Freedom Financial Group facing asset sale, dissolution

After nearly seven years of pulling itself up by its bootstraps, Springfield-based Freedom Financial Group Inc. is set to liquidate its assets in the face of a financing famine.

The consumer finance company is set to sell its $19 million subprime auto loan portfolio to Houston-based First Investors Financial Services Inc. (OTC: FIFS), according to a report filed Oct. 5 with the Securities and Exchange Commission.

The move, if approved by stockholders, would likely spell the company's demise.

Publicly traded Freedom Financial (OTC: FFGR) learned earlier this year that the New York-based lender that surfaced as the cash-strapped company's savior in early 2008 had suddenly become its biggest threat. In the second quarter, Goldman Sachs Group Inc. affiliate ReMark Capital Group LLC notified company officials that Freedom Financial's $15 million revolving line of credit would not be renewed or extended in January.

Freedom Financial depends on the credit line to acquire auto loans from independent car dealers in Missouri, Illinois, Indiana, Kansas, Oklahoma and Tennessee that cater to customers with low credit scores. Freedom Financial, in turn, stopped purchasing auto receivable notes in September and has reduced its staff by half to 11 employees.

Freedom Financial CEO Jerry Fenster-maker said exhaustive attempts to replace the ReMark credit line with financing through other lenders have been unsuccessful due largely to the rigid lending climate. Provided the sale goes through as planned, the company would likely be dissolved and its remaining assets distributed to stockholders, Fenstermaker said.

"I think there's going to be a lot of people disappointed," he said. "Here's a company that's making money, has very low leverage, has positive net worth and can't borrow a dollar. We carry a million-dollar balance in a bank account, and the very same bank won't lend you $500,000. The system is broke completely. ... There's zero flexibility out there."

Freedom Financial had its first profitable year in 2008, posting net income of $303,000. The year's gains were attributed to the company's liquidation of its Canadian subsidiary and an 87 percent year-over-year increase in installment contracts. The company's shares closed Oct. 7 at 12 cents each, compared to a 52-week range of 7 cents to 15 cents.

Terms of the purchase agreement will be made available to stockholders in a proxy statement that the company had planned to file Oct. 9 with the SEC, Fenstermaker said. Proceeds from the sale - expected to close Dec. 15 - would pay off the credit line, which had a $12 million principal balance as of June 30, according to an SEC 8-K form filed Oct. 5.

St. Louis investor Larry Callahan, who owns half-a-million shares in Freedom Financial, said he learned of the company while working for a securities firm looking to build markets in over-the-counter pink sheet stocks.

"They were trading well below their stated book value per share ... and I thought they could reach some level of profitability if they could get above $25 (million) or $30 million in loans outstanding," Callahan said of Freedom Financial. "They really hadn't quite reached a critical mass, but they were sure headed in that direction."

Freedom Financial was created in January 2003 through the bankruptcy reorganization plan of its troubled predecessor, Stevens Financial Group, known in local circles for bilking some 2,800 investors out of $54 million. Most of Freedom Financial's stockholders are holdovers from Stevens Financial Group, whose owner Clarence Stevens was convicted of securities fraud and related offenses and sentenced to five years in prison. Stevens purchased the company from Damian Sinclair, who also faced similar charges but died in December 2003 before he was able to stand trial.

Retiree Troy Compton, who has served on Freedom Financial's board of directors since its inception, was hoping to recoup a "substantial" investment he lost when Sinclair went belly up. But the prognosis isn't good for Compton or other similarly situated investors; Fenstermaker predicted stockholders would receive between 12 cents and 20 cents per share through the asset sale.

"We really don't have much other choice," Compton said. "That's the choice that the economic situation has given us. There is always a remote possibility of a white knight riding in with lots of money to rescue the company, but white knights are very few and far between."

Callahan, who purchased his shares at an average of about 10 cents, actually stands to make a little money if Freedom Financial's stockholders receive a payout in the range stated by Fenstermaker. He's hoping for about 15 cents per share.

Freedom Financial's suitor, First Investors Financial Services, originates auto loans with hundreds of franchised dealers in 28 states. For the quarter ending July 31, First Investors reported net income of $522,649, or 11 cents per share, compared to $1.06 million, or 24 cents per share for the quarter ended July 31, 2008.

"As of July 31, 2009, we had approximately $74 million in available borrowing capacity, which continues to grow, compared to approximately $42 million as of July 31, 2008," President and CEO Tommy Moore Jr. said in a news release. "After factoring in our portfolio amortization, we have more than enough credit capacity to originate new loans in the current economic environment."

First Investors shares closed Oct. 7 at $2.55 apiece, compared to a 52-week range of $1.75 to $5.

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