stockholders in connection with the liquidation and dissolution of theCompany are subject to uncertainties and depend on the resolution of certaincontingencies. The Company’s financial statements have been prepared on agoing-concern basis and the asset and liability carrying amounts do not purportto present the net realizable or settlement values in the event of thedissolution and liquidation of the Company.

 

On November 10,2008, we purchased all of the outstanding equity interests of FCC InvestmentTrust I (“***Trust I***”), and on December 12,2008, we purchased certain receivables, installment sales contracts andrelated assets owned by SSPEInvestment Trust I (“***SSPE Trust***”)and SSPE, LLC (“***SSPE***”). On February 13,2009, we purchased assets owned by Fair Finance Company, an Ohio corporation (“***Fair***”), James F. Cochran,Chairman and Director of Fair, and by Timothy S. Durham, Chief ExecutiveOfficer and Director of Fair and an officer, director and stockholder of ourCompany. Messrs. Durham and Cochran own all of the outstanding equity ofFair. The Board of Directors (the “***Board***”)believes that each of these acquisitions will be a better investment return forour 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 notes receivable, we have not abandoned ourplan of dissolution.

 

The Company has reclassified to discontinued operations, for allperiods presented, the results and related charges for the North American andLatin American Regions (See footnote 2). Certain prior year financial amounts have been reclassified to conformto the current year presentation.

 

The Company’s consolidated financial statements include the Company’saccounts and those of the majority-owned subsidiaries. All materialintercompany balances and transactions have been eliminated in consolidation.Unconsolidated subsidiaries and investments are accounted for under the equitymethod.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern.  As discussed in Notes 3, 7 and 11 to theconsolidated financial statements, the Company has experienced higher thananticipated defaults on the notes receivable included in CLST Asset I, LLC (“***CLST Asset I***”) which has resulted ina default under the Trust I Credit Agreement and an approximate $3.5 millionincrease in the allowance for doubtful accounts during the twelve months ended November 30,2009. As a result of the Company’s default under the Trust I Credit Agreement,the amount due to Fortress under this agreement has been classified as currentas of November 30, 2009. The Company has also been engaged in severallawsuits which have resulted in the Company incurring significant legal fees.The combination of the increase in the allowance for doubtful accounts and highlegal fees has resulted in the Company incurring a net loss of approximately$5.2 million during the twelve months ended November 30, 2009. The Companyis continuing discussions to resolve the default under the Trust I Credit Agreement(as defined below). The Company has made a claim under its directors andofficers liability insurance policy for reimbursement of legal fees incurred inexcess of our $1.0 million self retention amount. It is uncertain whether theCompany can continue as a going concern if it continues to incur net losses andif the Company loses the CLST Asset I consumer receivables as a result of thedefault under the Trust I Credit Agreement. These consolidated financialstatements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts andclassifications of liabilities that may result from the outcome of thisuncertainty.

 

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

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosure of any contingent assets and liabilities at the financial statementdate and reported amounts of revenue and expenses during the reporting period.On an on-going basis, the Company reviews its estimates and assumptions. TheCompany’s estimates were based on its historical experience and various otherassumptions that the Company believes to be reasonable under the circumstances.Actual results are likely to differ from those estimates under differentassumptions or conditions.

 

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

 

The Company considers all highly liquid investments with a maturity ofthree months or less when purchased to be cash equivalents. At November 30,2009 and 2008, the Company had no such investments.  The Company maintains deposits primarily inone financial institution, which may at times exceed amounts covered byinsurance provided by the U.S. Federal Deposit Insurance Corporation (“***FDIC***”).  The Company has not experienced any lossesrelated to amounts in excess of FDIC limits. The Company’s cash and cash equivalents are not subject to anyrestriction.

 

**CLST HOLDINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

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

 

***(d)  Notes Receivable***

 

The following table showscertain information as of November 30, 2009 for each of CLST Asset I, CLSTAsset II, LLC (“***CLST Asset II***”)  and CLST Asset III, LLC (“***CLST Asset III***”).   A more detailed description of the resultsfor each of these entities is provided below. Amounts presented are in thousands, except for the approximate number ofcustomer accounts and the average outstanding principal balance per account.

 
| ** **                                         | ** ** | **CLST  Asset I**     | ** ** | **CLST  Asset II** | ** ** | **CLST  Asset III**   | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **Principal Balance** | ** ** | **% of Total**     | ** ** | **Principal Balance** | ** ** | **% of Total** | ** ** | **Principal Balance** | ** ** | **% of Total** | ** ** |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Receivables Aging  (Principal)                     |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Current 0-30 Days                                  |       | $                     | 29,335     |               | 85.2       | %                     | $          | 7,181 |   | 97.9 | % | $ | 1,691 |   | 93.9 | % |
| 31 - 60 Days                                       |       | 1,205                 |       | 3.5                | %          | 52                    |       | 0.7 | % | 34 |   | 1.9 | % |
| 61 - 90 Days                                       |       | 556                   |       | 1.6                | %          | 39                    |       | 0.5 | % | 46 |   | 2.6 | % |
| 91 + 120                                           |       | 452                   |       | 1.3                | %          | 12                    |       | 0.2 | % | 29 |   | 1.6 | % |
| 120+                                               |       | 2,898                 |       | 8.4                | %          | 51                    |       | 0.7 | % | — |   | 0.0 | % |
| Total Receivables                                  |       | 34,446                |       | 100.0              | %          | 7,335                 |       | 100.0 | % | 1,800 |   | 100.0 | % |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Allowance for doubtful  Accts                      |       | (3,610                | )          | -10.5              | %          | (58                   | )          | -0.8 | % | — |   | 0.0 | % |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Net Receivables                                    |       | 30,836                |       | 89.5               | %          | 7,277                 |       | 99.2 | % | 1,800 |   | 100.0 | % |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Discount                                           |       | (531                  | )          | -1.5               | %          | (630                  | )          | -8.6 | % | (55 | ) | -3.1 | % |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Acquisition fees                                   |       | 168                   |       | 0.5                | %          | 26                    |       | 0.4 | % | 41 |   | 2.3 | % |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Total                                              |       | $                     | 30,473     |               | 88.5       | %                     | $          | 6,673 |   | 91.0 | % | $ | 1,786 |   | 99.2 | % |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Accounts Receivable  Other                         |       | $                     | 2,010      |               |       |                  | $          | — |   |   |   | $ | — |   |   |   |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Notes Payable and Loans Outstanding                |       | $                     | 28,666     |               |       |                  | $          | 4,997 |   |   |   | $ | 498 |   |   |   |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Approximate Number of Customer  Accounts           |       | 5,139                 |       |               |       | 981                   |       |   |   | 1,676 |   |   |   |
|                                               |       |                  |       |               |       |                  |       |   |   |   |   |   |   |
| Average Outstanding  Principal Balance per Account |       | $                     | 6,703      |               |       |                  | $          | 7,477 |   |   |   | $ | 1,074 |   |   |   |

 

The majority ofthe notes receivable have collateral in various forms, which may include asecond lien position on the borrower’s home or property.  Notes receivable are recorded at thehistorical cost paid at the date of acquisition net of any purchase discounts.Subsequent to the date of acquisition, notes receivable are reduced by any principalpayments made by the customer. Purchase discounts are recorded based on thenegotiated difference between the face value and the amount paid for the notesreceivable. Purchase discounts are recognized as revenue, using the effectiveinterest method, as principal payments are collected.

 

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The Companyestablishes an allowance for doubtful accounts for receivables where thecustomer has not made a payment for the most recent 120 day period.  The Company specifically analyzes notesreceivable using historical activity, current economic trends, changes in itscustomer payment terms, recoveries of previously reserved notes and collectiontrends when evaluating the adequacy of its allowance for doubtful accounts. Anychange in the assumptions used in analyzing a specific note receivable mayresult in an additional allowance for doubtful accounts being recognized in theperiod in which the change occurs. During the fourth quarter, the Company modified its reserve policy dueto recent market trends. Additional reserves are accrued based on accountbalances that are over 60 days past due with the reserve amount dependent onthe overall performance of the portfolio. The Company may also establish anadditional reserve for any portfolio that, in management’s judgment, may needto be discounted at a future date in order to sell the portfolio in itsentirety. Any reserve amount may be reduced based upon any offset rights orclaims against parties who initially sold the portfolio to the Company. TheCompany may from time to time make additional increases to the allowance basedon the foregoing factors. Once a note receivable has been reserved due tononpayment, the Company will no longer accrue, for financial reportingpurposes, interest earned on the note receivable. Should the note receivablereturn to a performing status, then the Company will resume accruing intereston the note receivable. Recoveries are recorded against the allowance whenpayments are received.  Notes receivableare charged off against the allowance after all means of collection have beenexhausted and a legal determination has been rendered that less than the fullamount of the note receivable will be collected.  Recoveries of notes receivable, which werepreviously charged off, are recorded to income when payments are received.

 

The following table details the activity in theallowance for doubtful accounts for the year ended November 30, 2009 and2008 (in thousands):

 
| ** **                                | ** ** | **For the  year ended** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **November 30,**   | ** ** |
| ** **                                | ** ** | **2009**                | ** ** | **2008** | ** ** |
|                                      |       |                    |       |   |   |
| Beginning  balance                        |       | $                       | 144        |   | $ | — |   |
| Additions to  allow for doubtful accounts |       | 3,456                   |       | 144 |   |
| Recoveries                                |       | 68                      |       | — |   |
| Charge offs                               |       | —                  |       | — |   |
|                                      |       |                    |       |   |   |
| Ending balance                            |       | $                       | 3,668      |   | $ | 144 |   |

 

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

 

Property and equipment are recorded at cost. Depreciation of equipmentis provided over the estimated useful lives of the respective assets, whichrange from three to five years, on a straight-line basis. Leaseholdimprovements are amortized over the shorter of their useful life or the relatedlease term. Major renewals are capitalized, while maintenance, repairs andminor renewals are expensed as incurred.

 

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

 

Long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flows expectedto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured as the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lesscosts to sell.

 

***(g)  Revenue Recognition***

 

Revenues, which consist of interest earned, late fees and othermiscellaneous charges, will be recorded as earned from notes receivable.Revenues will not be accrued on accounts over 120 days without paymentactivity, unless payment activity resumes.

 

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

 

Basic net income (loss) per common share is based on the weightedaverage number of common shares outstanding for the relevant period. Dilutednet income (loss) per common share is based on the weighted average number ofcommon shares outstanding plus the dilutive effect of potentially issuablecommon shares pursuant to vesting of restricted stock, stock options, warrants,and

 

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convertible instruments. Because of the loss in theyears ended November 30, 2009 and 2008 from continuing operations in eachyear, no potentially issuable common shares were included in the diluted pershare computation. Outstanding options to purchase 0.1 million shares of commonstock at November 30, 2009 and 2008, were not included in the computationof diluted earnings per share because their inclusion would have beenanti-dilutive as the exercise price was higher than the average market price.

 

***(i)  Income Taxes***

 

Income taxes are accounted for under the asset and liability method.Deferred income tax assets and liabilities are recognized for the future taxconsequences attributable to (i) differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and (ii) operating loss and tax credit carryforwards.Deferred income tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferredincome tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. 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. Avaluation allowance is provided when the realization of the deferred tax assetis not likely.

 

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

 

The Company’s former 1993 Long-Term Incentive Plan (the “***1993 Plan***”) terminated on December 3,2003. However, Mr. Kaiser, as disclosed in the following footnote,currently has exercisable options that were granted under the 1993 Plan. At ameeting of the Board of Directors on September 25, 2007, our Board ofDirectors unanimously resolved to terminate our 2003 Long-Term Incentive Plan(the “***2003 Plan***”) due to thereduction in the Company’s workforce. As a result of the termination of the2003 Plan, all outstanding options to purchase the equity securities of theCompany issued thereunder were terminated as well. Therefore, there are nocurrently outstanding options, warrants or other rights to purchase the Company’ssecurities under the 2003 Plan. We have no other equity compensation plans.

 

Mr. Kaiser was granted options under the1993 Plan to purchase 80,000 shares of the Company’s common stock on December 12,2001, 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.

 

Most options vested over a four year periodand had an exercise price equal to the fair market value of the Company’scommon stock as of market close on the date of grant. There were no stockoption grants issued in 2009 and 2008.

 

Stock option activity during the years ended November 30,2009 and 2008, is as follows:

 
| ** **                  | ** ** | **2009**       | ** ** | **2008**             | ** ** |
|-----------------------------|------------|----------------|------------|----------------------|------------|
| ** **                  | ** ** | **Number  of** | ** ** | **Weighted-average** | ** ** | **Number  of** | ** ** | **Weighted-average** | ** ** |
| ** **                  | ** ** | **Shares**     | ** ** | **Exercise  prices** | ** ** | **Shares** | ** ** | **Exercise  prices** | ** ** |
|                        |       |           |       |                 |       |   |   |   |   |
| Beginning balance           |       | 130,000        |       | $                    | 4.93       |   | 130,500 |   | $ | 4.95 |   |
| Forfeited                   |       | —         |       | —               |       | (500 | ) | 9.38 |   |
| Outstanding, end of  year   |       | 130,000        |       | $                    | 4.93       |   | 130,000 |   | $ | 4.93 |   |
| Exercisable, end of  year   |       | 130,000        |       | $                    | 4.93       |   | 130,000 |   | $ | 4.93 |   |
| Reserved for future  grants |       | —         |       |                 |       | — |   |   |   |

 

Foroptions that were outstanding and exercisable as of November 30, 2009, theexercise prices and remaining lives were as follows:

 
| **Number**      | ** ** | **Remaining  Life** | ** ** | **Exercise** | ** ** | **Number**      | ** ** | **Exercise** | ** ** |
|-----------------|------------|---------------------|------------|--------------|------------|-----------------|------------|--------------|------------|
| **Outstanding** | ** ** | **(in  years)**     | ** ** | **Prices**   | ** ** | **Exercisable** | ** ** | **Prices**   | ** ** |
|            |       |                |       |         |       |            |       |         |       |
| 80,000          |       | 2.03                |       | $            | 4.60       |            | 80,000     |         | $          | 4.60 |   |
| 50,000          |       | 3.14                |       | $            | 5.45       |            | 50,000     |         | $          | 5.45 |   |
|            |       |                |       |         |       |            |       |         |       |
| 130,000         |       | 2.46                |       | $            | 4.93       |            | 130,000    |         | $          | 4.93 |   |

 

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In accordance with FASB ASC 718, we recognize in the income statementthe grant-date fair value of stock options and other equity-based forms ofcompensation issued to directors and executive officers over the individual’srequisite service period (generally the vesting period). The requisite serviceperiod may be subject to performance conditions.

 

The intrinsic value was zero for 2009 and 2008 related to outstandingstock options.

 

On December 1,2008, our Board approved the Company’s 2008 Long Term Incentive Plan (“***2008 Plan***”). Effective September 11,2009, the Board amended and restated the 2008 Plan to decrease the number ofshares of common stock of the Company that may be issued under the 2008 Planfrom 20,000,000 to 2,000,000. The following is a brief description of thematerial terms of the 2008 Plan:

 

·                  The plan is administered by the Board of the Company.

 

·                  The plan permits the grant of restricted stock, stockoptions and other stock-based awards to employees, officers, directors,consultants and advisors of the Company and its subsidiaries.

 

·                  The aggregate number of shares of common stock of theCompany that may be issued under the plan is 2,000,000 shares.

 

·                  The plan provides that the administrator of the planmay determine the terms and conditions applicable to each award and each awardwill be evidenced by a stock option agreement or restricted stock agreement.

 

·                  The plan will terminate on December 1, 2018.

 

In addition, on December 1,2008 the Board approved the grant of 300,000 shares of restricted stock to eachof Timothy S. Durham, Robert A. Kaiser and Manoj Rajegowda. 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. On March 5, 2009, our Board approved the grant of 300,000 shares ofrestricted stock to David Tornek, our director who was appointed to fill thevacancy on the Board.Of each restricted stock grant, 100,000shares vested on the date of grant and the remaining 200,000 of the shares vestin two equal annual installments on each anniversary of the date of grant. Therestricted stock grants are evidenced by restricted stock agreements approvedby the Board. The total value of the awards using a grant date price of $0.22per share for 600,000 shares and $0.16 per share for 300,000 shares is $180,000and will be expensed over the vesting period.

 

For the twelvemonths ended November 30, 2009, the Company recognized $115,000 of expenserelated to the restricted stock grants.

 

The followingtable summarizes the restricted stock activity for the years ended November 30,2009:

 
| ** **                    | ** ** | **2009**  | ** ** |
|-------------------------------|------------|-----------|------------|
| ** **                    |       |      |       |
| Balance at beginning of  year |       | —    |       |
| Shares granted                |       | 1,200,000 |       |
| Shares vested                 |       | (300,000  | )          |
| Shares forfeited              |       | (300,000  | )          |
|                          |       |      |       |
| Balance at end of year        |       | 600,000   |       |

 

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

 

For purposes of the consolidated statementsof cash flows, the Company considers all investments with an original maturityof 90 days or less to be cash equivalents.

 

The Company paidapproximately $2.1 million of interest for the year ended November 30,2009 and there was no interest paid for the year ended November 30, 2008. TheCompany did not pay any taxes in 2008 but did receive an income tax refund of$1.0 million in 2008 from taxes paid in 2007. The Company paid $17,000 in taxesin 2009.

 

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***(l)  Accounting Pronouncements Not YetAdopted***

 

In December 2007, the FASB issued ASC 805-20(formerly SFAS 141 (R)), “Business Combinations” which clarifies the accountingfor a business combination and requires an acquirer to recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree at the acquisition date, measured at their fair values as of thatdate. The requirements of ASC 805-20 apply to business combinations for whichthe acquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. Early application is notpermitted.

 

In September 2006,the FASB issued ASC 820 (formerly SFAS 157), *FairValue Measurements and Disclosures*(“***ASC820***”), which clarifies the definition of fair value, establishesa framework for measuring fair value in GAAP, and expands disclosures aboutfair value measurement. ASC 820 does not require any new fair valuemeasurements and eliminates inconsistencies in guidance found in various prioraccounting pronouncements. The Company adopted ASC 820 as of December 1, 2008and it had no material impact on its consolidated financial statements.

 

InApril 2009, the FASB issued ASC 825 (formerly FSP FAS 107-1), “*Interim Disclosures about Fair Value of FinancialInstruments”* ASC 825 requires disclosures about the fair value offinancial instruments whenever a public company issues financial informationfor interim reporting periods. ASC 825 is effective for interim reportingperiods ending after June 15, 2009. The Company adopted this staffposition upon its issuance, and it had no material impact on its consolidatedfinancial statements.

 

InJune 2009, the FASB issued ASC 105-10 (formerly SFAS 168), *“The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles.” ASC 105-10*identifies the FASB Accounting Standards Codification as the authoritativesource of**generally acceptedaccounting principles (“***GAAP***”) inthe United States. Rules and interpretive releases of the Securities and Exchange Commission (“***SEC***”) underfederal securities laws are also sources of authoritative GAAP for SECregistrants. ASC 105-10 is**effectivefor financial statements issued for interim and annual periods ending after September 15,2009. The Companyadopted the provisions of ASC 105-10 as of November 30, 2009. The adoptionof these provisions did not have a significant impact on the Company’sconsolidated financial statements.

 

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.

 

***(m) Deferred Costs***

 

Wehave recorded acquisition costs related to the purchase of certain notesreceivables and deferred loan costs associated with certain Companyobligations. The acquisition costs are amortized over the remaining principalbalance of the notes receivable and are recorded as contra revenue. Thedeferred loan costs are amortized over the remaining outstanding balance of theCompany obligation and are recorded in operating interest expense. Any impactof prepayment of the balances by either the Company or our customers would berecognized in the period of prepayment.

 

**(2) DiscontinuedOperations**

 

During fiscal year 2007 wesold all of our U.S. operations, including our Miami-based Latin Americanoperations, Mexico operations and Chile operations. For more information onthese transactions, please see the Company’s Annual Report on Form 10-K/Afor the fiscal year ended November 30, 2008.

 

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The results of discontinued operations for the U.S.for the years ended November 30, 2009 and 2008, as previously reported areas follows (in thousands):

 
| ** **                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |
| Revenues                                     |       | $        | —     |     | $          | — |   |
| Cost of sales                                |       | —   |       | —   |       |
| Gross profit                                 |       | —   |       | —   |       |
|                                         |       |     |       |     |       |
| Selling, general and administrative expenses |       | —   |       | —   |       |
|                                         |       |     |       |     |       |
| Operating income                             |       | —   |       | —   |       |
|                                         |       |     |       |     |       |
| Other income (expense):                      |       |     |       |     |       |
| Interest expense                             |       | —   |       | —   |       |
| Loss on sale of accounts receivable          |       | —   |       | —   |       |
| Minority interest                            |       | —   |       | —   |       |
| Gain on sale                                 |       | —   |       | —   |       |
| Other, net                                   |       | —   |       | 10       |       |
|                                         |       |     |       |     |       |
| Total other income (expense)                 |       | —   |       | 10       |       |
|                                         |       |     |       |     |       |
| Income before income taxes                   |       | —   |       | 10       |       |
|                                         |       |     |       |     |       |
| Provision for income taxes                   |       | —   |       | —   |       |
|                                         |       |     |       |     |       |
| Discontinued operations                      |       | $        | —     |     | $          | 10 |   |

 

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**(3) Acquisitionof notes receivable**

 

***(a)******        ******CLST Asset I, LLC***

 

On November 10, 2008, we, through CLST Asset I, awholly owned subsidiary of CLST Financo, Inc. (“***Financo***”), which is one of our direct, wholly ownedsubsidiaries, entered into a purchase agreement to acquire all of theoutstanding equity interests of Trust I from a third party for approximately$41.0 million (the “***Trust I******Purchase Agreement***”). OurBoard unanimously approved the transaction. Our acquisition of Trust I wasfinanced by approximately $6.1 million of cash on hand and by a non-recourse,term loan of approximately $34.9 million by an affiliate of the seller of Trust I, pursuant to the terms andconditions set forth in the credit agreement, dated November 10, 2008,among Trust I, Fortress Credit Co LLC, as lender (“***Fortress***”),FCC Finance, LLC (“***FCC***”), as the initialservicer, the backup servicer, and the collateral custodian (the “***Trust I Credit Agreement***”). The $34.9 million of acquiredreceivables and loans payable are non-cash transactions relating to theacquisition of a new business.  TheCompany is now responsible for the collection of the receivables included inthe trust through its wholly owned subsidiary Financo.

 

Therepayment terms on the accounts are standardized, but are dependent on the formof agreement used by the originator. Customers are required to make monthly payments until the loans are paidin full. At the time of purchase of the CLST Asset I portfolio, the remainingtime to maturity was in a range of 8-10 years, not including prepayments, ifany.

 

Financo hashistorically conducted our financing business, including ownership ofreceivables generated by our businesses and providing internal financing to ourother operating subsidiaries. All of the assets acquired by Trust I consist ofa portfolio of consumer home improvement, repair and other home related loans tohomeowners, some of which are collateralized or otherwise secured by interestsin real estate. We are 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 equivalents balances. We will continue to hold andcollect on these consumer notes receivable while we continue to review therelative benefits to our stockholders of continuing to wind down our businesspursuant to our plan of dissolution. We believe that we will be able to disposeof Trust I, if properly marketed, whether through the use of reputable brokersor investment bankers, through an auction process or other strategies formaximizing proceeds from an asset disposition, within the timeframe necessaryto complete the winding down of the Company prior to its final dissolution.

 

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 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. These loans are all homeimprovement, repair and other home related loans to homeowners of whichapproximately 63% were secured with a second lien on the property, with theremainder being unsecured.  Approximately89% of the loans are in the Northeast with the remainder in Texas, Georgia andMissouri.  As of October 31, 2008,the weighted average interest rate of the portfolio was 14.4%. We have theright 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 I Purchase Agreement.If it is discovered by a party that a receivable account was not an “EligibleReceivable” as of the cut-off date of October 31, 2008, the seller isrequired to repurchase such receivable account unless such breach is remediedwithin thirty business days of notice of such breach. An account is not anEligible Receivable if, as of October 31, 2008, such receivable accountis, among other things, a defaulted receivable, subject to litigation, disputeor rights of rescission, setoff or counterclaim, or is not subject to a dulyrecorded and perfected lien, the seller must repurchase the account.  The Company believes that between $1.3million and $2.2 million of receivables purchased were ineligible, as definedin the Trust I Purchase Agreement, at the time of purchase. Of thesepotentially ineligible receivables, approximately $574,000 have becomedefaulted receivables. The Company has notified Fortress of these potentiallyineligible receivables and discussions with Fortress are ongoing. The Companycannot predict when or if these matters will be resolved favorably or at all.

 

When we purchased Trust I, the historical default rate for the previousthree years for the portfolio was approximately 4%, which was the basis forassessing the creditworthiness of the assets included in CLST Asset I.  Beginning in the third quarter of 2009 andcontinuing through the fourth quarter of 2009, we saw the default rate increaseto the 7-8% range; accordingly, we have been increasing our allowances toreflect this change.

 

The Trust I CreditAgreement provides for a non-recourse, term loan of approximately $34.9million, maturing on November 10, 2013. The term loan bears interest at anannual rate of 5.0% over the LIBOR Rate (3.81% at October 31, 2008) (asdefined in the Trust I Credit Agreement). The obligations under the Trust ICredit Agreement are secured by a first priority security interest insubstantially all of the assets of Trust I, including portfolio collections.

 

The Trust I CreditAgreement provides the material terms and conditions for the services to beperformed by the servicer. In return, Trust I pays the servicer a monthlyservicing fee equal to 1.5%, per annum of the then aggregate outstandingprincipal balance of the receivables.

 

Portfoliocollections are distributed on a monthly basis. Absent an event of default,after payment of the servicing fee and other fees and expenses due under theTrust I Credit Agreement and the required principal and interest payments tothe lender under 

 

F-14

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Table of Contents

 

the Trust I CreditAgreement, all remaining amounts from portfolio collections are paid to Trust Iand are available for distribution to CLST Asset I and 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) thethen-current aggregate unpaid principal balance of such receivable and (3) apercentage specified in the Trust I Credit Agreement based upon the aging ofsuch receivable, and (b) amounts on deposit in the collection account forthe receivables net of any accrued and unpaid interest on the loan and fees dueto the 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 outstandingprincipal amount of the loan plus all accrued interest, fees and expenses aredue on the maturity date. Interest payments on the term loan are due monthly.

 

The Trust I CreditAgreement contains customary covenants for facilities of its type, includingamong other things covenants that restrict Trust I’s ability to incurindebtedness, grant liens, dispose of property, pay dividends, make certainacquisitions or to take actions that would negatively affect Trust I’s specialpurpose vehicle status. Generally, these covenants do not impact the activitiesthat may be undertaken by the Company. The Trust I Credit Agreement containsvarious events of default, including failure to pay principal and interest whendue, breach of covenants, materially incorrect representations, default undercertain other agreements of Trust I, bankruptcy or insolvency of Trust I, theoccurrence of an event which causes a material adverse effect on Trust I, theoccurrence of certain defaults by the servicer, entry of certain materialjudgments against Trust I, and the occurrence of a change of control or certainmaterial events and the issuance of a qualified audit opinion with respect toTrust I’s financials.

 

On October 16,2009, we received a notice of default from Fortress stating that an event ofdefault had occurred and was continuing under the Trust I Credit Agreement. TheFortress notice states that the three-month rolling average annualized defaultrate of the Trust I portfolio has exceeded 7.0%. As a result of the default,pursuant to the Trust I Credit Agreement, the interest rate payable by Trust Ihas increased by an additional 2% per annum, and all collections by Trust Iabove amounts retained to pay interest, fees, principal amortizations, andother charges that are normally remitted to the Company, are instead beingapplied to outstanding principal under the Trust I Credit Agreement until theamount due has been reduced to zero.  Inaddition, Fortress is entitled to foreclose on the assets of Trust I and sellthem to satisfy amounts due it under the Trust I Credit Agreement.  Only Trust I is liable for amounts dueFortress under the Trust I Credit Agreement. Thus, although the Company could lose some or all of its investment inTrust I, the Company will not be obligated to pay any amounts due Fortressunder the Trust I Credit Agreement.  AllTrust I collections are being retained by Fortress and applied to pay interestand reduce indebtedness while the Company discusses amending the Trust I CreditAgreement, but Fortress has not sought to foreclose on the assets of TrustI.  Those discussions are ongoing.  The Company does not expect that Fortresswill foreclose on the assets of Trust I while negotiations are proceeding.  As a result of this default, the entirebalance of $28.7 million due to Fortress under the Trust I Credit Agreement hasbeen classified as current on the November 30, 2009 balance sheet. Had theCompany not been in default under the Trust I Credit Agreement, $22.2 millionof the outstanding balance as of November 30, 2009 would have beenclassified as non-current.

 

The purchase priceof $41 million consisted of the following:

 

·                  cash paid to the sellers in the amount of $6.1million; and

·                  debt financing of $34.9 million.

 

The estimated fair value of the assets is based upon the acquisition ofTrust I being a 1) negotiated transaction between independent third parties, 2)the notes receivable bear market rates of interest and 3) purchase discountsare recorded based on the negotiated difference between the face value and theamount paid for the notes receivable. 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 |   |

 

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The following unaudited pro forma information presentsthe 2008 combined results of operations of Trust I and the Company as if the acquisition had occurred on December 1,2007.  The unaudited pro forma resultsare for informational purposes and are not necessarily indicative of resultsthat would have occurred had the acquisition been in effect for the periodspresented, nor are they necessarily indicative of future results.  The unaudited proforma information was preparedfrom the historical financial information of Trust I and the Company.

 

**(unaudited)**

 
| ** **                                                             | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|
|                                                                   |       |     |       |
| Revenues                                                               |       |     |       |
| Interest income                                                        |       | $        | 8,160      |   |
| Other                                                                  |       | 44       |       |
| Total revenues                                                         |       | 8,204    |       |
|                                                                   |       |     |       |
| Loan servicing fees                                                    |       | 129      |       |
| Management fees                                                        |       | 915      |       |
| Interest expense                                                       |       | 4,604    |       |
| General and  administrative                                            |       | 2,719    |       |
| Operating loss                                                         |       | (163     | )          |
|                                                                   |       |     |       |
| Other expense:                                                         |       |     |       |
| Interest expense                                                       |       | —   |       |
| Loss on settlement of  note receivable related to sale of Asia-Pacific |       | —   |       |
| Realized loss on sale  of assets                                       |       | (4,078   | )          |
| Other, net                                                             |       | 550      |       |
|                                                                   |       |     |       |
| Total other loss                                                       |       | (3,528   | )          |
|                                                                   |       |     |       |
| Loss from continuing  operations before income taxes                   |       | (3,691   | )          |
|                                                                   |       |     |       |
| Income tax expense  (benefit)                                          |       | 192      |       |
|                                                                   |       |     |       |
| Loss from continuing  operations, net of taxes                         |       | (3,883   | )          |
|                                                                   |       |     |       |
| Discontinued  operations, net of taxes of $5 for 2008                  |       | 10       |       |
|                                                                   |       |     |       |
| Net income (loss)                                                      |       | $        | (3,873     | ) |
|                                                                   |       |     |       |
| Net income (loss) per  share:                                          |       |     |       |
|                                                                   |       |     |       |
| Basic and diluted:                                                     |       |     |       |
|                                                                   |       |     |       |
| Net income (loss) per  share                                           |       | $        | (0.19      | ) |
|                                                                   |       |     |       |
| Weighted average number  of shares:                                    |       |     |       |
|                                                                   |       |     |       |
| Basic and diluted                                                      |       | 20,553   |       |

 

***(b)******        ******CLST Asset II, LLC***

 

On December 12,2008, we, through CLST Asset Trust II (the “***Trust II***”), a newly formed trust wholly owned by CLSTAsset II, a wholly owned subsidiary of Financo, which is one of ourdirect, wholly owned subsidiaries, entered into a purchase agreement, effectiveas of December 10, 2008, to acquire from time to time certain receivables,installment sales contracts and related assets owned by third parties (the “***Trust II Purchase Agreement***”). The Board unanimously approved the establishment of the Trust II and thepurchase agreement. Under the terms of a non-recourse, revolving loan, whichTrust II entered into with Summit Consumer Receivables Fund, L.P. (“***Summit***”), as originator, andSSPE and SSPE Trust, as co-borrowers, Summit and Eric J. Gangloff, asGuarantors, Fortress Credit Corp. (“***Fortress Corp***.”),as the lender, Summit Alternative Investments, LLC, as the initial servicer,and various other parties (“***Trust II Credit Agreement***”),Trust II committed to purchase receivables of at least $2.0 million.  In conjunction with this agreement, Trust IIbecame a co-borrower under a $50 million credit agreement that permits Trust IIto use more than $15 million of the aggregate availability under the revolvingfacility.  Trust II’s commitment topurchase $2.0 million of receivables was fulfilled in the first quarter of2009, when Trust II purchased $5.8 million of receivables, with an aggregatepurchase 

 

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discount of $0.5 million,that are secured by a second mortgage or the personal property itself. Thesereceivables represent primarily home improvement loans originated through FCC,the service provider of CLST Asset I. The loans represent new originations withan average term of 9 years and a current average interest rate of 14.7%.** **Since these are newloans, the Company has managed the originations such that almost 65% of the newloans have credit scores higher than 680, with a portfolio average of 676. Asof June 2009, the Company is no longer originating new loans under thecredit agreement.

 

We or the sellers under the Trust II Purchase Agreement can terminatethe Trust II Purchase Agreement at any time (with notice) after March 29,2009. Also, pursuantto the Trust II Credit Agreement**, w**e have theright to require the sellers to repurchase any accounts, for the originalpurchase price applicable to such account plus interest accrued thereon, thatdo not satisfy certain specified eligibility requirements set out in the TrustII Credit Agreement as of the purchase date. If it is discovered by a partythat a receivable account was not an “Eligible Receivable” as of the purchasedate, the seller is required to repurchase such receivable account. An accountis not an Eligible Receivable if, as of the purchase date, such receivableaccount is, among other things, a defaulted receivable, a delinquentreceivable, subject to litigation, dispute or rights of rescission, setoff orcounterclaim, or is not subject to a duly recorded and perfected lien, as theterms are defined in the Trust II Credit Agreement, the seller must repurchasethe account.  For the twelve months endedNovember 30, 2009, there had not been a determination that any receivablesfailed to meet the eligibility requirements set out in the Trust II CreditAgreement.

 

Thepurchases of receivables by the Trust II from the sellers under the Trust II Purchase Agreement and otherapproved sellers or dealers will be financed by cash on hand and by advancesunder a non-recourse, revolving facility provided by a third party lender. Therevolving facility was initially established by an affiliate of the sellersunder the Trust IIPurchase Agreement. The Trust II has become a co-borrowerunder the Trust II Credit Agreement and has pledged its assets to secureperformance by the borrowers thereunder. The revolving facility permits anaggregate borrowing of all co-borrowers thereunder of up to $50,000,000.Financo has the ability to direct that not less than $15 million to be borrowedunder the revolving facility be utilized by the Trust II to purchase receivables,installment sales contracts and related assets for the Trust II. With the consent of itsco-borrowers, the TrustII may utilize more than $15,000,000 of the aggregate availability underthe revolving facility. Receivables purchased by the Trust II will be owned by the Trust II, and the Trust II will receive the benefitsof collecting them, subject to the third party lender’s rights in those assetsas collateral under the revolving facility. The terms and conditions of therevolver are set forth in the Trust II Credit Agreement and the letteragreement, effective as of December 10, 2008, among the Trust II, Financo, the originator,the co-borrowers, the initial servicer, and the guarantor (the “***Letter Agreement***”). Advancesunder the revolver are limited to an amount equal to, net of certainconcentration limitations set forth in the Trust II Credit Agreement, (a) thelesser of (1) the product of 85% and the purchase price being paid foreligible receivables with a credit score greater than or equal to 650 (“***Class A Receivables***”) or(2) the product of 80% and the then-current aggregate balance of principaland accrued and unpaid interest outstanding for Class A Receivables plus (b) thelesser of (1) the product of 75% and the purchase price being paid foreligible receivables with a credit score less than 650 (“***Class B Receivables***”) or(2) the Maximum Advance.

 

The Trust IICredit Agreement matures on September 28, 2010 and bears interest at anannual rate of 4.5% over the LIBOR Rate (1.62% as of December 12, 2008)(as defined in the Trust 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 the Trust II CreditAgreement are securedby a first priority security interest in substantially all of the assets of theTrust II and the co-borrowers, including portfolio collections.

 

The Trust II CreditAgreement providesthe material terms and conditions for the services to be performed by theservicer. In return, the Trust II pays the servicer a monthly servicing feeequal to an annual rate of 1.5% of the then aggregate outstanding principalbalance of the receivables and a 2% loan origination fee on each new loanoriginated.

 

Portfoliocollections are distributed on a monthly basis. Absent an event of default,after payment of the servicing fee and other amounts, fees and expenses dueunder the Trust II Credit Agreement and the required principal, interest, unusedcommitment fee payments to the lenders under the Trust II Credit Agreement and fees due to the co-borrowers underthe Letter Agreement, all remaining amounts from portfolio collections are paidto the Trust II and are available for distribution to CLST Asset II andsubsequently to Financo.

 

Principal paymentson the Trust II Credit Agreement are due monthly to the extent that theaggregate 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 required toeither 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 

 

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plus all accruedinterest, fees and expenses is due on the maturity date. The Trust II may, atits option, repay in whole or in part borrowings under the revolver butprepayments made before September 28, 2010 are subject to a prepaymentpremium equal to 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 TrustII’s special 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 impact theactivities that may be undertaken by the Company. The Trust II Credit Agreementcontains various events of default, including failure to pay principal andinterest when due, breach of covenants, materially incorrect representations,default under certain other agreements of the Trust II, bankruptcy or insolvencyof the Trust II, the occurrence of an event which causes a material adverseeffect on the Trust II, the occurrence of certain defaults by the servicer,entry of certain material judgments against the Trust II, and the occurrence ofa change of control or certain material events and the issuance of a qualifiedaudit opinion with respect to the Trust II’s financials. In addition, an eventof default occurs if the three-month rolling average delinquent accounts rateexceeds 15.0% for Class A Receivables or 30.0% for Class BReceivables, or the three-month rolling average annualized default rate exceeds5.0% for Class A Receivables or 12.0% for Class B Receivables. If anevent of default occurs, all of the Trust II’s obligations under the Trust IICredit Agreement could be accelerated by the lender, causing the entireremaining outstanding principal balance plus accrued and unpaid interest andfees to be declared immediately due and payable.

 

During the twelvemonths ended November 30, 2009, Trust II purchased $9.6 million ofreceivables with an aggregate purchase discount of $0.8 million. Thesereceivables represent primarily home improvement loans originated through FCC,the service provider of CLST Asset I. Trust II borrowed $6.4 million utilizing the revolving facility.

 

Approximately 54% of these loans were secured through a second lien onthe property, with the remainder being unsecured.  The loans are through the 48 mainland stateswith the top five concentration as follows:

 
| **State**     | ** ** | **Percentage** | ** ** |
|---------------|------------|----------------|------------|
|          |       |           |       |
| Michigan      |       | 23             | %          |
| Ohio          |       | 19             | %          |
| Massachusetts |       | 7              | %          |
| Florida       |       | 5              | %          |
| Pennsylvania  |       | 5              | %          |

 

During the second quarterof 2009 we were informed by Summit that the commitment under the Trust IICredit Agreement had been reduced by $20 million to $30 million.  Summit did not indicate the specific reasonsfor the reduction in the credit facility other than it was part of anegotiation with Fortress Corp. regarding a default on another Summitportfolio.  This reduction has no impacton the Company because during the third quarter of 2009, we ceased purchasingany new receivables under the facility and are no longer originating new loansunder the credit agreement and, as a result, the Company is no longer drawingadditional funds under the credit agreement. Because we are no longer originating new loans under this creditagreement, FCC is no longer providing origination services to the Company. Theorigination services performed by FCC included loan documentation, collateraldocumentation where applicable, credit verification, and other requiredactivities to secure loan approval per the Company’s standards.  FCC was paid a one-time fee of 2% of theoriginal principal amount of loans originated for performing theseservices.  Once a loan was approved, FCCwould perform the monthly servicing activities, which would includecollections, reporting, lock box services, customer service, and other relatedservices. FCC was paid 1.5%, per annum, of the outstanding principal balancefor these services.  As of November 30,2009, total borrowings under the Trust II Credit Agreement were $15.1 million,of which $5.0 million was attributable to Trust II.

 

We received a notice of default dated December 2, 2009 fromFortress Corp. (“***Default Notice***”) stating thata servicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the SSPE Trust, hasfailed to perform its servicing duties with respect to that portion of thereceivables portfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federal investigationof Fair and Timothy Durham, and constitutes a material adverse effect withrespect to the servicer and thus a breach of a covenant under the Trust IICredit Agreement.  We also received anotice of default dated February 8, 2010 from Fortress Corp. (“***Second Default Notice***”) stating thatan additional event of default has occurred and is continuing under the TrustII Credit Agreement because the three-month rolling average annualized defaultrate of the Class A receivables in the Trust II portfolio had exceeded5.0% as of January 31, 2010. On February 26, 2010, the parties to theTrust II Credit Agreement entered into a wavier and release agreement (the “***Fortress***

 

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***Waiver***”) whereby 1) each event ofdefault declared in the Default Notice and the Second Default Notice waswaived, 2) Trust II became the sole borrower under the Trust II CreditAgreement, 3) the outstanding borrowings attributable to SSPE Trust were paidin full, 4) SSPE Trust and their affiliates were released from all furtherobligations under the Trust II Credit Agreement, and 5) the SSPE Trust assetswere removed as pledged collateral for the Trust II Credit Agreement. TheFortress Waiver also amended certain terms of the Trust II Credit Agreementincluding the elimination of Trust II’s right to further borrowings and therequirement for Trust II to pay an unused commitment fee.

 

***(c)******         ******CLST Asset III, LLC***

 

Effective February 13,2009, we, through CLST Asset III, a newly formed, wholly owned subsidiary ofFinanco, which is one of our direct, wholly owned subsidiaries, purchasedcertain receivables, installment sales contracts and related assets owned byFair, James F. Cochran, Chairman and Director of Fair, and Timothy S. Durham,Chief Executive Officer and Director of Fair and an officer, director andstockholder of our Company (the “***Trust III PurchaseAgreement***”). Messrs. Durham and Cochran own all of theoutstanding equity of Fair. In return for assets acquired under the Trust IIIPurchase Agreement, CLST Asset III paid the sellers total consideration of$3,594,354 as follows:

 

(1)             cash in the amount of $1,797,178 of which $1,417,737was paid to Fair, $325,440 was paid to Mr. Durham and $54,000 was paid to Mr. Cochran,

 

(2)             2,496,077 newly issued shares of our common stock, parvalue $.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 CLST Asset III in an aggregateoriginal stated principal amount of $898,588, of which two promissory notes inan aggregate original principal amount of $708,868 were issued to Fair, twopromissory notes in an aggregate original principal amount of $162,720 wereissued to Mr. Durham and two promissory notes in an aggregate originalprincipal amount of $27,000 were issued to Mr. Cochran.

 

We received afairness opinion of Business Valuation Advisors (“***BVA***”) stating that BVA is of the opinion that theconsideration paid by us pursuant to the Trust III Purchase Agreement is fair,from a financial point of view, to our nonaffiliated stockholders.  A copyof the fairness opinion was filed as an exhibit to our Current Report on Form 8-Kfiled with the SEC on February 20, 2009.  The shares of Common Stockwere issued by us in a transaction exempt from registration pursuant to Section 4(2) ofthe Securities Act.  As additional inducement for CLST Asset III to enterinto the Trust III Purchase Agreement, Fair agreed to use its best efforts tofacilitate negotiations to add CLST 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. To date we have not beenadded as a co-borrower.

 

Substantially allof the assets acquired by CLST Asset III are in one of two portfolios.Portfolio A is a mixed pool of receivables from several asset classes,including health and fitness club memberships, membership resort memberships,receivables associated with campgrounds and timeshares, in-home food sales andservices, buyers clubs, delivered products, home improvements andtuitions.  Portfolio B is made up entirely of receivables related to thesale of tanning bed products.  Only 2% of these portfolios are homeimprovement loans and none of the loans are secured.  The loans are through the 48 mainland stateswith the top five concentration as follows:

 
| **State**    | ** ** | **Percentage** | ** ** |
|--------------|------------|----------------|------------|
|         |       |           |       |
| Ohio         |       | 17             | %          |
| Florida      |       | 8              | %          |
| Colorado     |       | 8              | %          |
| Texas        |       | 6              | %          |
| Pennsylvania |       | 6              | %          |

 

As of February 13,2009, the portfolios of receivables acquired pursuant to the Trust III PurchaseAgreement collectively consisted of approximately 3,000 accounts with anaggregate outstanding balance of approximately $3,709,500 with a weightedaverage interest rate greater than 18% and an average outstanding balance peraccount of approximately $1,015 for Portfolio A and approximately $5,740 forPortfolio B.  We have the right to require the seller to repurchase anyaccounts, for the original purchase price applicable to such account, that donot satisfy certain specified eligibility requirements set out in the Trust IIIPurchase Agreement as of February 13, 2009. If it is discovered by a partythat a receivable account was not an “Eligible Receivable” as of 

 

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February 13, 2009,the closing date of the acquisition, the seller is required to repurchase suchreceivable account. An account is not an Eligible Receivable if, as of February 13,2009, such receivable account is a delinquent receivable, a defaultedreceivable subject to litigation, dispute or rights of rescission, setoff orcounterclaim, or is not subject to a duly recorded and perfected lien, theseller must repurchase the account.  Forthe twelve months ended November 30, 2009, there had not been adetermination that any receivables failed to meet the eligibility requirementsset out in the Trust III Purchase Agreement.

 

Additionally, theTrust III Purchase Agreement provides that each of the sellers jointly andseverally guarantee to CLST Asset III, up to the aggregate stated principalamount of the Notes issued to such seller, that the outstanding receivablebalance of each receivable as of the closing date will be collectible infull.  For each receivable that becomes adefaulted receivable following the closing date, the sellers are obligated topay to CLST Asset III an amount equal to the outstanding receivable balance ofsuch receivable and CLST Asset III has the right to offset such amount againstthe amount due to the seller under the promissory notes issued to the sellerson the closing date.  The aggregateamount of each seller’s guarantee obligation is limited to the aggregate statedprincipal amount of the promissory note issued to such seller representingapproximately 25% of the total purchase price of the portfolio of approximately$3.6 million.  Since the principalbalance of the notes declines over time as payments are made by the Company tothe sellers, future defaulted receivables can be offset only against the thenremaining balance of the notes issued to the sellers.  Any future defaults of receivables will beoffset against any remaining amounts owed the sellers pursuant to thesenotes.  In February 2010, Faircommenced bankruptcy proceedings which may limit the Company’s ability tocontinue to offset future receivable defaults against the notes payable toFair, but should not impact the Company’s rights to continue to offset defaultsof receivables against the other remaining seller notes. Defaults of $208,000during the twelve months ended November 30, 2009 were offset against thenotes payable to the sellers. The remaining obligation to the sellers, as of November 30,2009, was $498,000 after interest was accrued and delinquent receivables wererecorded.

 

The Notes issuedby CLST Asset III in favor of the sellers are full-recourse with respect toCLST Asset III and are unsecured.  The three Notes relating to Portfolio A(the “***Portfolio A Notes***”)are payable in 11 quarterly installments, each consisting of equal principalpayments, plus all interest accrued through such payment date at a rate of 4.0%plus the LIBOR Rate (0.38% as of February 13, 2009) (as defined in thePortfolio A Notes).  The three Notes relating to Portfolio B (the “***Portfolio B Notes***”) arepayable 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).

 

During the secondquarter of 2009 we began implementing the servicing, collection and otherprocedures relating to management of CLST Asset III contemplated by theagreements between us and the servicer of the portfolio. Fair is the servicerof the CLST Asset III portfolio and is an affiliate of Mr. Durham. Theimplementation of the procedures required several meetings with the servicerand were implemented during the third quarter of 2009 with the exception ofsecuring a lock box to receive payments, which we expected to have in placeduring the fourth quarter of 2009.

 

During the fourth quarter of 2009, unexpectedly to the Company, theFederal Bureau of Investigation (“***FBI***”) andother government agencies seized certain assets of Fair, including theirservers, computers and other items used by Fair in the servicing of our CLSTAsset III portfolio. Due to these and other facts, we understand Fair wasclosed for a period of time and was unable to fully service our CLST Asset IIIportfolio for an extended period of time. As a result, we have moved theservicing of our CLST Asset III portfolio to an alternate servicer. Effective February 1,2010, Highlands Premier Acceptance Corp. and Highlands Financial Services, LLC(collectively referred to herein as “***Highlands***”)assumed all servicing functions previously performed by Fair. Highlands isfully independent of Fair and the Company, and there are no related partyrelationships of any nature among Fair, Highlands or the Company. Fair had beenfully co-operating with the logistics of the transfer of the servicing of theCLST Asset III portfolio to Highlands, however, in February 2010 Faircommenced bankruptcy proceedings, which may negatively impact the timing andcompleteness of this transfer.

 

Our agreement with Highlands calls for an initial term of six monthsand is automatically renewed in one year increments unless cancelled in writingby either party in accordance with the terms of the agreement. We will incurservicing fees at market rates and per the terms of the agreement. Highlands isrequired to make daily remittances of our collected accounts.

 

At this time, we believethat we have a right of recoupment against Fair for payments it has received onour behalf and not remitted, and expect to exercise that right by withholdingsuch amounts from any money due to Fair. However, there can be no assurance that Fair will not challenge ourrecoupment right, or what the ultimate outcome of that challenge might be. On March 1,2010 approximately $73,000****was due toFair and the other sellers which has not been paid.

 

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**(4) RelatedParty Transactions**

 

***CLST Asset I***

 

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

 

Pursuant to the Trust ICredit Agreement, Fair, may become the servicer if and only if there occurs anevent of a default by the then current servicer and only if Fair is not then indefault either as a borrower or as a servicer under any credit facility towhich Fortress or any of its affiliates is a party and no change of control ofFair has occurred.  Timothy S. Durham, anofficer, director and stockholder of the Company, is Chief Executive Officerand Director of Fair and is also a majority stockholder of Fair. As of the dateof this Form 10-K, FCC continues to be the servicer of the CLST Asset Iportfolio, and the Company is not aware that the servicer is in default underthe Trust I Credit Agreement.  BecauseFair is not currently acting as the servicer of CLST Asset I and Fair couldonly become a servicer upon certain defaults by the current servicer, it is notcurrently anticipated that Fair will have a direct or indirect materialinterest in the Trust I Credit Agreement. The servicing fee payable to the servicer in any given year under theTrust I Credit Agreement is based upon a service fee rate of 1.5% and theaggregate outstanding receivable balance. In February 2010, Fair commenced bankruptcy proceedings, which mayimpact Fair’s ability to ultimately act as the servicer of the CLST Asset Iportfolio if there was a need to change from the current servicer.

 

***CLST Asset II***

 

On December 12, 2008, the Company entered into the Trust IIPurchase Agreement, through Trust II, a newly formed trust wholly owned by CLST Asset II,a wholly owned subsidiary of Financo, effective as of December 10,2008, to acquire from time to time certain receivables, installment salescontracts and related assets owned by SSPE Trust and SSPE.  Under the terms of the Trust II CreditAgreement, a non-recourse, revolving loan, which Trust II entered into withSummit, as originator, and SSPE and SSPE Trust, as co-borrowers, Summit andEric J. Gangloff, as Guarantors, Fortress Corp., as the lender, Summit AlternativeInvestments, LLC, as the initial servicer, and various other parties, Trust IIcommitted to purchase receivables of at least $2.0 million.  In conjunction with the Trust II CreditAgreement, Trust II became a co-borrower under a $50 million credit agreementthat permits Trust II to use more than $15 million of the aggregateavailability under the revolving facility.

 

Fair is a sub-servicer ofthe CLST Asset II portfolio and is an affiliate of Mr. Durham, a directorof the Company.  Fair has been retainedas a sub-servicer for assets held by the SSPE Trust.  The Company has not made any payments to Fairin connection with its services as a sub-servicer for CLST Asset II portfolioassets held by the SSPE Trust.** **In February 2010, Faircommenced bankruptcy proceedings, which may impact Fair’s ability to ultimatelyact as the servicer of the CLST Asset II portfolio if there was a need tochange from the current servicer.

 

We received theDefault Notice dated December 2, 2009 from Fortress Corp. stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the SSPE Trust, hasfailed to perform its servicing duties with respect to that portion of thereceivables portfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We also receiveda Second Default Notice dated February 8, 2010 from Fortress Corp. statingthat an additional event of default has occurred and is continuing under theTrust II Credit Agreement because the three-month rolling average annualizeddefault rate of the Class A receivables in the Trust II portfolio hadexceeded 5.0% as of January 31, 2010. On February 26, 2010, theparties to the Trust II Credit Agreement entered into the Fortress Waiverwhereby 1) each event of default declared in the Default Notice and the SecondDefault Notice was waived, 2) Trust II became the sole borrower under the TrustII Credit Agreement, 3) the outstanding borrowings attributable to SSPE Trustwere paid in full, 4) SSPE Trust and their affiliates were released from allfurther obligations under the Trust II Credit Agreement, and 5) the SSPE Trustassets were removed as pledged collateral for the Trust II Credit Agreement.The Fortress Waiver also amended certain terms of the Trust II Credit Agreementincluding the elimination of Trust II’s right to further borrowings and therequirement for Trust II to pay an unused commitment fee.

 

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***CLST Asset III***

 

EffectiveFebruary 13, 2009, we, through CLST Asset III, a newly formed, whollyowned subsidiary of Financo, which is one of our direct, wholly ownedsubsidiaries, purchased certain receivables, installment sales contracts andrelated assets owned by Fair, James F. Cochran, Chairman and Director of Fair,and by Timothy S. Durham, Chief Executive Officer and Director of Fair and anofficer, director and stockholder of our Company under the Trust III PurchaseAgreement. Messrs. Durham and Cochran own all of the outstanding equity ofFair. In return for assets acquired under the Trust III Purchase Agreement,CLST Asset III paid the sellers total consideration of $3,594,354 as follows:

 

(1)          cash in the amount of $1,797,178 of which $1,417,737 was paid to Fair, $325,440was paid to Mr. Durham and $54,000 was paid to Mr. Cochran,

 

(2)          2,496,077 newly issued shares of our common stock at a price of $0.36 pershare, of which 1,969,077 shares of common stock were issued to Fair, 452,000shares of common stock were issued to Mr. Durham and 75,000 shares ofcommon stock were issued to Mr. Cochran and

 

(3)          six promissory Notes issued by CLST Asset III in an aggregate original statedprincipal amount of $898,588, of which two promissory notes in an aggregateoriginal principal amount of $708,868 were issued to Fair, two promissory notesin an aggregate 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.

 

Wereceived a fairness opinion of BVA stating that BVA is of the opinion that theconsideration paid by us pursuant to the Trust III Purchase Agreement is fair,from a financial point of view, to our nonaffiliated stockholders.  A copyof the fairness opinion was filed as an exhibit to our Current Report on Form 8-Kfiled with the SEC on February 20, 2009.  The shares of common stockwere issued by us in a transaction exempt from registration pursuant to Section 4(2) ofthe Securities Act.  As additional inducement for CLST Asset III to enterinto the Trust III Purchase Agreement, Fair agreed to use its best efforts tofacilitate negotiations to add CLST 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.  To date we have not been added as aco-borrower.

 

Substantiallyall of the assets acquired by CLST Asset III are in one of two portfolios.Portfolio A is a mixed pool of receivables from several asset classes,including health and fitness club memberships, resort memberships, receivablesassociated with campgrounds and timeshares, in-home food sales and services,buyers clubs, delivered products, home improvements and tuitions. Portfolio B is made up entirely of receivables related to the sale of tanningbed products.  Fair initially continued to act as the servicer of thesereceivables for no additional consideration.

 

As of February 13,2009, the portfolios of receivables acquired pursuant to the Trust III PurchaseAgreement collectively consisted of approximately 3,000 accounts with anaggregate outstanding balance of approximately $3,709,500, a weighted averageinterest rate greater than 18% and an average outstanding balance per accountof approximately $1,015 for Portfolio A and approximately $5,740 for PortfolioB.  The receivables were recorded at thefair value based on an evaluation prepared by BVA upon which we relied.  All the loans were originated by Fair betweenNovember 1998 and August 2009 and are unsecured loans.  None of the loans purchased were in default.

 

Wehave the right to require the seller to repurchase any accounts, for theoriginal purchase price applicable to such account, that do not satisfy certainspecified eligibility requirements set out in the Trust III PurchaseAgreement.  If it is discovered by aparty that a receivable account was not an “Eligible Receivable” as of February 13,2009, the closing date of the acquisition, the seller is required to repurchasesuch receivable account.  An account isnot an Eligible Receivable if, as of February 13, 2009, such receivableaccount is a delinquent receivable, a defaulted receivable subject tolitigation, dispute or rights of rescission, setoff or counterclaim, or is notsubject to a duly recorded and perfected lien, the seller must repurchase theaccount.  For the twelve months ended November 30,2009, there had not been a determination that any receivables failed to meetthe eligibility requirements set out in the Trust III Purchase Agreement.

 

Additionally,the Trust III Purchase Agreement provides that each of the sellers jointly andseverally guarantee to CLST Asset III, up to the aggregate stated principalamount of the Notes issued to such seller, that the outstanding receivablebalance of each receivable as of the closing date will be collectible infull.  For each receivable that becomes adefaulted receivable following the closing date, the sellers are obligated topay to CLST Asset III an amount equal to the outstanding receivable balance ofsuch receivable and CLST Asset III has the right to offset such amount againstthe amount due to the seller under the promissory notes issued to the sellerson the closing date.  The aggregateamount of each seller’s guarantee obligation is limited to the aggregate statedprincipal amount of the promissory note issued to such seller representingapproximately 25% of the total purchase price of the portfolio of approximately$3.6 million.  Since the principalbalance of the notes declines over time as payments are made by the Company tothe sellers, future defaulted receivables can be offset only against the thenremaining balance of the notes issued to the 

 

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sellers.  In February 2010, Fair commencedbankruptcy proceedings which may limit the Company’s ability to continue tooffset future receivable defaults against the notes payable to Fair, but shouldnot impact the Company’s rights to continue to offset defaults of receivablesagainst the other remaining seller notes. Defaults of $208,000 during thetwelve months ended November 30, 2009 were offset against the notespayable to the sellers.The remaining obligation to the sellers, as of November 30, 2009,was $498,000 after interest was accrued and delinquent receivables wererecorded. At this time, we believe that we have a right of recoupment againstFair for payments it has received on our behalf and not remitted, and expect toexercise that right by withholding such amounts from any money due toFair.  However, there can be no assurancethat Fair will not challenge our recoupment right, or what the ultimate outcomeof that challenge might be. On March 1, 2010 approximately $73,000 was dueto Fair and the other sellers which has not been paid.

 

TheNotes issued by CLST Asset III in favor of the sellers are full-recourse withrespect to CLST Asset III and are unsecured.  The three Portfolio A Notesare payable in 11 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 A Notes).  The threePortfolio B Notes are payable in 21 quarterly installments, each consisting ofequal principal payments, plus all interest accrued through such payment dateat a rate of 4.0% plus the LIBOR Rate (as defined in the Portfolio B Notes).

 

Forthe twelve months ended November 30, 2009, Fair, as a servicer for CLSTAsset III, remitted approximately $2.0 million to the Company.

 

During the secondquarter of 2009 we began implementing the servicing, collection and otherprocedures relating to management of CLST Asset III contemplated by theagreements between us and the servicer of the portfolio. Fair was the servicerof the CLST Asset III portfolio and is an affiliate of Mr. Durham. Theimplementation of the procedures required several meetings with the servicerand were implemented during the third quarter of 2009 with the exception ofsecuring a lock box to receive payments, which we expected to have in placeduring the fourth quarter of 2009.

 

During the fourth quarter of 2009, unexpectedly to the Company, the FBIand other government agencies seized certain assets of Fair, including theirservers, computers and other items used by Fair in the servicing of our CLSTAsset III portfolio. Due to these and other facts, we understand Fair wasclosed for a period of time and was unable to fully service our CLST Asset IIIportfolio for an extended period of time. As a result, we have moved theservicing of our CLST Asset III portfolio to an alternate servicer. Effective February 1,2010, Highlands assumed all servicing functions previously performed by Fair.Highlands is fully independent of Fair and the Company, and there are norelated party relationships of any nature among Fair, Highlands or the Company.Fair had been fully co-operating with the logistics of the transfer of theservicing of the CLST Asset III portfolio to Highlands, however, Fair’sbankruptcy proceedings may negatively impact the timing and completeness ofthis transfer.

 

**(5) FairValue of Financial Instruments**

 

The carrying amounts ofaccounts receivable-other, prepaid expenses and other current assets, accountspayable and accrued liabilities as of November 30, 2009 and 2008approximate fair value due to the short maturity of these instruments. Thecarrying value of notes receivable, loans payable and notes payable-relatedparties also approximate fair value since these instruments bear market ratesof interest, and notes receivable arenet of allowances and purchase discounts.

 

**(6) Propertyand Equipment**

 

Property and equipmentconsisted of the following at November 30, 2009 and 2008 (in thousands):

 
| ** **                                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Furniture, fixtures and  equipment (useful life - 3 to 5 years) |       | $          | 14         |       | $          | 14 |   |
|                                                            |       |       |       |       |       |
|                                                            |       | 14         |       | 14         |       |
| Less accumulated  depreciation and amortization                 |       | (7         | )          | (2         | )          |
|                                                            |       |       |       |       |       |
|                                                            |       | $          | 7          |       | $          | 12 |   |

 

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**(7) Debt**

 

Debt consisted of thefollowing at November 30, 2009 and 2008 (in thousands):

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Loans payable                                   |       |     |       |     |       |
| Trust I Credit  Agreement                       |       | $        | 28,666     |     | $          | 34,338 |   |
| Trust II Credit  Agreement                      |       | 4,997    |       | —   |       |
|                                            |       |     |       |     |       |
| CLST Asset III notes  payable - related parties |       |     |       |     |       |
| Timothy S. Durham                               |       | 90       |       | —   |       |
| James F. Cochran                                |       | 15       |       | —   |       |
| Fair Finance                                    |       | 393      |       | —   |       |
|                                            |       |     |       |     |       |
| Total debt                                      |       | $        | 34,161     |     | $          | 34,338 |   |

 

On November 10,2008, we financed approximately $34.9 million of the purchase price of Trust Ipursuant to the Trust I Credit Agreement more fully described in footnote3.  The Trust I Credit Agreement providesfor a non-recourse, term loan maturing on November 10, 2013, with anannual interest rate of LIBOR (as defined in the Trust I Credit Agreement) plus5%.  Principal and interest payments onthe term loan are due monthly as provided in the Credit Agreement.  Principal payments on the term loan are duemonthly to the extent that the aggregate principal amount of the term loanoutstanding exceeds the sum of (a) the sum for each outstanding receivableof the product of (1) 85%, (2) the then-current aggregate unpaidprincipal balance of such receivable and (3) a percentage specified in theTrust I Credit Agreement based upon the aging of such receivable, and (b) theMaximum Advance Amount.  Principal payments are also due within fivebusiness days of any time that the aggregate principal amount of the term loanoutstanding exceeds the Maximum Advance Amount.  The remaining outstandingprincipal amount of the loan plus all accrued interest, fees and expenses aredue on the maturity date.  Interest payments on the term loan are duemonthly.

 

On October 16, 2009,we received a notice of default from Fortress stating that an event of defaulthad occurred and was continuing under the Trust I Credit Agreement. TheFortress notice states that the three-month rolling average annualized defaultrate of the Trust I portfolio has exceeded 7.0%. As a result of the default,pursuant to the Trust I Credit Agreement, the interest rate payable by Trust Ihas increased by an additional 2% per annum, and Fortress is entitled toforeclose on the assets of Trust I and sell them to satisfy amounts due itunder the Trust I Credit Agreement. Fortress has not yet sought to foreclose on the assets of Trust I,however, if it does so, the Company may lose some or all of its investment in TrustI.  As a result of this default, theentire balance of $28.7 million due to Fortress under the Trust I CreditAgreement has been classified as current on the November 30, 2009 balancesheet. Had the Company not been in default under the Trust I Credit Agreement,$22.2 million of the outstanding balance as of November 30, 2009 wouldhave been classified as non-current.

 

On December 12,2008, we entered into the Trust II Purchase Agreement and became a party to theTrust II Credit Agreement more fully described in footnote 3. The revolver matureson September 28, 2010 and bears interest at an annual rate of 4.5% overthe LIBOR Rate (as defined in the Trust II Credit Agreement). The Trust II paysan additional fee to the co-borrowers equal to an annual rate of 0.5% for loansattributable to the Trust II equal to or below $10 million and an annual rateof 1.5% for loans attributable to the Trust II in excess of $10 million. Inaddition, a commitment fee is due to the lender equal to an annual rate of0.25% of the unused portion of the maximum committed amount. The obligationsunder the Trust II Credit Agreement are secured by a first priority securityinterest in substantially all of the assets of the Trust II and theco-borrowers, including portfolio collections. Advances under the revolver are limitedto an amount equal to, net of certain concentration limitations set forth inthe Trust II Credit Agreement, (a) the lesser of (1) the product of85% and the purchase price being paid for Class A Receivables or (2) theproduct of 80% and the then-current aggregate balance of principal and accruedand unpaid interest outstanding for Class A Receivables plus (b) thelesser of (1) the product of 75% and the purchase price being paid for Class BReceivables or (2) the product of 50% and the then-current aggregatebalance of principal and accrued and unpaid interest outstanding for Class BReceivables.

 

Principalpayments on the revolver are due monthly to the extent that the aggregateprincipal amount of the loan outstanding exceeds the lesser of (1) $30 millionor (2) the Maximum Advance plus the Maximum Outstanding Loan Amount. Theborrowers are also required to either make principal payments or add additionaleligible receivables as collateral within 5 business days of any time that theaggregate principal amount of the revolver exceeds the Maximum Outstanding LoanAmount. The remaining outstanding principal amount of the loan plus all accruedinterest, fees and expenses is due on the maturity date. The Trust II may, atits option, repay in whole or in part borrowings under the revolver butprepayments made before September 28, 2010 are subject to a prepayment 

 

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premium equal to 2.0%.Interest payments on the term loan are due monthly.  Unused commitment fees for the Trust IICredit Agreement were $13,663 for the twelve months ended November 30,2009.

 

We received theDefault Notice dated December 2, 2009 from Fortress Corp. stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the SSPE Trust, hasfailed to perform its servicing duties with respect to that portion of thereceivables portfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We alsoreceived a Second Default Notice dated February 8, 2010 from FortressCorp. stating that an additional event of default has occurred and iscontinuing under the Trust II Credit Agreement because the three-month rollingaverage annualized default rate of the Class A receivables in the Trust IIportfolio had exceeded 5.0% as of January 31, 2010. On February 26,2010, the parties to the Trust II Credit Agreement entered into the FortressWaiver whereby 1) each event of default declared in the Default Notice and theSecond Default Notice was waived, 2) Trust II became the sole borrower underthe Trust II Credit Agreement, 3) the outstanding borrowings attributable toSSPE Trust were paid in full, 4) SSPE Trust and their affiliates were releasedfrom all further obligations under the Trust II Credit Agreement, and 5) theSSPE Trust assets were removed as pledged collateral for the Trust II CreditAgreement. The Fortress Waiver also amended certain terms of the Trust IICredit Agreement including the elimination of Trust II’s right to furtherborrowings and the requirement for Trust II to pay an unused commitment fee.

 

At November 30,2009, we had $208,000 of deferred loan costs, net of accumulated amortizationwhich is included in other assets in the accompanying consolidated balancesheets.  We amortize the deferred loancosts based on the percentage of reduction of the outstanding balances of theTrust I Credit Agreement and the Trust II Credit Agreement.  Included in operating interest expense in theaccompanying consolidated statements of operations for the year ended November 30,2009 is $47,000 of amortization of these deferred loan costs associated withthe acquisition of the term loan.

 

On February 12, 2009, we entered into the TrustIII Purchase Agreement and issued Notes to the sellers. These Notes consistedof six promissory notes in an aggregate original stated principal amount of$898,588, of which two promissory notes in an aggregate original principalamount of $708,868 were issued to Fair, two promissory notes in an aggregateoriginal principal amount of $162,720 were issued to Mr. Durham and twopromissory notes in an aggregate original principal amount of $27,000 wereissued to Mr. Cochran.

 

In accordance with the Trust III Purchase Agreementand the Notes, we have the right to require the seller to repurchase anyaccounts, for the original purchase price applicable to such account, that donot satisfy certain specified eligibility requirements set out in the Trust IIIPurchase Agreement as of February 13, 2009. If it is discovered by a partythat a receivable account was not an “Eligible Receivable” as of February 13,2009, the closing date of the acquisition, the seller is required to repurchasesuch receivable account. An account is not an Eligible Receivable if, as of February 13,2009, such receivable account is a delinquent receivable, a defaultedreceivable subject to litigation, dispute or rights of rescission, setoff orcounterclaim, or is not subject to a duly recorded and perfected lien, theseller must repurchase the account.  Forthe twelve months ended November 30, 2009, there had not been adetermination that any receivables failed to meet the eligibility requirementsset out in the Trust III Purchase Agreement.

 

Additionally, the Trust III Purchase Agreementprovides that each of the sellers jointly and severally guarantee to CLST AssetIII, up to the aggregate stated principal amount of the Notes issued to suchseller, that the outstanding receivable balance of each receivable as of theclosing date will be collectible in full. For each receivable that becomes a defaulted receivable following theclosing date, the sellers are obligated to pay to CLST Asset III an amountequal to the outstanding receivable balance of such receivable and CLST AssetIII has the right to offset such amount against the amount due to the sellerunder the promissory notes issued to the sellers on the closing date.  The aggregate amount of each seller’sguarantee obligation is limited to the aggregate stated principal amount of thepromissory note issued to such seller representing approximately 25% of thetotal purchase price of the portfolio of approximately $3.6 million.  Since the principal balance of the notesdeclines over time as payments are made by the Company to the sellers, futuredefaulted receivables can be offset only against the then remaining balance ofthe notes issued to the sellers.  Anyfuture defaults of receivables will be offset against any remaining amountsowed the sellers pursuant to these notes. In February 2010, Fair commenced bankruptcy proceedings which maylimit the Company’s ability to continue to offset future receivable defaultsagainst the notes payable to Fair, but should not impact the Company’s rightsto continue to offset defaults of receivables against the other remainingseller notes. Defaults of $208,000 during the twelve months ended November 30,2009 were offset against the notes payable to the sellers. The remainingobligation to the sellers, as of November 30, 2009, was $498,000 afterinterest was accrued and delinquent receivables were recorded.

 

The Notes issued by CLST Asset III in favor of thesellers are full-recourse with respect to CLST Asset III and areunsecured.  The Portfolio A Notes arepayable in 11 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 A Notes).  The Portfolio B Notes are payable in 21quarterly installments, each consisting of equal principal payments, plus allinterest accrued through such

 

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paymentdate at a rate of 4.0% plus the LIBOR Rate (as defined in the Portfolio BNotes).

 

At this time, we believe that we have a right ofrecoupment against Fair for payments it has received on our behalf and notremitted, and expect to exercise that right by withholding such amounts fromany money due to Fair.  However, therecan be no assurance that Fair will not challenge our recoupment right, or whatthe ultimate outcome of that challenge might be. On March 1, 2010approximately $73,000 was due to Fair and the other sellers which has not beenpaid.

 

**(8) IncomeTaxes**

 

Provision (benefit) forincome taxes for the years ended November 30, 2009 and 2008 consisted ofthe following (in thousands):

 
| ** **                         | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                               |       |        |       |         |       |      |       |
| Year ended  November 30, 2009 |       |        |       |         |       |      |       |
| United States:                     |       |        |       |         |       |      |       |
| Federal                            |       | $           | —     |         | —     |      | —     |   |
| State                              |       | 26          |       | —       |       | 26        |       |
| International                      |       | —      |       | —       |       | —    |       |
|                               |       |        |       |         |       |      |       |
| Total                              |       | $           | 26         |         | —     |      | 26         |   |
|                               |       |        |       |         |       |      |       |
| Year ended  November 30, 2008 |       |        |       |         |       |      |       |
| United States:                     |       |        |       |         |       |      |       |
| Federal                            |       | $           | 55         |         | —     |      | 55         |   |
| State                              |       | 142         |       | —       |       | 142       |       |
| International                      |       | —      |       | —       |       | —    |       |
|                               |       |        |       |         |       |      |       |
| Total                              |       | $           | 197        |         | —     |      | 197        |   |

 

Provision (benefit) for income taxes differed from theamounts computed by applying the U.S. Federal income tax rate of 35% to incomebefore income taxes as a result of the following for the years ended November 30,2009 and 2008 (in thousands):

 
| ** **                                                                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                            |       |     |       |     |       |
| Expected tax benefit                                                                            |       | $        | (1,809     | )        | $          | (535 | ) |
|                                                                                            |       |     |       |     |       |
| State income taxes, net  of federal benefits                                                    |       | 17       |       | 92       |       |
| Current year losses not  benefited                                                              |       | 1,809    |       | 535      |       |
| Utilization of deferred  tax assets (including NOLs) previously offset with valuation allowance |       | —   |       | 105      |       |
| Other                                                                                           |       | 9        |       | —   |       |
|                                                                                            |       |     |       |     |       |
| Actual tax expense                                                                              |       | $        | 26         |     | $          | 197 |   |

 

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The tax effect of temporary differences underlyingsignificant portions of deferred income tax assets and liabilities at November 30,2009 and 2008 is presented below (in thousands):

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Deferred income tax  assets:      |       |     |       |     |       |
| Allowance for doubtful  accounts  |       | $        | 1,325      |     | $          | 50 |   |
| Stock based  compensation         |       | 687      |       | 668      |       |
| Net operating loss  carryforwards |       | 44,138   |       | 43,635   |       |
|                              |       |     |       |     |       |
|                              |       | 46,150   |       | 44,353   |       |
| Valuation allowance               |       | (41,364  | )          | (39,567  | )          |
|                              |       |     |       |     |       |
| Deferred income tax  asset - net  |       | $        | 4,786      |     | $          | 4,786 |   |

 

The net deferred income tax asset of $4.8 million isprimarily related to payables that were accrued in 2002 and in earlier periodsbut remain in accounts payable at November 30, 2009. The Company hasdisputed the validity of these payables since 2001and believes that the statuteof limitations has expired and that the Company will ultimately settle thesepotential obligations for amounts less than book value. Any amounts settled forless than book value will be recognized as income. 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. Theultimate realization of deferred income tax assets is dependent on thegeneration of future taxable income during the periods in which those temporarydifferences are deductible. Management considers the scheduled reversal ofdeferred income tax assets, projected future taxable income, and tax planningstrategies in determining the amount of the valuation allowance. The mostsignificant factor considered in determining the realizability of the deferredtax asset was projected profitability, including taxable income generated fromtax planning strategies, over the next three to five years. The Company needsto generate $13.7 million in pre-tax income over this period to fullyutilize the net deferred tax asset.

 

The amount of the deferredincome tax asset considered realizable, however, could change in the near termif estimates of future taxable income during the relevant carry-forward periodchange or if the number of years considered for these projections change. At November 30,2009, the Company had U.S. Federal net operating loss carryforwards ofapproximately $126 million, which will begin to expire in 2020.

 

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

 

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

 

Effective December 1, 2007, we adopted theprovisions of ASC 740-10 (formerly FIN 48), which contains a two-step processfor recognizing and measuring uncertain tax positions. The first step is todetermine whether or not a tax benefit should be recognized. A tax benefit willbe recognized if the weight of available evidence indicates that the taxposition is more likely than not to be sustained upon examination by therelevant tax authorities. The recognition and measurement of benefits relatedto our tax positions requires significant judgment, as uncertainties oftenexist with respect to new laws, new interpretations of existing laws, andrulings by taxing authorities. Differences between actual results and ourassumptions or changes in our assumptions in future periods are recorded in theperiod they become known.  Interest costsand penalties related to income taxes are classified as other expenses in theconsolidated financial statements. For the years ended November 30, 2009and 2008, we recognized $3,000 and $12,000, respectively, in interest andpenalty 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.  We are currently subject to a three yearstatute of limitations by major tax jurisdictions. We and our subsidiaries fileincome tax returns in the U.S. federal jurisdiction.

 

**(9) Leases**

 

The Company leases certain office facilities andequipment operating leases. Rental expense for operating leases related tocontinuing operations was $38,000 and $31,000 for the years ended November 30,2009 and 2008, respectively. The Company’s office lease expires in June 2011.  Expected minimum lease payments for thetwelve months ended November 30, 2010 and 2011 are $39,000 and $20,000,respectively.

 

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**(10) Stockholders’Equity**

 

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

 

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

 

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

 

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

 

*TheRights*. Weauthorized the issuance of one right per each outstanding share of our commonstock payable to our stockholders of record as of February 16, 2009.Subject to the terms, provisions and conditions of the Rights Plan, if therights become exercisable, each right would initially represent the right topurchase 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.

 

*Series B Preferred Stock Provisions.*  Each one ten-thousandth of a shareof Series B Preferred Stock, if issued: (1) will not be redeemable; (2) willentitle holders to quarterly dividend payments of $0.01 per one ten-thousandthof a share of Series B Preferred Stock, or an amount equal to the dividendpaid on one share of common stock, whichever is greater; (3) will entitleholders upon liquidation either to receive $1.00 per one ten-thousandth of ashare of Series B Preferred Stock or an amount equal to the payment madeon one share of common stock, whichever is greater; (4) will have the samevoting power as one share of common stock; and (5) if shares of our commonstock are exchanged via merger, consolidation, or a similar transaction, willentitle holders to a per share payment equal to the payment made on one shareof common stock.  The value of one one-hundredth interest in a PreferredShare should approximate the value of one share of common stock.

 

*Exercisability*. The rights will not be exercisableuntil the earlier of (i) 10 business days after a public announcement byus that a person or group has become an Acquiring Person and (ii) 10business days after the commencement of a tender or exchange offer by a personor group for 4.9% of the common stock.

 

We refer to the date thatthe rights become exercisable as the “***Distribution Date***.” Until the DistributionDate, our common stock certificates will evidence the rights and will contain anotation to that effect. Any transfer of shares of common stock prior to theDistribution Date will constitute a transfer of the associated rights. Afterthe Distribution Date, the rights may be transferred other than in connectionwith the transfer of the underlying shares of common stock.

 

After the DistributionDate, each holder of a right, other than rights beneficially owned by theAcquiring Person (which will thereupon become null and void), will thereafterhave the right to receive upon exercise of a right and payment of the PurchasePrice, that number of shares of common stock having a market value at the timeof exercise of two times the Purchase Price.

 

*Exchange*. After the Distribution Date, we mayexchange the rights (other than rights owned by an Acquiring Person, which willhave become null and void), in whole or in part, at an exchange ratio of oneshare of common stock, or a fractional share of

 

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Series B PreferredStock (or of a share of a similar class or series of the Company’s preferredstock having similar rights, preferences and privileges) of equivalent value,per right (subject to adjustment).

 

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

 

*Redemption*. At any time prior to the time anAcquiring Person becomes such, we may redeem the rights in whole, but not inpart, at a price of $0.01 per right (the “***Redemption Price***”). The redemption of therights may be made effective at such time, on such basis and with suchconditions as we in our sole discretion may establish. Immediately upon anyredemption of the rights, the right to exercise the rights will terminate andthe only right of the holders of rights will be to receive the RedemptionPrice.

 

*Anti-DilutionProvisions*. Wemay adjust the purchase price of the shares of Series B Preferred Stock,the number of shares of Series B Junior Preferred Stock issuable and thenumber of outstanding rights to prevent dilution that may occur as a result ofcertain events, including among others, a stock dividend, a stock split or areclassification of the shares of Series B Preferred Stock or our commonstock. No adjustments to the purchase price of less than 1% will be made.

 

*Amendments*. Before the Distribution Date, we mayamend or supplement the Rights Plan without the consent of the holders of therights. After the Distribution Date, we may amend or supplement the rights Planonly to cure an ambiguity, to alter time period provisions, to correctinconsistent provisions, or to make any additional changes to the Rights Plan,but only to the extent that those changes do not impair or adversely affect anyrights holder.

 

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

 

**(11)Commitments and Contingencies**

 

***(a)  Legal Proceedings***

 

**Introduction**

 

The Company has expendeda significant amount of management time and resources in connection with theFederal Court Action and the State Court Action (as defined below) with Red Oak Fund, L.P. and certain of itsaffiliates (“***Red Oak***” orthe “***Red Oak Group***”).. The Company has had settlement discussions with Red Oak regarding the FederalCourt Action and the State Court Action, but those discussions have not beensuccessful and are not ongoing.  The Company may have further settlementdiscussions with Red Oak in the future.  No assurance can be given thatany settlement agreement could be reached if the Company undertakes furtherdiscussions or, if a settlement agreement is entered into, that the terms ofany settlement would not have a material adverse effect on the Company, itsfinancial position, or its results of operations.

 

**Federal Court Action**

 

In December 2008,David Sandberg of the Red Oak Group placed a telephone call to Robert Kaiserexpressing interest in the Red Oak Group making a minority investment in theCompany and obtaining control of the Company. Our Board responded by suggestingthat the Red Oak Group and the Company discuss the Red Oak Group’s desire tomake a minority investment and obtain control after the Company filed itsAnnual Report on Form 10-K for the fiscal year ended November 30,2008 with the SEC and made its results of operations available to the Company’sstockholders.

 

On January 15, 2009,the Red Oak Group acquired 5,000 shares of our common stock in secondary marketand privately negotiated transactions.  On or about January 30, 2009,the Red Oak Group requested that the Company provide a stockholder list andsecurity position listings, which it said it would use to make a tenderoffer.  On February 3, 2009, the Red Oak Group announced its plan tocommence a tender offer to acquire up to 70% of our outstanding shares ofcommon stock at $0.25 per share.  On February 5, 2009, we adopted theRights Plan which became effective on February 16, 2009.  Stating theCompany’s Rights Plan as its reason, the Red Oak Group announced on February 9,2009 that it had abandoned its intention to make a tender offer. Nevertheless, the Red Oak Group continued through February 13, 2009 toacquire shares of our common stock in the secondary market and privatelynegotiated 

 

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transactions resulting inits beneficial ownership of 4,561,554 shares of our common stock (according tothe Red Oak Group’s Schedule 13D filed with the SEC on February 18, 2009),representing approximately 19.05% of our outstanding common stock as of therecord date. The Red Oak Group made its purchases of our common stock inopen-market and privately negotiated transactions, not by means of tender offermaterials filed with the SEC.

 

On February 13,2009, we filed a lawsuit in the United States District Court for the NorthernDistrict of Texas against Red Oak Fund, L.P., Red Oak Partners, LLC, and DavidSandberg (the “***Federal CourtAction***”).  Our Original Complaint and Application forInjunctive Relief alleges that Red Oak engaged in numerous violations offederal securities laws in making purchases of our common stock and sought toenjoin any future unlawful purchases of our stock by them, their agents, andpersons or entities acting in concert with them. We believe Red Oak violatedfederal securities laws as follows:

 

(i)            violating Rule 14(e)-5 of theExchange Act by not truly abandoning its tender offer and instead directly orindirectly purchasing or arranging to purchase shares not in connection withits tender offer and without complying with the procedural, disclosure andanti-fraud requirements applicable to tender offers regulated under Section 14of the Exchange Act;

 

(ii)           violating Exchange Act Rule 14d-5(f) byfailing to return the Company’s stockholder list, which we provided to Red Oakupon its request, and by using such list for a purpose other than in connectionwith the dissemination of tender offer materials in connection with its tenderoffer;

 

(iii)          violating Exchange Act Rule 14(d)-10by purchasing shares pursuant to its tender offer at varying prices rather thanpaying consideration for securities tendered in the tender offer at the highestconsideration paid to any stockholder for securities tendered; and

 

(iv)          violating Section 13(d) of theExchange Act by not timely filing a Schedule 13D and disclosing the informationrequired therein.

 

On March 13, 2009,we announced that we would hold our Annual Meeting of Stockholders on May 22,2009 in Dallas, Texas, and that the close of business on April 2, 2009would be the record date for the determination of stockholders entitled toreceive notice of, and to vote at, the Annual Meeting or any adjournments orpostponements thereof.

 

On March 18, 2009,the Red Oak Group sent a letter to us demanding to inspect and copy certain ofour books and records.  We have taken the position that the Red Oak Groupdid not comply with state law requirements applicable to stockholders seekingsuch information.

 

On March 19, 2009,the Red Oak Group sent a letter to us stating its intention to put forthseveral precatory proposals including stockholder votes for: approval toproceed with the 2007 shareholder-approved plan of dissolution; approval of theNovember 10, 2008 transaction whereby CLST Asset I, a wholly ownedsubsidiary of Financo, entered into a purchase agreement to acquire all of theoutstanding equity interests of Trust I from a third party for approximately$41.0 million; approval of the 2008 Plan pursuant to which the Board approvedthe new issuance to themselves of up to 20 million shares of common stock, orjust over 97% of the common stock outstanding at the time this plan wasapproved; approval of the December 12, 2008 transaction whereby Trust II,a newly formed trust wholly owned by CLST Asset II, a wholly owned subsidiaryof Financo entered into a purchase agreement, effective as of December 10,2008, to acquire (i) on or before February 28, 2009 receivables of atleast $2 million, subject to certain limitations and (ii) from time totime certain other receivables, installment sales contracts, and relatedassets; and approval of the February 13, 2009 transaction whereby CLSTAsset III, a newly formed, wholly owned subsidiary of Financo, which is one ofCLST’s direct, wholly owned subsidiaries, purchased certain receivables,installment sales contracts, and related assets owned by Fair, which is partlyowned by Timothy S. Durham, an officer and director of CLST. On the same day,the Red Oak Group sent a letter to us stating its intention to nominate a slateof directors to our Board.

 

On April 6, 2009, wenotified the Red Oak Group that our Board rejected the Red Oak Group’snominations for Class I and Class II seats, as the nominations werenot in accordance with our certificate of incorporation.  In addition, wealso rejected the Red Oak Group’s proposals because they were not proper inform or substance under federal and state law to come before an AnnualMeeting.  We offered to discuss the Red Oak Group’s concerns, directornominations, and stockholder proposals provided that (1) the Red Oak Groupand the Company enter into a confidentiality and standstill agreement, (2) theRed Oak Group appropriately make publicly available disclosures regarding itsrapid accumulation of the Company’s shares and its intentions to acquirecontrol of the Company that are required by the federal securities laws,including in a Report on Schedule 13D, and (3) the Red Oak Group not votethe shares that the Company believes it to have acquired in violation ofapplicable law, including the tender offer rules and other rules regulatingsuch accumulation of shares under the federal securities laws, at the AnnualMeeting.

 

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Also on April 6,2009, we filed our First Amended Complaint and Application for InjunctiveRelief in the Federal Court Action adding Red Oak’s affiliates (PinnaclePartners, LLC; Pinnacle Fund, LLLP; and Bear Market Opportunity Fund, L.P.) asdefendants, alleging the same and other violations of federal securities laws,including:

 

(i)            filing a materially false and misleadingSchedule 13D and failing to amend the same after delivering to the Company aNotice of Director Nominations and proposal for business at the Annual Meeting;

 

(ii)           violating Section 14(d) of theExchange Act by engaging in fraudulent, deceptive and manipulative acts inconnection with its tender offer by failing to abide by Section 14(d)’stiming requirements and by failing to make required filings with the SEC; and

 

(iii)          that any attempt to solicit proxies fromour stockholders with respect to director nominations or notice of businesswould be misleading in light of the defendants’ illegal activities inaccumulating Company stock.

 

Through this action, weseek to obtain various declaratory judgments that the defendants have failed tocomply with federal securities laws and to enjoin the defendants from, amongother things, further violating federal securities laws and from voting any andall shares or proxies acquired in violation of such laws.

 

Also on April 6,2009, because, among other reasons, we did not expect the litigation, whichbears directly upon our Annual Meeting of stockholders, to be resolved for somemonths, our Board postponed the Annual Meeting of stockholders previouslyscheduled for May 22, 2009 until September 25, 2009.

 

On April 15, 2009,the Red Oak Group submitted another letter to the Company, providing additionalinformation regarding the stockholder proposals it intends to bring before theAnnual Meeting and revising those proposals to: request the Board to completethe dissolution approved at the stockholder meeting held in 2007; advise theBoard that the stockholders do not approve of the transaction purportedlyentered into as of November 10, 2008 whereby CLST Asset I, a wholly ownedindirect subsidiary of the Company, entered into a purchase agreement toacquire the outstanding equity interest in Trust I and request the directors totake any available and appropriate actions; disapprove the 2008 Plan adopted bythe Board and request the Board not to issue any additional share grants or optiongrants under such plan and request that the directors rescind their approval ofsuch plan; advise the Board that the stockholders disapprove of the transactionpurportedly entered into as of December 12, 2008 pursuant to which CLSTAsset II, an indirect wholly owned subsidiary of the Company, entered into apurchase agreement to acquire certain receivables on or before February 28,2009 and request the directors to take any available and appropriate actions;and advise the Board that the stockholders disapprove of the transactionpurportedly entered into as of February 13, 2009 whereby CLST Asset III,an indirect wholly owned subsidiary of the Company purchased certainreceivables, installment contracts and related assets owned by Fair and requestthe directors to take any available and appropriate actions.

 

On July 24, 2009, wefiled our Brief in Support of Application for Preliminary Injunction.  The Red Oak Group filed its Opposition on August 7,2009, and we filed our Reply Brief in Support on August 14, 2009. On October 14,2009, the Court denied the Company’s Application for Preliminary Injunction.

 

On December 30,2009, the Company voluntarily filed a Motion to Dismiss the Federal CourtAction (“***Motion to Dismiss***”).  As an exercise of itsbusiness judgment, CLST’s board of directors has decided not to pursue CLST’sclaims against the Red Oak Group beyond the preliminary injunction stage.

 

On January 20, 2010,the Red Oak Group filed its Combined Motion for Leave to Amend, to Join ThirdParties, to Vacate Scheduling Order and to Continue the Trial Date (“***Motion for Leave***”) and its Motionfor Attorneys’ Fees under Rule 11 of the Federal Rules of CivilProcedure (“***Rule 11 Motion***”).  By its Motion for Leave, RedOak sought to join Messrs. Durham, Kaiser, and Tornek as defendants and toadd claims against them and CLST respectively for alleged violations ofSections 13(d), 14(a), and 10(b) of the Exchange Act and certain rules promulgatedthereunder.  By its Rule 11 Motion,the Red Oak Group sought to recover all of its “attorneys’ fees and costs indefending this action” from CLST based on the legal contention that injunctiverelief is not available for a violation of Section 13(d) of theExchange Act.

 

OnMarch 2, 2010, the Court denied the Company’s Motion to Dismiss andgranted the Red Oak Group’s Motion for Leave. The Court also denied the Red Oak Group’s Rule 11 Motion.

 

TheFederal Court Action remains pending.

 

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**State Court Action**

 

On March 2, 2009,certain members of the Red Oak Group (namely, Red Oak Partners, LLC; PinnacleFund, LLP; and Bear Market Opportunity Fund, L.P.) and Jeffrey S. Jones (“***Jones***”) (the Red OakGroup and Jones may be collectively referred to below as “Plaintiffs”) filed aderivative lawsuit against Robert A. Kaiser, Timothy S. Durham, and DavidTornek in the 134th District Court of Dallas County, Texas (the “***State Court Action***”).The petition alleges that Messrs. Kaiser, Durham, and Tornek entered intoself-dealing transactions at the expense of the Company and its stockholdersand violated their fiduciary duties of loyalty, independence, due care, goodfaith, and fair dealing. The petition asks the Court to order, among otherthings, a rescission of the alleged self-interested transactions by Messrs. Kaiser,Durham, and Tornek; an award of compensatory and punitive damages; the removalof Messrs. Kaiser, Durham, and Tornek from the Board; and that the Companyhold an Annual Meeting of stockholders, or that the Company appoint aconservator to oversee and implement the dissolution plan approved bystockholders in 2007.

 

On March 13, 2009,we announced that we would hold our Annual Meeting of Stockholders on May 22,2009 in Dallas, Texas, and that the close of business on April 2, 2009would be the record date for the determination of stockholders entitled toreceive notice of, and to vote at, the Annual Meeting or any adjournments orpostponements thereof.

 

On March 18, 2009,the Red Oak Group sent a letter to us demanding to inspect and copy certain ofour books and records.  We have taken the position that the Red Oak Groupdid not comply with state law requirements applicable to stockholders seekingsuch information.

 

On March 19, 2009,the Red Oak Group sent a letter to us stating its intention to put forthseveral precatory proposals including stockholder votes for: approval toproceed with the 2007 shareholder-approved plan of dissolution; approval of theNovember 10, 2008 transaction whereby CLST Asset I, a wholly ownedsubsidiary of Financo, entered into a purchase agreement to acquire all of theoutstanding equity interests of Trust I from a third party for approximately$41.0 million; approval of the 2008 Plan pursuant to which the Board approvedthe new issuance to themselves of up to 20 million shares of common stock, orjust over 97% of the common stock outstanding at the time this plan wasapproved; approval of the December 12, 2008 transaction whereby Trust II,a newly formed trust wholly owned by CLST Asset II, a wholly owned subsidiaryof Financo entered into a purchase agreement, effective as of December 10,2008, to acquire (i) on or before February 28, 2009 receivables of atleast $2 million, subject to certain limitations and (ii) from time totime certain other receivables, installment sales contracts and related assets;and approval of the February 13, 2009 transaction whereby CLST Asset III,a newly formed, wholly owned subsidiary of Financo, which is one of CLST’sdirect, wholly owned subsidiaries, purchased certain receivables, installmentsales contracts and related assets owned by Fair, which is partly owned byTimothy S. Durham, an officer and director of CLST. On the same day, the RedOak Group sent a letter to us stating its intention to nominate a slate ofdirectors to our Board.

 

On April 6, 2009, wenotified the Red Oak Group that our Board rejected the Red Oak Group’snominations for Class I and Class II seats, as the nominations werenot in accordance with our certificate of incorporation.  In addition, wealso rejected the Red Oak Group’s proposals because they were not proper inform or substance under federal and state law to come before an AnnualMeeting.  We offered to discuss the Red Oak Group’s concerns, directornominations, and stockholder proposals provided that (1) the Red Oak Groupand the Company enter into a confidentiality and standstill agreement, (2) theRed Oak Group appropriately make publicly available disclosures regarding itsrapid accumulation of the Company’s shares and its intentions to acquirecontrol of the Company that are required by the federal securities laws,including in a Report on Schedule 13D, and (3) the Red Oak Group not vote theshares that the Company believes it to have acquired in violation of applicablelaw, including the tender offer rules and other rules regulating suchaccumulation of shares under the federal securities laws, at the AnnualMeeting.

 

Also on April 6, 2009,because, among other reasons, we did not expect the litigation, which bearsdirectly upon our Annual Meeting of stockholders, to be resolved for somemonths, our Board postponed the Annual Meeting of stockholders previouslyscheduled for May 22, 2009 until September 25, 2009.

 

On April 15, 2009,the Red Oak Group submitted another letter to the Company, providing additionalinformation regarding the stockholder proposals it intends to bring before theAnnual Meeting and revising those proposals to: request the Board to completethe dissolution approved at the stockholder meeting held in 2007; advise theBoard that the stockholders do not approve of the transaction purportedlyentered into as of November 10, 2008 whereby CLST Asset I, a wholly ownedindirect subsidiary of the Company, entered into a purchase agreement toacquire the outstanding equity interest in Trust I and request the directors totake any available and appropriate actions; disapprove the 2008 Plan adopted bythe Board and request the Board not to issue any additional share grants oroption grants under such plan and request that the directors rescind theirapproval of such plan; advise the Board that the stockholders disapprove of thetransaction purportedly entered into as of December 12, 2008 pursuant towhich CLST Asset II, an indirect wholly owned subsidiary of the Company,entered into a purchase agreement to acquire certain receivables on or before February 28,2009 and request the directors to take any available and appropriate actions;and advise the Board that the stockholders disapprove of the transactionpurportedly entered into as of February 13, 2009 whereby CLST Asset III,an indirect wholly owned 

 

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subsidiary of the Companypurchased certain receivables, installment contracts and related assets ownedby Fair and request the directors to take any available and appropriateactions.

 

On April 30, 2009,the Red Oak Group and Jones amended their petition in the State CourtAction.  In addition to the relief already requested, the petition soughtto compel the Company to hold its 2008 and 2009 annual stockholders’ meetingswithin sixty days; to enjoin Messrs. Kaiser, Durham, and Tornek from anyinterference or hindrance of such meetings or the election of directors; toenjoin Messrs. Kaiser, Durham, and Tornek from voting any shares of stockacquired in the alleged self-interested transactions; and to appoint a specialmaster.  On June 3, 2009 and again on June 12, 2009, pursuant tocourt order, the Red Oak Group and Jones amended their petition to, among otherthings, remove Bear Market Opportunity Fund, L.P. as a plaintiff and add RedOak Fund, L.P. as a plaintiff.

 

On May 5, 2009, theRed Oak Group and Jones filed a motion seeking to compel the Company to holdits 2008 and 2009 stockholders’ meetings on June 30, 2009 and to appoint aspecial master and requested an expedited hearing on both.  Hearings wereheld on May 8, 2009 and May 29, 2009, but no ruling was reached.

 

On August 14, 2009,our Board postponed the Annual Meeting of stockholders from September 25,2009 to October 27, 2009.

 

On August 24, 2009,the Red Oak Group resubmitted its director nomination letter and its letterstating its intention to put forth the stockholder proposals, as mentioned inthe March 19, 2009 and April 15, 2009 letters.

 

On August 25, 2009,the Court set an evidentiary hearing on the Plaintiffs’ Application forTemporary Injunction, which had yet to be filed, for October 7 and 8,2009.  Plaintiffs’ request for injunctiverelief concerned Messrs. Kaiser, Durham, and Tornek voting any shares ofstock acquired in the alleged self-interested transactions.

 

On August 28, 2009,the parties executed a Stipulation Regarding the Company’s Annual Meeting ofStockholders (“***Stipulation***”). The Court approved the Stipulation the same day and entered an Order identicalto the Stipulation’s terms.  Pursuant to the Stipulation, absent adetermination by the Court of good cause shown, the Company must hold itsannual stockholders’ meeting for the election of one Class I director andone Class II director and consideration of any properly submittedproposals that are proper subjects for consideration at an annual meeting on October 27,2009, with a record date for that meeting of September 25, 2009. Good cause for delaying the Annual Meeting beyond October 27, 2009, andcorrespondingly amending the September 25, 2009 record date, includesamong other things, situations where reasonable delay is necessary: (1) forthe Board to avoid breaching any of their fiduciary duties to the Company orthe Company’s stockholders; (2) to assure compliance with the Company’scertificate of incorporation and bylaws; (3) for the Company or the Boardto comply with state or federal law; or (4) to assure compliance with anyorder of any court or regulatory authority having jurisdiction over the Companyor members of its Board.

 

We received a letterdated September 22, 2009 from the Red Oak Group seeking, pursuant to Section 220of the Delaware General Corporation Law, to inspect the books and records ofthe Company, including among other things a stockholder list as of the recorddate. The letter states that the purpose of such request is to enable the RedOak Group to solicit proxies to elect directors at the 2009 Annual Meeting andto communicate with stockholders. Our counsel responded by letter dated September 30,2009 that the Company was aware of its obligations under Section 220 ofthe Delaware General Corporation Law but believed that the demand letter didnot comply with the inspection requirements under Section 220. We receivedanother letter dated September 29, 2009 from the Red Oak Group pursuant toSection 220 of the Delaware General Corporation Law in which the Red OakGroup requests to inspect the books and records of the Company pertaining to,among other things, all analyses performed with respect to our net operatinglosses and a list of all business ventures and dealings Messrs. Tornek andDurham have evaluated or commenced in the past ten years and a list of allinvestments they currently share. Our counsel responded by letter dated October 6,2009 that (i) the commencement of the Red Oak Group’s derivative actionbars it from using a Section 220 demand as a substitute for discoverypermissible in litigation; (ii) the stated purposes of the demand letterdo not constitute proper purposes under Section 220; and (iii) thescope of information requested in the demand letter is overly broad and notlimited to books and records that are “essential and sufficient” to accomplishthe Red Oak Group’s stated purposes.

 

On October 9, 2009,the Court denied Plaintiffs’ application for injunctive relief, which sought toenjoin Messrs. Kaiser, Durham, and Tornek from voting certain shares atthe CLST annual shareholders’ meeting currently scheduled for October 27,2009.   Further, the Court granted Defendants’ plea to thejurisdiction, granted Defendants’ motion to disqualify Plaintiffs, anddismissed Plaintiffs’ derivative claims.  Beyond that, the Court grantedDefendants’ amended motion to stay, thereby staying all remaining direct claimsasserted by Plaintiffs.   Defendants’ motion to disqualify Plaintiffswas based on Plaintiffs’ lack of adequacy to pursue derivative claims on thefollowing grounds: (1) that Red Oak improperly brought derivative claimsto advance its own personal interests; (2) that Red Oak had engaged inillegal conduct by violating federal securities laws; and (3) that Joneswas only a tag-along 

 

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plaintiff and thereforesuffered the same adequacy problems as Red Oak, the driving force behind theState Court Action.  The Court reached each of these rulings after thetwo-day evidentiary hearing.

 

On October 15, 2009,we applied to the Court, on an emergency basis, for an order to: (1) reopenthis case for the limited purpose of modifying the Court’s Order RegardingAnnual Meeting of Stockholders entered on August 28, 2009 (the “***Annual Meeting Order***”); (2) modifyits Annual Meeting Order to prevent CLST from alternatively being in violationof (a) federal securities law, Delaware statutory law, and its Bylaws or (b) theAnnual Meeting Order; (3) nullify the current September 25, 2009record date; and (4) grant an emergency hearing as soon as possible. A hearing was held on CLST’s emergency motion on October 16, 2009. The Court continued the hearing until a time agreeable to the parties and theCourt on or before October 26, 2009.

 

On October 29, 2009, Plaintiffs filed theirMotion and Memorandum to Reopen Case And To Reconsider (“***Motion to Reconsider***”)concerning the Court’s Order of October 9, 2009, which granted Defendants’Plea to the Jurisdiction and Motion to Disqualify Plaintiffs and dismissedPlaintiffs’ derivative claims.   On December 10,2009, Plaintiffs filed their Motion and Memorandum to Reopen Case and CompelAnnual Stockholders’ Meeting (“***Motion to Compel***”).

 

On November 12, 2009, the parties executed aSecond Stipulation and Order Setting and Regarding an Annual Meeting ofStockholders of the Company (the “***Second Stipulation***”).  The Court approved the Second Stipulation on November 13,2009 and entered an Order identical to the Second Stipulation’s terms.  The Second Stipulation provides that theCompany must hold its annual stockholders’ meeting on December 15, 2009and that the record date for that meeting must be set as October 30, 2009.

 

At the December 15, 2009 hearing on Plaintiffs’Motion to Reconsider, Plaintiffs’ counsel stated on the record that Plaintiffs’Motion to Compel had not been properly noticed and therefore was not before theCourt.  The Court denied Plaintiffs’Motion to Reconsider on December 21, 2009.

 

On January 15, 2010,Plaintiffs filed their Motion for Summary Relief, Summary Judgment, andApplication for Injunctive Relief to Compel the Company’s Annual Stockholders’Meeting (“***Motion forSummary Relief***”).  Bytheir Motion for Summary Relief, Plaintiffs sought for the Company to hold itsannual stockholders’ meetings for 2008, 2009, and 2010 on March 25,2010.  On February 15, 2010, theCourt heard Plaintiffs’ Motion for Summary Relief and, in part, granted therelief requested.  Specifically, theCourt ordered, pursuant to its Order and Interlocutory Partial Summary Judgment(the “***Second Annual Meeting Order***”)as follows: (1) Absent a determination by the Court for good cause shown,the Company shall hold its annual stockholders’ meeting on March 23, 2010(the “***Annual Meeting***”); the AnnualMeeting satisfies the Company’s requirement to hold its 2008 and 2009 annualstockholders’ meetings; the record date for the Annual Meeting shall be March 8,2010; and the Company shall provide notice in accordance with applicableDelaware law to all CLST stockholders on or before March 12, 2010 for theAnnual Meeting.  By the same order, theCourt also appointed IVS Associates, Inc. to be the independent inspectorof elections to oversee the voting process of the Annual Meeting, tabulateproxies, and certify the election results. By separate order dated February 15, 2010, and upon its own motion,the Court ordered that the State Court Action is reopened and reinstated on atwo-week trial docket beginning June 1, 2010.

 

On February 18,2010, the Red Oak Group filed its Application for TRO and sought to prevent theCompany from filing a certificate of dissolution with the Delaware Secretary ofState on February 26, 2010, as the Company had disclosed in its Form 8-Kfiled on February 9, 2010.  Thehearing on the Application for TRO was held on February 23, 2010.  On February 24, 2010, the Court grantedRed Oak’s Application for TRO and, pursuant to the TRO, ordered, among otherthings, that the defendants (namely, CLST Holdings, Inc., Robert Kaiser,Timothy Durham, and David Tornek) and their agents be restrained from filingthe certificate of dissolution for the Company on or before midnight onWednesday, March 10, 2010, or until further order of the Court.

 

On March 2, 2010,the Court signed the order upon the Stipulation and Agreed TemporaryInjunction, which provides, among other things, that, on or before March 5,2010, the Company will send notice of its intent to file a certificate ofdissolution with the Delaware Secretary of State on March 26, 2010, andthat the notice shall indicate that the certificate of dissolution will not beeffective until June 24, 2010. Accordingly, in a press release issued on March 5, 2009, theCompany announced that it intended to file a certificate of dissolution withthe Delaware Secretary of State on March 26, 2010 and that suchcertificate of dissolution would not be effective until June 24, 2010.

 

After the Second AnnualMeeting Order issued, the Company filed an emergency motion for temporaryrelief (“***Motion for Relief***”)requesting that the Fifth District Court of Appeals of Texas at Dallas (the “***Court of Appeals***”) void the SecondAnnual Meeting Order.  On March 3,2010, the Court of Appeals issued a memorandum opinion in which the Court ofAppeals granted the Company’s Motion for Relief and voided the Second AnnualMeeting Order.  The Court of Appeals’judgment taxes all costs of the appeal against the Red Oak Group.  On March 4, 2010, the trial courtentered its Order dissolving the Second Annual Meeting Order.  For these reasons, there is currently noscheduled annual stockholders’ meeting.

 

We areparty to various other claims, legal actions and complaints arising in theordinary course of business. Our 

 

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management believes thatthe disposition of these matters will not have a materially adverse effect onour consolidated financial condition or results of operations.

 

***(b)  Retirement Plans***

 

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

 

**(12)Subsequent Events**

 

We received theDefault Notice dated December 2, 2009 from Fortress Corp. stating that aservicer default had occurred and was continuing under the Trust II CreditAgreement, as a result of a material adverse effect with respect to theservicer.  The Default Notice states thatFair, in its capacity as a sub-servicer for assets held by the SSPE Trust, hasfailed to perform its servicing duties with respect to that portion of thereceivables portfolio owned by SSPE Trust for which Fair has been retained as asub-servicer by the SSPE Trust.  Thisfailure, the Default Notice asserts, results from the ongoing federalinvestigation of Fair and Timothy Durham, and constitutes a material adverseeffect with respect to the servicer and thus a breach of a covenant under theTrust II Credit Agreement.  We alsoreceived a Second Default Notice dated February 8, 2010 from FortressCorp. stating that an additional event of default has occurred and is continuingunder the Trust II Credit Agreement because the three-month rolling averageannualized default rate of the Class A receivables in the Trust IIportfolio had exceeded 5.0% as of January 31, 2010. On February 26,2010, the parties to the Trust II Credit Agreement entered into the FortressWaiver whereby 1) each event of default declared in the Default Notice and theSecond Default Notice was waived, 2) Trust II became the sole borrower underthe Trust II Credit Agreement, 3) the outstanding borrowings attributable toSSPE Trust were paid in full, 4) SSPE Trust and their affiliates were releasedfrom all further obligations under the Trust II Credit Agreement, and 5) theSSPE Trust assets were removed as pledged collateral for the Trust II Credit Agreement.The Fortress Waiver also amended certain terms of the Trust II Credit Agreementincluding the elimination of Trust II’s right to further borrowings and therequirement for Trust II to pay an unused commitment fee.

 

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