**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: **March 31, 2006**

 

o Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from ____________ to ____________

 

Commission File Number:**0-27750**

 

**FIRSTPLUS Financial Group, Inc.**

(Exact name of small business issuer as specified in its charter)

 

 

| **Nevada******                                                  | **75-2561085******                        |
|-----------------------------------------------------------------|-------------------------------------------|
| (State or other jurisdiction of incorporation or organization)  | (IRS Employer Identification No.)

  |
| **5100 North O'Connor Blvd., 6th Floor**

**Irving, Texas****** |
| (Address of principal executive offices)                        |
| **(214) 496-1266******                                          |
| (Issuer's telephone number)                                     |

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

The number of shares of common stock outstanding as of:  May 12, 2006 was 45,340,090.

 

Transitional Small Business Disclosure Format (Check one): Yes o No x

 

 

 

 

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Except where otherwise stated, references in this document to “us,” “we,” “FPFG” or “the Company” refer to FIRSTPLUS Financial Group, Inc. (“FIRSTPLUS”). This Form 10-QSB contains forward-looking statements within the meaning of the “safe harbor” provisions under Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  The Company uses forward-looking statements in its description of its plans and objectives for future operations and assumptions underlying these plans and objectives, as well as in its expectations, assumptions, estimates and projections about its business and industry.  These forward-looking statements involve risks and uncertainties.  The Company’s actual results could differ materially from those anticipated in such forward-looking statementsas a result of certain factors as more fully described in this Report and other risks and factors identified from time to time in the Company’s reports filed with the Securities and Exchange Commission.

 

Forward-looking terminology includes the words “may”, “expects”, “believes”, “anticipates”, “intends”, “projects” or similar terms, variations of such terms or the negative of such terms.  These forward-looking statements are based upon the Company’s current expectations and are subject to factors and uncertainties which could cause actual results to differ materially from those described in such forward-looking statements.  The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Report to reflect any change in the Company’s expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

 

 

 

 

 

**INDEX**

 

| Part I. Financial Information                                                                       |      |
|----------------------------------------------------------------------------------------------------------|-----------|
|                                                                                                     |      |
| Item 1     Financial Statements                                                 |      |
|                                                                                                     |      |
| Balance Sheet at March 31, 2006 (unaudited)                                                              | 1         |
|                                                                                                     |      |
| Statements of Operations for the

Three Months and Nine Months Ended March 31, 2006 and 2005 (unaudited) |  

2 |
|                                                                                                     |      |
| Statements of Cash Flows for the

Nine Months ended March 31, 2006 and 2005 (unaudited)                  |  

3 |
|                                                                                                     |      |
| Notes to Financial Statements (unaudited)                                                                | 4         |
|                                                                                                     |      |
| Item 2. Management's Discussion and Analysis or Plan of Operations                                  | 9         |
|                                                                                                     |      |
| Item 3.       Controls and Procedures                                 | 16        |
|                                                                                                     |      |
| Part II        Other Information  Other Information              |      |
|                                                                                                     |      |
| Item 1. Legal Proceedings                                                                           | 18        |
|                                                                                                     |      |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                 | 20        |
|                                                                                                     |      |
| Item 3. Defaults Upon Senior Securities                                                             | 20        |
|                                                                                                     |      |
| Item 4. Submission of Matters to a Vote of Security Holders                                         | 21        |
|                                                                                                     |      |
| Item 5. Other Information                                                                           | 21        |
|                                                                                                     |      |
| Item 6. Exhibits                                                                                    | 21        |

 

 

 

 

 

 

FIRSTPLUS Financial Group, Inc.

Balance Sheet

|                                                                                                                                  | March 31, 2006 |
|---------------------------------------------------------------------------------------------------------------------------------------|----------------|
|                                                                                                                                  | (Unaudited)    |
| **ASSETS:******                                                                                                                       |           |
| Current assets:                                                                                                                       |           |
| Cash and cash equivalents                                                                                                             | $              | 527,735  |   |
| Prepaid insurance                                                                                                                     |           | 64,583  |   |
|                                                                                                                                  |           |   |   |
| Total current assets                                                                                                                  |           | 592,318  |   |
|                                                                                                                                  |           |   |   |
| Accounts receivable Capital Lending Strategies, LLC                                                                                   |           | 108,689  |   |
| Claim from bankruptcy estate (see notes 6 and 12)                                                                                     |           | 9,034,954  |   |
| Deferred tax asset                                                                                                                    |           | 93,300  |   |
| Advance to Versatile Consulting LLC (see note 2)                                                                                      |           | 250,000  |   |
| Investment in Capital Lending Strategies, LLC                                                                                         |           | 71,150  |   |
|                                                                                                                                  |           |   |   |
| Total assets                                                                                                                          | $              | 10,150,411  |   |
|                                                                                                                                  |           |   |   |
|                                                                                                                                  |           |   |   |
| **LIABILITIES**

**AND STOCKHOLDERS’ EQUITY**                                                                                    |           |   |   |
|                                                                                                                                  |           |   |   |
| Current liabilities – income taxes payable                                                                                       | $              | 93,300  |   |
|                                                                                                                                  |           |   |   |
| Commitments and contingencies                                                                                                         |           | -  |   |
|                                                                                                                                  |           |   |   |
| Stockholders’ equity:                                                                                                            |           |   |   |
| Common stock, $.01 par value, 100,000,000 shares

authorized; 45,340,090 shares issued and outstanding                                |           | 453,401  |   |
| Additional paid in capital                                                                                                            |           | 11,490,171  |   |
| Accumulated deficit since December 31, 2002 when a

deficit of $312,527,864 was eliminated in connection

with a quasi-reorganization |           | (1,886,461) |   |
|                                                                                                                                  |           |   |   |
| Total stockholders’ equity                                                                                                       |           | 10,057,111  |   |
|                                                                                                                                  |           |   |   |
| Total liabilities and stockholders’ equity                                                                                       | $              | 10,150,411  |   |

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

1

 

 

 

 

FIRSTPLUS Financial Group, Inc.

Statements of Operations

(Unaudited)

 

|                                             | For the Three Months Ended

March 31, |
|--------------------------------------------------|---------------------------------------|
|                                             | 2006                                  |   | 2005 |
| Revenues                                         | $                                     | -  | $ | -  |
|                                             |                                  |   |   |   |
| Operating expenses:                              |                                  |   |   |   |
| General and administrative                       |                                  | 320,066  |   | 120,604  |
|                                             |                                  |   |   |   |
| Total operating expenses                         |                                  | 320,066  |   | 120,604  |
|                                             |                                  |   |   |   |
| Operating income (loss)                          |                                  | (320,066) |   | (120,604) |
|                                             |                                  |   |   |   |
| Non-operating income:                            |                                  |   |   |   |
| Interest, net                                    |                                  | 70,729  |   | 975  |
|                                             |                                  |   |   |   |
| Income (loss) before provision

for income taxes |                                  | (249,337) |   | (119,629) |
|                                             |                                  |   |   |   |
| Provision for income taxes/(benefit)             |                                  | -  |   | (17,944) |
|                                             |                                  |   |   |   |
| Net income (loss)                                | $                                     | (249,337) | $ | (101,685) |
|                                             |                                  |   |   |   |
| Earnings (loss) per share                        | $                                     | (0.01) | $ | (0.00) |
|                                             |                                  |   |   |   |
| Weighted average of common shares outstanding    |                                  | 45,340,090 |   | 44,340,090 |
|                                                  |                                       |  |  |  |  |

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

2

 

 

 

 

FIRSTPLUS Financial Group, Inc.

Statements of Cash Flows

(Unaudited)

|                                                                                       | For the Three Months Ended

March 31, |
|--------------------------------------------------------------------------------------------|---------------------------------------|
|                                                                                       | 2006                                  |   | 2005 |
| Cash flow from operating activities:                                                       |                                  |   |   |
| Net income (loss)                                                                          | $                                     | (249,337) |   | $ | (101,685) |
| Adjustments to reconcile net income to

net cash provided (used) by operating

activities: |                                  |   |   |   |   |
| Accrued interest income                                                                    |                                  | (62,031) |   |   | -  |
| Changes in operating assets and liabilities:                                               |                                  |   |   |   |   |
| Prepaid insurance                                                                          |                                  | (64,583) |   |   | -  |
| Deferred tax asset                                                                         |                                  | -  |   |   | (17,944) |
| Accounts payable                                                                           |                                  | (161,210) |   |   | (5,132) |
| Income taxes payable                                                                       |                                  | -  |   |   | (19,600) |
| Net cash provided (used) by operating activities                                           |                                  | (537,161) |   |   | (144,361) |
|                                                                                       |                                  |   |   |   |   |
| Cash flows from investing activities:                                                      |                                  |   |   |   |   |
| Advance to Versatile Consulting LLC                                                        |                                  | (250,000) |   |   |   |
| Collections on account receivable

Capital Lending Strategies, LLC                         |                                  | 10,500  |   |   | 14,307  |
| Net cash provided (used) by investing activities                                           |                                  | (239,500) |   |   | 14,307  |
|                                                                                       |                                  |   |   |   |   |
|                                                                                       |                                  |   |   |   |   |
| Net increase/(decrease) in cash                                                            |                                  | (776,661) |   |   | (130,054) |
|                                                                                       |                                  |   |   |   |   |
| Cash at the beginning of the period                                                        |                                  | 1,304,396  |   |   | 460,310  |
|                                                                                       |                                  |   |   |   |   |
| Cash at the end of the period                                                              |                                  | 527,735  |   |   | 330,256  |
|                                                                                       |                                  |   |   |   |   |
|                                                                                       |                                  |   |   |   |   |
| Supplemental disclosure of cash flow information:                                          |                                  |   |   |   |   |
| Cash paid for:                                                                             |                                  |   |   |   |   |
| Interest                                                                                   | $                                     | -  |   | $ | -  |
| Taxes                                                                                      | $                                     | -  |   | $ | -  |

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

3

 

 

FIRSTPLUS Financial Group, Inc.

 

Notes to Financial Statements

 

 

 

 

| Note 1. | Basis of Presentation |
|---------|-----------------------|

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  In the opinion of management, such statements include all adjustments consisting only of normal, recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods indicated.  Pursuant to accounting requirements of the Securities and Exchange Commission (the “SEC”) applicable to Quarterly Reports on Form 10-QSB, the accompanying financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America for audited financial statements.  While the Company believes that the disclosures presented are adequate to make the information not misleading,these financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2005 which are contained in the Company’s Annual Report on Form 10-KSB.  The results for the three month period ended March 31, 2006 are not necessarily indicative of the results to be expected for the full fiscal year.

 

| Note 2. | Organization and Business |
|---------|---------------------------|

 

FIRSTPLUS Financial Group, Inc. ("FPFG") (together with its subsidiaries, the "Company") was a specialized consumer finance company that originated, purchased, serviced and sold consumer finance receivables.  The Company's principal loan product was a debt consolidation or home improvement loan secured by a second lien on real property ("High LTV Loans").  The Company sold substantially all of its High LTV Loans through its securitization program and retained rights to service those loans.

 

The Company's operations required continued access to financing sources. The Company's primary operating cash requirements included the funding of (i) loan originations, (ii) reserve accounts, overcollateralization requirements, fees and expenses incurred in connection with its securitization transactions, (iii) television, radio and direct mail advertising and other marketing and (iv) administrative and other operating expenses.

 

Due to numerous market factors beyond the Company’s control during the fourth quarter of 1998, the Company’s access to those financing sources was unavailable.  As a result, the subsidiaries filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in 1999.  As part of the plan of reorganization confirmed by the bankruptcy court on April 7, 2000, holders of the Company’s 7.25% Convertible Subordinated Notes Due 2003 received a Certificated Interest representing Obligations under the plan of reorganization.  FPFG also retained an unsecured interest in monies that it had advanced to its subsidiaries. As payments are made from the former subsidiaries to the creditor trust which administers the bankruptcy estate (the “Creditor Trust”), the Obligations to the Certificated Interests are paid by the Creditor Trust.

 

In March 2006, the Company made an advance of $250,000 to Versatile Consulting, LLC (“Versatile”), secured by a contract between a partnership, for which Versatile is the managing general partner, and a third party supplier of storage units.  The advance bears interest at the prime rate of interest as established by the *Wall Street Journal* plus 3.5%.  Under the terms of the agreement, the Company will receive a factoring commission of 2% of each contracted account and an additional discount of 3.5% over the maximum prime rate quoted in**the *Wall Street Journal* adjusted weekly.  The Company has also retained a non-expiring option, the terms of which have not been finalized, to purchase the 51% controlling partnership interest from Versatile.

 

 

4

 

FIRSTPLUS Financial Group, Inc.

 

Notes to Financial Statements

 

 

 

 

| Note 3. | Concentration of Credit Risk |
|---------|------------------------------|

 

FPFG at times during operations has cash deposits that exceed $100,000 in one account in individual banks. The Federal Deposit Insurance Corporation (FDIC) insures only the first $100,000 of funds at member banks.  FPFG has not incurred losses related to its cash.

 

| Note 4. | Income Taxes |
|---------|--------------|

 

Deferred taxes are recognized for net operating losses that are available for carryback to offset prior taxable income.  Based on the March 31, 2006 loss, FPFG will have a net operating loss carryforward available of approximately $1,700,000.  A valuation allowance is provided against the deferred tax asset for future taxable income as realization is uncertain.

 

Income tax benefit is recorded net of any penalties and interest.

 

| Note 5. | Quasi-reorganization |
|---------|----------------------|

 

The Company Board approved a plan to affect a quasi-reorganization effective December 31, 2002. A quasi-reorganization is an accounting procedure that eliminates an accumulated deficit in retained earnings and permits a company to proceed on much the same basis as if it had been legally reorganized. A quasi-reorganization involves adjusting a company’s assets and liabilities to their fair values. Any remaining deficit in retained earnings is then eliminated by a transfer of amounts from paid-in capital and capital stock, if necessary, giving a company a “fresh start” and a zero balance in retained earnings.

 

| Note 6. | Other Assets |
|---------|--------------|

 

FPFG retains a claim against the bankruptcy estate of its former subsidiaries for monies advanced to them.  On January 20, 2006, the bankruptcy trustee remitted $9,523,451 to the Dallas County District Clerk designated for partial payment of that claim.  In March 2006, another $1,742,552 was submitted to the Dallas County District Clerk and $723,323 was set aside for the benefit of FPFG, bringing the aggregate amount of funds designated for the benefit of FPFG to $11,989,326.  FPFG, nor the bankruptcy trustee, can estimate the amount or timing of any future payments.  FPFG has booked a valuation reserve of $3,015,000 against the amount set aside for potential creditor claims against FPFG. See Note 12.

 

The funds placed with the Dallas County District Clerk have been invested in 30-day U.S. Treasury Bills with an automatic renewal policy.  The Treasury Bills currently earn an interest rate of 4.0% per annum.  Because the funds are not readily accessible to the Company due to the Grantor Trust Litigation, the Company did not consider the funds to be cash or cash equivalents as of March 31, 2006.

 

FPFG owns a minority equity interest in Capital Lending Strategies, LLC (“CLS”).  During 2004, it sold approximately 60% of its holdings in CLS which provided FPFG’s working capital. The investment (less than 20%) is recorded on the books at the cost basis of $71,150. (See note 10).

 

5

 

FIRSTPLUS Financial Group, Inc.

 

Notes to Financial Statements

 

 

 

 

| Note 7. | Commitments and Contingencies |
|---------|-------------------------------|

 

FPFG has recorded a valuation allowance of $3,015,000 for potential claims arising from creditors of FPFG and its former subsidiaries.  No creditors have initiated a claim against FPFG.  FPFG has recorded an allowance since any claim would be dependent on the receipt of funds from the bankruptcy estate of FPFG’s former subsidiaries.

 

In October 2005, FPFG entered into a contract with Versatile Consulting, LLC to provide services in identifying and acquiring an operating entity in the financial services sector.  The contract is for a period of twelve months and requires payments of $10,000 per month.

 

| Note 8. | Stockholders’ Equity |
|---------|---------------------------|

 

Holders of the Company's 7.25% Convertible Subordinated Notes Due 2003 (amended by a supplemental indenture entered into by the Company and the trustee for the notes pursuant to a plan of reorganization under Chapter 11 of the Bankruptcy Code dated April 7, 2000) received a Certificated Interest payable from residual funds of the subsidiaries after the secured interests have been paid.  Two of the former noteholders received rights to convert a portion of their Certificated Interests into shares of the FPFG's common stock.  At March 31, 2006, Certificated Interests held conversion rights to 1,655,000 shares of common stock. (See note 10).

 

| Note 9. | Director Stock Option Plan |
|---------|----------------------------|

 

The Company has stock options outstanding to participants under the 1995 Non-Employee Director Plan to grant options to members of the Board of Directors who are not employees of the Company or its subsidiaries on the date they become a director.  No options under the 1995 Employee Option Plan may be exercised more than ten years from the date of grant.

 

 

| Note 9. | Director Stock Option Plan (continued) |
|---------|----------------------------------------|

 

Each of the four directors holds options, exercisable at $0.10 per option, for the issuance of 300,000 shares of common stock for an aggregate total of 1,200,000 shares.  Exercise of the options would have an anti-dilutive effect and therefore are not included in the earnings per share calculations.

 

6

 

FIRSTPLUS Financial Group, Inc.

 

Notes to Financial Statements

 

 

 

 

| Note 10. | Related Party Transactions |
|----------|----------------------------|

 

The Company’s executive offices are shared with the facilities leased by Capital Lending Strategies, LLC, which incurs the cost and full responsibility of the lease.  There is no formal agreement between the Company and Capital Lending Strategies, LLC with respect to the lease arrangement.  Daniel T. Phillips, FPFG’s Director, is a Manager and Member of Capital Lending Strategies, LLC.

 

The Company has loaned to Capital Lending Strategies, LLC approximately $275,000.  The loan balance at March 31, 2006 was $108,689.  The line of credit bears interest at the prime rate of interest as established by the Wall Street Journal plus 1% and matures on the second anniversary of any advance on the line of credit.

 

In 2003, the Company entered into a “reciprocal swap” with Capital Lending Strategies, LLC whereby the Company transferred most of its ownership interests in Capital Lending Strategies, LLC to Capital Lending in exchange for all of the shares of Series D Convertible Preferred Stock of the Company then owned by Capital Lending Strategies, LLC, which represented approximately 51% of the voting stock of the Company.  The Company did not transfer back to Capital Lending Strategies, LLC the ownership interests assigned to the plaintiffs’ co-lead counsel in escrow on behalf of the authorized claimants under the settlement of the Company’s consolidated class action lawsuit styled In re: FirstPlus Financial Group, Inc. Securities Litigation, Civil Action No. 3:98-CV-2551-M.

 

Prior to the reciprocal swap, the mutual ownership positions of the Company and Capital Lending Strategies, LLC resulted in Capital Lending Strategies, LLC holding a controlling interest in the Company and approximately 12% of the Company’s ownership of Capital Lending Strategies, LLC “attributing back” to Capital Lending Strategies, LLC. Following the reciprocal swap, the Company retained the same economic interest in Capital Lending since none of its ownership interest then “attributed back” to Capital Lending Strategies, LLC via Capital Lending Strategies, LLC’s ownership of Company stock. However, Capital Lending Strategies, LLC no longer owns any shares of the Company and is no longer in a position to control the Company through its stock ownership. In May 2004, the Company sold its remaining interest in Capital Lending Strategies, LLC, other than the interest assigned onbehalf of the claimants in the class action lawsuit, for $796,580.

 

FPFG has a liability insurance policy with American Financial Services covering its directors and officers. The total premium for the policy is $77,500.  Dexter & Company was the broker for the policy.  John R. Fitzgerald, FPFG’s Director, is Executive Vice President of Dexter & Company.

 

7

 

FIRSTPLUS Financial Group, Inc.

 

Notes to Financial Statements

 

 

 

 

| Note 11. | Recent Accounting Pronouncements |
|----------|----------------------------------|

 

In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payments". The new pronouncement replaces the existing requirements under SFAS No. 123 and APB 25. According to SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options and employee stock purchase plans, would be treated the same as any other form of compensation by recognizing the related cost in the statement of operations. This pronouncement eliminates the ability to account for stock-based compensation transactions using APB No. 25 and generally would require that such transactions be accounted for using a fair-value method. SFAS No. 123(R) is effective for awards and stock options granted, modified or settled in cash in interim or annual periods beginning after December 15, 2005. The Company plans to adopt the modified prospective transitionmethod, which would necessitate the Company to recognize compensation cost for awards that are not fully vested as of the effective date of the SFAS 123(R) based on the same estimate that the Company used to previously value its grants under SFAS 123.

 

The Company will be required to expense the fair value of its stock option grants rather than disclose the impact on its statement of operations within the Company's footnotes, as is the current practice. As a result, the Company will incur stock based compensation expense from December 15, 2005 for options issued prior to that date but which were not fully vested at the time. The Company will incur additional compensation expense as new awards are made after that date. The Company is evaluating the form of share-based compensation arrangements it will utilize in the future, if any.

 

In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate any material impact on its financial statements fromthe adoption of SFAS 154 since it currently does not anticipate any voluntary changes to its accounting policies.

 

| Note 12. | Subsequent Events |
|----------|-------------------|

 

On April 6, 2006, the Company entered into a settlement agreement to resolve disputes in the lawsuit styled Danford L. Martin, et al v. FirstPlus Financial Group, Inc. et al.  As part of the agreement the Company agreed to pay up to $300,000 to the petitioners for expenses they incurred arising from the lawsuit.  The Company has also agreed to instruct the FIRSTPLUS Financial Group, Inc. Grantor Residual Trust (the “Grantor Trust”) to make distributions to the holders of the Company’s common stock on a pro rata basis as of a record date to be set by the board of directors of the Company in aggregate amounts equal to fifty percent of the funds received by the Grantor Trust from the registry of the district court and from the Creditor Trust pursuant to the settlement agreement.

 

In addition, the Company has agreed not to issue any shares of its common stock prior to the initial distribution and, for a period of one year following the distribution, to not issue any shares of its common stock equal to 30% of the then outstanding shares unless the Company obtains a fairness opinion with respect to such transaction.

 

 

8

 

 

 

| **Item 2.** | **Management’s Discussion and Analysis or Plan of Operation** |
|-------------|--------------------------------------------------------------------|

 

**General**

 

FIRSTPLUS Financial Group, Inc. (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, 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 wasgenerally 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 filings were 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. 

 

FPFI’s plan of reorganization was confirmed on April 7, 2000 by the United States Bankruptcy Court, Northern District of Texas, Dallas Division.  The plan of reorganization provided for the creation of the FPFI Creditor Trust (the “Creditor Trust”) to facilitate implementation of the plan of reorganization, to hold trust assets for the benefit of the beneficiaries, to resolve claims, to make distributions in accordance with the plan of reorganization and to provide various administrative services related to the Creditor Trust and the implementation of the plan of reorganization.  Under the plan of reorganization, the Company still owned FPFI but could not transfer its interest in FPFI until the Creditor Trust terminates.  However, the Creditor Trust trustee is the sole officer and director of FPFI.  The stock was transferred to a voting trust whereby the voting trust wouldhave the sole power to hold and vote the stock.  As a result, the Company has no interest in FPFI or the Creditor Trust’s assets other than its interest in the FPFI Intercompany Claim.

 

In the plan of reorganization, the Company was able to resolve many of its own creditor claims through the plan of reorganization.  In addition, the Company received the FPFG Intercompany Claim as a general unsecured claim defined in the plan of reorganization to be in an amount that was not to be less than $50 million.  By being a holder of the FPFG Intercompany Claim, the Company became a beneficiary of the Creditor Trust.  Under the plan of reorganization, the Company would only receive distributions as a beneficiary of the Creditor Trust from payments on the FPFG Intercompany Claim based on a previous series of securitized loan pools that had been sold in the marketplace.  At that time, the amount and timing of cash flow from residuals were completely unknown.  The Company has no operations with respect to, or any control over, the securitized loans.

 

9

 

 

 

To settle other claims asserted against it, the Company assigned portions of the FPFG Intercompany Claim to various creditors.  Consistent with the plan of reorganization, in settlement of the claims of the holders of the Company’s 7.25% Convertible Subordinated Notes due 2003, the bondholders received an instrument representing the right to receive an assignment of 25% of the FPFG Intercompany Claim, permitting the bondholders to become a direct beneficiary of the Creditor Trust, and an agreement to instruct the Creditor Trust to make two payments to the bondholders of $1,428,000 based on certain conditions.  The bondholder settlement was consummated in June 2001.  Two of the bondholders also received agreements allowing them to convert portions of their new interest into an aggregate of 5,555,000 shares of the Company’s common stock.  The Company believes that it is entitled toa reassignment of a portion of the new interests from the bondholders who received the conversion rights and has initiated discussions with those holders and the trustee for the new interests regarding the reassignment.

 

At the closing of the plan of reorganization, in settlement of claims of Paine Webber Real Estate Securities Inc. (“Paine Webber”), the Company assigned a 22% interest in the FPFG Intercompany Claim to Paine Webber 

allowing Paine Webber to become a direct beneficiary of the Creditor Trust.  The Paine Webber claim has been settled, and the Company recovered the assignment from Paine Webber in August 2005. 

 

The Company has agreed to pay 1.86% of the distributions it receives, up to an aggregate amount of $931,000, on the FPFG Intercompany Claim to Thaxton Investment Corporation (“Thaxton”).  The amounts payable to Thaxton are based on a settlement of disputes concerning the purchase price paid by Thaxton to FirstPlus Consumer Finance, Inc. (“Consumer Finance”), then a subsidiary of the Company, pursuant to the sale of all of the assets of Consumer Finance to Thaxton in 1999.

 

The Company has previously discussed with other creditors settlement of various claims by assignment of portions of the FPFG Intercompany Claim.  For example, the Company agreed to execute and deliver to its former landlord a certificate in the amount of $3,800,000 to evidence an undivided interest in FPFG Intercompany Claim, and in satisfaction of that agreement assigned a 7.6% interest in the FPFG Intercompany Claim to the landlord, in connection with amendments to the Company’s then existing lease for its executive and administrative offices.  However, communications with this landlord and other parties have been dormant in recent years.  There is no assurance that these parties may not assert claims in excess of the Company’s current estimate of the value of these claims or that there are no additional parties who may assert claims with respect to the FPFG Intercompany Claim.Since the bankruptcy proceedings, the FPFG Intercompany Claim had been the only substantial asset of the Company and the only source of potential payment for its obligations.    The Company has booked a valuation reserve of approximately $3 million against the amount set aside for potential creditors claims.

 

There can be no assurance as to the ultimate value of the FPFG Intercompany Claim or the timing of distributions on the FPFG Intercompany Claim.

 

10

 

 

 

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, an 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, except for the increase in litigation related expenses and general and administrative costs due primarily to regulatory filing compliance.  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.  As of March 31, 2006, the Company had approximately $527,000 million in cash and cash equivalents which management believes will be sufficient to cover operating expenses for the next twelve months.  As of March 31, 2006, the trustee of the Creditor Trust has set aside approximately $12 million for the Grantor Trust, for which the Company is the sole beneficiary, including $11.2 million deposited bythe Creditor Trust in the registry of the district court in Dallas, Texas in connection with the lawsuit described in Part II, Item 1 under the heading “Legal Proceedings—Grantor Trust Litigation.”  The Company does not believe it will have to raise additional funds in the next twelve months.

 

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 expectations of the Company after further examination and the Company learned of opposition to those transactions by certain shareholders.

 

11

 

 

 

**Strategic Plan**

 

On February 28, 2006, the Company entered into a factoring agreement with Signs For Life LLC (“Signs”) which provides for the Company to purchase accounts arising out sales of merchandise or services rendered by Signs that the Company approves for purchase.  The Company will receive a factoring commission of 2% and discount over the purchase price of the accounts of 3.5% per annum over the prime rate quoted in the Wall Street Journal, plus additional fees based on the difference between the amounts outstanding under the accounts and the amounts in a reserve account established under the agreement.  The Company has made payments of $250,000 under to purchase accounts under this arrangements as of March 31, 2006.

 

Versatile Financial Technology LLC (“Versatile”) has also agreed to grant to the Company an option to acquire its 51% interest in Signs and a right of first refusal to acquire its interest in Signs.  The Company and Versatile have not finalized the terms of the option or right of first refusal.

 

Although the Company is not pursuing any other specific opportunities at this time, it is reviewing the marketplace and its strategic plan.  The areas for opportunity may include buying an existing company, merging with an existing concern or entering into a joint venture.  In 2004, the Company received a substantial return on its investment in Capital Lending, a startup company which provides financial and risk services offering insured loan programs to financial institutions.  In recent years, the financial services industry has seen substantial growth and the Company believes that this trend will continue.  The Company has engaged Versatile to assist in the development and implementation of its strategic plan.  The Company offers strong leadership with the vision and passion needed to catapult the Company into any sector of the industry.

 

| *The Company has not identified a target business* |
|----------------------------------------------------|

 

To date, the Company has not selected any target business on which to concentrate its search for a business combination.  Thus, there is no basis to evaluate the possible merits or risks of any target business or potential transaction into which the Company may enter.  To the extent the Company enters into a transaction with a financially uncertain company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, the Company may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies.  Although the Company’s management will endeavor to evaluate the risks inherent in a particular target business, the Company cannot provide assurance that it will properly ascertain or assess all significant risk factors. 

 

| *Sources of potential opportunities* |
|--------------------------------------|

 

The Company anticipates that business opportunities will be brought to its attention from various sources, including its network relationships, who may present solicited or unsolicited proposals.  The Company’s officers and directors as well as their affiliates may also bring transaction candidates to the Company’s attention.  The Company may use the services of professional firms that specialize in business acquisitions, such as Versatile, in which event the Company may pay a finder’s fee or other compensation.  In no event, however, will the Company pay any of its existing officers, directors or shareholders or any entity with which they are affiliated any finder’s fee or other compensation for services rendered to it prior to or in connection with the consummation of a transaction.

 

12

 

 

 

 

| *Selection of a potential business opportunity and structuring of a transaction* |
|----------------------------------------------------------------------------------|

 

In evaluating a prospective business opportunity or transaction, the Company will consider, among other factors, the following:

 

| • | financial condition and results of operation; |
|--------|-----------------------------------------------|

 

| • | growth potential; |
|--------|-------------------|

 

| • | experience and skill of management and availability of additional personnel; |
|--------|------------------------------------------------------------------------------|

 

| • | capital requirements; |
|--------|-----------------------|

 

| • | competitive position; |
|--------|-----------------------|

 

| • | stage of development of the products, processes or services; |
|--------|--------------------------------------------------------------|

 

| • | degree of current or potential market acceptance of the products, processes or services; |
|--------|------------------------------------------------------------------------------------------|

 

| • | proprietary features and degree of intellectual property or other protection of the products, processes or services; |
|--------|----------------------------------------------------------------------------------------------------------------------|

 

| • | regulatory environment of the industry; and |
|--------|---------------------------------------------|

 

| • | costs associated with effecting the business combination. |
|--------|-----------------------------------------------------------|

 

These criteria are not intended to be exhaustive.  Any evaluation relating to the merits of a particular business opportunity or transaction will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by the Company’s management in pursuing the business opportunity or transaction consistent with the Company’s overall strategy.  In evaluating a prospective business opportunity or transaction, the Company will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and inspection of facilities, as well as review of financial and other information which will be made available to the Company. 

 

The fair market value of such business will be determined by the Company’s Board of Directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value.  If the Board of Directors is not able to independently determine that the target business has a sufficient fair market value, the Company will obtain an opinion or valuation from an unaffiliated, independent investment banking or business valuation firm with respect to the satisfaction of such criteria.  For example, a valuation was obtained for the Company’s proposed transaction with New Freedom Mortgage Corporation in 2001, although the transaction was not consummated, and the Company obtained a fairness opinion with respect to its initial equity investment in Capital Lending in 2002.  

 

13

 

 

 

The time and costs required to select and evaluate a business opportunity and to structure and complete a transaction cannot presently be ascertained with any degree of certainty.  Any costs incurred with respect to the identification and evaluation of a prospective business opportunity or transaction may reduce the amount of capital available to otherwise complete a business combination. 

 

| *Possible lack of business diversification* |
|---------------------------------------------|

 

While the Company may seek to pursue multiple business opportunities with more than one target business, it is possible that, at any particular time, the Company will be engaged in a single business opportunity or transaction.  Accordingly, the prospects for the Company’s success may be entirely dependent upon the future performance of a single business or investment.  Unlike other entities that may have the resources to complete several transactions in multiple industries or multiple areas of a single industry, it is probable that the Company will not have the resources to diversify its operations or benefit from the possible spreading of risks or offsetting of losses.  The Company’s lack of diversification may: 

 

| • | subject the Company to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which it may operate subsequent to a transaction, and |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| • | result in the Company’s dependency upon the development or market acceptance of a single or limited number of products, processes or services. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

| *Limited ability to evaluate the target business’ management* |
|--------------------------------------------------------------------|

 

Although the Company intends to closely scrutinize a prospective business opportunity or transaction, the Company cannot provide assurance that its assessment of the prospective business opportunity or transaction will prove to be correct.  Furthermore, the future role of the Company’s officers and directors, if any, in a prospective business opportunity or transaction cannot presently be stated with any certainty.  While it is possible that one or more of the Company’s current officers and directors will remain associated in some capacity with the Company following a prospective business opportunity or transaction, it is unlikely that any of them will devote their full  

efforts to the Company’s affairs subsequent to prospective business opportunity or transaction.  Moreover, the Company cannot provide assurance that its officers and directors will have significant experience or knowledge relating to the operations of the particular prospective business opportunity or transaction.

 

Following a transaction, the Company may seek to recruit additional executive officers or employees to supplement its current management.  The Company cannot provide assurance that it will have the ability to recruit additional executive officers or employees, or that additional executive officers or employees will have the requisite skills, knowledge or experience necessary to enhance the Company’s current management. 

 

14

 

 

 

**Competition**

 

In identifying, evaluating and selecting a business opportunity, the Company expects to encounter intense competition from other entities having similar business objectives.  Many of these entities are well established and have extensive experience identifying and effecting business opportunities directly or through affiliates.  Many of these competitors possess greater technical, human and other resources than the Company and its financial resources will be relatively limited when contrasted with those of many of these competitors.  While the Company believes there are numerous potential business opportunities or transactions that may be available to it, the Company’s ability to compete in pursuing these opportunities or transactions will be limited by its available financial resources.  This inherent competitive limitation gives others an advantage in pursuing these businessopportunities or transactions.

 

Any of these obligations may place the Company at a competitive disadvantage in successfully pursuing a business opportunity or transaction.  The Company believes, however, that its network relationships and the experience of its management team and Board of Directors may give it a competitive advantage over other competitors for pursuing business opportunities or transactions. 

 

**Financial Reporting Issues**

 

In January 1999, the Company announced that it would be implementing new accounting guidance regarding the valuation of its retained interests from securitization transactions which had been recently provided by the Financial Accounting Standards Board (“FASB”).  FASB issued a draft Special Report (“A Guide to Implementation of Statement 125 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, Questions and Answers, Second Edition”) which was finalized during December 1998.  In this Special Report, FASB concluded that the “cash-out” method of valuing retained interests should be used to estimate fair value.  The SEC Staff announced in December 1998 that the change to the “cash-out” method should be made by restatement.  Based on this guidance, the Company decided to revise its methodology for estimating thefair value of certain financial instruments for each of the fiscal years in the three-year period ended September 30, 1997, the three-month transition period ended December 31, 1997, and the first three quarters of the fiscal year ended December 31, 1998.  As the Company disclosed in its Form 10-Q for the quarter ended September 1998, it was expected that the impact would be material to the results of all prior periods.

 

As a result of limited resources and conflicting demands, the Company has not completed its analysis necessary to complete the restatement.  In addition, the Company has not had the financial resources or personnel to prepare and file its periodic reports with the SEC.  In July 2005, the Company received a letter from the SEC directing the Company to file all required reports or become subject to a revocation of registration under the Securities Exchange Act of 1934.  In preparation for the shareholders’ meeting originally scheduled for September 2005, but held in May 2006, the Company obtained audited financial statements for fiscal year 2004 to prepare and distribute its proxy materials for the meeting and resumed filing its periodic reports with the SEC.  However, this information alone will not cure the Company’s reporting delinquencies with the SEC.  The Company has initiateddiscussions with the SEC regarding its compliance issues and has started the process to prepare its plan to correct any SEC reporting delinquencies.

 

15

 

 

 

Following the settlement of the Company’s securities-related class action lawsuit in 2003, the Company began to analyze the extent of its liabilities and reporting compliance issues.  In 2004, the Company received a small return on its investment in Capital Lending which allowed it to pay mounting debts and begin becoming compliant with its charter requirements in the State of Nevada.  This also allowed the Company to organize its financial records in preparation for an audit of its financial statements for the year ended December 31, 2004, which is an  expensive and time consuming process.  Through changes in management and the nature of FPFI’s bankruptcy and litigation filed against the Company, the business records have been scattered.  As a result, gathering the necessary information to complete audited financial statements has taken more time than anticipated or would berequired under other circumstances.  The Company cannot currently estimate when it will complete the restatement or the delinquent reports for past time periods.

 

**Forward-Looking Statements**

 

This report contains forward-looking statements within the meaning of the “safe harbor” provisions under Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  The Company uses forward-looking statements in its description of its plans and objectives for future operations and assumptions underlying these plans and objectives, as well as in its expectations, assumptions, estimates and projections about the Company’s business and industry.  These forward-looking statements involve risks and uncertainties.  The Company’s actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors as more fully described in this report.

 

Forward-looking terminology includes the words “may”, “expects”, “believes”, “anticipates”, “intends”, “projects” or similar terms, variations of such terms or the negative of such terms.  These forward-looking statements are based upon the Company’s current expectations and are subject to factors and uncertainties which could cause actual results to differ materially from those described in such forward-looking statements.  The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to reflect any change in its expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

 

| **Item 3.** | **Controls and Procedures** |
|-------------|-----------------------------|

 

The Company’s management, with the participation of its Principal Executive Officer/Principal Accounting Officer, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report.  Based on such evaluation, the Company’s Principal Executive Officer/Principal Accounting Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. 

 

Because the Company has been in a dormant capacity for the past several years, the Company has only one officer and employee.  However, management’s revised assessment has concluded that, as of March 31, 2006, the Company’s shortage of personnel is not sufficient to constitute effective disclosure controls and procedures in light of the state of its financial records discussed in the paragraphs below and the resources required for the functions described under Part I, Item 2, Plan of Operation, particularly if unforeseen circumstances arise, such as those described in Part II, Item 1, Legal Proceedings.

 

16

 

 

 

The Company has implemented the following changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.  Since 1999, the Company was essentially a dormant company without sufficient resources to retain an independent auditor.  Prior to 1999, the Company’s main operating entity employed a large accounting staff responsible for the Company’s extensive accounting needs and financial reporting.  Prior to its collapse, FPFI’s operations were geographically dispersed and its accounting records had not been centralized in Dallas.  When FPFI filed for bankruptcy protection in 1999, FPFI employees who maintained the Company’s recordswere inundated with creditor demands for information.  Following FPFI’s bankruptcy, virtually all of FPFI’s remaining accounting personnel were laid off.  The Company, with its very limited personnel, attempted to maintain control over its records, but most of those records remained fragmented or under the control of the FPFI bankruptcy estate.  

 

In January 2004, the Company attempted to assemble the fragmented records in an effort to develop a workable set of books and records.  The individuals involved with this endeavor, while not employed by the Company, volunteered to help and worked diligently to assemble the fragmented records.  By the beginning of 2005,  the Company had finally gathered a workable set of books and records necessary to address the deficiencies in the Company’s financial reporting, including its period reports under the Exchange Act.  Gathering the necessary information to complete audited financial statements has taken more time than anticipated or would be required under other circumstances.  The Company cannot currently estimate when it will complete the restatement or the delinquent reports for past time periods.

 

 

17

 

 

 

| **PART II** | **Other Information** |
|-------------|-----------------------|

 

| **Item 1.** | **Legal Proceedings.** |
|-------------|------------------------|

 

| *Special Meeting Litigation* |
|------------------------------|

 

In February 2006, the Company filed an answer and counterclaim in the lawsuit 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”).  A group of Company shareholders commenced the Election Suit in March 2005 to compel a shareholders’ meeting and election of directors.  Although the Company had 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.”

 

| In the counterclaim, the Company alleged, among other things, that: |
|---------------------------------------------------------------------|

 

| **•** | the purported “committees” used their improper influence and control over George 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 breached their duties to the Company and caused Mr. Davis to breach his duties to the Company; |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the “committees” exerted this improper influence and control over George 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 breached their duties to the Company and caused Mr. Davis to breach his duties to the Company; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the “committees” exerted this improper influence and control over Mr. Davis in Mr. 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 breached their duties to the Company and caused Mr. 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; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

18

 

 

 

 

| **•** | 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  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 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. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In April 2006, the Company and the petitioners in the Election Suit entered into a settlement agreement to resolve the disputes in the Election Suit.  Pursuant to the settlement agreement:

 

| **•** | the Company agreed to pay to the petitioners an aggregate amount of up to $300,000 for the expenses they incurred arising from the Election Suit; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | upon the Company’s payment of the petitioners’ expenses, the parties would cause all claims and counterclaims in the Election Suit to be dismissed with prejudice and would exchange mutual releases; |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the petitioners agreed not to nominate an opposing slate of directors for election at the Company’s 2006 Special Meeting of Shareholders (the “Special Meeting”) or to take any action to delay, interfere with or contest the Special Meeting; |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | the Company has agreed to instruct the Grantor Trust to make distributions to the holders of the Company’s common stock on a pro rata basis as of a record date to be set by the board of directors of the Company in aggregate amounts equal to fifty percent of the funds received by the Grantor Trust from the registry of the district court and from the Creditor Trust.  The Company will announce record dates for these distributions at the applicable times; |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | prior to the initial distribution from the Grantor Trust, the Company has agreed not to issue any shares of its common stock, except pursuant to agreements in effect on the date of the settlement agreement; and |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | for a year following the initial distribution from the Grantor Trust, the Company agreed not to issue any shares of its common stock pursuant to a transaction that would result in the issuance of shares of common stock in an amount equal to 30% of the then outstanding shares, unless the Company obtains a fairness opinion with respect to such transaction. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| The court dismissed the Election Suit on April 7, 2006. |
|---------------------------------------------------------|

 

19

 

 

 

 

| *Grantor Trust Litigation* |
|----------------------------|

 

On February 17, 2006, the court in the lawsuit styled *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 granted the Company’s motion for partial summary judgment against George Davis.

 

Until November 2004, George Davis was the initial trustee of the Grantor Trust.  The Company appointed two additional trustees to the Grantor Trust in November 2004 but did not remove Mr. Davis as trustee at that time.  In June 2005, the Company, as settlor of the Grantor Trust, terminated Mr. Davis as trustee pursuant to the terms of the trust agreement governing the Grantor Trust and appointed a successor trustee.

 

The lawsuit is based on a dispute regarding whether the Company had the ability to appoint additional trustees to the Grantor Trust.  In granting the partial summary judgment, the court determined that:

 

| **•** | the Company is the sole beneficiary of the Grantor 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, George Davis is not the sole trustee of the Grantor Trust; and |
|------------|---------------------------------------------------------------------------------------------------------------------|

 

| **•** | a majority of the appointed trustees are authorized to direct distributions from the Creditor Trust to the Grantor Trust. |
|------------|---------------------------------------------------------------------------------------------------------------------------|

 

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.  The litigation has prevented the Grantor Trust from conducting its business, such as making provisions for satisfaction of creditor claims and implementing existing arrangements with creditors.  However, the Company believes that the court’s ruling will finally allow the trustees of the Grantor Trust to conduct the business of the Grantor Trust.

 

| **Item 2.** | **Unregistered Sales of Equity Securities and Use of Proceeds** |
|-------------|-----------------------------------------------------------------|

 

None

 

| **Item 3.** | **Defaults Upon Senior Securities** |
|-------------|-------------------------------------|

 

None

 

20

 

 

 

 

| **Item 4.** | **Submission of Matters to a Vote of Security Holders** |
|-------------|---------------------------------------------------------|

 

On May 9, 2006, the Company held its 2006 Special Meeting of Shareholders (the “Special Meeting”) on May 5, 2006.  At the Special Meeting, Robert P. Freeman, John R. Fitzgerald, Daniel T. Phillips and David B. Ward were elected as directors of the Company.  According to the certified report of the independent inspector of election, at the opening of the Special Meeting, there were 35,804,641 shares represented at the meeting, in person or by proxy.  The number of For and Withheld votes with respect to the election of the directors was as follows:

 

|               | **For****** | **Withheld****** |
|--------------------|-------------|------------------|
| Robert P. Freeman  | 30,671,616  | 5,133,025        |
| John R. Fitzgerald | 30,671,616  | 5,133,025        |
| Daniel T. Phillips | 30,472,516  | 5,332,125        |
| David B. Ward      | 30,671,316  | 5,133,325        |

 

| **Item 5.** | **Other Information** |
|-------------|-----------------------|

 

On February 28, 2006, the Company entered into a factoring agreement with Signs For Life LLC (“Signs”) which provides for the Company to purchase accounts arising out sales of merchandise or services rendered by Signs that the Company approves for purchase.  The Company will receive a factoring commission of 2% and discount over the purchase price of the accounts of 3.5% per annum over the prime rate quoted in the Wall Street Journal, plus additional fees based on the difference between the amounts outstanding under the accounts and the amounts in a reserve account established under the agreement.  The Company has made payments of $250,000 under to purchase accounts under this arrangements as of March 31, 2006.

 

Versatile Financial Technology LLC (“Versatile”) has also agreed to grant to the Company an option to acquire its 51% interest in Signs and a right of first refusal to acquire its interest in Signs.  The Company and Versatile have not finalized the terms of the option or right of first refusal.

 

21

 

 

 

 

| **Item 6.** | **Exhibits** |
|-------------|--------------|

 

| Number | Description |
|--------|-------------|

 

| 10.1 | Settlement Agreement, dated as of April 6, 2006, by and among FirstPlus Financial Group, Inc. and Danford L. Martin, individually, on behalf of the FPFX Shareholder Value Committee and the FPFX Steering Committee and as attorney-in-fact for all of the Petitioners in the Election Suit (as defined therein) |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 10.2 | Factoring Agreement and Security Agreement, dated February 28, 2006, between Signs For Life, LLC and FIRSTPLUS Financial Group, Inc. |
|------|--------------------------------------------------------------------------------------------------------------------------------------|

 

| 31.1 | Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|------|-----------------------------------------------------------------------------------------------------------|

 

| 31.2 | Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|------|------------------------------------------------------------------------------------------------------------|

 

| 32.1 | Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|------|-----------------------------------------------------------------------------------------------------------------------|

 

| 32.2 | Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|------|------------------------------------------------------------------------------------------------------------------------|

 

 

 

22

 

 

 

**SIGNATURES**

 

In accordance with the requirements of the Securities and Exchange Act of 1934, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

FIRSTPLUS Financial Group, Inc.

 

| Dated: May 22, 2006 | /s/ Jack (J.D.) Draper |
|---------------------|------------------------|

President and Chief Executive Officer 

(Principal Executive and Accounting Officer)

 

 

23

 

 

 

**EXHIBIT INDEX**

 

| Number | Description |
|--------|-------------|

 

| 10.1 | Settlement Agreement, dated as of April 6, 2006, by and among FirstPlus Financial Group, Inc. and Danford L. Martin, individually, on behalf of the FPFX Shareholder Value Committee and the FPFX Steering Committee and as attorney-in-fact for all of the Petitioners in the Election Suit (as defined therein) |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 10.2 | Factoring Agreement and Security Agreement, dated February 28, 2006, between Signs For Life, LLC and FIRSTPLUS Financial Group, Inc. |
|------|--------------------------------------------------------------------------------------------------------------------------------------|

 

| 31.1 | Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|------|-----------------------------------------------------------------------------------------------------------|

 

| 31.2 | Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|------|------------------------------------------------------------------------------------------------------------|

 

| 32.1 | Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|------|-----------------------------------------------------------------------------------------------------------------------|

 

| 32.2 | Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|------|------------------------------------------------------------------------------------------------------------------------|

 

 

 

24