FIRSTPLUS FINANCIAL GROUP INC - 10KSB - 20060331 - PART_I
PART I
ITEM
1.
DESCRIPTION OF BUSINESS.
General
FIRSTPLUS Financial Group, Inc. (the
“Company”) was incorporated in 1994 in the State of Nevada. The Company was a diversified consumer finance company that originated, serviced,
and sold consumer finance receivables. The Company operated through various subsidiaries until 1998 when macroeconomic factors adversely affected
financial markets and largely destroyed the industry’s access to the capital markets. Without access to working capital, the Company’s
ability to provide consumer-based products evaporated and, like virtually all its competitors, it saw its business liquidated to satisfy obligations.
The Company’s principal operating subsidiary at that time, FIRSTPLUS Financial, Inc. (“FPFI”), engaged in the business of originating,
purchasing, marketing and servicing home equity loans. Prior to the collapse of the financial markets, its primary loan product was a credit
consolidation or home improvement loan, which was generally secured by a second lien on real property (commonly referred to as a “high loan to
value” or “HLTV” loan). Over the course of many years, FPFI originated billions of dollars of loans. By 1998, FPFI had attained a market
leadership position in the HLTV loan business.
In March 1999, two wholly-owned
subsidiaries then owned by the Company, FPFI, and FIRSTPLUS Special Funding Corp., filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. FIRSTPLUS Special Funding Corp. was a special purpose entity formed to facilitate certain borrowings by FPFI. The filing was made in
the United States Bankruptcy Court for the Northern District of Texas in Dallas. Neither the Company, nor any of its other subsidiaries, sought
bankruptcy protection.
Although the Company was not subject to
any bankruptcy proceedings, it had no income producing activities and was dependent on its subsidiaries to fund its obligations. FPFI was severely
limited in its ability to provide funds to the Company as a result of the bankruptcy filing. The Company’s other significant operating subsidiary
at the time, Western Interstate Bancorp (“WIB”), was limited in its ability to release funds to the Company due to its debt covenant
restrictions. Additionally, WIB’s main operating company, a FDIC-insured industrial loan company, FIRSTPLUS Bank, was also limited in the amount
of funds that it could release by way of dividends or intercompany loans due to regulatory restrictions. These limitations caused the Company and its
other subsidiaries to experience liquidity issues similar to FPFI.
The liquidity issues leading to the
FPFI’s bankruptcy filing and the subsequent lack of operations and sources of income of the Company required significant focus by senior
management of the Company. Additionally, senior management concentrated on related strategic issues such as negotiating with lenders and creditors,
finding new sources of financing, and reorganizing and recapitalizing the Company. The resources available to the Company have been limited by the
liquidity issues and the downsizing of the Company and its operations.
Primarily due to lack of funds, the
Company has for the most part been in a dormant capacity for the past several years. In addition, the Company’s operating subsidiaries, including
FPFI and WIB, had been transferred from the Company to a trust pursuant to the FPFI bankruptcy proceedings. As a result, the company has no interest in
FPFI or its assets other than its interest in the FPFI Intercompany Claim.
The Company currently has one employee,
its President and Chief Executive Officer, Mr. Jack (J.D.) Draper. Mr. Draper does not have an employment agreement with the Company. Since 1999, the
Company has managed to avoid bankruptcy by negotiating with creditors and utilizing the anticipated but uncertain cash flow from an allowed unsecured
claim against FPFI, more commonly known as the FPFG Intercompany Claim. The Company’s management has withstood the pressure from creditors and
avoided bankruptcy primarily by assigning portions of the FPFG Intercompany Claim to various creditors. However, the Company has maintained that one of
its strategies has been to create value in the Company so that its prospects are enhanced for the future. The Company has been active in seeking a
platform for operations and has pursued several opportunities; however, those opportunities were abandoned when the transactions did not meet
the
2
expectations of the Company after
further examination and the Company learned of opposition to those transactions by certain shareholders.
Executive Officers
The Company’s executive officers
are as follows:
Jack (J.D.) Draper
. Mr. Draper
has served as President and Chief Executive Officer since 2003. Mr. Draper is co-founder of FIRSTPLUS Financial, Inc. and has 25 years of progressive
management experience in the mortgage, second mortgage and property improvement industries. Mr. Draper is recognized as a compliance specialist in
state and federal lending laws. Mr. Draper is skilled in quality control plan development, fiscal planning and budget administration and has particular
expertise in strategic planning, operations management and project management. Before being appointed President and CEO of the Company in 2003, Mr.
Draper held the following executive leadership positions with companies in the financial services industry:
Liquidation Specialist, Federal Deposit Insurance Corporation,
1990–1992
•
Co-Founder-President, SFA: State Financial Acceptance Corp,
1989–1993
ITEM
2.
DESCRIPTION OF PROPERTY.
The Company’s executive offices
are shared with the facilities leased by Capital Lending Strategies, LLC (“Capital Lending”), which incurs the cost and full responsibility
of the lease. There is no formal agreement between the Company and Capital Lending with respect to the lease arrangement.
ITEM
3.
LEGAL PROCEEDINGS.
Grantor Trust
Litigation
In 2002, the Company as sole settlor
and sole beneficiary established the FirstPlus Financial Group, Inc. Grantor Residual Trust (the “Grantor Trust”) and assigned to the Grantor
Trust the Company’s remaining interest in the FPFG Intercompany Claim. The initial trustee of the Grantor Trust was George T. Davis
(“Davis”).
In November 2004, the Company appointed
two additional trustees for the Grantor Trust. Thereafter, those additional trustees sought to reach agreement with Davis (who remained as a trustee)
concerning the distribution of funds which were beginning to flow to the Grantor Trust from the FPFI bankruptcy. Davis challenged the appointment of
the additional trustees and refused to agree to a distribution proposed by the Company. The Company and the additional trustees filed suit in Texas
state court in Dallas (
FirstPlus Financial Group, Inc., Michael Montgomery, Jack Draper and The FirstPlus Financial Group Grantor Residual Trust v.
George T. Davis and The FPFI Creditor Trust
; Civil Action No. 05-02962; in the 298th District Court of Dallas County, Texas) (the “Trust
Suit”) seeking declaratory relief against Davis and the FPFI creditors’ trust to the effect that the additional trustees had been properly
appointed and were authorized to act.
When the Company selected Davis as the
initial trustee upon formation of the Grantor Trust, the Company had confidence in its appointee and also appointed Davis as Vice President of
Shareholder Relations. He also was appointed to a vacant seat on the Board of Directors. The Company believed that Davis would also have the confidence
of a group of shareholders with whom the Company consulted prior to the formation of the Grantor Trust, including a group of shareholders purportedly
represented by Danford L. Martin.
3
Distributions on the FPFG Intercompany
Claim, including distributions to the Grantor Trust, became available in the fourth quarter of 2004. Prior to the actual distribution of funds to the
Grantor Trust, a dispute arose with Davis concerning the validity of the Company’s appointment of additional trustees for the Grantor Trust.
Because this unresolved issue led to uncertainty on the part of the Creditor Trust as to who could properly direct the distribution of funds to the
Grantor Trust, the Creditor Trust requested that the bankruptcy court take custody of the funds and resolve the trustee issue. The bankruptcy court
determined, however, that it did not have jurisdiction to resolve that dispute and dismissed the Creditor Trust’s request. Immediately thereafter,
the Company initiated the Trust Suit in Texas state court. That action remains pending, and while funds totaling approximately $12 million are
currently available for distribution by the Creditor Trust to the Grantor Trust, no such funds have actually been distributed to the Grantor Trust due
to the dispute over the trustee issue.
When it appeared that payments on the
FPFG Intercompany Claim were about to commence, Davis began making unfounded allegations against the well-respected trustee of the Creditor Trust, with
whom the Company believes it otherwise has a good relationship. The allegations were unsupported factually but continued to be lodged by Davis. The
Company believes that these accusations were contrary to the interests of the Grantor Trust in that the trustee of the Creditors Trust is the person
who processes all payments to the Grantor Trust on account of the FPFG Intercompany Claim.
Further, as the commencement of
payments on the FPFG Intercompany Claim appeared imminent, the Board of Directors sought confirmation from Davis that creditors holding valid claims
against the Company would not be ignored and would be paid as distributions on the FPFG Intercompany Claim were received as required by the trust
agreement governing the Grantor Trust. Davis refused to provide that confirmation to the Board of Directors and took no steps to adequately plan for
the payment of creditor claims.
In light of Davis’ behavior
concerning the Grantor Trust’s sole source of revenue and disregarding the need to pay creditors with valid claims, the Board of Directors
believed that appointing two additional trustees to the Grantor Trust would improve relations with the Creditor Trust and ensure that provisions for
the creditors of FirstPlus would be made. The Company did not remove Davis as trustee at that time.
Upon the appointment of the two
additional trustees, they began to develop a plan for a distribution to shareholders with adequate provisions for creditors. In an effort to resolve
the dispute between the additional trustees and Davis, the additional trustees proposed an immediate distribution to the Grantor Trust, followed by a
$3.5 million distribution to the shareholders which the additional trustees agreed would not affect the determination of the issues in the Trust Suit.
Davis has continued to object to any distribution to shareholders unless he can be designated as the sole party to have access and control over the
funds held by the Grantor Trust. In this regard, the Grantor Trust, acting through a majority of the trustees, attempted to reach an agreement with
Davis to make a distribution to shareholders.
While that action was pending, the
Company, as settlor of the Grantor Trust, terminated Davis for cause pursuant to the terms of the trust agreement governing the Grantor Trust and
appointed a successor trustee. Davis has sought declaratory relief in the Trust Suit to the effect that he has not been terminated. However, a
continuation of litigation by Davis and his refusal to attempt to resolve the dispute between the trustees has amounted to a veto of the intended
distribution to the shareholders.
On February 17, 2006, the court in the
Trust Suit granted the Company’s motion for partial summary judgment against Davis. In granting the partial summary judgment, the court determined
that:
•
the Company is the sole beneficiary of the Group
Trust;
•
the Company, as the sole settlor and sole beneficiary, has the
ability to appoint additional trustees;
•
the Company properly appointed the additional
trustees;
•
by virtue of the appointment of additional trustees, Davis is
not the sole trustee of the Group Trust; and
•
a majority of the appointed trustees are authorized to direct
distributions from the FPFI Creditor Trust to the Group Trust.
4
The court has not yet entered a final
judgment in the lawsuit on these matters, and ancillary claims regarding the validity of the Company’s termination of Mr. Davis and attorneys fees
are still pending in the lawsuit. However, the Company believes that the court’s ruling will finally allow the trustees of the Group Trust to
conduct the business of the Group Trust.
Special Meeting
Litigation
In March 2005, a group of Company
shareholders commenced a court action, styled
Danford L. Martin, et al. v. FirstPlus Financial Group, Inc., et al
., in the Second Judicial
District Court for the State of Nevada (the “Election Suit”) to compel a shareholders’ meeting and election of directors. The Company
has treated the Election Suit as a valid request for meeting pursuant to the bylaws. During the hearings in the court and in discussions with the
petitioners in the Election Suit, the Company has at all times insisted that the meeting and the election be conducted in accordance with all
applicable laws, regulations and procedures.
The petitioners submitted two separate
plans of election that the Company believed would have, if adopted by the court, resulted in a meeting:
•
without providing shareholders with customary and necessary
information on the subject of the election;
•
that would have failed to convene a quorum;
•
that would have failed to yield a valid outcome under the
Company’s articles of incorporation and bylaws and applicable law; and
•
that would have violated applicable law in numerous
respects.
In fact, under one of the
petitioners’ proposed plans of election, the solicitation of proxies and provision of information to shareholders regarding the subject of the
meeting would have been expressly forbidden. The Company’s position has at all times been that the shareholders should receive the required
disclosures about the Company and about the persons soliciting votes, including those persons soliciting votes in opposition to the
Company.
The court has directed that a
shareholders’ meeting and election of directors, utilizing the proxy process, be held. The meeting is currently scheduled for April 28, 2006 in
Reno, Nevada. The Company has informed the petitioners that it intends to follow applicable laws, regulations and, except to the extent otherwise
expressly directed by the court, provisions of the Company’s articles of incorporation and bylaws in the conduct of the meeting and the
election.
The shareholders’ meeting and
election of directors was originally scheduled for September 1, 2005. Petitioners’ counsel requested that the Company postpone the
shareholders’ meeting to November 16, 2005, and the Company agreed to this date. In November 2005, the Company and the petitioners participated in
a status hearing at the court. At the hearing, upon the request of the petitioners and over the Company’s objections, the court reset the meeting
date for January 13, 2006. In December 2005, the court again “reset” the meeting date to April 28, 2006 after the Company explained that the
parties would not have been able to comply with a January 2006 meeting date for regulatory reasons.
In February 2006, the Company filed an
answer and counterclaim in the Election Suit. Although the Company has treated the Election Suit as a valid request for a meeting in accordance with
the Company’s bylaws, after reviewing the several amendments to the petitioners’ proxy materials and the behavior of the petitioners and
their advisors during the Election Suit, the Company filed the counterclaim to address the damages incurred by the Company and its shareholders due to
the actions of the petitioners, two purported “committees” that are in no way affiliated with the Company and the controlling persons of the
purported “committees.”
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In the counterclaim, the Company has
alleged, among other things, that:
•
the purported “committees” have used their improper
influence and control over Davis, the Company’s former director and Vice President — Shareholder Relations, both during his time in office
with the Company and after the termination of his positions with the Company, and as a result have breached their duties to the Company and caused
Davis to breach his duties to the Company;
•
the “committees” have exerted this improper influence
and control over Davis to interfere with the Company’s business and to obtain material non-public information about the Company and to selectively
use or disseminate that information, and as a result have breached their duties to the Company and caused Davis to breach his duties to the
Company;
•
the “committees” have exerted this improper influence
and control over Davis in Davis’ role as trustee of the Grantor Trust described below to the detriment of the Company and the FPFI Intercompany
Claim, and as a result have breached their duties to the Company and caused Davis to breach his duties to the Company;
•
members of the “committees” and certain other
petitioners improperly traded shares of the Company’s common stock based upon the publishing of reports by one of the “committees” which
ignored or purposely misstated the amount of the Company’s liabilities and assets, causing the price of the Company’s common stock to
fluctuate with the issuance of the reports and that such conduct constitutes part of a scheme and artifice to manipulate the market for the personal
financial gain of such petitioners, to create support for the slate of nominees which may be nominated by one of the “committees” in the
upcoming election of directors and to secure additional monetary contributions to fund the litigation and further the scheme;
•
one or more of the petitioners who controlled the content and
timing of the “committee reports” published and disseminated false and misleading information about the Company in those reports and
coordinated their trades in Company common stock with the release of those reports;
•
the petitioners have engaged in an ongoing campaign of
misinformation regarding the Company and its officers and directors on various websites, including making false statements to the court, the Company
and the Company’s shareholders in the Election Suit; and
•
the petitioners have abused the Election Suit to further a
scheme of manipulation of the court process and the election by using a court order to, among other things, delay the Company’s performance with a
pre-existing contract and subjecting the Company to possible penalties under the contract, delaying the meeting due to their refusal or inability to
properly file their proxy materials with the Securities and Exchange Commission, inducing the Company to enter into agreements regarding the special
meeting date and a mediation proposed by the petitioners and subsequently breaching such agreements.
Although it was not required to do so,
the Company has paid attorney’s fees for the petitioners in an aggregate amount of $25,000 and agreed to pay printing and distribution fees for
petitioners’ proxy materials in an amount not to exceed an aggregate of $20,000, which the parties have stipulated fully satisfies any and all
requests petitioners have made or could have made in the future concerning reimbursement for petitioners’ attorneys’ fees and expenses
associated with the Election Suit. The Company has applied the $20,000 amount to the printing and mailing costs it incurred in connection with its
attempt to hold the shareholders’ meeting in November 2005 that was delayed by the court upon the request of the petitioners.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
There were no matters submitted to a
vote of the security holders during the fourth quarter of the fiscal year ended December 31, 2005.
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