AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997
REGISTRATION NO. 333-37891
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
J.G. WENTWORTH & COMPANY, INC.
(Exact name of registrant as specified in its charter)
---------------------------
DELAWARE 6162 23-2927741
---------------- ------------------- -------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
THE GRAHAM BUILDING
15TH AND RANSTEAD STREETS
10TH FLOOR
PHILADELPHIA, PA 19102
(215) 567-7660
-----------------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------------
JAMES D. DELANEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
J.G. WENTWORTH & COMPANY, INC.
THE GRAHAM BUILDING
15TH AND RANSTEAD STREETS
10TH FLOOR
PHILADELPHIA, PA 19102
(215) 567-7660
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
With copies to:
JASON M. SHARGEL, ESQ. JAMES R. TANENBAUM, ESQ.
RICHARD P. PASQUIER, ESQ. STROOCK & STROOCK & LAVAN LLP
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP 180 MAIDEN LANE
TWELFTH FLOOR PACKARD BUILDING NEW YORK, NY 10038-4982
111 SOUTH 15TH STREET (212) 806-5400
PHILADELPHIA, PA 19102-2678
(215) 977-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION -- DATED DECEMBER 11, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
5,286,738 Shares
J.G. WENTWORTH & COMPANY, INC.
Common Stock
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Of the shares of Common Stock, par value $.01 per share (the "Common Stock"),
offered hereby (the "Offering"), 4,000,000 shares are being sold by J.G.
Wentworth & Company, Inc. (the "Company") and 1,286,738 shares are being sold by
certain selling stockholders (the "Selling Stockholders"). The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
See "Principal and Selling Stockholders."
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
per share will be between $10.00 and $12.00. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Application has been made to have the Common Stock approved for inclusion
in The Nasdaq Stock Market's National Market (the "Nasdaq National Market")
under the symbol "JGWC."
SEE "RISK FACTORS" ON PAGES 8 TO 19 FOR A DISCUSSION OF CERTAIN MATERIAL RISKS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
| | Underwriting | | Proceeds to
| Price to | Discounts and | Proceeds to | Selling
| Public | Commissions(1) | Company(2) | Stockholders
Per Share.... | $ | $ | $ | $
Total(3)..... | $ | $ | $ | $
================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $1,000,000.
(3) The Selling Stockholders have granted the Underwriters a 30-day
over-allotment option to purchase up to 793,011 additional shares of Common
Stock on the same terms and conditions as set forth above. If all such
additional shares are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , the total Proceeds to Company will be $ and the
total Proceeds to Selling Stockholders will be $ . See
"Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
CIBC OPPENHEIMER
FURMAN SELZ
, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Combined Financial
Statements of the J.G. Wentworth Affiliated Companies and the Notes thereto
appearing elsewhere in this Prospectus. Except as otherwise indicated, all
information in this Prospectus gives effect to the following transactions which
will occur on or before completion of the Offering (collectively, the
"Reorganization") pursuant to which: (i) the limited partners of J.G. Wentworth
MFC Associates, L.P., a Delaware limited partnership ("MFC"), and J.G. Wentworth
S.S.C. Limited Partnership, a Delaware limited partnership ("SSC" and,
collectively with MFC, the "Partnerships"), will contribute all of their limited
partnership interests in the Partnerships to the Company; (ii) the shareholders
of J.G. Wentworth Funding Corp., a Pennsylvania corporation ("MFC Funding"), and
J.G. Wentworth Structured Settlement Funding Corporation, a Delaware corporation
("SSC Funding"), the respective general partners of the Partnerships
(collectively, the "General Partners"), will contribute all of the capital stock
of the General Partners to the Company; and (iii) the shareholders of J.G.
Wentworth Management Company, Inc., a Pennsylvania corporation ("JGW"), and SSC
Management Company, Inc., a Pennsylvania corporation ("SSC Management" and,
together with JGW, the Partnerships and the General Partners and their
respective subsidiaries, the "J.G. Wentworth Affiliated Companies"), will
contribute all of the capital stock of JGW to the Company; each in exchange for
the issuance by the Company of shares of Common Stock. See "The Reorganization
and Change in Tax Status" and the Combined Financial Statements of the J.G.
Wentworth Affiliated Companies and the Notes thereto. Unless the context
otherwise requires, (a) all references herein to the "Company" refer to the J.G.
Wentworth Affiliated Companies on a combined basis, (b) all references herein to
the Company's activities, financial condition or results of operations refer to
those of the J.G. Wentworth Affiliated Companies, taken as a whole and (c) all
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised.
THE COMPANY
The Company is a specialty finance company that originates, securitizes and
services rights to receive payments from structured settlements and other
deferred payment obligations. Deferred payment obligations are contractual
arrangements under which one party has agreed to make fixed, scheduled payments
to another party over time to satisfy an obligation that would otherwise be paid
in an up-front, lump sum. The Company specializes in transactions involving two
types of deferred payment obligations: (i) structured settlements arising from
personal injury litigation as to which highly-rated insurance companies are the
obligor, and, to a lesser extent, (ii) other deferred payment obligations, such
as claims arising from personal injury litigation and state-operated lotteries,
as to which governmental or quasi-governmental entities are the obligor.
According to Structured Settlements and Periodic Payment Judgments by
Daniel Hindert et al. (1986, 1997), in excess of $40 billion of annuity premiums
paid to third parties to fund structured settlements were generated from 1980 to
1995 and approximately $4 billion in new structured settlements are generated
each year in the United States. Structured settlements continue to be an
attractive option for claimants and insurance companies because structured
settlements: (i) offer favorable tax treatment; (ii) permit payment flexibility
and incorporation of investment management features; and (iii) lower the cost of
compensating victims and thereby help foster timely settlement of litigation.
From the claimants' point of view, however, structured settlements have a
significant weakness, inflexibility. When claimants' financial needs change, the
fixed payment schedule of a structured settlement may no longer satisfy these
needs. The Company's funding programs offer those claimants the ability to
convert their rights to future payments into cash that they can use for such
purposes as paying medical or tuition expenses, purchasing or improving a home,
starting a business or repaying debt.
The Company has achieved significant growth in the number and maturity
value of receivables originated since commencing operations. As used in this
Prospectus, "origination" of structured
3
<PAGE>
settlement receivables refers to the Company's purchase of the rights to receive
payments from a claimant, not the origination of the underlying deferred payment
obligation itself. From inception to September 30, 1997, the Company has
originated 15,698 deferred payment obligation receivables with an aggregate
maturity value of $437.3 million. Maturity value equals the sum of all future
payments to be received under a deferred payment obligation. The Company has
generally purchased receivables at a significant discount from maturity value.
The difference between the amount paid by the Company and the maturity value of
the receivables is accrued as income over the life of the receivable. The
annualized weighted average yield of the Company's portfolio was 21.4% for the
nine months ended September 30, 1997. The Company's revenues have increased
significantly as the Company's originations volume and portfolio have grown and
the Company has employed securitizations to fund its operations. Revenues
increased from $249,000 in 1992 to $11.8 million in 1996 and to $31.7 million in
the nine months ended September 30, 1997.
The Company completed its first securitization in June 1997, a $70.8
million transaction which it believes was the first investment-grade rated
securitization of structured settlement receivables. The Company sold, through a
special purpose entity, $59.5 million of senior pass-through certificates rated
"A2" by Moody's Investors Service, Inc. ("Moody's") and "A" by Duff & Phelps
Credit Rating Co. ("Duff & Phelps"). The Company retained $11.3 million in face
value of unrated subordinated certificates and recorded a Gain on Sale (as
defined herein) of $11.3 million for the six months ended June 30, 1997. The
Company completed a securitization transaction in which it sold $31.0 million of
receivables in September 1997 and $41.0 million of receivables in October 1997,
and recorded a Gain on Sale of $6.8 million and $8.0 million, respectively.
Structured settlement receivables and other deferred payment obligations differ
from other regularly securitized financial assets, such as consumer credit cards
and mortgage loans, in that (i) prepayment risk is minimal because the timing of
scheduled payments is fixed and (ii) credit risks are low because obligors are
typically insurance companies that have received a credit rating of "A" or
better from A.M. Best or are governmental entities. From inception through
December 31, 1996, the Company had not charged-off any receivables. For the nine
months ended September 30, 1997, the Company recorded a net charge-off of 0.8%
of the Company's average owned portfolio. Although the Company believes that it
acquires valid ownership of the claimants' rights to receive payments under
their settlement contracts, structured settlement contracts themselves cannot be
assigned. Accordingly, issues surrounding the assignability of structured
settlements could pose material risks to the Company's business. See "Risk
Factors -- Risks Associated with Structured Settlements."
The Company generally does not utilize brokers to originate structured
settlements and other deferred payment receivables and its policies prohibit the
"cold calling" of prospective customers. Instead, the Company utilizes a
nationwide television advertising campaign to identify hard-to-find claimants
who want to sell their payment rights to the Company. Using a 21,520-square-foot
call center, the Company's originations staff responds to claimant inquiries,
attempts to quantify an individual claimant's financial needs and endeavors to
structure the funding transaction to meet those needs. The Company's policies
prohibit the origination of receivables from minors and incompetent persons.
The Company's growth strategy is to increase its originations of deferred
payment receivables and profitability by further enhancing its position as the
leading originator of the rights to receive payments from structured settlements
and other deferred payment obligations. To achieve its goals for profitable
growth, the Company intends to continue to: (i) increase retail originations
through its nationwide targeted television advertising campaign; (ii) provide
quality customer service by continuing to qualify and structure transactions
based on the needs of the claimant through the Company's trained marketing,
underwriting and servicing personnel; (iii) maintain stringent underwriting
standards to minimize the risks of claimant fraud; (iv) market to referral
sources such as attorneys and bankruptcy and estate trustees; (v) obtain
institutional financing and complete regular securitizations of its receivables;
(vi) maintain its state-of-the-art information management systems; (vii) apply
its originations strategy to the market for seller-financed mortgages; and
(viii) expand into new deferred payment market niches through internal growth
and possible acquisitions.
4
<PAGE>
J.G. Wentworth & Company, Inc. was formed in October 1997 in connection
with the Reorganization as a successor to the businesses of the J.G. Wentworth
Affiliated Companies. See "The Reorganization and Change in Tax Status." JGW was
formed by James D. Delaney and Gary Veloric in 1991 as a merchant bank
specializing in transactions in the healthcare industry. In 1992, the Company
entered the business of purchasing the deferred settlement obligations of the
New Jersey Full Insurance Joint Underwriting Association ("JUA"), and its
successor, the New Jersey Market Transition Facility ("MTF"). As the Company's
success in the JUA/MTF market established its reputation as a creative funding
source, it began to search for other opportunities to purchase income streams
that, while secure and predictable, did not meet the requirements for more
traditional means of financing. After evaluating a number of market
possibilities, the Company decided in 1995 to enter the secondary market for
structured settlements. By using the capabilities and systems it developed for
the JUA/MTF business, the Company emerged as a market leader in the business of
purchasing structured settlements. In May 1995, ING (U.S.) Capital Corporation
(together with its affiliates, "ING") extended a credit facility to the Company
to fund its originations of other deferred payment obligations. In August 1995,
the Company and ING expanded their relationship to include funding the
acquisition of structured settlement receivables, at which time ING became a
limited partner in SSC. In October 1997, the Company hired six individuals with
experience in brokering seller-financed mortgages and established a subsidiary
through which it initially will purchase seller-financed mortgages.
The Company's principal executive office is located at The Graham Building,
15th and Ranstead Streets, 10th Floor, Philadelphia, PA 19102, and its telephone
number is (215) 567-7660.
THE OFFERING
Common Stock Offered by the
Company.......................... 4,000,000 shares
Common Stock Offered by the Selling
Stockholders..................... 1,286,738 shares (1)
Common Stock to be Outstanding
after the Offering............... 16,466,667 shares (2)
Use of Proceeds.................... To pay a cash tax distribution to certain of
the Company's stockholders, to pay a
termination fee to ING and to pay down
outstanding amounts on the Credit Facilities
(as defined herein). See "The Reorganization
and Change in Tax Status" and "Use of
Proceeds."
Proposed Nasdaq National Market
symbol........................... JGWC
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(1) Assumes that the Underwriters' over-allotment option to purchase 793,011
shares from the Selling Stockholders will not be exercised.
(2) Does not include 650,000 shares issuable upon exercise of stock options to
be granted to employees and directors upon the completion of the Offering
with an exercise price equal to the initial public offering price.
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events which could adversely affect the Company's business. See "Risk Factors."
5
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary combined financial data should be read in conjunction
with the Combined Financial Statements of the J.G. Wentworth Affiliated
Companies and the Notes thereto, "Selected Combined Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The following tables also
include certain unaudited pro forma and pro forma, as adjusted, combined
statement of operations data for the year ended December 31, 1996 and the nine
months ended September 30, 1997. The pro forma and pro forma, as adjusted,
combined statement of operations data give effect to the Reorganization and
certain other adjustments as if they had occurred at the beginning of the
periods presented. The unaudited operating data has been derived from management
records for all periods presented. The pro forma, as adjusted, combined balance
sheet data gives effect to the Reorganization, certain other adjustments and the
Offering. The combined statement of operations data for the nine months ended
September 30, 1997 and the combined balance sheet data at September 30, 1997
have been audited.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ------ ------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Interest income............. $ -- $ 389 $2,755 $8,560 $ 10,426 $ 6,926 $ 12,621
Gain on sale of
receivables............... -- -- -- 268 576 576 18,246
Other income................ 249 1,008 417 894 785 461 870
---- ------ ------ ------ ----------- ------- -----------
Total revenues............ 249 1,397 3,172 9,722 11,787 7,963 31,737
Expenses other than
interest.................. 256 1,159 1,707 3,083 9,482 6,551 15,630
---- ------ ------ ------ ----------- ------- -----------
Income (loss) before interest
expense..................... (7) 238 1,465 6,639 2,305 1,412 16,107
Interest expense............ -- 163 1,541 4,995 6,380 4,486 6,620
---- ------ ------ ------ ----------- ------- -----------
Income (loss) before
extraordinary loss.......... (7) 75 (76) 1,644 (4,075) (3,074) 9,487
Extraordinary (loss).......... -- -- -- (876) -- -- --
---- ------ ------ ------ ----------- ------- -----------
Net income (loss)............. $ (7) $ 75 $ (76) $ 768 $ (4,075) $(3,074) $ 9,487
==== ====== ====== ====== =========== ======= ===========
UNAUDITED PRO FORMA
INFORMATION:
Pro forma benefit (provision)
for income taxes (1)........ 1,508 (3,510)
----------- -----------
Pro forma net income (loss)
(1)......................... $ (2,567) $ 5,977
=========== ===========
PRO FORMA PER SHARE DATA:
Pro forma net income (loss)
per share (1)(2)............ $ (0.20) $ 0.48
=========== ===========
Pro forma number of shares
outstanding (1)(2).......... 12,579,122 12,579,122
=========== ===========
UNAUDITED PRO FORMA, AS ADJUSTED, INFORMATION:
Pro forma, as adjusted, income
(loss) before benefit
(provision) for income taxes
(3)......................... $ (2,079) $ 10,694
Pro forma, as adjusted,
benefit (provision) for
income taxes (1)(3)......... 726 (3,989)
----------- -----------
Pro forma, as adjusted, net
income (loss)............... $ (1,353) $ 6,705
=========== ===========
PRO FORMA, AS ADJUSTED, PER
SHARE DATA:
Pro forma, as adjusted, net
income (loss)
per share (3)(4)............ $ (0.08) $ 0.41
=========== ===========
Pro forma, as adjusted, number
of shares outstanding
(3)(4)...................... 16,466,667 16,466,667
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED (5)
------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Finance receivables, net...... $42,668 $ 42,668
Finance receivables held for
sale........................ 28,714 28,714
Retained interests............ 7,290 7,290
Servicing asset............... 1,328 1,328
Goodwill...................... -- 2,933
Total assets.................. 85,033 88,484
Notes payable, banks.......... 71,866 34,552
Capital lease obligations..... 1,622 1,622
Deferred tax liability........ -- 8,100
Total liabilities............. 84,935 57,721
Total equity.................. 98 30,763
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED OPERATING DATA:
PORTFOLIO DATA:
Maturity value of portfolio (6):
Owned................................. $ 14 $3,839 $38,799 $74,820 $166,061 $135,383 $142,657
Serviced.............................. -- -- -- -- -- -- 150,236
------ ------ ------- ------- -------- -------- --------
Total................................. $ 14 $3,839 $38,799 $74,820 $166,061 $135,383 $292,893
====== ====== ======= ======= ======== ======== ========
Carrying value of portfolio:
Owned................................. $ 12 $3,221 $33,778 $60,104 $ 90,930 $ 81,244 $ 74,125
Serviced.............................. -- -- -- -- -- -- 99,409
------ ------ ------- ------- -------- -------- --------
Total................................. $ 12 $3,221 $33,778 $60,104 $ 90,930 $ 81,244 $173,534
====== ====== ======= ======= ======== ======== ========
Maturity value of portfolio (6):
Structured settlements................ $ -- $ -- $ -- $18,239 $135,392 $ 95,279 $278,835
Other deferred payment obligations.... 14 3,839 38,799 56,581 30,669 40,104 14,058
------ ------ ------- ------- -------- -------- --------
Total................................. $ 14 $3,839 $38,799 $74,820 $166,061 $135,383 $292,893
====== ====== ======= ======= ======== ======== ========
Carrying value of portfolio:
Structured settlements................ -- -- -- 7,774 61,433 40,509 160,209
Other deferred payment obligations.... 12 3,221 33,778 52,330 29,497 40,735 13,325
------ ------ ------- ------- -------- -------- --------
Total................................. $ 12 $3,221 $33,778 $60,104 $ 90,930 $ 81,244 $173,534
====== ====== ======= ======= ======== ======== ========
Weighted average portfolio yield (6):
Structured settlements................ --% --% --% 20.5% 22.3% 21.4% 22.1%
Other deferred payment obligations.... 29.7 26.2 18.0 14.1 13.2 12.9 13.3
------ ------ ------- ------- -------- -------- --------
Blended portfolio yield............... 29.7% 26.2% 18.0% 14.7% 20.2% 18.9% 21.4%
====== ====== ======= ======= ======== ======== ========
Allowance for credit losses as a
percentage of owned portfolio (8)..... -- -- -- -- 0.5% 0.4% 3.9%
Net charge-offs as a percentage of
average owned portfolio (9)........... -- -- -- -- -- -- 1.0%
STRUCTURED SETTLEMENTS DATA:
Number of receivables originated in
period.............................. -- -- -- 136 2,197 1,362 3,759
Maturity value of receivables
originated in period................ $ -- $ -- $ -- $13,674 $125,697 $ 84,676 $163,639
Carrying value of receivables
originated in period................ $ -- $ -- $ -- $ 4,916 $ 56,004 $ 36,566 $ 74,471
Weighted average yield of receivables
originated in period................ -- -- -- 20.5% 22.3% 21.4% 22.1%
Weighted average maturity of
receivables originated in period (in
years).............................. -- -- -- 9.1 6.5 7.4 6.3
OTHER DEFERRED PAYMENT OBLIGATIONS DATA:
Number of receivables originated in
period.............................. 1 475 2,637 4,610 1,409 1,211 430
Maturity value of receivables
originated in period................ $ 14 $1,871 $38,745 $62,851 $ 19,738 $ 17,601 $ 6,985
Carrying value of receivables
originated in period................ $ 12 $1,427 $31,854 $53,213 $ 17,052 $ 15,015 $ 5,952
Weighted average yield of receivables
originated in period................ 29.7% 26.2% 18.0% 14.1% 13.2% 12.9% 13.3%
Weighted average maturity of
receivables originated in period
(in years).......................... 0.5 1.1 1.2 1.3 1.2 1.2 1.2
</TABLE>
- ------------------
(1) Prior to the Reorganization, JGW and the General Partners were treated as S
corporations under Subchapter S of the Internal Revenue Code of 1986 (the
"Code") and applicable state law. The pro forma and pro forma, as adjusted,
presentations reflect the provision for income taxes as if JGW and the
General Partners had always been C corporations and the activities of the
Partnerships had always been taxed as if owned by the Company at an assumed
effective tax rate of 37%.
(2) Pro forma net income (loss) per share is computed based on 12,466,667 shares
of Common Stock outstanding before the Offering and gives effect to the
Reorganization and reflects the 112,455 shares of Common Stock which would
need to be issued to generate the cash necessary to fund the Tax
Distribution (as defined herein) at an assumed initial public offering price
of $11.00 per share (the mid-point of the price range set forth on the cover
page of this Prospectus). See "The Reorganization and Change in Tax Status."
(3) Pro forma, as adjusted, income (loss) before benefit (provision) for income
taxes gives effect to: (i) the decrease in interest expense of $3.5 million
for the year ended December 31, 1996 and $2.7 million for the nine months
ended September 30, 1997 as if the repayment of Notes payable, banks from
the proceeds of the Offering had occurred at the beginning of the respective
periods; (ii) the payment of $1.4 million to ING in consideration of ING's
agreement to release the Company from a commitment to use ING as placement
agent for future securitizations; and (iii) the effect of the amortization
of Goodwill at the beginning of the respective periods. See "Certain
Relationships and Related Party Transactions."
(4) Pro forma, as adjusted, net income (loss) per share is computed based on
16,466,667 shares of Common Stock outstanding after giving effect to the
Reorganization and the Offering.
(5) Adjusted to reflect (i) the conversion of JGW and the General Partners to C
corporations, (ii) the recording of a deferred tax liability of $8.1
million, (iii) the distribution to Existing Stockholders of $1.2 million,
(iv) the accrual of a $2.0 million distribution by SSC to its partners which
was declared on October 13, 1997 and paid on October 31, 1997, (v) the
recording of Goodwill in the amount of $2.9 million, (vi) the payment of
$1.4 million to ING in lieu of future placement agency fees and (vii) the
sale of 4,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share (the mid-point of the
price range set forth on the cover page of this Prospectus) after deducting
underwriting discounts and commissions and estimated offering expenses
payable by the Company. See "The Reorganization and Change in Tax Status."
(6) Maturity value equals the sum of future payments to be received by the
Company.
(7) Net of capitalized origination costs.
(8) Allowance for credit losses divided by the carrying value of the Company's
owned portfolio.
(9) Net charge-offs, annualized, divided by the average carrying value of the
Company's owned portfolio.
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RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, and under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus.
CAPITAL NEEDS AND ACCESS TO CAPITAL MARKETS
HISTORY OF NEGATIVE CASH FLOW. The Company has operated, and expects to
continue to operate, on a negative operating cash flow basis, and the level of
negative operating cash flow is expected to increase as the volume of the
Company's originations of deferred payment obligations and other receivables
increases. The Company incurs significant expenses in connection with its
originations and does not receive cash from receivables until scheduled payments
are received or its receivables are sold. The Company's primary operating cash
requirements include the funding of (i) originations of deferred payment
obligations and other receivables, (ii) reserve accounts, over-
collateralization requirements, fees and expenses incurred in connection with
its securitizations, (iii) interest expense due under various financing
arrangements, (iv) television, radio and direct mail advertising and other
marketing expenses, (v) administrative and other operating expenses and (vi)
working capital requirements. The Company has historically funded its operations
principally through borrowings from financial institutions, payments on
receivables and securitizations. For the nine months ended September 30, 1997,
the Company used $13.3 million more than it generated through its operations.
DEPENDENCE ON CREDIT FACILITIES. The Company depends on credit
facilities with financial institutions to finance the purchase of deferred
payment obligations and other receivables pending securitization. The Company
currently has a $105.0 million Revolving Credit Facility with ING and a
participating bank (the "SSC Facility") and a $20.0 million Credit Facility with
ING and a participating bank (the "MFC Facility" and together with the SSC
Facility, the "Credit Facilities") of which $49.8 million and $10.0 million were
outstanding at November 30, 1997, respectively. The SSC Facility expires on
August 25, 1998 and the MFC Facility expires on May 20, 1998. To finance its
growth, the Company intends to seek additional financing, whether by increasing
the amounts available pursuant to the Credit Facilities or otherwise. There can
be no assurance, however, that such financing will be available to the Company
on favorable terms or at all. The inability of the Company to arrange new
financing capacity or to extend the term of the Credit Facilities when they
expire would have a material adverse effect on the Company's financial condition
and results of operations. Continued availability of the Credit Facilities is
subject to, among other things, continued compliance by the Company with various
representations and covenants included within the applicable loan documents and
the absence of an occurrence of any of the events of default set forth in the
loan documents. The SSC Facility includes as an event of default failure of J.G.
Wentworth Receivables II LLC ("Receivables II") (a special purpose limited
liability company wholly owned by SSC) to meet various financial and other
covenants. The MFC Facility provides for events of default upon the failure of
MFC to abide by financial covenants including maintaining a minimum net worth of
its receivables and upon any change in the law that may materially alter the
schedule of payments due on the deferred payment obligations owned by MFC. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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DEPENDENCE ON SECURITIZATIONS. The Company intends to rely significantly
upon securitizations to generate cash proceeds for repayment of the Credit
Facilities and to finance originations of deferred payment obligations and other
receivables. In addition, Gain on Sale (as defined below) of receivables
generated by these securitizations is expected to represent a significant
portion of the Company's revenues. In June 1997 and in September and October
1997, the Company completed securitizations of structured settlement
receivables. The Company has limited experience with securitizations and has not
yet completed any securitizations in the public markets. Accordingly, there can
be no assurance that the Company will be able to securitize its deferred payment
obligations and other receivables efficiently or successfully in the future.
As of October 3, 1997, the majority of the approximately $30.0 million in
structured settlement receivables on the Company's balance sheet did not meet
the eligibility criteria of the recent securitizations. These receivables
include originations from Notice States (as defined herein), from Illinois and
payment rights arising from workers' compensation awards where the assignability
or enforceability of such receivables may be subject to substantive and
procedural restrictions. The Company does not anticipate securitizing these
receivables and presently intends to hold them to maturity. See "Risk Factors --
Risks Associated with Structured Settlements -- Restrictions on Assignability of
Structured Settlement Receivables."
The securitization market for the Company's assets is relatively
undeveloped and may be more susceptible to market fluctuations or other adverse
changes than markets for other asset classes. Securitization transactions may be
affected by a number of factors, some of which are beyond the Company's control,
including, among others, conditions in the securities markets in general,
conditions in the asset-backed securitization market, conformity of asset pools
to rating agency requirements and the type of credit enhancements used. Adverse
changes in the secondary market could impair the Company's ability to originate,
purchase or sell assets on a favorable or timely basis. Failure to obtain
acceptable rating agency ratings could adversely affect the terms or timing of
future securitizations. The Company intends to continue securitizing its
receivables on a regular basis. Any delay in the sale of an asset pool beyond a
quarter end may eliminate reported Gain on Sale in that quarter and would likely
result in losses for such quarter being reported by the Company. If the Company
were unable to securitize receivables for any reason, the Company's growth could
be materially impaired and the Company's financial condition and results of
operations could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Securitizations."
NEED FOR ADDITIONAL CAPITAL. The net proceeds of the Offering, along with
borrowings under the Credit Facilities and proceeds from regular
securitizations, are expected to be sufficient to meet the Company's expected
cash requirements and fund operations based on management's strategic growth
plans for the twelve months following the Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company's ability to implement its business strategy
will depend upon its ability to effect securitizations, to continue to obtain
sufficient financing under the existing Credit Facilities or to establish
alternative long-term financing arrangements. There can be no assurance that
such financing will be available to the Company on favorable terms. If such
financing were not available or the Company's capital requirements exceed
anticipated levels, then the Company may be required to seek additional equity
financing which would dilute the interests of stockholders who purchase Common
Stock in the Offering. The Company cannot determine the amount and timing of
additional equity financing requirements because such requirements are tied to,
among other factors, the growth of the Company's originations of deferred
payment obligations. If the Company were unable to access the capital markets,
its financial condition and results of operations would be materially adversely
affected. No assurance can be given, however, that the Company will have access
to the capital markets in the future for securitizations or for equity or debt
issuances, or that financing through borrowings or other means will be available
on acceptable terms to satisfy the Company's cash requirements and implement its
business strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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INTEREST RATE FLUCTUATIONS. The Company's profitability is directly
affected by levels of and fluctuations in interest rates. Such profitability is
largely determined by the difference, or "spread," between the effective yield
earned by the Company on the deferred payment obligations and other receivables
acquired by the Company and the interest rates payable under the Credit
Facilities and for pass-through certificates or notes issued in securitizations.
Several factors affect the Company's ability to manage interest rate risk.
Deferred payment obligations and other receivables are purchased at effective
yields which are fixed, while amounts borrowed under the Credit Facilities bear
interest at variable rates that are subject to frequent adjustment to reflect
prevailing rates for short-term borrowings. As a result, increases in interest
rates after deferred payment obligations and other receivables are acquired
could have a material adverse effect on the Company's financial condition and
results of operations. Securitization of the Company's receivables fixes the
spread between the effective yields earned by the Company and the interest rates
paid to investors in securitizations (the "Excess Spread") with respect to such
receivables. This Excess Spread is a component of what will determine Gain on
Sale if the securitization meets the requirements of Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 125"), although such
Excess Spread may be less than the potential spread that existed at the time the
receivables were purchased by the Company. Furthermore, the interest rates
demanded by investors in securitizations are affected by prevailing market rates
for comparable transactions and the general interest rate environment. Thus,
increases in interest rates prior to the sale or securitization of deferred
payment obligations and other receivables may reduce Gain on Sale earned by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
VALUATION AND POTENTIAL IMPAIRMENT OF RETAINED INTEREST. As a fundamental
part of its business and financing strategy, the Company sells a significant
portion of its receivables through securitizations. In a securitization, the
Company sells receivables that it has originated to a special purpose vehicle
for a cash purchase price and may retain a subordinated interest in the
receivables securitized and an interest in any excess cash flows, after expenses
(collectively, the "Retained Interest"). The cash purchase price is raised
through an offering of pass-through certificates or notes by the special purpose
vehicle. Following securitization, purchasers of the pass-through certificates
or notes receive the principal collected and the investor pass-through interest
rate on the principal balance, while the Company receives the cash flows from
the Retained Interest and servicing fees.
A substantial portion of the Company's total revenues for the nine months
ended September 30, 1997 was recognized as gain on sale of receivables, which
represents the difference between the cash proceeds (less expenses from the sale
of pass-through certificates to investors) and the allocated basis attributable
to the pass-through certificates ("Gain on Sale"). The Company will recognize
such Gain on Sale of receivables in the quarter in which such receivables are
sold. Concurrent with recognizing such Gain on Sale, the Company records the
value of the Retained Interest and the servicing asset on its balance sheet.
To account for the securitization of its receivables, the Company has
adopted SFAS 125. Under SFAS 125, the Company determines the value of the
Retained Interest by allocating the recorded investment in the receivables based
on the relative fair values of each portion on the date of sale. To value the
Retained Interest, the cash flows are projected over the life of the residual
certificates using default and interest rate assumptions that market
participants would use for similar financial instruments, subject to credit and
interest rate risks. These cash flows are discounted using an interest rate that
market participants would use for similar financial instruments. The fair
valuation also includes considerations of type of receivable, size, date of
origination and schedule of payment. The estimate of the fair value of the
servicing asset is initially calculated from market quotes for the type of
servicing performed by the Company; or alternatively, the fair value is based on
an analysis of discounted cash flows from servicing that incorporates estimates
of (i) prevailing market servicing costs; (ii) servicing revenues and (iii)
prevailing market profit margins. Although management of the Company believes
that it has made reasonable estimates of the Retained Interest and servicing
asset likely to be realized, it should be recognized that assumptions utilized
by the Company represent estimates. Actual experience may vary from these
estimates. If the Company's assumptions used in
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deriving the value of the Retained Interest and the servicing asset differ from
the actual results, earnings could be negatively affected and the Company may be
required to write down the value of its Retained Interest and servicing asset.
Furthermore, if a liquid market for the Retained Interest exists, it is limited.
Therefore, no assurance can be given that all or any portion of the Retained
Interest could be sold at any price, including at its stated value on the
balance sheet, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Accounting Considerations."
COMPETITION. As an originator of rights to receive payments from structured
settlements and other deferred payment obligations, the Company faces
competition, primarily from other specialty finance companies. In the future,
the Company could face competition from a wide variety of financial services
providers, including commercial banks, insurance companies, credit unions,
savings and loans and other consumer and commercial lending institutions. Many
of these existing and potential competitors in the financial services business
are substantially larger and have more capital and other resources than the
Company. Competition can take many forms, including convenience in obtaining
funding, service, marketing and distribution channels and effective interest
rates and may be affected by fluctuations in interest rates and general economic
conditions. During periods of rising interest rates, competitors which have
"locked in" low borrowing costs may have a competitive advantage. Furthermore,
the current level of gains realized on the sale of the type of receivables by
the Company and its competitors is attracting additional competitors into this
market with the effect of lowering the gains that may be realized by the Company
on future sales and securitizations. In addition, greater investor acceptance of
securities backed by assets comparable to the Company's receivables and greater
availability of information regarding the default experience of such receivables
creates greater efficiencies in the market for such securities. Such
efficiencies may create a desire for even larger transactions giving companies
with greater volumes of originations a competitive advantage. In addition, a
more efficient market for such securities may lead certain investors to purchase
securities backed by other types of assets where potential returns may be
greater. See "Business -- Competition."
POSSIBLE LOSS IN QUARTER. The Company will record a one-time, non-cash
charge to the provision for income taxes in the quarter in which the Offering is
completed to reflect the deferred tax liability of the J.G. Wentworth Affiliated
Companies recorded in connection with the Reorganization. If the Reorganization
had occurred as of September 30, 1997, the amount of the deferred tax charge
would have been approximately $8.1 million. Upon the completion of the Offering,
the Company will also pay $1.4 million to ING in connection with the termination
of ING's placement arrangements with the Company in connection with its
securitization transactions. The recording of the charge to income taxes and the
payment to ING in the quarter in which the Offering is completed may result in
the Company reporting a net loss for such quarter. See Note 2 to the Combined
Financial Statements of the J.G. Wentworth Affiliated Companies for a discussion
of the effects of the change in tax status of the Company.
VARIABLE QUARTERLY EARNINGS. Several factors affecting the Company's
business can cause significant variations in its quarterly results of
operations. In particular, variations in the volume of the Company's receivables
originations, the interest rate spreads between the Company's cost of funds and
the average effective yield on purchased receivables, gains recorded on the sale
of receivables which are affected by the rate paid to investors in
securitizations, and the timing and size of securitizations, can result in
significant increases or decreases in the Company's revenues and income from
quarter to quarter. Moreover, should the volume of originations fail to grow as
anticipated in any quarterly or other period, the Company's earnings for such
period will experience an immediate adverse impact since the costs associated
with the Company's internal originations capacity cannot be easily or quickly
reduced should the volume of originations fall. Any significant decrease in the
Company's quarterly revenues or income could have a material adverse effect on
the Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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ABILITY OF THE COMPANY TO CONTINUE GROWTH STRATEGY. The Company's ability
to continue its growth strategy depends on its ability to increase the volume of
deferred payment receivables it originates while successfully managing its
growth. This volume increase is, in part, dependent on the Company's ability to
effect regular securitizations and to procure, maintain and manage sources of
funding pursuant to the Credit Facilities or otherwise. In addition to the
Company's financing needs, the Company's ability to manage its growth
successfully and sustain profitability will depend upon, among other factors,
(i) offering attractive products to prospective customers, (ii) marketing its
products successfully, (iii) maintaining appropriate procedures, policies and
systems to ensure that the Company's receivables have an acceptable level of
credit risk and loss, (iv) managing the costs associated with expanding its
infrastructure, (v) identifying new lines of business and asset classes where
the opportunities for profitable operations are present as competition
intensifies in existing lines of business, (vi) hiring and retaining qualified
personnel and (vii) continuing to operate in competitive economic, regulatory
and judicial environments that are conducive to the Company's business
activities. In order to support the growth of its business, the Company has
added a significant number of new operating procedures and personnel. The
Company recently implemented new computer hardware and software systems that
require additional corresponding investments in training and education. The
Company's significant growth has placed substantial new and increased pressures
on the Company personnel. There can be no assurance that the addition of new
operating procedures and personnel, together with the Company's enhanced
computer system, will be sufficient to enable it to meet its current or future
operating needs. Changes in the Company's ability to obtain or maintain any or
all of these factors or to successfully manage its growth strategy could have a
material adverse effect on the Company's operations, profitability and growth.
RISKS ASSOCIATED WITH STRUCTURED SETTLEMENTS
LIMITED OPERATING EXPERIENCE IN STRUCTURED SETTLEMENTS. The Company
began acquiring rights to receive payments from structured settlements in 1995.
Consequently, the Company has limited operating history in acquiring, servicing
and collecting structured settlement receivables. Therefore, the historical
performance of the Company's operations, including its underwriting and
servicing operations, may be of limited relevance in predicting future
performance. Any collections or other problems associated with the large number
of structured settlement receivables originated in the recent past will not
become apparent until sometime in the future. Consequently, the Company's
historical results of operations may be of limited relevance to an investor
seeking to predict the Company's future performance.
RESTRICTIONS ON ASSIGNABILITY OF STRUCTURED SETTLEMENT RECEIVABLES. Most
of the settlement agreements giving rise to the structured settlement payments
purchased by the Company contain anti-assignment clauses that expressly prohibit
the assignment of the scheduled payments due thereunder. Consequently, there is
no assurance that the assignment proscribed by an anti-assignment clause would
be effective against the obligor which, in the case of most structured
settlements, is a special purpose entity to which an insurance company assigns
its obligations to make payments under the settlement (the "Assumption Party").
Although the Company is aware that certain judicial opinions have held that
assignments of contractual rights are effective notwithstanding an express
contractual provision to the contrary, the traditional legal rule would hold
that an express prohibition of assignment will normally be enforced in
accordance with its terms. In the majority of the states, case law is
insufficient to allow any determination as to how a court would rule. Even in
the jurisdictions which have adopted the modern trend, however, an assignment in
violation of an anti-assignment clause could give rise to a breach by the
claimant of the underlying settlement contract, thereby permitting the
beneficiary of such clause to recover damages, if any could be proved, for
breach of contract. The presence of restrictions on the assignability of certain
receivables may make such receivables ineligible for the Company's
securitization program. Therefore, to the extent that courts permit the recovery
of damages from claimants, the Company's business could be materially adversely
affected. Furthermore, although the Company is aware that certain courts have
held assignments to be enforceable even in the presence of an anti-assignment
clause, there is no assurance that a court would permit the Company to enforce
the
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assignment of payment rights under structured settlements. For a description of
the typical structure of a structured settlement, see "Business -- Market
Overview -- Structured Settlements."
In addition, a Texas insurance statute deems assignments of payment rights
in contravention of anti-assignment clauses void ab initio. Although the Company
does not seek to originate receivables from claimants who the Company believes
would be subject to the Texas statute, to the extent any of the Company's
receivables are subject to Texas law, the Company's ability to collect
delinquent payments may be adversely affected.
Because of the legal uncertainties associated with the effectiveness of an
assignment to the Company, the Company may not be able to enforce its rights to
the scheduled payments directly against the Assumption Party or the Annuity
Provider. Because the Company believes that the claimant has the right to
enforce the settlement contract and that the power to enforce that right can be
delegated, the Company has required that each claimant deliver to the Company a
power of attorney giving the Company the right to assert the claimant's rights
to such enforcement, subject to the Company's potential liability for damages
for breach of contract as discussed above. The Company believes that the form of
such power of attorney gives the Company the power to sue to enforce its rights
with respect to the scheduled payments and that the power will not terminate
upon the bankruptcy of a claimant. If, however, a bankruptcy court were to rule
that the scheduled payments were part of the bankruptcy estate of the claimant,
the automatic stay imposed by Section 362 of the U.S. Bankruptcy Code of 1978,
as amended (the "Bankruptcy Code"), would prevent the exercise of such power of
attorney. Although in such cases the Company would seek relief from automatic
stay from the bankruptcy court, there is no assurance that the court would rule
in the Company's favor. See "-- Risks of Insolvency of the Claimant and the
Annuity Provider."
Furthermore, the assignment by the claimant of its rights may violate the
terms of the annuity contract entered into between the Assumption Party and the
Annuity Provider. The assignment of the rights to the proceeds of an annuity
contract may in some states be governed by insurance statutes whose provisions
may be more restrictive than the general legal principles governing assignments
of payment rights. In addition, the assignment of the settlement payments may
result in the breach of certain other provisions in the underlying settlement
agreements. These restrictions on assignability may also have an adverse effect
on the Company's ability to complete securitizations of its receivables.
RISK OF TAX LAW CHANGE. The use of structured settlements is largely the
result of the favorable federal income tax treatment of such transactions under
current law. See "Business -- Market Overview -- Structured Settlements." If
such treatment were changed adversely by a statutory change or a change in
interpretation, the dollar volume of structured settlements could be reduced
significantly which would also reduce the level of the Company's structured
settlement business. In addition, if there were a change in the Code that would
result in adverse tax consequences of the assignment of deferred payment
obligations, such change could have a material adverse effect on the Company's
business.
RISK OF DIVERSION OF SCHEDULED PAYMENTS. Approximately 2.7% of the
claimants from whom the Company has purchased structured settlement receivables
have diverted scheduled payments. A diversion occurs when a claimant redirects
any scheduled payment previously sold to the Company to any person other than
the Company in violation of the claimant's contractual undertaking with the
Company. The Company considers diversion of scheduled payments to be defaults by
the claimants. Although the Company, as part of its collection efforts, has
instituted litigation to recover the diverted payments, the Company's ability to
enforce judgments entered against the claimants may be adversely affected by the
actions of Annuity Providers. In connection with its collection efforts, the
Company, upon obtaining a judgment against a claimant, serves garnishment
process on the applicable Annuity Provider in order to enforce the judgment and
preclude the claimant from receiving and diverting additional scheduled
payments. Certain garnishee Annuity Providers have filed pleadings challenging
the Company's garnishment process. The responsive pleadings of such Annuity
Providers have included allegations and legal arguments to the effect that: (i)
contractual provisions in the underlying settlement agreements and annuity
contracts prohibit assignment, encumbrance, or garnishment of the scheduled
payments thereunder; (ii) the settlement purchase agreements entered into by the
Company
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and the claimant are unenforceable because of fraud or prohibitions on
assignment of scheduled payments set forth in the settlement agreements and/or
the annuity contracts; and/or (iii) the scheduled payments are exempt from
garnishment under certain state laws. Certain states have enacted statutes that
prohibit garnishment of payments under specified arrangements such as insurance
contracts and workers' compensation awards. Although collections under the
deferred payment obligations originated by the Company have not to date been
adversely affected by such statutes, there is no assurance that such statutes
will not have a material adverse effect on the Company's business in future
periods.
Although the Company has filed pleadings contesting all of the material
allegations and defenses asserted by such garnishee Annuity Providers and is
presently engaged in settlement discussions with substantially all such
garnishee Annuity Providers with whom the Company is currently engaged in
litigation, to the extent that any such Annuity Provider is successful in
contesting the Company's garnishment process, the collectibility of any diverted
scheduled payments and the value of the Company's owned or managed receivables
may be materially adversely impacted. Any impairment of the collectibility of
the managed receivables may also constitute an event of default under the
documents governing any applicable securitization transaction. See "Business --
Legal Proceedings."
RISKS OF INSOLVENCY OF THE CLAIMANT AND THE ANNUITY PROVIDER. The
Company's rights to scheduled payments in structured settlement transactions
will be adversely affected if any of the claimant, the Assumption Party or the
Annuity Provider becomes insolvent and/or becomes a debtor in a case under the
Bankruptcy Code.
If a claimant were to become a debtor in a case under the Bankruptcy Code,
a court could hold that the scheduled payments transferred by the claimant under
the applicable settlement purchase agreement would not constitute property of
the estate of the claimant under the Bankruptcy Code. If, however, a trustee in
bankruptcy or other receiver were to assert a contrary position, such as by
requiring the Company (or any securitization vehicle) to establish its right to
those payments under Federal bankruptcy law or by persuading courts to
recharacterize the transaction as secured loans, such result could have a
material adverse effect on the Company's business. Such risks may be greater in
cases where anti-assignment clauses are enforced. If the rights to receive the
scheduled payments are deemed to be property of the bankruptcy estate of the
claimant, the trustee may be able to avoid assignment of the receivable to the
Company. Courts in the jurisdictions that have ruled on such matters are not in
agreement as to the ability of the trustee to avoid the transfer when the
Assumption Party has not been notified of the assignment. The Company is aware
that of the states that have considered such issues, judicial decisions of only
four (each hereinafter referred to as a "Notice State") conclude that a
subsequent creditor takes priority over an assignee of a payment right who did
not notify the obligor of such assignment. Although the Company purchases
receivables in Notice States, it has not securitized receivables purchased from
residents of the Notice States where it has not given proper notice. To the
extent that other states in which claimants reside from whom the Company
originates receivables adopt the rule of the Notice States, the Company's
ability to collect or securitize its receivables may be adversely affected. See
"-- Restrictions on Assignability of Structured Settlement Receivables."
The Company believes that the vast majority of its structured settlement
receivables emanate from qualified assignments which require that the Assumption
Parties fund their respective obligations under the applicable settlement
agreements with an annuity contract covering the payments required to be made
under such settlement agreements. Pursuant to each qualified assignment and the
related annuity contract, the obligation to make the scheduled payments in
respect of a structured settlement continues to be the responsibility of the
Assumption Party, but an Assumption Party's ability to make such payments is
typically dependent on the ability of the Annuity Provider to fund such payments
under the related annuity contract. Although the large majority of the Company's
structured settlement receivables are funded with annuity contracts issued by
Annuity Providers rated "A" or better by A.M. Best, there can be no assurance
that such Annuity Providers will satisfy their obligations under the annuity
contracts when due.
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Furthermore, a general creditor or representative of the creditors (such as
a trustee in bankruptcy) of an Assumption Party could make the argument that the
payments due from the Annuity Provider are the property of the estate of such
Assumption Party (as the named owner thereof). There is very little judicial
precedent addressing this issue in the context of annuity contracts. To the
extent that a court would accept this argument, the resulting delays or
reductions in payments on the Company's receivables could have a material
adverse effect on the Company's financial condition and results of operations.
RELATIONSHIPS WITH ANNUITY PROVIDERS. The ability of the Company to
collect payments under structured settlement transactions depends on the Annuity
Providers not successfully challenging the claimant's right to direct the
payment to be sent to lockboxes or bank accounts controlled by the Company.
Although the Company believes that the claimant is legally entitled to change
the address of payment and the majority of Annuity Providers have changed the
address of payment when requested to do so by claimants, certain Annuity
Providers have resisted, and continue to resist, sending payments to Company
controlled lockboxes and bank accounts. Successful challenges by Annuity
Providers in this regard or any effort by Annuity Providers to resist
redirecting payments to the Company could have a material adverse affect on the
Company's business. See "Business -- Legal Proceedings."
REGULATION AND LEGISLATION. There is currently no significant government
regulation of the Company's current business, except in Illinois, where the
legislature enacted a law that takes effect on January 1, 1998 and requires that
any assignment of a structured settlement receive the prior approval of the
county court in which the underlying claim was or could have been maintained and
prohibits an Annuity Provider from mailing payments to any party other than the
claimant without such prior court approval. The Illinois law does not currently
specify the standards on which courts would grant approval of assignments or the
process by which such approval should be sought. Accordingly, although the
Company expects to gain court approval for any structured settlement receivables
purchased in Illinois, there is no assurance that such approvals will be
granted. As of September 30, 1997, 4.3% of the Company's serviced receivables
consisted of receivables relating to structured settlements originated in
Illinois. Also, there is no assurance that other states will not enact similar
statutes or impose other forms of regulation in the future or that the
assignment of certain receivables originated outside of Illinois may not be
subject to the restrictions in the Illinois law. Consequently, the Company's
structured settlements business may become subject to similar or other
government regulation. The nature and impact of any such future regulation
cannot be determined. There is no assurance that any such regulation will not
have a material adverse effect upon the Company's financial condition and
results of operations.
Every state has statutes that regulate activities related to "conducting an
insurance business." Although the Company does not believe that it is conducting
an "insurance business" and is not aware of any judicial authority in favor of
such interpretation, there can be no assurance that some or all of these
statutes will not be interpreted in the future to preclude the Company's
purchase of rights under annuity contracts or other insurance products in that
state. In addition, federal law and the laws of each state regulate the
activities of lending institutions. Although the Company believes that its
originations of receivables are true sales of such assets and thus are not
lending transactions, there is no assurance that laws that regulate lending
activities may not be interpreted in the future as applying to all or any aspect
of the Company's business activities. The application of lending regulations,
such as usury limits, disclosure requirements and capital requirements, could
have a material adverse effect on the Company's business.
LOSS OF SERVICING RIGHTS AND SUSPENSION OF FUTURE SERVICING CASH
FLOWS. The Company is entitled to receive servicing income only while it acts
as servicer for securitized receivables. Any loss of the servicing rights would
have a material adverse effect on the Company's operations and financial
condition. The Company's right to act as servicer can be terminated under
certain circumstances described in the purchase and contribution agreement, the
pooling and servicing agreement or the indenture applicable to each
securitization. The Company's loss of the servicing rights under any such
agreement or indenture or the occurrence of a trigger event that would block
release of future servicing cash flows from the servicing account would have a
material adverse effect on the Company's financial condition and results of
operations.
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<PAGE>
RISKS RELATING TO PURCHASES OF NEW CLASSES OF ASSETS. The Company plans to
expand the scope of its business by investing in additional classes of assets on
a trial basis prior to making large scale commitments to purchases of such
assets. See "Business -- Strategy." As a result, investors in the Offering will
not know into what new areas, if any, the Company will expand its business and,
accordingly, will have to rely on management's determinations in this regard.
Any such new areas may involve a number of financial, competitive, regulatory
and other risks. As result, there is no assurance that the Company will be able
to expand the scope of its business or, if it does, that it will be able to do
so on a long-term profitable basis. Any unsuccessful attempt in this regard may
have a material adverse effect on the Company's financial condition and results
of operations.
RISKS RELATING TO ENTRY INTO SECONDARY MARKET FOR SELLER-FINANCED
MORTGAGES. The Company is currently evaluating becoming a principal in the
secondary market for seller-financed mortgages. Should the Company determine
that there is potential for profitable development on a larger scale, there
would be certain risks associated with development of this business, including
those summarized below.
INCONSISTENT DOCUMENTATION; UNAVAILABILITY OF CERTAIN INFORMATION. The
Company expects that a majority of the seller-financed mortgage loans that it
would purchase were originated by individual sellers of the related mortgaged
property who generally are inexperienced in the mortgage banking business.
Consequently, such mortgage loans are not expected to have been originated
pursuant to consistent underwriting guidelines or similar mortgage loan
documentation. Thus, it is possible that the Company will not have access to
information regarding such mortgage loans that would be available if such
mortgage loans had been originated by a financial institution, mortgage banker,
or other institutional lender. While the Company expects to evaluate each loan
using specialized underwriting criteria, there is no assurance that the Company
will be able to accurately estimate the credit and property risks that accompany
each mortgage loan. Any failure of the Company to correctly evaluate the
mortgage loans it purchases could result in higher-than-anticipated defaults in
its mortgage portfolio and could have an immediate adverse impact on the
Company's financial condition and results of operations.
LACK OF CONSISTENT UNDERWRITING STANDARDS. Because the Company will not
be originating mortgage loans, but rather will be acquiring mortgage loans some
time after origination, the Company will adopt less stringent underwriting
standards compared to those of the Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") or the
Federal Home Loan Mortgage Corporation ("Freddie Mac") with respect to single
family mortgage loans and those of institutional lenders with respect to
commercial mortgage loans. For example, the Company may not be able to obtain
borrower applications, verify income or employment or, with respect to
commercial mortgage loans, obtain information regarding the borrowers' business
experience. Thus, the Company will not be able to calculate debt ratios that are
typically employed in underwriting a mortgage loan at origination consistent
with the guidelines imposed by Ginnie Mae, Fannie Mae and Freddie Mac or
institutional lenders. Although the Company plans to obtain and review the
credit history of the borrower for each mortgage loan acquired, there can be no
assurance that the default and delinquency rates experienced in the Company's
portfolio will not exceed the levels typical for institutionally-originated
mortgage loans. Higher than expected default and delinquency rates may also have
an adverse impact on the Company's ability to complete securitizations of its
portfolio on favorable terms.
In connection with the Company's purchase of mortgage loans, the Company
will have to calculate the loan-to-value ratio of the mortgage loan at
acquisition for underwriting purposes to determine the borrower's equity in the
related mortgaged property. Although the Company intends to obtain a drive-by
appraisal of the market value of each mortgaged property within 60 days prior to
the purchase, in certain instances, the Company may use a
previously-commissioned appraisal if it was completed within six months prior to
the purchase by such seller or is otherwise deemed reliable by the Company's
underwriting staff. A drive-by appraisal is similar in most respects to a full
real estate appraisal except that the appraiser does not have access to the
interior of the property or in some cases the sides or rear of the property. As
a result, the appraisal may reflect assumptions made by the appraiser regarding
the interior or the sides or rear of the property which may not be accurate.
Also, in cases where a previously commissioned appraisal is used, no assurance
can be given that the value of
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<PAGE>
the mortgaged property has remained or will remain at the level that existed on
the respective appraisal date or on the date of valuation.
FACTORS AFFECTING THE DELINQUENCY RATE ON SELLER-FINANCED
MORTGAGES. Although the Company will review the payment history on each
mortgage loan and obtain limited information on the credit history of the
borrower, the delinquency performance of the Company's portfolio of seller-
financed mortgages may not meet the Company's expectations. The delinquency
performance of seller-financed mortgages may be affected by various factors
other than the creditworthiness of the borrower at origination, the applicable
loan-to-value ratio or the borrower's past payment history. Delinquency
performance may also be related to the influence of economic trends on the
employment and income of the borrower or the value of the property and to the
possible lack of late payment penalties or provisions for the creation of escrow
accounts for property taxes and insurance in the underlying loan documents. The
lack of escrow provisions may increase the default rate as borrowers may fail to
pay their taxes or insurance as they become due resulting in a default under the
terms of the loan documents. The lack of late payment penalties may remove the
incentives the borrower needs to maintain current payments on the mortgage loan.
OTHER RISKS IN THE SECONDARY MORTGAGE MARKET. The Company's investment
in the secondary market for seller-financed mortgages may also be adversely
affected by certain other risks, including, without limitation: (i) possible
environmental contamination of the mortgaged properties, (ii) failure of the
loan documents to require adequate insurance against special hazards, such as
flood or earthquake hazards, that would have been required if the loan had been
originated by an institutional lender; (iii) possible inadequacies in title
insurance coverage; (iv) the ability of borrowers to make use of certain
equitable defenses to the enforcement of mortgage loans generally; and (v)
possible geographic concentration of Company-acquired mortgage loans in
geographic regions experiencing special economic problems. If any or all of the
foregoing result in higher than normal credit risks or delinquency experience in
the Company's portfolio as compared to portfolios of mortgage loans that have
similar interest and repayment terms, these factors may have an adverse effect
on the performance of the Company's owned portfolio as well as the ability of
the Company to successfully complete securitizations of such assets on terms
favorable to the Company.
RISKS RELATING TO INVESTMENT COMPANY ACT REGISTRATION. A company is
generally required to register as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), if it owns
"investment securities," as defined under the Investment Company Act, having a
value exceeding 40% of the value of the company's total assets (exclusive of
government securities and cash items) on an unconsolidated basis (the "40%
Test"). There is no direct authority on whether any or all of the various types
of rights that the Company acquires as part of its business constitute
investment securities for purposes of the 40% Test. Although the Company
believes that none of such rights constitutes investment securities for such
purposes, there is no assurance that the Securities and Exchange Commission (the
"Commission") or courts will not reach a contrary conclusion with respect to
some or all of such rights. Registration as an investment company under the
Investment Company Act would result in a number of restrictions and requirements
that would make it impracticable for the Company to operate as currently
contemplated. Accordingly, the Company will have to monitor the mix of its
current and future investments so that it does not become subject to the
requirement to register as an investment company as a result of the 40% Test or
otherwise.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
degree upon the continuing contributions of its key management personnel
including James D. Delaney, its President and Chief Executive Officer, Gary
Veloric, its Chairman, and Michael B. Goodman, its Executive Vice President and
Chief Operating Officer (collectively, the "Principals"). The Company currently
has employment agreements with each of the Principals for a three-year term. The
loss of these or other key management or technical personnel could have a
material adverse effect on the Company's financial condition and results of
operations. The Company does not intend to obtain key man life insurance with
respect to any of its executives.
CONTROL BY EXISTING STOCKHOLDERS AND POSSIBLE EFFECT OF ANTI-TAKEOVER
PROVISIONS. The Principals, together with Alpha Nickelberry, Edward S. Stone
and ING (collectively, the "Existing Stockholders"), currently own 100% of the
issued and outstanding capital stock of the Company. All
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<PAGE>
of the Existing Stockholders are participating in the Offering as Selling
Stockholders (in this context, the "Selling Stockholders"). After the Offering,
the Existing Stockholders are expected to own approximately 67.9% of the
outstanding Common Stock. As a result, the Existing Stockholders, to the extent
they act in concert, would effectively be able to control all matters requiring
approval by the Company's stockholders, including the election of directors. See
"Principal and Selling Stockholders" and "Shares Eligible for Future Sale." In
addition, the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction which such stockholder
became an "interested stockholder" unless the business combination is approved
in a prescribed manner. These provisions, together with other provisions in the
Company's Certificate of Incorporation and By-laws, may discourage acquisition
bids for the Company by persons unrelated to certain existing stockholders. The
effect of Existing Stockholders' stock ownership and these provisions may be to
limit the price that investors might be willing to pay in the future for shares
of the Common Stock or prevent or delay a merger, takeover, or other change in
control of the Company and thus discourage attempts to acquire the Company. In
addition, the Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock (as defined herein) and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plan to issue any shares of
Preferred Stock. The Company's Certificate of Incorporation and By-laws contain
other provisions, such as a classified Board of Directors, notice requirements
for stockholders and limitations on the stockholders' ability to remove
directors or to present proposals to the stockholders for a vote, all of which
may have the further effect of making it more difficult for a third party to
gain control or to acquire the Company. See "Description of Capital Stock."
BENEFITS TO THE EXISTING STOCKHOLDERS. In connection with the Offering,
the Existing Stockholders will receive substantial benefits. Upon the completion
of the Offering, the Existing Stockholders will be paid a Tax Distribution (as
defined herein) of $1.2 million and ING will receive a payment of $1.4 million
in consideration of ING's agreement to release the Company from its commitment
to use ING as placement agent in its securitizations. The termination payment to
ING and certain other transactions between the Company and Existing Stockholders
described in "Certain Relationships and Related Party Transactions" may not be
on terms as favorable to the Company as would have been obtained from an
unrelated third party. See "Certain Relationships and Related Party
Transactions." The Company intends to use the remaining $37.3 million of the net
proceeds of the Offering to pay down the Credit Facilities, for which ING is the
prime lender. Furman Selz LLC, an affiliate of ING and one of the
Representatives, will be entitled to receive compensation as an Underwriter in
the Offering. See "Use of Proceeds" and "Underwriting." In addition, all of the
Existing Stockholders are participating in the Offering as Selling Stockholders.
The Selling Stockholders will realize from the sale of an aggregate of 1,286,738
shares in the Offering net proceeds estimated to be $13.2 million, assuming an
initial public offering price of $11.00 per share (the mid-point of the price
range set forth on the cover page of this Prospectus) and after deducting
underwriting discounts and commissions. See "Principal and Selling
Stockholders." In connection with the sale by the Principals of the Healthcare
Business (as defined herein), the Company gave certain representations and
indemnities to the purchaser that are customary in such transactions. See
"Certain Relationships and Related Party Transactions -- Relationships with the
Principals." In connection with the Reorganization, the Company has also entered
into a Tax Agreement (as defined herein) pursuant to which it will indemnify the
Existing Stockholders in regard to certain tax liabilities. See "The
Reorganization and Change in Tax Status."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market will develop or, if developed, be
sustained after the Offering. The initial public offering price
18
<PAGE>
will be determined through negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the price at
which the Common Stock will trade after the Offering. See "Underwriting." The
market price of the Common Stock may be volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, announcements of new lines of business by the Company or its
competitors, developments with respect to conditions and trends in the Company's
lines of business or in the financial services industry as a whole, governmental
regulation, changes in estimates by securities analysts of the Company's or its
competitors' future financial performance, general market conditions and other
factors, many of which are beyond the Company's control. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have adversely affected the market prices of securities of
companies irrespective of such companies' operating performances.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Common Stock in the public market following the Offering could adversely affect
the market price of the Common Stock. Upon the completion of the Offering, the
Company will have 16,466,667 shares of Common Stock outstanding. Of these
shares, the 5,286,738 shares of Common Stock sold in the Offering will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"). The remaining 11,179,929 shares of
Common Stock outstanding as of the date of this Prospectus are "restricted
securities" as defined by Rule 144 under the Securities Act ("Rule 144"). The
Company and the Existing Stockholders are expected to enter into a registration
rights agreement (the "Registration Rights Agreement") to govern the Company's
obligation to register such shares beginning one year after the completion of
the Offering. See "Certain Relationships and Related Party Transactions --
Transactions in Connection with the Formation."
Upon the completion of the Offering, there will be 650,000 shares of Common
Stock issuable upon exercise of options under the 1997 Stock Incentive Plan. The
options will become exercisable in four equal annual installments beginning on
the first anniversary of the completion of the Offering. The Company intends to
file a registration statement on Form S-8 covering the shares of Common Stock
issuable upon exercise of options within one year from the date of this
Prospectus. The shares registered under such registration statement will be
available for resale in the open market upon the exercise of options, subject to
Rule 144 volume limitations applicable to affiliates. See "Management -- 1997
Stock Incentive Plan."
The Company, the Selling Stockholders, directors, executive officers and
certain other securityholders of the Company have agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company or any other securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except that during such period, shares of Common
Stock may be issued upon the exercise of outstanding stock options and the
Company may issue employee stock options which are exercisable after the 180th
day after the date of this Prospectus. Prudential Securities Incorporated may,
in its sole discretion, at any time and without notice, release all or any
portion of the shares of Common Stock subject to such lock-up agreements.
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in the Offering will experience an immediate and substantial dilution of
approximately $9.31 per share, assuming an initial public offering price of
$11.00 (the mid-point of the price range set forth on the cover page of this
Prospectus) in the pro forma net tangible book value per share of Common Stock
from the initial public offering price. See "Dilution."
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<PAGE>
THE REORGANIZATION AND CHANGE IN TAX STATUS
On the date of the Reorganization, pursuant to the terms of a contribution
agreement (the "Contribution Agreement"), the Principals will contribute all of
their capital stock in JGW, SSC Management and the General Partners and the
Existing Stockholders will contribute 100% of their interests in the
Partnerships to the Company, in exchange for an aggregate number of 12,466,367
shares of Common Stock. All of the transactions related to the contribution of
interests in the J.G. Wentworth Affiliated Companies to the Company and the
issuance of Common Stock to the Existing Stockholders are referred to
collectively as the "Reorganization." The Reorganization will occur concurrently
with the completion of the Offering. Except for a total of 300 shares issued to
the Principals upon the formation of J.G. Wentworth & Company, Inc. in October
1997, the Common Stock issued pursuant to the Contribution Agreement will
constitute all of the outstanding stock of the Company prior to the completion
of the Offering.
As a result of the Reorganization, JGW and the General Partners, each of
which will become a wholly owned subsidiary of the Company, will be fully
subject to federal and state income taxes, and the Company will record a net
deferred tax liability on its balance sheet. From their formation until the
Reorganization, JGW and the General Partners have been treated as S corporations
for federal income tax purposes and for certain state corporate income tax
purposes. As a result, the historical earnings of JGW and the General Partners
have been taxed directly to their respective stockholders at their individual
federal and state income tax rates. The amount of the deferred tax liability to
be recorded as of the date of termination of the S corporation status will
result principally from temporary differences between accounting and tax
treatment of income earned from finance receivables and Gain on Sale. The net
deferred tax liability will be recorded as a non-cash charge to the provision
for taxes in the quarter in which the Offering is completed. If the S
corporation status of JGW and the General Partners had been terminated as of
September 30, 1997, the amount of the deferred tax liability would have been
approximately $8.1 million. See "Risk Factors -- Possible Loss in Quarter,"
"Capitalization" and "Selected Combined Financial Data."
Since inception, JGW and the General Partners have paid approximately 83%
of their estimated taxable income, including an estimate for the nine months
ended September 30, 1997, to the Principals as S corporation distributions
(approximately $1.3 million was distributed from January 8, 1991 through
September 30, 1997). Such distributions were paid to the Principals as
distributions of a portion of JGW's and the General Partner's earnings and to
pay the Principals' taxes. On October 31, 1997, SSC distributed $2.0 million to
the Existing Stockholders. Since inception through September 30, 1997, the
Partnerships paid approximately $6.7 million to the Existing Stockholders. Prior
to the Reorganization, JGW will distribute an additional estimated $1.2 million
cash payment to the Principals (the "Tax Distribution"). The Tax Distribution
represents the sum of approximately (i) $298,000 in taxes payable at the
applicable statutory rate by the Principals on the estimated net earnings of JGW
and the General Partners for the period from January 1, 1997 to November 30,
1997 and (ii) $939,000 in taxes payable at the applicable statutory rate by the
Principals on the estimated net profits of the Partnerships from January 1, 1997
to November 30, 1997. SSC Management has not made any distributions to the
Existing Stockholders.
Prior to the completion of the Reorganization, the Company, JGW, the
General Partners and the Existing Stockholders will enter into a tax
indemnification agreement (the "Tax Agreement") relating to their respective
income tax liabilities. Because JGW and the General Partners will be fully
subject to corporate income taxation after the termination of their S
corporation status, the reallocation of income and deductions between the period
during which JGW and the General Partners were treated as S corporations and the
period during which the Company, JGW and the General Partners will be subject to
corporate income taxation may increase the taxable income of one party while
decreasing that of another party. Accordingly, the Tax Agreement is intended to
assure that taxes are borne by the Company on the one hand and the Existing
Stockholders on the other only to the extent that such parties received the
related income. The Tax Agreement will generally provide that the Company will
indemnify the Existing Stockholders against any liabilities of the Company after
the Reorganization, and the Existing Stockholders will indemnify the Company
against any tax liabilities of the Existing
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<PAGE>
Stockholders prior to the date of the Reorganization (in each case such
indemnified amounts include interest and penalties and related costs and
expenses). The Company will also indemnify the Existing Stockholders for all
taxes imposed upon them as the result of their receipt of an indemnification
payment under the Tax Agreement. Any payment made by the Company to the Existing
Stockholders pursuant to the Tax Agreement may be considered by the Internal
Revenue Service or state taxing authorities to be non-deductible by the Company
for income tax purposes. The Tax Agreement also will provide that the Company
reimburse the Existing Stockholders for any taxes that result from the
disallowance of deductions taken by the Existing Stockholders, the result of
which will be to permit the Company, JGW or the General Partners to take such
disallowed deductions after completion of the Reorganization. None of the
parties' obligations under the Tax Agreement will be secured, and, as such,
there can be no assurance that the Existing Stockholders or the Company will
have funds available to make any payments which may become due under the Tax
Agreement. See "Certain Relationships and Related Party Transactions."
For accounting purposes, the Reorganization will be treated as an
acquisition by SSC of the assets of the Company and the other J.G. Wentworth
Affiliated Companies. SSC will be treated as the acquiring entity because the
partners of SSC represent the ownership group receiving the majority of voting
interests in the combined Company. As a result, the Company will record an
estimated $4.0 million in goodwill, representing the fair value of the
consideration deemed paid by SSC for the Company and the J.G. Wentworth
Affiliated Companies.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 4,000,000 shares of Common
Stock offered by the Company hereby are estimated to be $39.9 million, assuming
an initial public offering price of $11.00 per share (the mid-point of the price
range set forth on the cover page of this Prospectus) and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any of the proceeds from the shares of Common Stock
sold by the Selling Stockholders.
The Company anticipates applying approximately $1.2 million of the net
proceeds to fund the cash Tax Distribution to the Principals, $1.4 million to
pay a termination fee to ING and, based on the remaining proceeds available, to
pay down temporarily the outstanding amounts on the Credit Facilities that were
incurred to fund the Company's originations of structured settlements and other
deferred payment obligations. At November 30, 1997, $49.8 million was
outstanding on the SSC Facility, which bore interest at a rate of 9.2% per annum
on that date, and $9.96 million was outstanding on the MFC Facility, which bore
interest at a rate of 7.2% per annum on that date. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DISTRIBUTIONS AND DIVIDEND POLICY
Prior to the Reorganization, the Partnerships distributed cash to their
partners on a periodic basis, including the Principals. MFC paid $793,000,
$928,000 and $174,000 in distributions to its partners in 1995, 1996 and the
nine months ended September 30, 1997, respectively, and SSC paid $0, $702,000
and $4.1 million in distributions to its partners in 1995, 1996 and the nine
months ended September 30, 1997, respectively. In addition, JGW and the General
Partners made S corporation distributions to their shareholders of $22,000,
$285,000 and $866,000 in 1995, 1996 and the nine months ended September 30,
1997, respectively. During the period from September 30, 1997 until October 31,
1997, SSC distributed $2.0 million to its partners. See "The Reorganization and
Change in Tax Status."
J.G. Wentworth & Company, Inc., as a newly formed entity, has not paid or
declared cash dividends on its capital stock. The Company currently expects it
will retain its future earnings for use in the operation and expansion of its
business and does not anticipate paying or declaring any cash dividends in the
foreseeable future.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997 (i) on a historical combined basis, (ii) on a pro forma
combined basis assuming the Reorganization, the payment of the Tax Distribution
and the recording of a deferred tax liability, and (iii) on a pro forma combined
basis as adjusted to reflect the sale of the 4,000,000 shares of Common Stock
offered by the Company at the assumed initial public offering price of $11.00
per share (the mid-point of the price range set forth on the cover page of this
Prospectus) and the application of the estimated net proceeds therefrom.
The table should be read in conjunction with the Combined Financial
Statements of the J.G. Wentworth Affiliated Companies and the Notes thereto
included elsewhere herein. See "The Reorganization and Change in Tax Status,"
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SEPTEMBER 30, 1997
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
------- -------- --------------
(DOLLARS IN THOUSANDS)
Debt:
Notes payable, banks.......... $71,866 $71,866 $34,552
Capital lease obligations..... 1,622 1,622 1,622
------- ------- -------
Total debt............... 73,488 73,488 36,174
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par
value, 5,000,000 shares
authorized and no shares
outstanding.............. -- -- --
Common stock, $.01 par
value, 30,000,000 shares
authorized, 12,466,667
outstanding, pro forma,
and 16,466,667 shares
outstanding, as
adjusted................. 2 125 165
Additional paid-in capital.... 261 2,852 44,732
Retained earnings (deficit)... (1,915) (11,252) (14,134)
Partners capital accounts..... 1,781 -- --
Due from stockholders or
partners.................... (31) -- --
------- ------- -------
Total equity (deficit)... 98 (8,275) 30,763
------- ------- -------
Total capitalization..... $73,586 $65,213 $66,937
======= ======= =======
- ------------------
(1) Gives pro forma effect to (i) the Reorganization and the Tax Distribution to
the Principals in the amount of $1.2 million (ii) the accrual of a $2.0
million distribution by SSC to its partners which was declared on October
13, 1997 and paid on October 31, 1997 and (iii) the creation of an estimated
net deferred tax liability in the amount of $8.1 million arising in
connection with the Company's conversion to a C corporation. See "The
Reorganization and Change in Tax Status" and the Pro Forma Financial
Information included elsewhere in this Prospectus.
(2) Gives pro forma effect to the matters stated in Note 1 plus (i) the issuance
and sale by the Company of 4,000,000 shares of Common Stock offered hereby
at the assumed initial public offering price of $11.00 per share (the
mid-point of the price range set forth on the cover page of this Prospectus)
and (ii) the application of the estimated net proceeds therefrom, including
a $1.4 million payment to ING in exchange for termination of the Company's
obligation to engage ING as placement agent in future securitizations and an
assumed $37.3 million to be paid to reduce amounts outstanding under the
Credit Facilities. See "Use of Proceeds" and Notes 1 and 2 to the Combined
Financial Statements of the J.G. Wentworth Affiliated Companies.
22
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the initial public offering price. The pro forma negative net tangible book
value of the Company as of September 30, 1997 was $(12.1) million or $(0.97) per
share after giving effect to certain adjustments described in the table below.
Pro forma negative net tangible book value per share is determined by dividing
the net negative tangible book value of the Company on a pro forma basis (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding on a pro forma basis, after giving effect to the Reorganization.
After giving effect to the sale by the Company of 4,000,000 shares of Common
Stock offered by the Company at an assumed initial public offering price of
$11.00 per share (the mid-point of the price range set forth on the cover page
of this Prospectus), after deducting underwriting discounts and commissions and
estimated offering expenses, the pro forma net tangible book value of the
Company as of September 30, 1997 would have been $27.8 million or $1.69 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.66 per share to the Existing Stockholders and an immediate and
substantial dilution in pro forma net tangible book value of $9.31 per share to
new investors purchasing Common Stock in the Offering. The following table
illustrates this per share dilution:
Assumed initial public offering price per
share...................................... $ 11.00
Net tangible book value per share at
September 30, 1997, after Reorganization... $ 0.01
Decrease attributable to Tax
Distribution...................... (0.10)
Decrease due to partners distribution
by SSC............................ (0.16)
Decrease due to deferred tax
liability......................... (0.65)
Decrease due to payment in lieu of
future placement fees, net of
tax............................... (0.07)
-------
(0.97)
Increase in net tangible book value
per share attributable to new
public investors.................. 2.66
Pro forma, as adjusted, net tangible book
value per share after the Offering......... 1.69
-------
Dilution per share to new public investors... $ 9.31
=======
- ------------------
The following table summarizes, on a pro forma basis (as described above)
as of September 30, 1997, the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company and the average price
per share paid by the Existing Stockholders (which for the purposes of this
table is assumed to be zero although the amounts distributed to the Existing
Stockholders out of earnings and to fund tax payments exceed the amount of their
initial cash investment) and by the new investors purchasing shares of Common
Stock in the Offering, at an assumed initial public offering price of $11.00 per
share (the mid-point of the price range set forth on the cover page of this
Prospectus) and before deducting underwriting discounts and commissions and
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 12,466,667 75.7% -- -- --
New Investors........... 4,000,000 24.3% $44,000,000 100% $11.00
---------- ----- ----------- -----
Total................... 16,466,667 100.0% $44,000,000 100% $ 3.74
========== ===== =========== =====
</TABLE>
The foregoing tables assume that the Underwriters' over-allotment option to
purchase 793,011 shares of Common Stock to be granted prior to the completion of
the Offering with an exercise price per share equal to the initial public
offering price will not be exercised. See "Underwriting."
23
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables contain selected combined financial data of the J.G.
Wentworth Affiliated Companies and are qualified by the more detailed Combined
Financial Statements of the J.G. Wentworth Affiliated Companies and the Notes
thereto included elsewhere in this Prospectus. The selected combined statement
of operations data for the years ended December 31, 1994, 1995, and 1996 and the
nine months ended September 30, 1997 and the selected combined balance sheet
data as of December 31, 1995 and 1996 and September 30, 1997 have been derived
from the Combined Financial Statements of the J.G. Wentworth Affiliated
Companies which have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report included elsewhere in this Prospectus.
The selected combined statement of operations data for the years ended December
31, 1992 and 1993 and for the nine months ended September 30, 1996 and the
combined balance sheet data as of December 31, 1992, 1993 and 1994 of the J.G.
Wentworth Affiliated Companies have been derived from unaudited combined
financial statements. The combined unaudited financial statements, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
condition and results of operations for such periods. The results of operations
for the nine months ended September 30, 1996 and September 30, 1997 are not
necessarily indicative of the results that may be expected for any other interim
period or for the entire year. The selected combined financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and all of the Combined
Financial Statements of the J.G. Wentworth Affiliated Companies and Notes
thereto included elsewhere in this Prospectus. The selected pro forma financial
data should be read in conjunction with the Notes to the Pro Forma Financial
Information of J.G. Wentworth & Company, Inc. included elsewhere in this
Prospectus. The following tables also include certain unaudited pro forma and
pro forma, as adjusted, combined statement of operations data for the year ended
December 31, 1996 and the nine months ended September 30, 1997 which give effect
to the Reorganization, the Offering and certain other adjustments as if they had
occurred at the beginning of the period presented. The selected combined
statement of operations data for the nine months ended September 30, 1997 and
the selected combined balance sheet data as of September 30, 1997 have been
audited.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
INCOME STATEMENT DATA: ----------- ----------- ------ ------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Interest income............. $ -- $ 389 $2,755 $8,560 $ 10,426 $ 6,926 $ 12,621
Gain on sale of
receivables............... -- -- -- 268 576 576 18,246
Other income................ 249 1,008 417 894 785 461 870
------ ------ ------ ------ ----------- ------- -----------
Total revenues............ 249 1,397 3,172 9,722 11,787 7,963 31,737
------ ------ ------ ------ ----------- ------- -----------
Expenses:
Marketing expenses.......... -- 45 148 224 3,606 2,230 6,686
Salaries and benefits....... 42 453 686 1,509 1,992 1,564 3,593
Other expense............... 214 661 873 1,350 3,384 2,432 2,485
Provision for credit
losses.................... -- -- -- -- 500 325 2,866
------ ------ ------ ------ ----------- ------- -----------
Total expenses before
interest................ 256 1,159 1,707 3,083 9,482 6,551 15,630
------ ------ ------ ------ ----------- ------- -----------
Income (loss) before interest
expense..................... (7) 238 1,465 6,639 2,305 1,412 16,107
Interest expense............ -- 163 1,541 4,995 6,380 4,486 6,620
------ ------ ------ ------ ----------- ------- -----------
Income (loss) before
extraordinary loss.......... (7) 75 (76) 1,644 (4,075) (3,074) 9,487
Extraordinary loss............ -- -- -- 876 -- -- --
------ ------ ------ ------ ----------- ------- -----------
Net income (loss)............. $ (7) $ 75 $ (76) $ 768 $ (4,075) $(3,074) $ 9,487
====== ====== ====== ====== =========== ======= ===========
UNAUDITED PRO FORMA
INFORMATION:
Pro forma benefit (provision)
for income taxes (1)........ 1,508 (3,510)
----------- -----------
Pro forma net income
(loss) (1).................. $ (2,567) $ 5,977
=========== ===========
PRO FORMA PER SHARE DATA:
Pro forma net income (loss)
per share (1)(2)............ $ (0.20) $ 0.48
=========== ===========
Pro forma number of shares
outstanding (1)(2).......... 12,579,122 12,579,122
=========== ===========
UNAUDITED PRO FORMA, AS ADJUSTED, INFORMATION:
Pro forma, as adjusted, income
(loss) before benefit
(provision) for income
taxes (3)................... $ (2,079) $ 10,694
Pro forma, as adjusted,
benefit (provision) for
income taxes (1)(3)......... 726 (3,989)
----------- -----------
Pro forma, as adjusted, net
income (loss)............... $ (1,353) $ 6,705
=========== ===========
PRO FORMA, AS ADJUSTED, PER
SHARE DATA:
Pro forma, as adjusted, net
income (loss)
per share (3)(4)............ $ (0.08) $ 0.41
=========== ===========
Pro forma, as adjusted,
number of shares
outstanding (3)(4).......... 16,466,667 16,466,667
=========== ===========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
BALANCE SHEET DATA: ----------- ----------- ----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Finance receivables, $ 12 $3,221 $33,778 $60,104 $90,930 $ 42,668
net....................
Finance receivables held
for sale............... -- -- -- -- -- 28,714
Retained interests....... -- -- -- -- -- 7,290
Servicing asset.......... -- -- -- -- -- 1,328
Total assets............. 246 4,629 35,270 62,987 91,975 85,033
Notes payable, banks..... -- 3,443 32,840 56,907 91,858 71,866
Capital lease
obligations............ -- -- -- -- -- 1,622
Total liabilities........ 4 3,925 34,642 61,943 96,378 84,935
Total equity (deficit)... 242 704 628 1,044 (4,403) 98
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED OPERATING DATA:
PORTFOLIO DATA:
Maturity value of portfolio (5):
Owned................................. $ 14 $3,839 $38,799 $74,820 $166,061 $135,383 $142,657
Serviced.............................. -- -- -- -- -- -- 150,236
------ ------ ------- ------- -------- -------- --------
Total................................. $ 14 $3,839 $38,799 $74,820 $166,061 $135,383 $292,893
====== ====== ======= ======= ======== ======== ========
Carrying value of portfolio:
Owned................................. $ 12 $3,221 $33,778 $60,104 $ 90,930 $ 81,244 $ 74,125
Serviced.............................. -- -- -- -- -- -- 99,409
------ ------ ------- ------- -------- -------- --------
Total................................. $ 12 $3,221 $33,778 $60,104 $ 90,930 $ 81,244 $173,534
====== ====== ======= ======= ======== ======== ========
Maturity value of portfolio (5):
Structured settlements................ $ -- $ -- $ -- $18,239 $135,392 $ 95,279 $278,835
Other deferred payment obligations.... 14 3,839 38,799 56,581 30,669 40,104 14,058
------ ------ ------- ------- -------- -------- --------
Total................................. $ 14 $3,839 $38,799 $74,820 $166,061 $135,383 $292,893
====== ====== ======= ======= ======== ======== ========
Carrying value of portfolio:
Structured settlements................ -- -- -- 7,774 61,433 40,509 160,209
Other deferred payment obligations.... 12 3,221 33,778 52,330 29,497 40,735 13,325
------ ------ ------- ------- -------- -------- --------
Total................................. $ 12 $3,221 $33,778 $60,104 $ 90,930 $ 81,244 $173,534
====== ====== ======= ======= ======== ======== ========
Weighted average portfolio yield (6):
Structured settlements................ --% --% --% 20.5% 22.3% 21.4% 22.1%
Other deferred payment obligations.... 29.7 26.2 18.0 14.1 13.2 12.9 13.3
------ ------ ------- ------- -------- -------- --------
Blended portfolio yield............... 29.7% 26.2% 18.0% 14.7% 20.2% 18.9% 21.4%
====== ====== ======= ======= ======== ======== ========
Allowance for credit losses as a
percentage of owned portfolio (7)..... -- -- -- -- 0.5% 0.4% 3.9%
Net charge-offs as a percentage of
average owned portfolio (8)........... -- -- -- -- -- -- 1.0%
STRUCTURED SETTLEMENTS DATA:
Number of receivables originated in
period.............................. -- -- -- 136 2,197 1,362 3,759
Maturity value of receivables
originated in period................ $ -- $ -- $ -- $13,674 $125,697 $ 84,676 $163,639
Carrying value of receivables
originated in period................ $ -- $ -- $ -- $ 4,916 $ 56,004 $ 36,566 $ 74,471
Weighted average yield of receivables
originated in period................ -- -- -- 20.5% 22.3% 21.4% 22.1%
Weighted average maturity of
receivables originated in period (in
years).............................. -- -- -- 9.1 6.5 7.4 6.3
OTHER DEFERRED PAYMENT OBLIGATIONS DATA:
Number of receivables originated in
period.............................. 1 475 2,637 4,610 1,409 1,211 430
Maturity value of receivables
originated in period................ $ 14 $1,871 $38,745 $62,851 $ 19,738 $ 17,601 $ 6,985
Carrying value of receivables
originated in period................ $ 12 $1,427 $31,854 $53,213 $ 17,052 $ 15,015 $ 5,952
Weighted average yield of receivables
originated in period................ 29.7% 26.2% 18.0% 14.1% 13.2% 12.9% 13.3%
Weighted average maturity of
receivables originated in period (in
years).............................. 0.5 1.1 1.2 1.3 1.2 1.2 1.2
</TABLE>
25
<PAGE>
- ------------------
(1) Prior to the Reorganization, JGW and the General Partners were treated as S
corporations under Subchapter S of the Code and applicable state law. The
pro forma and pro forma, as adjusted, presentations reflect the provision
for income taxes as if JGW and the General Partners had always been C
corporations and the activities of the Partnerships had always been taxed as
if owned by the Company at an assumed effective tax rate of 37%.
(2) Pro forma net income (loss) per share is computed based on 12,466,667 shares
of Common Stock outstanding before the Offering and gives effect to the
Reorganization and reflects the 112,455 shares of Common Stock which would
need to be issued to generate the cash necessary to fund the Tax
Distribution at an assumed initial public offering price of $11.00 per share
(the mid-point of the price range set forth on the cover page of this
Prospectus). See "The Reorganization and Change in Tax Status."
(3) Pro forma, as adjusted, income (loss) before benefit (provision) for income
taxes gives effect to: (i) the decrease in interest expense of $3.5 million
for the year ended December 31, 1996 and $2.7 million for the nine months
ended September 30, 1997 as if the repayment of Notes payable, banks from
the proceeds of the Offering had occurred at the beginning of the respective
periods; (ii) the payment of $1.4 million to ING in consideration of ING's
agreement to release the Company from a commitment to use ING as placement
agent for future securitizations; and (iii) the effect of the amortization
of Goodwill at the beginning of the respective periods. See "Certain
Relationships and Related Party Transactions."
(4) Pro forma, as adjusted, net income (loss) per share is computed based on
16,466,667 shares of Common Stock outstanding after giving effect to the
Reorganization and the Offering.
(5) Maturity value equals the sum of future payments to be received by the
Company.
(6) Net of capitalized origination costs.
(7) Allowance for credit losses divided by the carrying value of the Company's
owned portfolio.
(8) Net charge-offs, annualized, divided by the average carrying value of the
Company's owned portfolio.
26
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of J.G. Wentworth &
Company, Inc. is based upon the historical combined balance sheet of the J.G.
Wentworth Affiliated Companies as of September 30, 1997, the historical combined
statements of operations of the J.G. Wentworth Affiliated Companies for the nine
months ended September 30, 1997 and the year ended December 31, 1996, and
adjustments necessary to give effect to the transactions described below. The
unaudited pro forma balance sheet and the unaudited pro forma statements of
operations do not give effect to the Offering.
The unaudited pro forma balance sheet gives effect to (i) the
Reorganization, (ii) the formation of J.G. Wentworth & Company, Inc., (iii) the
establishment of $8.1 million of net deferred tax liabilities that would have
been recorded had the J.G. Wentworth Affiliated Companies been taxed as a C
corporation, (iv) the recognition of goodwill associated with SSC's acquisition
of the remaining entities constituting the J.G. Wentworth Affiliated Companies
and J.G. Wentworth & Company, Inc., (v) the accrual of a distribution of $1.2
million to S corporation stockholders and partners and (vi) accrual of $2.0
million distribution paid by SSC to its partners on October 31, 1997. The pro
forma adjustments are based upon currently available information and certain
estimates and assumptions that management of the Company believes are
reasonable.
The unaudited pro forma net income (loss) gives effect to (i) the results
of operations adjusted to reflect the change in the J.G. Wentworth Affiliated
Companies' income tax status to a C corporation using a pro forma blended
federal and state income tax rate of 37%, and (ii) the estimated amortization of
Goodwill.
The following pro forma financial information is unaudited and should be
read in conjunction with the accompanying notes thereto and with the Combined
Financial Statements of the J.G. Wentworth Affiliated Companies included
elsewhere in this Prospectus. The pro forma financial information is not
indicative of either the financial condition or results of operations that would
have been achieved as if the transactions described above had actually occurred
on the dates referred to above, nor is it necessarily indicative of the results
of future operations, because such pro forma financial information is based on
estimates and assumptions.
27
<PAGE>
PRO FORMA FINANCIAL INFORMATION
J.G. WENTWORTH & COMPANY, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
($ IN THOUSANDS)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
Cash and cash equivalents............... $ 98 $ -- $ 98
Finance receivables, net of allowance
for credit losses of $2,743........... 42,668 -- 42,668
Finance receivables in the process of
sale.................................. 28,714 -- 28,714
Office equipment, net of accumulated
depreciation of $228 at September 30,
1997.................................. 912 -- 912
Office equipment under capital lease.... 1,422 -- 1,422
Servicing asset......................... 1,328 -- 1,328
Retained interests...................... 7,290 -- 7,290
Restricted cash......................... 1,019 -- 1,019
Goodwill................................ -- 2,933 (4) 2,933
Other assets............................ 1,582 -- 1,582
------- ------ -------
Total assets...................... $85,033 $2,933 $87,966
======= ====== =======
LIABILITIES
Notes payable, banks.................... $71,866 $ -- $71,866
Overdraft payable....................... 865 -- 865
Accounts payable........................ 1,966 1,206 (3) 3,172
Accrued expenses........................ 5,044 -- 5,044
Claims payable.......................... 1,547 -- 1,547
Capital lease obligations............... 1,622 -- 1,622
Partners distribution payable........... 2,025 2,000 (5) 4,025
Deferred tax liability.................. -- 8,100 (2) 8,100
------- ------ -------
Total liabilities................. 84,935 11,306 96,241
------- ------ -------
EQUITY (DEFICIT)
Common stock, 3,000 shares authorized,
1,300 shares issued and outstanding,
30,000,000 shares authorized,
12,466,667 shares outstanding, pro
forma................................. 2 123 (1) 125
Additional paid-in capital.............. 261 1,658 (1) 4,852
2,933 (4)
Retained earnings (deficit)............. (1,915) (8,100)(2) (13,252)
(1,237)(3)
(2,000)(5)
Partner capital (deficit) accounts...... 1,781 (1,781)(1) --
Due from stockholders or partners....... (31) 31 (3) --
------- ------ -------
Total equity (deficit)............ 98 (8,373) (8,275)
------- ------ -------
Total liabilities and equity
(deficit)......................... $85,033 $2,933 $87,966
======= ====== =======
The accompanying notes to the pro forma financial statements are an integral
part of this pro forma financial information.
28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
J.G. WENTWORTH & COMPANY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenue:
Interest income....................... $10,426 $ -- $10,426
Gain on sale of receivables........... 576 -- 576
Other income.......................... 785 -- 785
------- ----- -------
Total revenues...................... 11,787 -- 11,787
------- ----- -------
Expenses:
Interest expense...................... 6,380 -- 6,380
Marketing expenses.................... 3,606 -- 3,606
Salaries and benefits................. 1,992 -- 1,992
Other expenses........................ 3,384 117(6) 3,501
Provision for credit losses........... 500 -- 500
------- ----- -------
Total expenses...................... 15,862 117(6) 15,979
------- ----- -------
Net loss.............................. $(4,075) $(117) (4,192)
======= =====
Pro forma benefit for taxes............. 1,508
-------
Pro forma net loss...................... $(2,684)
=======
</TABLE>
The accompanying notes to the pro forma financial statements are an integral
part of this pro forma financial information.
29
<PAGE>
PRO FORMA FINANCIAL INFORMATION
J.G. WENTWORTH & COMPANY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Revenue:
Interest income....................... $12,621 $ -- $12,621
Gain on sale of receivables........... 18,246 -- 18,246
Other income.......................... 870 -- 870
------- ----- -------
Total revenues...................... 31,737 -- 31,737
------- ----- -------
Expenses:
Interest expense...................... 6,620 -- 6,620
Marketing expenses.................... 6,686 -- 6,686
Salaries and benefits................. 3,593 -- 3,593
Other expenses........................ 2,485 88(6) 2,573
Provision for credit losses........... 2,866 -- 2,866
------- ----- -------
Total expenses...................... 22,250 88(6) 22,338
------- ----- -------
Net income............................ $ 9,487 $ (88) 9,399
======= =====
Pro forma provision for taxes........... (3,510)
-------
Pro forma net income.................... $ 5,889
=======
The accompanying notes to the pro forma financial statements are an integral
part of this pro forma financial information.
30
<PAGE>
PRO FORMA FINANCIAL INFORMATION
J.G. WENTWORTH & COMPANY, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------
(1) For accounting purposes, the Reorganization will be treated as a business
combination using the purchase method of accounting whereby SSC will acquire
the registrant J.G. Wentworth & Company, Inc. and the remaining entities
within the combined group, including MFC, SSFC, FC, JGW and SSC Management.
SSC is deemed to be the accounting acquirer as the partners of SSC represent
the ownership group receiving the majority voting interests in the
transaction.
In connection with the accounting for the acquisition, the table below sets
forth the shares issued to the owners of each entity along with the
respective allocation of the purchase price ($ in thousands, except share
amounts).
<TABLE>
<CAPTION>
FAIR
PURCHASE VALUE OF
SHARES PRICE NET ASSETS GOODWILL
------- -------- ---------- --------
<S> <C> <C> <C> <C>
MFC................................................ 236,558 $2,420 $186 $2,234
JGW................................................ 48,680 498 (175) 673
SSFC............................................... 1,000 10 (15) 25
FC................................................. 400 4 4 0
SSC Management..................................... 100 1 -0- 1
------- ------ ---- ------
Total............................................ 286,738 $2,933 $ -- $2,933
======= ====== ==== ======
</TABLE>
The $2.9 million purchase price was computed by multiplying the share
dilution to the partners of SSC by $10.23 per share, the midpoint offering
price less applicable underwriting discounts. To the extent that J.G.
Wentworth & Company, Inc. is the legal acquirer with no substantive
operations, the issuance of 12,179,929 of shares by SSC to J.G. Wentworth &
Company, Inc. will be treated for accounting purposes as a capital stock
transaction with no goodwill recorded.
(2) To record a net deferred tax liability of $8.1 million. From their formation
until the Reorganization, JGW and the General Partners have been treated as
S corporations for federal income tax purposes and for certain state
corporate income tax purposes. As a result, the historical earnings of JGW
and the General Partners have been taxed directly to their respective
stockholders at their individual federal and state income tax rates. The
amount of the deferred tax liability to be recorded as of the date of
termination of the S corporation status will result principally from
temporary differences between accounting and tax treatment of income earned
from finance receivables and Gain on Sale. The net deferred tax liability
will be recorded as a non-cash charge to the provision for taxes in the
quarter in which the Offering is completed. The net deferred tax liability
is calculated using an overall effective tax rate of 37%. See "The
Reorganization and Change in Tax Status."
(3) To record an accrual for the tax distribution to Existing Stockholders as
discussed in "The Reorganization and Change in Tax Status."
(4) To record Goodwill of $2.9 million as a result of SSC's reverse acquisition
of the remaining entities constituting J.G. Wentworth Affiliated Companies
and J.G. Wentworth & Company, Inc.
(5) To accrue the $2.0 million distribution to its partners declared by SSC on
October 13, 1997 which was paid on October 31, 1997.
(6) To record amortization of Goodwill on a straight line basis over the
estimated life of 25 years.
(7) Certain material non-recurring charges directly resulting from the offering
have not been reflected in the pro forma income statements but will be
included in the financial statements of the Registrant within 12 months
following the transaction. Such items include an $8.1 million charge to
record a deferred tax liability and $1.4 million expense for the payment to
ING releasing the Company from its current securitization placement agent
commitment.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Combined
Financial Statements of the J.G. Wentworth Affiliated Companies and the Notes
thereto included elsewhere in this Prospectus.
GENERAL
Overview. The Company is a specialty finance company that originates,
securitizes and services rights to receive payments from structured settlements
and other deferred payment obligations. In 1991, JGW was formed as a merchant
banking firm to pursue healthcare related transactions. The Company entered the
business of purchasing deferred payment obligations with the purchase of
deferred auto insurance settlement obligations of the JUA in 1992, and of MTF
and other entities in 1994. Because neither the JUA nor MTF currently defer
significant amounts of new settlement obligations, the Company's acquisition of
these claims has decreased and is not expected to increase in the near future.
In August 1995, the Company commenced the purchase of structured settlements
from private litigation claimants. This has been the Company's primary business
since 1995. The Company generates revenues from interest income earned on these
originations and the ultimate disposition of these obligations. The Company
continued to engage in the merchant banking business (defined herein as the
Healthcare Business) and earned brokerage fees and commissions which are
included in other income in the combined financial statements for periods prior
to October 1996. In October 1996, the Healthcare Business was transferred to
Partners, Partners LP, Securities and Mortgage Funding (as each is defined
herein), separate entities owned by Messrs. Delaney and Veloric which are not
included in the combined financial statements subsequent to that date. In
October 1997, Messrs. Delaney and Veloric entered into a letter of intent with a
publicly traded company to dispose of their entire investment in the Healthcare
Business, which disposition was completed on November 14, 1997. See "Certain
Relationships and Related Party Transactions -- Relationship with Principals."
To date, the Company has not experienced any significant seasonal
variations in its acquisitions of receivables.
Recent Growth. The Company has experienced significant growth particularly
since August 1995. Management believes that this growth is primarily
attributable to (i) development of its originations staff and systems; (ii) the
development of a national brand identity through television and other
advertising; (iii) strong relationships with referral sources; (iv) the
Company's further penetration into its established markets; and (v) adequate
funding sources from credit facilities and securitizations to finance
originations. The rate of growth in the Company's total number of originations
declined for the twelve months ended June 30, 1996 because the JUA and the MTF
stopped deferring their settlement obligations. The decrease in the purchase of
the deferred obligations of the JUA and the MTF was offset beginning in August
1995 when the Company commenced purchasing structured settlement obligations.
Since then, structured settlements have been the principal contributor to the
growth of the Company.
The Company's percentage of defaulted receivables on its owned portfolio
has increased from 0.5% of carrying value at December 31, 1995 to 4.9% at
September 30, 1997 as a result of the Company's practice of retaining
receivables it has not securitized until delinquencies are cured or written off.
The Company's percentage of defaulted receivables on its total portfolio
(including securitized assets) has increased from 0.5% of carrying value at
December 31, 1995 to 2.1% at September 30, 1997.
There can be no assurance that the Company will continue to grow
significantly in the future. Future growth may be limited by, among other
things, the Company's need for continued funding sources, access to capital
markets, ability to attract and retain qualified personnel, fluctuations in
interest rates, competition from existing competitors and new market entrants,
changes in regulation and legislation and other market conditions.
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The Company's recent and rapid growth may have a somewhat distortive impact
on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons less meaningful. In light of the Company's growth,
the Company's historical earnings may be of limited relevance in predicting
future performance. Furthermore, the Company's recent earnings and other
financial results may not be indicative of the Company's results in future
periods. Any credit or other problems associated with the large number of
receivables acquired in the recent past may not become apparent until sometime
in the future. See "Risk Factors -- Ability of the Company to Continue Growth
Strategy" and "-- Risks Associated with Structured Settlements -- Limited
Operating Experience in Structured Settlements."
ACCOUNTING CONSIDERATIONS
Revenue Recognition. The Company purchases deferred payment obligations at
an amount less than maturity value. The difference between the purchase price
and the maturity value is recorded as unearned income. Unearned income is
recognized as interest income on the interest method over the life of the
related deferred payment obligation.
The Company, in accordance with a Statement of Financial Accounting
Standards No. 91, Accounting for Non-refundable Fees and Costs Associated with
Originations or Acquiring Loans and Indirect Costs of Leases ("SFAS 91"), defers
certain incremental origination costs which are then amortized as an adjustment
to interest income over the life of the related deferred payment obligations
using the interest method.
There are certain expenses incurred by the Company, including primarily
marketing and other indirect costs of origination, which are expended currently
as operating expenses, but for which the related income is earned in the future.
The Company records marketing expenses and other costs of origination that are
not capitalized under SFAS 91 but are expensed as incurred. The effect of
expensing these costs, particularly marketing expenses, is a primary cause of
the net loss in 1996.
Securitization. As a part of its business and financing strategy the
Company regularly securitizes rights to receive payment from structured
settlements. In a securitization, receivables originated by the Company are sold
to a special purpose entity which issues interests to independent investors. The
Company sells the receivables for a cash price and records a Retained Interest.
The book value of the Retained Interest is calculated as the difference between
the maturity value to be received from the structured receivables sold and the
sum of: (i) principal and interest to be paid to the independent investors; (ii)
trustee fees; (iii) servicing fees; and (iv) credit losses projected to be
sustained by the securitized pool. The Company's right to the excess cash flows
is subordinated to certain reserve requirements specific to each securitization
which function as a means of credit enhancement. The Company determines the
present value of the anticipated excess cash flows at the time each
securitization transaction closes using valuation assumptions for that
securitization and records an asset called the Retained Interest.
The Retained Interest is classified as being "held to maturity" and
therefore is carried at amortized cost in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Retained Interest is recorded by the Company based on an
allocation of fair value based on the structured settlement receivables sold.
Valuation assumptions for the Retained Interest are generally related to the
maturity value of the securitized receivables, market and economic conditions
and the anticipated credit losses associated with the receivables. Structured
settlement receivables do not have prepayment risk. The Company's risk is
limited to its Retained Interest and the settlement cash reserve. Consequently,
the Company has not recorded a valuation allowance or recorded a writedown for
the nine months ended September 30, 1997 or the years 1996, 1995 or 1994. The
excess cash flows were discounted at an estimated rate which provides for
valuation including possible credit losses and current market and economic
conditions.
Gains or losses are determined based upon the difference between the sale
proceeds of the receivables sold and the allocation of recorded investment
therein. The Company allocates the recorded
33
<PAGE>
investment in the receivables between the receivables sold, the Retained
Interest and the servicing asset based on the relative fair values of those
portions on the date of sale.
The value of a servicing asset is determined by allocating the receivables'
previous carrying amount among the servicing asset, the receivables that were
sold, and the Retained Interest, if any, based on their relative fair values at
the date of sale. The fair value of the servicing asset is initially calculated
from market estimates of other servicing arrangements using a discount rate that
management believes is appropriate where available; or alternatively, the fair
value is based on an analysis of discounted cash flows that incorporates
estimates of: (i) market servicing costs; (ii) servicing revenue; and (iii)
market profit margins. The servicing asset is amortized in proportion to, and
over the period of, estimated net servicing income. The servicing asset recorded
by the Company as of September 30, 1997 amounted to $1.3 million, net of
accumulated amortization of $54,000.
There can be no assurance that the Company's estimates used to determine
Gain on Sale and servicing asset valuations will remain appropriate for the life
of each securitization. If actual losses exceed the Company's estimates, the
carrying value of Company's servicing asset may have to be written down or the
Company may record a charge against its earnings during the period within which
management recognizes the disparity. See "Risk Factors -- Valuation and
Potential Impairment of Retained Interest."
Allowance for Credit Losses. An allowance for credit losses is maintained
at a level management considers adequate to provide for possible losses based on
known defaulted or delinquent claims, economic conditions and other relevant
factors. The Company calculates its allowance for credit losses in accordance
with Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan. Management considers its portfolio of
receivables to be homogenous except large dollar receivables, defined as
receivables with a purchase price in excess of $250,000. Management individually
determines the valuation of impairment on large receivables and collectively
evaluates the remaining portfolio for impairment. Management will charge-off the
receivables balance at the time it determines it to be uncollectible or if no
progress has been made to restore payments of the defaulted claim for a 12-month
period.
TERMINATION OF S CORPORATION STATUS, PARTNERSHIP STATUS AND INCOME TAXES
Prior to the Reorganization, each of JGW and the General Partners had
elected to be taxed as an S corporation under the Code and applicable provisions
of Pennsylvania law. No provision was made for income taxes by such entities
since all income was taxed directly to, and losses and tax credits utilized
directly by, the stockholders or partners.
Upon the completion of the Reorganization, JGW and the General Partners
will terminate their S corporation status, the Company will directly or
indirectly own 100% of the Partnerships and will be taxed as a C corporation and
adopt Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). See "The Reorganization and Change in Tax Status." Under the
asset and liability method prescribed by SFAS 109, deferred tax assets and
liabilities are recognized for future tax consequences attributable to temporary
differences between the accounting carrying amounts of existing assets and
liabilities and their respective tax bases using currently enacted tax rates.
The effect on deferred tax assets or liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date of the tax
change. Under SFAS 109, deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carry forwards, and then
a valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
On a pro forma basis, the net deferred tax liability resulted primarily
from differences in the treatment of income earned and treatment of the
securitization transaction. The net deferred tax liability will be recorded as a
non-cash charge to the provision for taxes in the quarter in which the Offering
is completed and may result in the Company reporting a net loss for the quarter.
The pro forma provision for income taxes in the accompanying combined statements
of operations shows
34
<PAGE>
results as if the Company had always been fully subject to federal and state
taxes at an assumed tax rate of 37%.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared To Nine Months Ended September
30, 1996
Revenues. Total revenues increased by $23.7 million, or 296.3%, to $31.7
million for the nine months ended September 30, 1997 from $8.0 million for the
nine months ended September 30, 1996. This increase was primarily due to the
$18.1 million in Gain on sale of receivables sold in securitizations and the
increase in interest earned as a result of increases in originations and the
size of the Company's receivables portfolio.
Interest Income. Interest income increased by $5.7 million, or 82.6%, to
$12.6 million for the nine months ended September 30, 1997 from $6.9 million for
the nine months ended September 30, 1996. This increase resulted from an
increase in the average balance of finance receivables which was a result of
increased originations of structured settlements partially offset by a decrease
in acquisitions of other deferred payment obligations. The increased
originations of structured settlements resulted in the Company's experiencing a
higher weighted average yield on its receivables. The average portfolio yield
was 21.4% for the nine months ended September 30, 1997 compared to 18.9% for the
nine months ended September 30, 1996. The Company has adopted a strategy of
retail origination to minimize its dependence on outside brokers. Through retail
originations, the Company avoids paying broker fees and establishes a direct
relationship with its customers which often lead to "continuations."
Continuations occur when claimants sell the Company a portion of their payments
due under their structured settlement and subsequently sell another portion of
their payments at a later time. Continuations give the Company the opportunity
to develop a history with a claimant prior to making additional purchases and,
therefore, potentially minimize risk of loss. The following is a table of
originations, yields and maturities:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
ORIGINATIONS INFORMATION 1996 1997
- ------------------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Structured Settlements:
Maturity value............................. $ 84,676 $163,639
Unearned discount.......................... (48,110) (89,168)
-------- --------
Purchase price............................. $ 36,566 $ 74,471
======== ========
Broker referrals........................... 41.5% 6.7%
Retail originations........................ 58.5% 93.3%
Continuations as a percentage of
originations............................ 19.8% 33.4%
Other Deferred Payment Obligations:
Maturity value............................. $ 17,601 $ 6,985
Unearned discount.......................... (2,586) (1,033)
-------- --------
Purchase price............................. $ 15,015 $ 5,952
======== ========
Weighted Average Yields on Originations:
Structured settlements..................... 21.4% 22.1%
Other deferred payment obligations......... 12.9% 13.3%
Weighted Average Maturity in Years (at
origination):
Structured settlements..................... 7.4 6.3
Other deferred payment obligations......... 1.2 1.2
Gain on Sale of Receivables. The Company recorded Gain on sale of
receivables of $18.2 million for the nine months ended September 30, 1997. The
Company securitized receivables with a book value of $72.6 million, including
initial direct costs of origination, and received cash
35
<PAGE>
totaling $85.6 million and a Retained Interest with a book value of $7.3
million. Included in Gain on sale of receivables for the nine months ended
September 30, 1997 is a Gain on sale of lottery claims totaling $135,000. Gain
on sale of receivables for the nine months ended September 30, 1996 reflected a
Gain on sale of lottery claims totalling $576,000, which is no longer a
significant part of the Company's business. No receivables were securitized
during the nine months ended September 30, 1996. The Company recorded a
servicing asset in connection with its securitizations that was $1.3 million at
September 30, 1997.
Other Income. Other income consists primarily of income earned for
management and other services provided to entities affiliated with Messrs.
Veloric and Delaney. See "Certain Relationships and Related Party Transactions."
Other income increased by $409,000, or 88.7%, to $870,000 for the nine months
ended September 30, 1997 from $461,000 for the nine months ended September 30,
1996. This increase was the result of an increase in the management fees and
servicing fee income offset by a decrease in brokerage fees and commissions due
to the separation of the investment banking business discussed above. Messrs.
Veloric and Delaney have completed the divestiture of these interests.
Accordingly, this income will not recur.
Expenses. Interest expense increased by $2.1 million, or 46.7%, to $6.6
million for the nine months ended September 30, 1997 from $4.5 million for the
nine months ended September 30, 1996. Interest expense increased primarily
because of significant increases in the average borrowings outstanding under the
Credit Facilities in the nine months ended September 30, 1997. Average
borrowings outstanding under the Credit Facilities were $96.9 million for the
nine months ended September 30, 1997 and bore interest at a weighted average
rate of approximately 9.0%. Average borrowings outstanding under the Credit
Facilities were $67.6 million for the nine months ended September 30, 1996 and
bore interest at a weighted average rate of approximately 8.8%. Average
borrowings increased during the nine months ended September 30, 1997 due to an
increase in originations of $29.8 million.
Salaries and benefits expense increased by $2.0 million, or 125.0%, to $3.6
million for the nine months ended September 30, 1997 from $1.6 million for the
nine months ended September 30, 1996. The Company employed 193 persons on a
full-time equivalent basis as of September 30, 1997 and 86 persons on a
full-time equivalent basis as of September 30, 1996, an increase of 124.4%. This
increase was principally the result of an increase in the Company's origination
and servicing activities relating to structured settlements.
Marketing expenses increased by $4.5 million, or 204.5%, to $6.7 million
for the nine months ended September 30, 1997 from $2.2 million for the nine
months ended September 30, 1996 primarily because of the significant increase in
the Company's television, radio and print media-based origination activities.
During the nine months ended September 30, 1997, the Company ran 56,000
television commercials compared to 11,000 for the nine months ended September
30, 1996. The Company's ratio of marketing expenses to receivable originations
was 8.3% for the nine months ended September 30, 1997, compared to 4.3% for the
nine months ended September 30, 1996. This increase in the ratio of the
Company's marketing expenses to originations is a result of the Company's
decreased reliance on brokers as a source of originations.
Other expenses increased by $54,000, or 2.3%, to $2.5 million for the nine
months ended September 30, 1997 from $2.4 million for the nine months ended
September 30, 1996. Other expenses include rent, office supplies, legal and
professional fees and other general and administrative expenses. The increase
was related to the expansion of the structured settlement business and was
offset by increased deferrals of direct orgination cost in accordance with SFAS
91. The Company, as it became more experienced in the origination process,
conducted a revised time and cost study to refine its estimates of direct
orgination costs. This revised study resulted in increased deferrals relating to
legal fees for file reviews, judgment searches, filing and courier fees.
The provision for credit losses increased by $2.5 million to $2.9 million
for the nine months ended September 30, 1997 from $325,000 for the nine months
ended September 30, 1996. The increase in the provision for credit losses for
the nine months ended September 30, 1997 resulted primarily from a
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<PAGE>
review of the portfolio in light of the 103.3% increase in originations of
structured settlements. Although the finance receivables balance decreased as of
September 30, 1997, principally because of the securitization of finance
receivables during 1997, the carrying value of defaulted and delinquent
receivables increased $1.9 million to $3.0 million at September 30, 1997 from
$1.1 million at September 30, 1996. This increase in the carrying value of
defaulted and delinquent receivables caused the Company to increase the
provision for credit losses during the nine months ended September 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Total revenues increased by $2.1 million, or 21.6%, to $11.8
million in 1996 from $9.7 million in 1995 primarily due to the $51.0 million
increase in originations of rights to payment under structured settlements
offset by a $36.2 million decline in originations of other deferred payment
obligations.
Interest Income. Interest income increased by $1.8 million, or 20.9%, to
$10.4 million in 1996 from $8.6 million in 1995 as a result of an increased
volume in the origination of structured settlements and overall increase in
weighted average yields. The average yields have increased as a result of
increased direct originations versus broker referrals and the increasing
concentration of higher yield structured settlements in the Company's mix of
receivables. The average yield on receivables increased to 20.2% in 1996 versus
14.7% in 1995. The following is a table of originations, yields and maturities:
YEAR ENDED DECEMBER 31,
------------------------
ORIGINATIONS INFORMATION 1995 1996
- ------------------------ ------- --------
(DOLLARS IN THOUSANDS)
Structured Settlements:
Maturity value............................. $13,674 $125,697
Unearned discount.......................... (8,758) (69,693)
------- --------
Purchase price............................. $ 4,916 $ 56,004
======= ========
Broker referrals........................... 68.8% 32.6%
Retail originations........................ 31.2% 67.4%
Continuations as a percentage of
originations............................ 8.2% 19.4%
Other Deferred Payment Obligations:
Maturity value............................. $62,851 $ 19,738
Unearned discount.......................... (9,638) (2,686)
------- --------
Purchase price............................. $53,213 $ 17,052
======= ========
Weighted Average Yields on Originations:
Structured settlements..................... 20.5% 22.3%
Other deferred payment obligations......... 14.1% 13.2%
Weighted Average Maturity in Years (at
origination):
Structured settlements..................... 9.1 6.5
Other deferred payment obligations......... 1.3 1.2
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Gain on Sale of Receivables. The Gain on sale of receivables increased by
$308,000, or 114.9%, to $576,000 in 1996 from $268,000 in 1995 and represented
gains on sale of lottery claims purchased and sold to financial institutions.
Other Income. Other income decreased by $109,000, or 12.2%, to $785,000 in
1996 from $894,000 in 1995. This income consisted principally of consulting and
brokerage fees related to merchant banking operations. Since the Company in 1996
transferred the operations of these businesses to entities controlled by Messrs.
Delaney and Veloric, this income will not recur after the completion of the
Offering.
Expenses. Interest expense increased by $1.4 million, or 28.0%, to $6.4
million in 1996 from $5.0 million in 1995 primarily because of significant
increases in the average borrowings outstanding under the Company's credit
facilities in 1996. Average borrowings outstanding under the Company's credit
facilities were $74.4 million for 1996 and bore interest at a weighted average
rate of approximately 8.8%. Average borrowings outstanding under the Credit
Facilities were $50.0 million for 1995 and bore interest at a weighted average
rate of approximately 9.2%.
Salaries and benefits expense increased by $483,000, or 32.2%, to $2.0
million in 1996 from $1.5 million in 1995. The Company employed 106 persons on a
full-time equivalent basis as of December 31, 1996, and 40 persons on a
full-time equivalent basis as of December 31, 1995, an increase of 165.0%. This
increase was principally the result of an increase in the Company's origination
and servicing activities related to structured settlements.
Marketing expenses increased by $3.4 million to $3.6 million in 1996 from
$224,000 in 1995. Marketing expenses increased primarily because of the
significant increase in the Company's television, radio and print media-based
originations activities. The Company commenced its television advertising
campaign in March 1996. Prior to that time, the Company was advertising only in
print media.
Other expenses increased by $2.0 million, or 142.9%, to $3.4 million in
1996 from $1.4 million in 1995. This increase is principally related to the
growth in the structured settlement business in 1996.
The Company provided $500,000 as a provision for credit losses in 1996 as
an estimate of potential losses. The Company's structured settlement business
grew in 1996 and the provision was based on possible losses based on this growth
and an increase in defaulted and delinquent receivables to $1.5 million at
December 31, 1996 from $173,000 at December 31, 1995.
Extraordinary Loss. In March 1995, the Company refinanced all of its then
outstanding notes payable. The Company incurred an extraordinary loss of
$876,000 representing $456,000 of deferred financing costs and $420,000 of
profit sharing payments under a provision of its debt agreement, both of which
were expensed in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Total revenues increased by $6.5 million, or 203.1%, to $9.7
million in 1995 from $3.2 million in 1994 primarily due to an increase in the
volume of other deferred payment obligations originated by the Company and its
entrance into the market for structured settlements.
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<PAGE>
Interest Income. Interest income increased by $5.8 million, or 207.1%, to
$8.6 million in 1995 from $2.8 million in 1994 as a result of the increase in
the acquisition of other deferred payment obligations and the commencement in
August 1995 of the origination of structured settlements. The following is a
table of originations, yields and maturities:
YEARS ENDED DECEMBER 31,
-------------------------
ORIGINATIONS INFORMATION 1994 1995
- ------------------------ -------- --------
(DOLLARS IN THOUSANDS)
Structured Settlements:
Maturity value............................. $ -- $13,674
Unearned discount.......................... -- (8,758)
------- -------
Purchase price............................. $ -- $ 4,916
======= =======
Broker referrals........................... -- 68.8%
Retail originations........................ -- 31.2%
Continuations as a percentage of
originations............................ -- 8.2%
Other Deferred Payment Obligations:
Maturity value............................. $38,745 $62,851
Unearned discount.......................... (6,891) (9,638)
------- -------
Purchase price............................. $31,854 $53,213
======= =======
Weighted Average Yields on Originations:
Structured settlements..................... -- 20.5%
Other deferred payment obligations......... 18.0% 14.1%
Weighted Average Maturity in Years (at
origination):
Structured settlements..................... -- 9.1
Other deferred payment obligations......... 1.2 1.3
Gain on Sale of Receivables. The $268,000 Gain on sale of receivables in
1995 related to lottery claim sales in 1995. There were no similar sales in
1994.
Other Income. Other income increased by $477,000, or 114.4%, to $894,000
in 1995 from $417,000 in 1994. Other income consists primarily of commissions
and brokerage fees earned. Since the Company in 1996 transferred the operations
of these businesses to entities controlled by Messrs. Delaney and Veloric, this
income will not recur after the completion of the Offering.
Expenses. Interest expense increased by $3.5 million, or 233.3%, to $5.0
million in 1995 from $1.5 million in 1994 primarily because of significant
increases in the average borrowings outstanding under the Credit Facilities in
1995. Average borrowings outstanding under the Credit Facilities were $50.0
million in 1995 and bore interest at a weighted average rate of approximately
9.2%. Average borrowings outstanding under the Credit Facilities were $16.2
million in 1994 and bore interest at a weighted average rate of approximately
10.2%.
Salaries and benefits expense increased by $823,000, or 120.0%, to $1.5
million in 1995 from $686,000 in 1994. The Company employed 40 persons on a
full-time equivalent basis as of December 31, 1995 and 32 persons on a full-time
equivalent basis as of December 31, 1994, an increase of 25.0%. This increase
was principally the result of an increase in the Company's commencement of
originations of structured settlements in August 1995.
Marketing expenses increased by $76,000, or 51.4%, to $224,000 in 1995 from
$148,000 in 1994. This increase was the result of additional advertising being
conducted in 1995.
Other expenses increased by $477,000, or 54.6%, to $1.4 million in 1995
from $873,000 in 1994. This increase was related to the commencement of the
acquisition of structured settlements in August 1995.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced, and expects to continue experiencing, negative
cash flow in its operations and requires continued access to financing sources.
The Company's primary operating cash requirements include the funding of (i)
receivables originations, (ii) reserve accounts, overcollateralization
requirements, fees and expenses incurred in connection with its securitization
transactions, (iii) payments due under the Credit Facilities, (iv) tax payments
due on the Company's taxable net income, (v) television, radio and direct mail
advertising and other marketing and (vi) administrative and other operating
expenses.
Adequate credit facilities and other sources of funding, which permit the
Company to fund its operating cash requirements and to securitize or sell
receivables in the secondary market, are essential to the continuation of the
Company's ability to originate receivables. After utilizing available working
capital, the Company borrows money to fund its receivables originations, and
repays these borrowings as the receivables are collected or are sold. Upon
securitization and the subsequent repayment of the borrowings, the Credit
Facilities then become available to fund originations of additional receivables.
Cash used in operations increased $1.2 million, or 9.9%, to $13.3 million
for the nine months ended September 30, 1997 from $12.1 million for the nine
months ended September 30, 1996. The increase resulted primarily from increased
salaries and benefits, marketing and other indirect organization and other costs
to grow the structured settlement receivables business.
Cash provided by investing activity was $35.8 million for the nine months
ended September 30, 1997 compared with cash used of $14.0 million for the nine
months ended September 30, 1996. The increase in cash provided related to the
cash received from the securitization of receivables in 1997 offset by an
increase in the purchase of deferred payment obligation receivables.
Cash used in financing activities was $22.5 million for the nine months
ended September 30, 1997 compared with cash provided by financial activities of
$24.8 million for the nine months ended September 30, 1996. This increase in
cash used related to the repayment of notes payable to banks using the proceeds
of the securitization.
The Company's total borrowing authority under the Credit Facilities totals
$125.0 million. The SSC Facility, a $105.0 million facility with ING and a bank
which expires on August 25, 1998, bears interest at a rate of 3.5% above the
then current London Interbank Offered Rate ("LIBOR") and if not extended is
converted to a term loan. The MFC Facility also provided by ING and a bank
totals $20.0 million in borrowing authority, bears interest at a rate of 1.5%
above LIBOR and expires May 20, 1998. Like the SSC Facility, the MFC Facility
does not contain a provision to extend the facility upon expiration. Upon
expiration, the amounts outstanding under the MFC Facility will convert to a
term loan. The borrower under the SSC Facility is Receivables II, a
bankruptcy-remote entity that uses the funds borrowed under the SSC Facility to
purchase rights to receive payments under structured settlements from SSC. The
funds received from Receivables II are available for the origination of
structured settlements and working capital. The MFC Facility, meanwhile, is
available for the purchase of deferred governmental obligations and working
capital. The Company plans to securitize and sell receivables on a periodic
basis. As of November 30, 1997, the Company had unused availability of $49.8
million under the SSC Facility and $10.0 million under the MFC Facility for
originations and other working capital needs, to the extent that the Company has
identified for origination receivables that comply with the Company's borrowing
base requirements. The proceeds of securitizations will be used to repay the
amounts outstanding under the Credit Facilities to create availability for
future purchases and working capital. The Company completed a securitization and
sale of receivables that closed in two transactions on September 30 and October
1, 1997 from which it realized proceeds that the Company used to repay and
increase the availability under the Credit Facilities. These arrangements,
together with the net proceeds of the Offering, are expected to be sufficient to
meet cash requirements to purchase structured settlements and other deferred
payment obligations and fund operations provided that the Company regularly
completes securitizations and either extends the Credit Facilities or obtains
new credit facilities. There is no assurance that the Company will be able to
extend the Credit Facilities beyond their expiration dates or obtain replacement
financing or favorable terms, if at all.
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IMPACT OF INFLATION
To date, inflation has had no material effect on the Company's results of
operations. Inflation, however, can have a substantial effect on operating costs
and interest rates. Interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. Profitability may be
directly affected by the level and fluctuation in interest rates which affect
the Company's ability to earn a spread between interest income and costs of its
borrowings. The profitability of the Company is likely to be adversely affected
during any period of unexpected or rapid increases in inflation and related
changes in interest rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), which supersedes Accounting Principles Board No. 15, Earnings per Share
("APB 15"), and is effective for the Company for both interim and annual periods
for the year ending December 31, 1997. This statement requires restatement of
all prior-period Earnings per Share data presented. SFAS 128 establishes
standards by simplifying the computation and presentation of earnings per share
("EPS"), and applies to entities with publicly held common stock or to-be-issued
common stock. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of shares of Common Shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other rights to be issued Common Stock were
exercised or converted into Common Stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB 15. If EPS had been calculated in
accordance with SFAS 128, the basic EPS and diluted EPS for the nine months
ended September 30, 1997 would have been the same as primary EPS under APB 15.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), which is effective for the
Company for the year ending December 31, 1998, and requires restatement of all
prior-period financial statements presented for comparative purposes. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It is anticipated that the
adoption of SFAS 130 will not have a material effect on the financial condition
or results of operations of the Company.
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BUSINESS
GENERAL
The Company is a specialty finance company that originates, securitizes and
services rights to receive payments from structured settlements and other
deferred payment obligations. Deferred payment obligations are contractual
arrangements under which one party has agreed to make fixed, scheduled payments
to another party over time to satisfy an obligation that would otherwise be paid
in an up-front, lump sum. The Company specializes in transactions involving two
types of deferred payment obligations: (i) structured settlements arising from
personal injury litigation as to which highly-rated insurance companies are the
obligor, and, to a lesser extent, (ii) other deferred payment obligations such
as claims arising from personal injury litigation and state-operated lotteries,
as to which governmental or quasi-governmental entities are the obligor.
According to Structured Settlements and Periodic Payment Judgments by
Daniel Hindert et al. (1986, 1997), in excess of $40 billion of annuity premiums
paid to third parties to fund structured settlements were generated from 1980 to
1995 and approximately $4 billion in new structured settlements are generated
each year in the United States. Structured settlements continue to be an
attractive option for claimants and insurance companies because structured
settlements: (i) offer favorable tax treatment; (ii) permit payment flexibility
and incorporation of investment management features; and (iii) lower the cost of
compensating victims and thereby help foster timely settlement of litigation.
From the claimants' point of view, however, structured settlements have a
significant weakness, inflexibility. When claimants' financial needs change, the
fixed payment schedule of a structured settlement may no longer satisfy these
needs. The Company's funding programs offer those claimants the ability to
convert their rights to future payments into cash that they can use for such
purposes as paying medical or tuition expenses, purchasing or improving a home,
starting a business or repaying debt.
The Company has achieved significant growth in the number and maturity
value of receivables originated since commencing operations. From inception to
September 30, 1997, the Company has originated 15,698 deferred payment
obligation receivables with an aggregate maturity value of $437.3 million.
Maturity value equals the sum of all future payments to be received under a
deferred payment obligation. The Company has generally purchased receivables at
a significant discount from maturity value. The difference between the amount
paid by the Company and the maturity value of the receivables is accrued as
income over the life of the receivable. The annualized weighted average yield of
the Company's portfolio was 21.4% for the nine months ended September 30, 1997.
The Company's revenues have increased significantly as the Company's
originations volume and portfolio have grown and the Company has employed
securitizations to fund its operations. Revenues increased from $249,000 in 1992
to $11.8 million in 1996 and $31.7 million in the nine months ended September
30, 1997.
The Company completed its first securitization in June 1997, a $70.8
million transaction which it believes was the first investment-grade rated
securitization of structured settlement receivables. The Company sold, through a
special purpose entity, $59.5 million of senior pass-through certificates rated
"A2" by Moody's and "A" by Duff & Phelps. The Company retained $11.3 million in
face value of unrated subordinated certificates and recorded a Gain on Sale of
$11.3 million for the six months ended June 30, 1997. The Company completed a
securitization transaction in which it sold $31.0 million of receivables in
September 1997 and $41.0 million of receivables in October 1997, and recorded a
Gain on Sale of $6.8 million and $8.0 million, respectively. Structured
settlement receivables and other deferred payment obligations differ from other
regularly securitized financial assets, such as consumer credit cards and
mortgage loans, in that (i) prepayment risk is minimal because the timing of
scheduled payments is fixed and (ii) credit risks are low because obligors are
typically insurance companies that have received a credit rating of "A" or
better from A.M. Best or are governmental entities. From inception through
December 31, 1996, the Company had not charged-off any receivables. For the nine
months ended September 30, 1997, the Company recorded a net charge-off of 0.8%
of the Company's average owned portfolio. Although the Company believes that it
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acquires valid ownership of the claimants' rights to receive payments under
their settlement contracts, structured settlement contracts themselves cannot be
assigned. Accordingly, issues surrounding the assignability of structured
settlements could pose material risks to the Company's business. See "Risk
Factors -- Risks Associated with Structured Settlements."
The Company generally does not utilize brokers to originate structured
settlements and other deferred payment receivables and its policies prohibit the
"cold calling" of prospective customers. Instead, the Company utilizes a
nationwide television advertising campaign to identify hard-to-find claimants
who want to sell their payment rights to the Company. Using a 21,520-square-foot
call center, the Company's originations staff responds to claimant inquiries,
attempts to quantify an individual claimant's financial needs and endeavors to
structure the funding transaction to meet those needs. The Company's policies
prohibit the origination of receivables from minors and incompetent persons.
J.G. Wentworth & Company, Inc. was formed in October 1997 in connection
with the Reorganization as a successor to the businesses of the J.G. Wentworth
Affiliated Companies. See "The Reorganization and Change in Tax Status." JGW was
formed by James D. Delaney and Gary Veloric in 1991 as a merchant bank
specializing in transactions in the healthcare industry. In 1992, the Company
entered the business of purchasing the deferred settlement obligations of the
JUA, and its successor, the MTF. As the Company's success in the JUA/MTF market
established its reputation as a creative funding source, it began to search for
other opportunities to purchase income streams that, while secure and
predictable, did not meet the requirements for more traditional means of
financing. After evaluating a number of market possibilities, the Company
decided in 1995 to enter the secondary market for structured settlements. By
using the capabilities and systems it developed for the JUA/MTF business, the
Company emerged as a market leader in the business of purchasing structured
settlements. In May 1995, ING extended a credit facility to the Company to fund
its originations of other deferred payment obligations. In August 1995, the
Company and ING expanded their relationship to include funding the acquisition
of structured settlement receivables, at which time ING became a partner in SSC.
In October 1997, the Company hired six individuals with experience in brokering
seller-financed mortgages and established a subsidiary through which it
initially will purchase seller-financed mortgages.
STRATEGY
The Company's growth strategy is to increase its originations of deferred
payment receivables and profitability by further enhancing its position as the
leading originator of the rights to receive payments from structured settlements
and other deferred payment obligations. The Company believes that the creation
of a strong brand image will enable the Company to increase profitably the
volume of its receivables originated and the size of its servicing portfolio. To
achieve its profitable growth, the Company intends to continue to:
Increase Retail Originations. The Company has been successful at
internally originating leads for the purchase of structured settlements by
developing brand awareness for the "Wentworth" name among potential
claimants through a variety of marketing media, including 88,000
thirty-second television commercials broadcast nationally from March 1996
through September 1997. By effectively reaching its target market, the
Company has largely eliminated its reliance on brokers. The Company
currently originates over 90% of its receivables using its own specially
trained personnel. Independence from the broker community permits the
Company to control the integrity of its origination process, avoid
conflicts among origination channels and maintain pricing flexibility. The
Company operates a 21,520-square-foot call center with approximately 200
telemarketing workstations that utilize predictive dialing and data
tracking technology. The Company has a policy that prohibits making
unsolicited marketing calls to establish initial contact with claimants.
The call center operates 24 hours a day Monday through Saturday.
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Provide Quality Customer Service. The Company believes that the
flexibility of its funding options, the speed of its approval process and
the responsiveness of its customer service personnel help to differentiate
the Company from its competitors. The Company processes applications from
claimants who can establish the existence of the right to be paid under a
settlement agreement. After the Company has evaluated the claimant's
request for funding, the Company typically offers the claimant alternative
proposals for funding. The proposals offer the claimant the choice of
funding varying portions of scheduled payments depending on the claimant's
individual funding needs. The Company believes that its turnaround time for
processing a claim from application to funding compares favorably with its
competitors. The Company's trained personnel also maintain contact with
claimants during and after the funding process to reduce claimant fraud and
encourage repeat business.
Maintain High Underwriting Standards. The Company's comprehensive
underwriting procedures are designed to ensure the quality of originated
receivables and to minimize the risk of claimant fraud, payment diversions
and loss with respect to the receivables. Each claimant file goes through
several stages of review, including a taped exit interview with the
claimant, culminating in approval by a Company staff attorney. After
Company counsel approves a claimant for funding, the Company, in accordance
with the terms of the Credit Facilities, submits the file to Electronic
Data Systems, Inc. ("EDS") for back-up review and approval prior to
disbursing funds. The Company's Underwriting Operations Group is located at
a separate facility from the Company's Originations Group. This physical
separation of the divisions and their clearly delineated responsibilities
provides the Company with an effective checks and balances system.
Market to Referral Sources Such as Attorneys and Bankruptcy and Estate
Trustees. The Company markets directly to referral sources such as
attorneys and bankruptcy and estate trustees. The Company maintains contact
with these sources through a mix of outbound telemarketing, company
sponsored newsletters and advertising in trade and professional magazines.
The Company is the only organization that has received endorsement of the
American Trial Lawyers Association in New Jersey ("ATLA-NJ") in connection
with its settlement funding programs.
Obtain Institutional Financing and Complete Regular
Securitizations. The Company intends to continue to finance its business
by maintaining strong relationships with institutional sources of capital.
The Company intends to complete securitizations on a regular basis to
enhance its liquidity and to reduce outstanding amounts under the Credit
Facilities and its exposure to fluctuations in interest rates. In June
1997, the Company completed the securitization of $70.8 million in
structured settlement receivables, resulting in the realization of a Gain
on Sale of $11.3 million in the second quarter of 1997. In addition, the
Company has completed the securitization of an aggregate of approximately
$31.0 million and $41.0 million in carrying value of structured settlement
receivables in September and October 1997, respectively.
Maintain its Telecommunications and Information Management
Systems. As part of its ongoing effort to increase efficiency, the Company
has equipped its new on-line call center with a proprietary system that
tracks information from initial contact with the claimant through
collection. The Company has recently upgraded its accounting systems and
proprietary databases and portfolio tracking systems. Its proprietary
databases were developed with the assistance of EDS and the Company's
accounting firm. The Company will continue to pursue and evaluate methods
for improving efficiencies by maintaining and upgrading its
telecommunications and information management systems.
Apply its Retail Originations Strategy to the Market for
Seller-financed Mortgages. The Company believes that it can potentially
originate seller-financed mortgages using its internal originations
capacity. By capitalizing on the Company's established reputation as a
creative funding source for alternative cash flows and by leveraging its
existing retail originations infrastructure, the Company believes that it
could be able to originate seller-financed mortgages on a profitable basis.
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Expand into New Deferred Payment Market Niches. The Company regularly
examines new markets to identify opportunities for completing profitable
funding transactions. The Company believes that it can replicate its past
successes in identifying, researching and developing, and then aggressively
entering and becoming a recognized leader in, the structured settlement and
other deferred payment obligations markets by applying its analytical and
empirical approach to new market niches. Company marketing personnel
maintain regular communication with attorneys, insurers and other market
participants and gather information on new deferred payment streams and
funding needs that are compatible with the Company's business model. The
Company's executive team then analyzes these opportunities and seeks the
input of the Company's legal staff as to alternative transaction
structures. In areas perceived as promising, the Company engages in limited
transactions on a trial basis to evaluate the attractiveness of the
markets. The Company also intends to consider expanding into new markets by
the selective acquisition of existing businesses. See "Risk Factors --
Risks Relating to Purchases of New Classes of Assets."
MARKET OVERVIEW
General
The need for the Company's funding services arises from the inflexible
nature of many deferred payment plans and the changing financial needs of many
claimants. Payment structures that originally met a claimant's needs may no
longer meet such claimant's needs as life circumstances change. The Company
provides liquidity to the claimant by purchasing, for a lump-sum, the claimant's
right to receive all or part of the future scheduled payments. Many claimants
want to sell their payment rights because they have an immediate need for cash
and lack access to traditional sources of financing. The claimant gains the
advantage of realizing immediate liquidity on an otherwise illiquid asset and
the Company gains the advantage of acquiring a predictable stream of payments
from sources with strong credit profiles, such as insurance companies and
governmental or quasi-governmental entities.
Structured Settlements
Historically, personal injury lawsuits were settled with up-front, lump-sum
payments in exchange for releases from liability. However, favorable tax rulings
in the 1970s, which allowed future periodic payments to be received by personal
injury claimants on a tax-free basis, and the increasing size of jury awards in
the personal injury arena, propelled the recent growth of structured
settlements. Certain judgments, like settlements, are sometimes structured to
provide for periodic payments rather than payment of a single lump-sum. As
arrangements for payment of structured settlements and structured judgment
awards are substantially similar, the discussion of structured settlements in
this Prospectus applies both to structured settlements and judgments.
In structuring litigation settlements, defendant insurers typically assign
their liability to an Assumption Party, which is typically an affiliate of the
claimant's insurance company, that enters into an annuity contract with the
Annuity Provider to fund the payments. The Assumption Party receives a lump-sum
payment from the defendant insurer in return for assuming the liability for
making settlement payments. The lump sum is sufficient to purchase from another
insurance company (the "Annuity Provider") an annuity contract to fund the
periodic payments to the claimant.
The Code provides for a tax-free receipt of the defendant insurer's payment
to the Assumption Party, provided that the Assumption Party simultaneously
purchases a "qualified funding asset" defined as an annuity purchased from an
insurance company that matches the terms of the settlement. The tax treatment of
the lump sum payment to the Assumption Party would be in jeopardy if the annuity
payments were accelerated. As a result, it is not feasible to restructure the
schedule of settlement payments once the annuity contract is purchased by the
Assumption Party.
The desire of claimants to access cash from their structured settlements
has created a secondary market. Specialty finance companies have developed
programs to purchase some or all of the claimant's right to payment under the
settlement agreement in exchange for paying to the claimant a
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<PAGE>
lump sum. The purchase transaction is structured as an assignment of payment
rights under the underlying settlement agreement because the claimant is not
technically the owner of the annuity contract and does not have the power to
alter any terms except the name of the beneficiary and the address for payment.
See "Risk Factors -- Risks Associated with Structured Settlements --
Restrictions on Assignability of Structured Settlement Receivables."
Other Deferred Payment Obligations
A significant amount of litigation arises from personal injuries allegedly
caused by the operations of municipalities and government-owned enterprises such
as mass transit authorities. Typically these governmental operations
self-insure. Also, many private litigation settlements are funded by insurance
provided through mandatory underwriting pools that state governments established
to respond to failures in the private market for insurance of certain risks,
such as automobile insurance for high risk drivers. The settlement obligations
of self-insured government agencies are backed by the full faith and credit of
the state government. Obligations of the state mandated underwriting pools,
however, are not typically backed by government guarantees. Nevertheless, such
claims have proved to have low credit risk.
Certain state governments and municipalities responded to the growing
volume of personal injury litigation in which they were involved by seeking to
defer settlement payments. Examples of this trend are the deferral programs
established by the JUA, a state-sponsored insurance pool for high risk drivers
in New Jersey, and its successor the MTF. In the early 1990's, the JUA and MTF
experienced financial problems and initiated several deferral programs under
which claimants were forced to wait from 12 to 18 months to receive payment and
in exchange were given the opportunity to earn interest at the rate of six
percent per annum.
These deferral programs offered a significant business opportunity to
firms, such as the Company, who were willing to purchase the deferred payments
from the claimant. Many claimants were willing to sell their payments at a
substantial discount to their maturity value to purchasers who, in turn,
obtained the right to be paid by a creditworthy entity. The number of JUA/MTF
claims originated by the Company has fallen dramatically in recent periods
because of the decreasing number of new claims and is not expected to increase
significantly in the near future. As a result, the Company has no plans to
purchase significant numbers of new JUA/MTF claims.
Certain other deferred payment obligations have many of the same attractive
characteristics to an originator as structured settlements. Because the deferral
arrangement fixes a payment as due on a specific date in the future, these other
deferred payment obligations do not suffer from any risk of prepayment. Also,
because the government-affiliated obligors have relatively strong credit
profiles, credit risks are effectively minimized.
Seller-financed Mortgages
As an integral element of its strategy, the Company regularly evaluates
opportunities to purchase other classes of financial assets. As an outgrowth of
these efforts, in October 1997, the Company hired six individuals with
experience in brokering seller-financed mortgages. The Company plans to engage
in transactions in this market on a trial basis to determine its potential for
development on a larger scale using institutional financing. Seller-financed
mortgages are obligations negotiated directly between a single buyer and a
single seller of real estate. Because they are not originated by financial
institutions, seller-financed mortgages lack uniform underwriting standards. The
varied risk profile of each mortgage loan requires that entities seeking to
purchase seller-financed mortgages in the secondary market perform a detailed
review of information relevant to the credit risks associated with the
transactions.
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The Company expects that each mortgage loan acquired by the Company will be
secured by a first lien on a one- to four-family residential property. Each loan
purchased also must conform to the underwriting guidelines being developed by
the Company. The Company's Underwriting Operations Group will review the
demographic reports, credit reports on the mortgagor, the payment history on
each obligation and an appraisal in making its evaluation of a proposed
investment. The underwriting guidelines currently being developed are intended
to help the Company evaluate the adequacy of each mortgaged property as
collateral for, and, to a lesser extent, the ability of a borrower to repay, the
related mortgage loan.
The Company believes that its experience underwriting transactions
involving unconventional assets and its ability to locate sellers of such assets
may give the Company competitive advantages in the secondary market for
seller-financed mortgages. The Company has not yet completed a detailed review
of the opportunities and risks of the market for seller-financed mortgages.
Although the Company believes seller-financed mortgages may present an
attractive business opportunity, this business has significant risks and, as
such, the commitment of significant resources to this business may have a
material adverse effect on the Company's financial condition and results of
operations. See "Risk Factors -- Risks Relating to Purchases of New Classes of
Assets" and "Risk Factors -- Risks Relating to Entry into Secondary Market for
Seller-financed Mortgages."
Other Markets
Certain large municipalities, such as the City of Philadelphia, and
governmental authorities, such as the Southeastern Pennsylvania Transportation
Authority ("SEPTA") self-insure against many risks, such as bodily injuries
caused by their activities. When these entities settle claims they often impose
deferred payments on claimants. The City of Philadelphia defers payment of its
claims for twelve months and SEPTA defers payments for nine months. Many state
lottery commissions impose structured payouts of awards funded by annuity
contracts. Similar opportunities exist for funding these payments as exists in
the market for structured settlements.
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RECEIVABLES ORIGINATIONS
Since its inception through September 30, 1997, the Company has originated
approximately $303.0 million in maturity value of structured settlements and
more than 9,400 JUA/MTF settlements with a maturity value of approximately
$130.2 million. The following table shows certain information regarding the
Company's deferred payment receivables originations on a quarterly basis for the
quarters shown:
QUARTERLY DEFERRED PAYMENT ORIGINATIONS
<TABLE>
<CAPTION>
NUMBER
THREE MONTHS ENDED OF CLAIMS CARRYING VALUE(1) MATURITY VALUE(2)
- ------------------ ----------- ----------------- -----------------
<S> <C> <C> <C>
December 31, 1992........ 1 $ 12,155 $ 13,750
March 31, 1993........... 38 387,917 485,132
June 30, 1993............ 118 1,077,552 1,386,470
September 30, 1993....... 154 1,567,395 1,990,099
December 31, 1993........ 116 1,280,741 1,687,365
March 31, 1994........... 263 3,584,010 4,471,797
June 30, 1994............ 359 6,097,913 7,511,585
September 30, 1994....... 784 9,396,090 11,447,672
December 31, 1994........ 1,252 12,776,731 15,492,868
March 31, 1995........... 1,377 15,292,890 18,241,866
June 30, 1995............ 1,463 17,081,460 20,273,265
September 30, 1995....... 1,189 15,320,795 18,850,975
December 31, 1995........ 726 10,387,094 19,165,817
March 31, 1996........... 680 13,273,953 22,590,421
June 30, 1996............ 819 16,759,435 33,078,039
September 30, 1996....... 1,074 21,547,767 46,608,781
December 31, 1996........ 1,036 21,456,514 43,357,622
March 31, 1997........... 1,225 25,937,301 52,987,903
June 30, 1997............ 1,348 25,130,082 55,191,722
September 30, 1997....... 1,676 29,355,622 62,444,070
------ ------------ ------------
15,698 $247,723,417 $437,277,219
====== ============ ============
</TABLE>
- ------------------
(1) The carrying value equals the purchase price paid by the Company to
originate the receivables.
(2) The maturity value equals the undiscounted sum of all future payments to be
received under a deferred payment obligation.
MFC's level of origination of JUA/MTF settlements in recent quarters has
fallen in tandem with the decreasing supply of deferred claims. In addition, the
Company does not expect the JUA and MTF to announce any new deferral programs in
the near future. Since inception, the Company has also purchased, in the
aggregate, claims against the City of Philadelphia and Southeastern Pennsylvania
Transportation Authority with maturity values of approximately $929,000 and $1.7
million, respectively. The Company does not expect that originations of these
claims will have a material impact on the Company's financial condition or
results of operations in 1997.
The Company has originated 11.6% and 11.2% of its portfolio of structured
settlement receivables from residents of California and New York, respectively,
and originations in only three other states represent in excess of five percent
(but less than ten percent) of its portfolio of structured settlement
receivables. The deferred payment obligations of the JUA/MTF purchased by the
Company were all originated in the State of New Jersey.
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The following table shows certain information with regard to the
distribution of structured settlement originations through September 30, 1997
based on A.M. Best ratings of Annuity Providers.
DISTRIBUTION OF ORIGINATIONS BY A.M. BEST RATINGS
PERCENT
OF TOTAL
ORIGINATION
RATING PRICE
------ ------------
A++.............................. 24.7%
A+............................... 45.4%
A................................ 18.1%
A-............................... 5.2%
B++.............................. 0.0%
B+............................... 0.2%
F................................ 3.1%
U................................ 3.3%
-----
100.0%
No Annuity Provider represents in excess of 20% of the Company's
originations based on carrying value and only two Annuity Providers represent in
excess of 10% of such originations, one of which is rated "A++" and the other is
rated "A+."
MARKETING AND CUSTOMER SERVICE
The Company markets its structured settlement business through a variety of
channels. Newspaper and television advertising is used to publicize the
Company's services to the broad population of claimants who may require the
Company's services. The Company has developed a comprehensive national
television advertising campaign that the Company believes helps to differentiate
it from its competitors. From March 1996 through September 1997, the Company
broadcast approximately 88,000 thirty-second television commercials nationwide.
The Company utilizes a proprietary call-tracking system that allows it to
trace the origin of each inbound call by geographic market, estimate the
approximate marketing costs incurred to generate the call and track the progress
of each file arising from the call to eventual funding or termination. The
Company's compensation policies for originations personnel rely heavily on
performance bonuses.
The Company also markets directly to referral sources such as attorneys and
bankruptcy and estate trustees. The Company maintains contact with these sources
by a mix of outbound telemarketing, company sponsored newsletters and
advertising in trade and professional magazines. As an example of its successful
marketing to attorneys, the Company is the only organization to receive the
endorsement of ATLA-NJ in connection with its settlement funding programs. The
Company also seeks to increase awareness of the Company's funding products among
attorneys and other professionals and their clients by publishing and
distributing a newsletter named The National Funding Chronicle.
Company personnel have also sought to increase the profile of the Company
among targeted groups by publishing articles in legal and other specialty
publications and making presentations to meetings of local bar associations and
trial lawyers' groups and other professional and business gatherings.
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UNDERWRITING OPERATIONS
The Origination Process
The Company currently originates in excess of 90% of its receivables using
its own trained personnel as opposed to outside brokers. The Company has two
separate divisions that are involved in the funding process, the Originations
Group located in Fort Lee, New Jersey and the Underwriting Operations Group
located at the Company's corporate headquarters in Philadelphia, Pennsylvania.
This physical separation of the groups and their clearly delineated
responsibilities provide the Company with an effective checks and balances
system. The 180-member Originations Group establishes the initial contact with
the claimant but has no power to execute a transaction. Meanwhile, the 18-member
Underwriting Operations Group processes and executes transactions but does not
initiate business.
The origination process starts when a claimant or a broker calls the
Company and ends with the execution of legal documentation and the disbursement
of funds. The Company's policies prohibit personnel from "cold calling"
prospective claimants in connection with structured settlement originations. The
Company's first contact with a prospective claimant is always initiated by the
claimant or a referral source. The Originations Group includes an in-house
advertising agency as well as a 200-seat telemarketing call center with both
inbound and outbound capacity equipped with predictive dialing technology.
The Company's use of its own personnel (as opposed to purchasing claims
through brokers) offers significant operational advantages. Minimizing reliance
on the broker community permits the Company to maintain more control of its
origination process. Broker-generated originations have fallen to less than five
percent of monthly production largely due to the Company's successful direct
marketing efforts. The Company relies on its highly trained sales force to
handle incoming claimant inquiries, provide customer service and thereby
increase the acquisition of high-quality receivables.
The Originations Group is primarily responsible for gathering the
information from the claimant that is necessary for the Company to determine
whether the claimant has an asset that qualifies for funding. A claimant who
cannot supply appropriate evidence of the existence of an annuity contract that
names the claimant as the beneficiary of the policy, as well as appropriate
evidence of the settlement agreement giving rise to the receivable, or whose
financial profile does not make the claimant a logical candidate for funding, is
rejected by trained staff member without the need of further review.
Once a claimant is deemed qualified, the account representative sends the
file to a staff member responsible for pricing, who analyzes the funding
requirements of the claimant, the structure of payments due the claimant and the
Company's return objective and then presents alternative funding choices to the
claimant. To meet the claimant's funding needs, the Company may propose buying
only certain scheduled payments or may propose buying varying portions of each
scheduled payment. These alternatives are presented to the claimant, who then
makes a decision as to which structure best meets his or her requirements. The
Company establishes a direct relationship with its customers which often lead to
"continuations." Continuations occur when claimants sell the Company a portion
of their payments due under the structured settlement and subsequently sell
another portion of their payments at a later time. Continuations give the
Company the opportunity to develop a history with a claimant prior to making
additional purchases and, therefore, potentially minimize risk of loss.
Contract Review and Processing
Once the claimant chooses a funding option, the file is submitted to the
Underwriting Operations Group for detailed review. The Company's comprehensive
underwriting procedures are designed to minimize the risk of claimant fraud and
the resulting loss with respect to its receivables. The structured settlement
purchase agreements typically require that the claimant request the Annuity
Provider to change the address for payment to a bank account controlled by the
Company. The Company also obtains a power of attorney to permit it to accept for
payment and endorse checks naming the claimant as payee. Accordingly, the
Company receives payment directly from the Annuity Provider and not
50
<PAGE>
from the claimant. Because it is paid directly, the Company does not need to
employ traditional underwriting procedures designed to determine the credit
quality of the obligor since the large majority of the structured settlement
receivables are funded by highly rated Annuity Providers. The most prominent
fraud-related risks inherent in the purchase, financing or securitization of
structured settlements are (i) diversion of payments to addresses other than
those of the bank accounts controlled by the Company, (ii) competing creditor
interests and (iii) duplicative financing of the receivable in question. The
Company's underwriting objective is to obtain an unencumbered interest in the
right to receive payments from the structured settlements.
The Company has established written underwriting standards to minimize the
frequency and severity of these types of fraud risks. The review process is
divided into separate stages, with each stage of review being the responsibility
of different staff members. Staff members at each stage of review have
independent authority to reject an application. In the case of structured
settlements, the Company: (i) requires that the claimant retain an attorney in
good standing with the applicable state bar association; (ii) conducts UCC,
lien, and judgment searches against the claimant with whom the Company is
considering a transaction; (iii) accesses a database located at a secure
intranet web site that was created by the Company and several of its competitors
to identify quickly a claimant who is trying to sell his right to receive
payments more than once; (iv) obtains an "estoppel" letter from claimant's
attorney confirming that the claimant agreed to assign payment rights under the
structured settlement knowingly and voluntarily after seeking the advice of an
attorney; (v) conducts taped exit interviews with claimants prior to funding;
(vi) completes review by in-house attorneys to ensure compliance with
eligibility criteria; and (vii) obtains back-up approval from EDS prior to
disbursement of funds.
In 1995, the Company entered into an agreement with EDS, which in June 1997
was amended to increase its term to ten years, pursuant to which, in accordance
with the requirements set forth in the Credit Facilities, the Company delivers
to EDS files with respect to each receivable the Company originates. As a
recipient of each file, EDS can track the Company's portfolio and independently
verify that the underwriting process for each receivable conforms to the
Company's standards. EDS also acts as "back-up" servicer with respect to both
the Company's owned and serviced receivables.
COLLECTIONS
The Company's five-member Collections Department is responsible for
monitoring any receivable for which a payment has not been received as expected,
and to take actions necessary to ensure collection. These instances include
circumstances when: (i) a payment is lost; (ii) a payment is not sent to the
proper address by the Annuity Provider or other obligor; (iii) a claimant has
diverted payment or otherwise compromised the Company's interest in a
receivable; (iv) the claimant seeks protection under the Bankruptcy Code; or (v)
the claimant is deceased.
In the case of structured settlements, once a receivable has been referred
to the Collections Department, the Company investigates the cause of non-payment
and attempts to collect directly from the responsible party. The Company views
its first-level collection efforts as a "rehabilitation" process. Administrative
delinquencies described in subparagraphs (i) and (ii) above are generally
quickly resolved by contacting the Annuity Provider responsible for the payment.
In these cases, the Company first works with the Annuity Provider to freeze
additional payments until it can be determined who is entitled to be paid. In
the event of actual diversion by the claimant, the Company's internal legal
staff initiates legal proceedings and seeks to obtain a judgment against the
claimant. Upon obtaining a judgment against the claimant, the Company serves
notice of such judgment on the Annuity Provider, and the Company subsequently
seeks to garnish the annuity payments and redirect them to the Company. If the
Annuity Provider is located in a jurisdiction different than the one in which
the judgment is obtained, the Company "domesticates" the judgment in the
appropriate jurisdiction and garnishment process is then served on the Annuity
Provider. If the Company's efforts to garnish the annuity payments are
contested, the matter is referred to outside counsel. See "Risk Factors --
Relationships with Annuity Providers."
51
<PAGE>
The following table shows certain information with regard to the
delinquency history regarding the Company's receivables:
ASSET QUALITY DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -------------------
1995 1996 1996 1997
---- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PORTFOLIO DATA:
Allowance for credit losses as a percentage
of owned portfolio (1)..................... -- 0.5% 0.4% 3.7%
Net charge-offs as a percentage of average
owned portfolio (2)........................ -- -- -- 1.0%
STRUCTURED SETTLEMENT DATA:
Total portfolio (3):
Number of defaulted receivables............ 2 34 20 101
Carrying value of defaulted receivables.... $ 40 $1,313 $ 929 $3,577
Defaulted receivables as a percentage of
total portfolio......................... 0.5% 2.1% 2.3% 2.2%
Carrying value of defaulted payments (4)... $ 7 $ 200 $ 126 $ 561
Defaulted payments as a percentage of total
portfolio............................... 0.0% 0.2% 0.2% 0.3%
OWNED PORTFOLIO:
Number of defaulted receivables............ 2 34 20 86
Carrying value of defaulted receivables.... $ 40 $1,313 $ 929 $2,975
Defaulted receivables as a percentage of
total owned portfolio................... 0.5% 2.1% 2.3% 4.9%
Carrying value of defaulted payments....... $ 7 $ 200 $ 126 $ 500
Defaulted payments as a percentage of total
owned portfolio......................... 0.1% 0.3% 0.3% 0.8%
Allowance for credit losses................ -- $ 500 $ 325 $2,641
Allowance for credit losses as a percentage
of owned portfolio...................... -- 0.8% 0.8% 4.3%
Allowance for credit losses as a percentage
of defaulted receivables................ -- 38.1% 35.0% 88.8%
Allowance for credit losses as a percentage
of defaulted payments................... -- 250.0% 257.9% 528.2%
Net charge-offs............................ $ -- $ -- $ -- $ 623
Net charge-offs as a percentage of average
owned portfolio......................... -- -- -- 1.0%
OTHER DEFERRED PAYMENT OBLIGATIONS DATA:
Number of delinquent receivables........... 13 20 16 8
Carrying value of delinquent receivables... $133 $ 197 $ 191 $ 48
Delinquent receivables as a percentage of
total receivables....................... 0.2% 0.7% 0.5% 0.4%
Allowance for credit losses................ -- -- -- $ 102
Allowance for credit losses as a percentage
of delinquent receivables............... -- -- -- 212.5%
</TABLE>
- ------------------
(1) Allowance for credit losses divided by the carrying value of the Company's
owned portfolio.
(2) Net charge-offs, annualized, divided by the average carrying value of the
Company's owned portfolio.
(3) Includes both the Company's owned and serviced portfolios.
(4) Represents the total dollar amount of missed payments.
52
<PAGE>
In the above table, the "number of defaulted receivables" refers to the
number of payment rights acquired pursuant to a single settlement purchase
agreement for which there is at least one diverted payment that has not been
received by the Company within approximately 30 days of its due date.
The Company's other deferred payment obligations have had no charge-offs
since inception. The Company recorded a net charge-off of $623,000 of structured
settlement receivables for the nine months ended September 30, 1997, 1.0%, on an
annualized basis, of its average portfolio owned for such period.
SECURITIZATIONS
In a securitization transaction, the Company sells a pool of structured
settlements to a securitization trust or other special purpose vehicle, which in
turn issues debt or equity securities that are sold to investors. Payments on
the securitized receivables, less a servicing fee and certain related expenses,
are made by the special purpose vehicle to investors. The Company recognizes
revenue in an amount equal to the Gain on Sale when the receivables are sold to
the special purpose vehicle. The Company also retains a subordinated interest in
the pool of securitized receivables which is recorded as a Retained Interest on
the Company's balance sheet.
The following table presents certain information with respect to the
Company's securitizations:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE CREDIT
RECEIVABLES PASS-THROUGH RATING OVER-
SECURITIZATION DATE COMPLETED SECURITIZED RATE (1) (2) COLLATERALIZATION
- -------------- -------------- ------------- ---------------- ------ -----------------
<S> <C> <C> <C> <C> <C>
1997-1........ June 13, 1997 $70.8 million 7.8% A2/A 17%
1997-A........ September 30, 1997 $31.0 million 7.2% A2/A 17%
October 1, 1997 $41.0 million 7.2% A2/A 17%
</TABLE>
- ------------------
(1) Senior securities only.
(2) Rating from Moody's and Duff & Phelps, respectively.
The Company acts as the master servicer of the securitized receivables for
which it receives a fee equal to one percent of the average discounted balance
of the securitized receivables on each monthly distribution date. See "Risk
Factors -- Loss of Servicing Rights and Suspension of Future Servicing Cash
Flows," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "-- Servicing Operations."
As of October 3, 1997, the majority of the approximately $30.0 million in
structured settlement receivables on the Company's balance sheet did not meet
the eligibility criteria of the recent securitizations. These receivables
include originations from Notice States, from Illinois and payment rights
arising from workers' compensation awards. The Company does not anticipate
securitizing these receivables and presently intends to hold them to maturity.
SERVICING OPERATIONS
The Company has the administrative capacity to manage all aspects of the
servicing of its owned and serviced receivables. The Company maintains a
detailed computerized data base which lists payment due dates with respect to
all owned and serviced receivables. Any payment which is not received on time by
the Company is promptly investigated by the Company's Underwriting Operations
Group. To the extent such non-payment or delay in payment is unresolved or is
suspected of being the result of claimant fraud, such receivable is turned over
to the Company's Collections Department for further action.
In addition, the Company acts as the master servicer with respect to its
securitized receivables. As master servicer, the Company is obligated to post
payments, produce reports, and allocate payments for the benefit of certificate
holders. In consideration of its services, the Company collects a servicing fee
equal to one percent of the aggregate receivables balance at the end of each
month. The Company's servicing capacity is supported by EDS, which maintains
detailed computer records pertaining to each of the Company's owned and managed
receivables in its role as "back-up" servicer.
In connection with its monitoring responsibilities, the standard operating
procedures of the Underwriting Operations Group require placing a telephone call
to an applicable Annuity Provider before each payment that is not made on a
recurring basis is due in order to make sure that the address
53
<PAGE>
for the payment is a lockbox controlled by the Company. As monthly payments tend
to be smaller than non-monthly payments, no such calls are made to confirm
payment instructions with respect to such receivables. Instead, the Company
relies on its ability to closely track scheduled payments and to initiate rapid
enforcement action in the case of any non-payment due to claimant fraud.
COMPETITION
The secondary market for deferred payment obligations is currently highly
fragmented. In the market for structured settlements, the Company currently
experiences competition from two main groups: specialty finance companies and
independent brokers. The Company also experiences competition from individual
brokers and networks of brokers through whom some of the Company's direct
funding competitors originate much of their business. Because the Company
originates substantially all of its receivables by its retail originations
infrastructure, independent brokers are more likely to broker claims they
identify to the Company's funding-company competitors than they are to refer
them to the Company. In the future, the Company could face competition from a
wide variety of financial services providers, including commercial banks,
insurance companies, credit unions, savings and loans and other consumer and
commercial lending institutions. Many of these existing and potential
competitors in the financial services business are substantially larger and have
more capital and other resources than the Company. The Company believes that it
competes for business based upon the quality of its services, convenience and
turnaround time in the funding process, availability of funding options and
price. See "Risk Factors -- Competition."
INFORMATION TECHNOLOGY
As part of its ongoing effort to increase efficiency, the Company has
recently installed a call center system combining voice-data integration,
predictive dialing and call and contact management software. The system provides
management with the power to change or update capabilities without the need for
costly customized software code due to its open-architecture design and
easy-to-use application-building software. In addition, the Company purchased a
new general ledger system and upgraded substantially all of its computer
hardware within the last year. The Company intends to continue to look for ways
to improve efficiencies through automation and improved information technology.
The Company believes that its information systems have all capabilities that are
required to handle the change of the century in a standard and accurate manner,
including any data management problems related to the year 2000.
PROPRIETARY RIGHTS AND LICENCES
The Company has applied for federal trademark protection for its company
name and logo, the name of its newsletter, The National Funding Chronicle, and
the slogan "An American Financial Rescue." Although the Company has not received
any response from the Patent and Trademark Office, and does not expect any
adverse office action on the application, there is no assurance that such
trademarks will be issued in a timely fashion, if at all.
GOVERNMENT REGULATION AND LEGISLATION
Although in most states the Company's business is currently not subject to
significant regulation, the Company monitors the progress of regulation and
legislation in each state in which it acquires deferred payment obligations.
Because the business of originating rights to receive payment from structured
settlements has only developed recently, the number of new regulatory
initiatives may increase in the future. For example, the Illinois legislature
recently passed a statute that takes effect on January 1, 1998 that will require
that any assignment of a structured settlement be approved by a court having
jurisdiction over the underlying claim and will prohibit an Annuity Provider
from mailing payments to any party other than the claimant without such court
approval. The Illinois law does not currently specify the standards on which
courts would grant approvals of assignments or the process by which such
approval should be sought. Because of the uncertainty associated with the
Illinois law, the Company did not securitize any receivables purchased from
claimants in Illinois in its most recent securitization.
The Company believes that the pressure on governments to regulate purchases
of structured settlements and other deferred payment obligations will grow as
the market continues to attract new
54
<PAGE>
entrants. The Company has led in the formation of the National Association of
Settlement Purchasers ("NASP"), a trade group, through which it will attempt to
influence the content of new laws and regulations to minimize the adverse impact
of such legislation. Although the Company believes that NASP efforts to promote
a favorable regulatory environment will be successful, the ultimate impact of
future laws and regulations cannot be determined. Accordingly, there is no
assurance that new regulatory and legislative initiatives will not have a
material adverse effect upon the Company's financial condition and results of
operation. See "Risk Factors -- Regulation and Legislation."
LEGAL PROCEEDINGS
The Company initiates legal proceedings in the ordinary course of its
business to collect delinquent payments due to the Company under the terms of
structured settlement purchase agreements entered into with claimants. The goal
of these actions is to obtain a judgment against the claimant and enforce the
judgment by seeking garnishment of payments made by Annuity Providers under the
annuity contracts. See "Business -- Collections." None of these proceedings,
considered separately, is material to the Company's business.
Some Annuity Providers, however, have contested the Company's garnishment
actions, by raising a number of claims, allegations or defenses in their
responsive pleadings. The responses typically raise one or more of the following
issues: (i) contractual provisions in the settlement agreements or annuity
contracts prohibit assignment, encumbrance or garnishment of the scheduled
payments; (ii) the settlement purchase agreement between the Company and the
claimant is unenforceable because of fraud, collusion or misrepresentation by
the claimant and the Company; (iii) scheduled payments are exempt from
garnishment under various states' laws regarding insurance contracts and annuity
contracts; and (iv) certain judgments entered against garnishees by the court
clerk or prothonotary should be stricken because such clerk or prothonotary
exceeded its statutory authority. The Company has vigorously contested, and
expects to continue to contest, these claims, allegations and defenses when they
are raised by Annuity Providers. Although to date none of the defenses to the
Company's garnishment actions brought by Annuity Providers have been successful,
to the extent that a court would accept the validity of such defenses, the
collection efforts of the Company could be materially adversely affected. The
Company was recently served with a complaint by an Annuity Provider that sought
a declaration that such Annuity Provider is not obligated to make scheduled
payments directly to the Company. Although the amount in issue in this
litigation is not material to the Company's business, if the Annuity Provider
were to prevail, other courts could rely on the conclusions of such court and
make it more difficult for the Company to collect payments under structured
settlement receivables. See "Risk Factors -- Relationships with Annuity
Providers."
The Company is also party to two actions initiated by claimants, neither of
which is material to the Company.
EMPLOYEES
As of November 7, 1997, the Company had approximately 235 employees. None
of the Company's employees is represented by a labor union. The Company believes
that its relations with its employees are good.
PROPERTIES
The Company's headquarters and underwriting operations are located in
16,043 square feet of leased office space in Philadelphia, Pennsylvania, its
originations and marketing operations are conducted from a 21,520-square foot
leased facility in Fort Lee, New Jersey and SSC leases shared office space in
Wilmington, Delaware. The leases for the Philadelphia and New Jersey facilities
expire in January 2003 and March 2002, respectively, with the Company having
options with respect to additional space in both locations. In October 1997, the
Company acquired an office in Florida which will be used in connection with the
seller-financed mortgage business. The Company's use of the facility is governed
by two leases, one for 1,650 square feet that expires in December 1999 (with a
three-year renewal option) and the other for an additional 450 square feet that
expires in May 1998 (with a one-year renewal option). With this additional
space, the Company believes its existing facilities are adequate for its current
needs, but that additional space will be required by December 1998.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Immediately after the completion of the Offering, the executive officers
and directors of the Company will be as follows:
NAME AGE POSITION
- ---- --- --------
Gary Veloric................. 37 Chairman of the Board of Directors
James D. Delaney............. 47 President, Chief Executive Officer and
Director
Michael B. Goodman........... 35 Executive Vice President, Chief Operating
Officer and Director
Andrew S. Hillman............ 45 Senior Vice President, General Counsel and
Secretary
James J. O'Malley............ 46 Vice President and Chief Financial Officer
Edward S. Stone.............. 35 Director
Gerald E. Bisbee, Jr......... 55 Director
Philip J. Kendall............ 68 Director
Anthony C. Salvo............. 54 Director
GARY VELORIC serves as the Chairman of the Board of Directors of the
Company. Since founding JGW in 1991, Mr. Veloric has served as a director and in
various capacities as an officer of each of JGW and the General Partners, most
recently as Chairman and, until August 1997, as Chief Financial Officer of each
entity. From 1983 until May 1992, Mr. Veloric served as Senior Vice President of
Development for Geriatric and Medical Companies, Inc., a leading provider of
long-term care based in Philadelphia, Pennsylvania ("GeriMed"). Mr. Veloric also
served as a director of GeriMed.
JAMES D. DELANEY serves as the President and Chief Executive Officer and a
director of the Company. Since co-founding JGW with Mr. Veloric in 1991, Mr.
Delaney has served as a director and in various capacities as an officer of each
of JGW and the General Partners, most recently as President and Chief Executive
Officer of each entity.
MICHAEL B. GOODMAN serves as the Executive Vice President and Chief
Operating Officer and a director of the Company. From March 1994 until October
1997, Mr. Goodman served as Vice President of Marketing of the Company, at which
time Mr. Goodman helped develop the Company's marketing strategy and
originations operations. From 1991 until February 1994, Mr. Goodman was an
independent investor and business consultant.
ANDREW S. HILLMAN serves as the Company's Senior Vice President, General
Counsel and Secretary since joining the Company in October 1997. From September
1994 until he joined the Company, Mr. Hillman was a shareholder at Silverman
Coopersmith Hillman & Frimmer, a Professional Corporation, a law firm based in
Philadelphia, PA, where he specialized in banking and corporate law and
represented the Company in a number of transactions and in certain corporate and
partnership matters. From 1986 until September 1994, Mr. Hillman was a partner
at the law firm of Cohen Shapiro Polisher Shiekman and Cohen in Philadelphia,
Pennsylvania.
JAMES J. O'MALLEY serves as the Company's Vice President and Chief
Financial Officer. From August 1997, Mr. O'Malley served as Chief Financial
Officer of JGW and the General Partners. From 1989 until June 1997, Mr. O'Malley
served in various financial capacities with GeriMed and served as its Vice
President and Chief Financial Officer from June 1992 until it was acquired by
Genesis Health Ventures, Inc. in October 1996.
EDWARD S. STONE serves as a director of the Company. From March 1997 until
October 1997, Mr. Stone served as outside General Counsel to the Company. Mr.
Stone began offering legal and other consulting services to the Company in May
1995 and billed the Company for such services through his legal practice, the
Law Offices of Edward S. Stone, and through Stone International LLC, a
consulting firm of which Mr. Stone is the principal. Until May 1995, Mr. Stone
was a principal of Settlers' Funding LLC ("Settlers' Funding"), a company that
purchased settlement obligations of the JUA and
56
<PAGE>
MTF in competition with the Company, at which time Mr. Stone ceased his
involvement in management of that firm's affairs. Settlers' Funding ceased
business operations in June 1995.
GERALD E. BISBEE, JR. has consented to become a member of the Company's
Board of Directors upon the completion of the Offering. Since January 1990, Mr.
Bisbee has been a director of APACHE Medical Systems, Inc. ("APACHE"), a company
specializing in healthcare decision support services. In November 1997, Mr.
Bisbee resigned as Chairman of APACHE and agreed that he would resign as Chief
Executive Officer when APACHE had selected his replacement. Prior to November
1997, Mr. Bisbee had served in both positions for over five years. Mr. Bisbee
also is a director of the Cerner Corporation, a publicly traded software company
located in Kansas City, Missouri, and is a director of Yamaichi, a registered
investment company. Yamaichi is affiliated with a Japanese financial services
company that ceased operations in November 1997.
PHILIP J. KENDALL has consented to become a member of the Company's Board
of Directors upon the completion of the Offering. Since April 1991, Mr. Kendall
has been Chairman of the Board of Directors of Global Financial Press, a leading
financial printing and document imaging firm ("Global"). Global is providing
financial printing services to the Company in connection with the Offering, for
which it will be paid a fee estimated to be $200,000.
ANTHONY C. SALVO has consented to become a member of the Company's Board of
Directors upon the completion of the Offering. In May 1995, Mr. Salvo co-founded
and became a principal of Rai Capital LLC, a private investment firm located in
New York, NY. From 1988 until December 1994, he was a Vice President with Dillon
Read & Co., Inc., an investment bank based in New York, New York.
CLASSIFIED BOARD; COMMITTEES
The Company's Board of Directors is divided into three classes. Each class
holds office until the third annual meeting for the election of directors
following the election of such class, except that the initial terms of the Class
I, Class II and Class III directors expire in 1998, 1999 and 2000, respectively.
Messrs. Goodman and Stone are Class I directors, Mr. Veloric is a Class II
director and Mr. Delaney is a Class III director. It is expected that upon the
completion of the Offering, Mr. Bisbee will be a Class I director, Mr. Kendall
will be a Class II director and Mr. Salvo will be a Class III director.
The Board of Directors intends to establish an Executive Committee, a
Compensation Committee, an Audit Committee and a Corporate Compliance Committee.
The Executive Committee will be authorized to exercise the power of the Board of
Directors between meetings. However, the Executive Committee may not: (i) amend
the Certificate of Incorporation or the By-laws of the Company, (ii) adopt an
agreement of merger or consolidation, (iii) recommend to the stockholders the
sale, lease, or exchange of all or substantially all of the Company's property
and assets, (iv) recommend to the stockholders a dissolution of the Company or
revoke a dissolution, (v) elect a director, or (vi) declare a dividend or
authorize the issuance of stock. The Compensation Committee will determine
salaries and bonuses and other compensation matters for officers of the Company,
determine employee health and benefit plans, and administer the Company's 1997
Stock Incentive Plan and any similar plans created in the future. The Audit
Committee will recommend the appointment of the Company's independent public
accountants and will review the scope and results of audits, internal accounting
controls and tax and other accounting related matters. The Corporate Compliance
Committee will ensure that the Company complies with all applicable laws and
regulations.
DIRECTOR COMPENSATION
Each of the Company's non-employee directors will be entitled to receive an
annual fee of $10,000 for service as a director and a fee of $1,000 for each
meeting of the Board of Directors or any committee thereof such director
attends. In addition, each director will be entitled to reimbursement of travel
and other expenses incurred in connection with their service as directors. Each
director, other than the Principals, will also receive options to purchase
10,000 shares of Common Stock concurrently with the completion of the Offering
exercisable at the initial public offering price that will vest on the six-month
anniversary of the Offering.
57
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid or accrued by the Company for fiscal 1996 to the Company's
Chief Executive Officer and to the four most highly compensated executive
officers of the Company whose salary and bonus for fiscal 1996 exceeded $100,000
for all services rendered in all capacities to the Company (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
--------------------------- --------- -------- ---------------
<S> <C> <C> <C>
James D. Delaney ....................................... $185,256 -0- $ 24,235
President and Chief Executive Officer
Gary Veloric ........................................... $182,814 -0- $ 24,235
Chairman of the Board of Directors
Michael B. Goodman ..................................... $186,288 -0- $211,735
Executive Vice President and Chief Operating Officer
</TABLE>
- ------------------
(1) The compensation reported in the above table was not paid by the Company but
by JGW and the Partnerships. For a description of the relationships between
the Partnerships and JGW prior to the formation of the Company, see "The
Reorganization and Change in Tax Status."
(2) Consists of commissions of $24,235 paid to each of the Principals as
compensation for services provided in connection with organizing the
business of the Partnerships and approximately $189,500 paid to Mr. Goodman
by MFC as a consulting fee. Amounts do not include $223,000 distributed to
each of Messrs. Delaney and Veloric by MFC and $42,000 distributed to each
of the Principals by SSC in 1996. For additional information regarding
payments made by the Partnerships to the Named Executive Officers and
others, see "Distributions and Dividend Policy" and "The Reorganization and
Change in Tax Status."
EMPLOYMENT AGREEMENTS
In October 1997, the Company entered into employment agreements with the
Principals, each for an initial term of three years. Under the terms of the
employment agreements, the Company will pay each of the Principals a base salary
of $195,000 per year, subject to annual cost of living adjustments and periodic
increases at the discretion of the Compensation Committee of the Board of
Directors. Each year, the executives are entitled to receive a formula bonus in
an amount ranging from 50% to 200% of the executives' base salary. The
percentage used to calculate the amount of the bonus increases on a
straight-line basis with the level of return on average equity ("ROAE"), as
defined in the appropriate employment agreement achieved by the Company for the
previous year. Under the formula, the executives earn no bonus if ROAE is less
than 15% and achieve a maximum bonus of 200% of base salary if the ROAE equals
or exceeds 35%. Each of the Principals will be entitled to participate generally
in the Company's employee benefit plans, including the 1997 Stock Incentive
Plan. Under the terms of the employment agreements each of the Principals will
be awarded options to purchase 50,000 shares of Common Stock upon the completion
of the Offering at the initial public offering price that will vest in four
equal annual installments beginning on the first anniversary of the completion
of the Offering.
Also in October 1997, the Company entered into an employment agreement with
Mr. Hillman for an initial term of one year. Under the terms of this employment
agreement, the Company will pay Mr. Hillman a base salary of $170,000 per year,
subject to annual cost of living adjustments and periodic increases at the
discretion of the Compensation Committee of the Board of Directors. Mr. Hillman
will also be entitled to a formula bonus and to participate generally in the
Company's employee benefit plans on the same terms as the Principals. Mr.
Hillman's employment agreement also provides for an award under the 1997 Stock
Incentive Plan of options to purchase 50,000 shares of Common Stock upon the
completion of the Offering at the initial public offering price that will vest
on the same schedule as the options to be granted to the Principals, except
that, upon Mr. Hillman's resignation for "good reason," the options will vest
immediately.
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According to each employment agreement, if the executive is terminated "for
cause," which is generally defined to include termination by the Company due to
the executive's willful failure to perform his duties under the employment
agreement, the executive's personal dishonesty, or the executive's breach of his
fiduciary duties or any other provisions of his respective employment agreement,
then the Company is obligated to pay the executive so terminated only his base
salary through the date of his termination. If any of the Principals is
terminated without cause, or the executive leaves for "good reason," the Company
is obligated to pay such executive his base salary, bonus and benefits for the
remaining term of his employment agreement or, in the case of Mr. Hillman, the
greater of the remaining term of his Agreement or one year from the date of
termination. As used in the employment agreements, "good reason" includes the
executive officer's resignation due to a breach by the Company of his employment
agreement or a change of control.
1997 STOCK INCENTIVE PLAN
Under the Company's 1997 Stock Incentive Plan (the "Plan"), a variety of
awards, including stock options, stock appreciation rights ("SARs") and
restricted and unrestricted stock grants may be made to the Company's employees,
officers, consultants and advisors who are expected to contribute to the
Company's future growth and success. The Company has reserved 1,500,000 shares
of Common Stock for issuance under the Plan and the maximum number of shares for
which options, SARs or other rights may be granted to any single individual
during one year is 500,000. The Compensation Committee will administer the Plan
and determine the price and other terms upon which awards shall be made. Stock
options may be granted either in the form of incentive stock options or
non-statutory stock options. The option exercise price of incentive stock
options may not be less than the fair market value of the Common Stock on the
date of the grant. While the Company currently anticipates that most grants
under this Plan will consist of stock options, the Company may grant stock
appreciation rights, which represent rights to receive any excess in value of
shares of Common Stock over the exercise price; restricted stock awards, which
entitle recipients to acquire shares of Common Stock, subject to the right of
the Company to repurchase all or a part of such shares at their purchase price
in the event that the conditions specified in the award are not satisfied; or
unrestricted stock awards, which represent grants of shares to participants free
of any restrictions under the plan. Options or other awards that are granted
under the Plan but expire unexercised are available for future grants. It is
expected that prior to the completion of the Offering options to purchase
650,000 shares of Common Stock will be granted under the Plan to the employees,
officers and directors with an exercise price equal to the initial public
offering price per share. No options to purchase Common Stock have been granted
to date.
401(K) SAVINGS PLAN
In January 1997, the Company established a 401(k) Savings Plan (the "401(k)
Plan"), which is intended to comply with Sections 401(a) and 401(k) of the Code,
and the applicable provisions of the Employee Retirement Income Security Act of
1974, as amended. Amounts contributed to the 401(k) Plan are held under a trust
intended to be exempt from income tax pursuant to Section 501(a) of the Code.
All employees of the Company that have completed at least three months of
service and who are at least 21 years old are eligible to participate in the
401(k) Plan. Participating employees are entitled to make pre-tax contributions
to their accounts, subject to certain maximum annual limits imposed by law
($9,500 in 1997), and certain other limitations.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company has not had a compensation committee or
any other committee of the Board of Directors performing similar functions.
Prior to the Offering, decisions concerning executive compensation were made by
the Principals, all of whom were, and continue to be, executive officers of the
J.G. Wentworth Affiliated Companies and participated in deliberations regarding
executive officer compensation. The Board of Directors of the Company has
established a Compensation Committee. See "-- Classified Board; Committees."
None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions. For other related
party transactions, see "Certain Relationships and Related Party Transactions."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock expected as of the completion of the Reorganization and as
adjusted to reflect the Offering by: (i) each of the Company's Named Executive
Officers and directors; (ii) all of the Company's executive officers and
directors as a group; (iii) each person known to the Company to own more than
five percent of the outstanding shares of Common Stock and (iv) each Selling
Stockholder. The information set forth in the table assumes that the initial
public offering price of the Common Stock will be $11.00 per share (the
mid-point of the price range set forth on the cover page of this Prospectus) and
that an aggregate 12,466,367 shares will be issued to Existing Stockholders in
the Reorganization. The calculation of number of shares to be issued to the
Existing Stockholders is governed by the provisions of the Contribution
Agreement. See "The Reorganization and Change in Tax Status."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING NO. OF OFFERING
-------------------- SHARES -----------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
James D. Delaney(1)(2)..... 2,687,313 21.6% 311,165 2,376,148 14.4%
Gary Veloric(1)(2)......... 2,687,313 21.6% 311,165 2,376,148 14.4%
Michael B. Goodman(1)(2)... 2,662,223 21.4% 286,075 2,376,148 14.4%
Edward S. Stone(1)......... 975,731 7.8% 83,333 892,398 5.4%
Alpha Nickelberry(1)....... 526,895 4.2% 45,000 481,895 3.0%
ING(3)..................... 2,927,192 23.5% 250,000 2,677,192 16.3%
All Directors and executive
officers as a group (9
persons)................. 9,012,580 72.3% 991,738 8,020,842 48.7%
</TABLE>
- ------------------
(1) The address of each of Messrs. Delaney, Veloric, Goodman, Stone and
Nickelberry is c/o the Company, The Graham Building, 15th and Ranstead
Streets, 10th Floor, Philadelphia, Pennsylvania 19102.
(2) After the completion of the Offering, Messrs. Delaney, Goodman and Veloric
intend to donate certain of their shares of Common Stock to a public
charitable fund managed by a bank and transfer certain of their shares of
Common Stock to grantor retained annuity trusts established for the benefit
of their respective children, and Mr. Delaney intends to make a gift of
certain other of his shares of Common Stock to his children.
(3) ING's address is 135 East 57th Street, New York, New York 10022. ING is a
wholly owned subsidiary of Internationale Nederlanden Groep N.V., a
diversified financial company based in the Netherlands.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RELATIONSHIPS WITH PRINCIPALS
Since founding JGW, Messrs. Delaney and Veloric have operated a number of
businesses not related to the business of the Company both through JGW and
through other corporations and partnerships under their joint control. Since
1991, Messrs. Delaney and Veloric have engaged in a merchant banking business
that specializes in the healthcare services industry, performing through JGW and
other entities such activities as advising on strategic transactions and
financings and providing mortgage brokerage services (collectively the
"Healthcare Business"). In connection with this business, Messrs. Delaney and
Veloric formed J.G. Wentworth Securities, Inc. ("Securities"), a registered
broker-dealer in compliance with the rules of the National Association of
Securities Dealers, Inc. ("NASD") and applicable federal and state regulatory
authorities. In October 1996, the activities related to the Healthcare Business
conducted by JGW were assigned to two partnerships controlled by Messrs. Delaney
and Veloric, J. G. Wentworth Mortgage Funding, L.P. ("Mortgage Funding") and
J.G. Wentworth Partners, L.P. ("Partners LP"). Since their formation, Mortgage
Funding and Partners LP have paid management fees to JGW in consideration for
the services performed by Company personnel and for the Company's technological
and administrative resources. JGW billed Partners LP $132,000 in 1996 and an
additional $464,000 for the nine months ended September 30, 1997 for management
and related services and billed Mortgage Funding a de minimis amount for such
services during the same periods. Since its inception, Securities has not paid
any management fees to JGW or any of the other JGW Affiliated Companies. At June
30, 1997, Partners LP was indebted to the Company for approximately $100,000 in
management fees billed by JGW, which amount represented the largest balance of
such fees remaining unpaid since such fees were charged. All such amounts are
booked as related party receivables by JGW and do not bear interest. At
September 30, 1997, the remaining unpaid balance of such indebtedness was
$77,000. In November 1997, all unpaid balances were paid in full.
In November 1997, Messrs. Delaney and Veloric sold to an unaffiliated
publicly-traded firm in the healthcare services industry all of their interests
in Securities, Mortgage Funding, Partners LP and J.G. Wentworth Partners, Inc.
("Partners"), the corporate general partner of Partners LP and Mortgage Funding,
and ceased participation in the Healthcare Business. After the completion of the
Offering, all services performed by the Company on behalf of Securities,
Mortgage Funding, Partners and Partners LP, if any, will be performed in
accordance with written agreements approved by the Company's non-employee
directors on terms at least as favorable to the Company as would have been
obtained in agreements with unaffiliated third parties. Pursuant to the sale
agreement, the purchaser of Securities, Mortgage Funding, Partners LP and
Partners will be permitted to use the Company's name for 15 months from the sale
date for the limited purpose of indicating their former affiliation with the
Company. Pursuant to such agreement, the Company gave certain representations
and indemnities to the purchaser that are customary in such transactions.
In January 1996, JGW distributed to a partnership controlled by Messrs.
Delaney and Veloric all of JGW's rights related to its development of a drug
formulary system, its 7.0% interest in a nursing home located in New Jersey and
its rights to be paid an investment banking fee of approximately $200,000. In
April 1996, the Company acquired rights to produce a musical recording and
shortly thereafter transferred such rights to J.G. Wentworth Short-Term Funding
Corp., a corporation controlled by the Principals ("Short-Term Funding"), for a
payment of $83,000. Prior to completion of the Offering, Short-Term Funding will
sell to the Company, through JGW, its rights to payment under several lottery
claims and other financing transactions at their aggregate carrying value of
approximately $244,000. Mortgage Funding also originated a loan transaction
secured by royalty rights for musical recordings and publishing. In November
1997, Mortgage Funding transferred its rights under this loan to the Company for
$188,000, its net book value.
Certain minor personal transactions of the Principals have been conducted
through the offices of the Company. The Company maintained a record of personal
expenses paid through the Company and periodically the Principals reimbursed the
Company for past expenses or deposited personal funds with
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the Company to finance anticipated expenses to be paid through the Company. Any
indebtedness of the Principals to the Company is booked as a related party
receivable and does not accrue interest. Neither Mr. Goodman nor Mr. Veloric has
been indebted to the Company for a material sum since January 1, 1994. In
October 1995, the balance of Mr. Delaney's indebtedness to the Company was
$132,000, which was the largest balance of such indebtedness outstanding since
the beginning of 1994. At September 30, 1997, no indebtedness of Mr. Delaney to
the Company remains outstanding. The Principals do not intend to continue the
practice of conducting personal transactions through the Company after
completion of the Offering. In addition, the Principals have personally
guaranteed the repayment of all amounts borrowed under the MFC Facility, which
guarantee is expected to be released in connection with the Offering.
In connection with the commencement of the seller-financed mortgage
business, Messrs. Veloric, Delaney and Goodman have agreed to lend up to an
aggregate of $2.0 million to a new subsidiary of the Company. The subsidiary may
use these funds to acquire seller-financed mortgages. If the Company borrows any
funds under this arrangement, it will pay Messrs. Veloric, Delaney and Goodman
interest on the outstanding principal balance at 9.75% per annum, and principal
and interest will be payable on demand. As of November 14, 1997, the Company had
not borrowed any amounts under this arrangement. Since the timing for obtaining
such financing is subject to many contingencies, there is no assurance that the
Company will have the funds to repay Messrs. Veloric, Delaney and Goodman when
repayment is demanded. The Company believes that the terms of this loan
arrangement are as favorable to the Company as could have been obtained from
unrelated third parties.
RELATIONSHIP WITH EDWARD S. STONE
In May 1995, Mr. Stone began to provide legal and business consulting
services to the Company. The Law Offices of Edward S. Stone, Mr. Stone's legal
practice, billed the Company an aggregate of $0, $21,490 and $127,904 in 1995,
1996 and the nine months ended September 30, 1997, respectively. Mr. Stone also
provided business consulting services to the Company through Stone International
LLC for which such company received $79,792, $115,939 and $36,827 in
compensation in 1995, 1996 and the nine months ended September 30, 1997,
respectively. After completion of the Offering, Mr. Stone will continue to offer
consulting services to the Company and shall receive a monthly fee of $15,000 in
lieu of legal or other fees otherwise payable to his legal practice or other
entities he controls. Such relationship can be terminated by either party at any
time. The Company believes that the arrangements with Mr. Stone reflect terms
that are as favorable to the Company as it can obtain from consultants or legal
counsel who are unrelated third parties.
RELATIONSHIP WITH ING
In connection with providing the SSC Facility, ING became a 25% limited
partner in SSC. After completion of the Offering, ING is expected to own 16.3%
of the outstanding Common Stock. ING acts as agent and the primary lender under
the Credit Facilities for both MFC and SSC and acts as placement agent for the
Company's securitizations. The Company paid ING a placement agency fee of $1.2
million for the June 1997 securitization and an aggregate placement agency fee
of $1.2 million for the September and October securitizations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." Furman Selz LLC, an affiliate of ING, is a
Representative in the Offering and will receive underwriting compensation on the
same terms as the other Underwriters. See "Underwriting."
Until the completion of the Offering ING has a right of first refusal to
act as placement agent in connection with future securitizations of structured
settlement receivables of up to an aggregate of $200.0 million. As of October
31, 1997, ING had acted as placement agent in connection with the securitization
of an aggregate of $60.5 million. Accordingly, ING currently retains a right of
first refusal with respect to $139.5 million in future securitizations. The
Company has agreed to pay ING a fee of $1.4 million upon the completion of the
Offering in exchange for which ING has agreed to release the Company from its
obligations to use ING as placement agent in securitizations. The Company
believes that the termination of the placement agency commitment with ING will
enable it to
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complete securitizations and obtain institutional financing for its receivables
originations on more favorable terms.
OTHER RELATIONSHIPS
Prior to joining the Company in October 1997, Mr. Hillman's law firm served
as outside legal counsel to the Company. For legal services, the Company paid
$4,900, $65,000, $263,000 and $197,000 to Mr. Hillman's law firm in 1994, 1995,
1996 and the nine months ended September 30, 1997. Any services that will be
provided to the Company by Mr. Hillman's law firm after the completion of the
Offering will be provided on terms no less favorable to the Company than it can
obtain from unrelated third parties.
TRANSACTIONS IN CONNECTION WITH THE FORMATION
On the date of the Reorganization, pursuant to the terms of the
Contribution Agreement, the Principals will contribute all of their capital
stock in JGW, SSC Management and the General Partners and the Existing
Stockholders will contribute 100% of their interests in the Partnerships to the
Company, in exchange for an aggregate of 12,466,367 shares of Common Stock. The
Reorganization will occur immediately prior to the completion of the Offering.
Except for a total of 300 shares issued to the Principals upon the formation of
J.G. Wentworth & Company, Inc. in October 1997, the Common Stock issued pursuant
to the Contribution Agreement will constitute all of the outstanding stock of
the Company prior to the completion of the Offering.
As a result of the Reorganization, JGW and the General Partners, each of
which will become a wholly owned subsidiary of the Company, will be fully
subject to federal and state income taxes, and the Company will record a net
deferred tax liability on its balance sheet. From their formation until the
Reorganization, JGW and the General Partners have been treated as S corporations
for federal income tax purposes and for certain state corporate income tax
purposes. As a result, the historical earnings of JGW and the General Partners
have been taxed directly to their respective stockholders at their individual
federal and state income tax rates. The amount of the deferred tax liability to
be recorded as of the date of termination of the S corporation status will
result principally from temporary differences between accounting and tax
treatment of income earned from finance receivables and Gain on Sale. The net
deferred tax liability will be recorded as a non-cash charge to the provision
for taxes in the quarter in which the Offering is completed. If the S
corporation status of JGW and the General Partners had been terminated as of
September 30, 1997, the amount of the deferred tax liability would have been
approximately $8.1 million. See "Risk Factors -- Possible Loss in Quarter,"
"Capitalization" and "Selected Combined Financial Data."
Since inception, JGW and the General Partners have paid approximately 83%
of their estimated taxable income, including an estimate for the nine months
ended September 30, 1997 to the Principals as S corporation distributions
(approximately $1.3 million was distributed from January 8, 1991 through
September 30, 1997). Such distributions were paid to the Principals as
distributions of a portion of JGW's and the General Partner's earnings and to
pay the Principals' taxes. On October 31, 1997, SSC distributed $2.0 million to
the Existing Stockholders. Since inception through September 30, 1997, the
Partnerships paid approximately $6.7 million to the Existing Stockholders. Prior
to the Reorganization, JGW will distribute an additional estimated $1.2 million
Tax Distribution to the Principals. The Tax Distribution represents the sum of
approximately (i) $298,000 in taxes payable at the applicable statutory rate by
the Principals on the estimated net earnings of JGW and the General Partners for
the period from January 1, 1997 to November 30, 1997 and (ii) $939,000 in taxes
payable at the applicable statutory rate by the Principals on the estimated net
profits of the Partnerships from January 1, 1997 to November 30, 1997. SSC
Management has made no distributions to the Existing Stockholders.
The Company, JGW, the General Partners and the Existing Stockholders have
entered into the Tax Agreement relating to their respective income tax
liabilities. Because JGW and the General Partners will be fully subject to
corporate income taxation after the termination of their S corporation
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<PAGE>
status, the reallocation of income and deductions between the period during
which JGW and the General Partners were treated as S corporations and the period
during which the Company, JGW and the General Partners will be subject to
corporate income taxation may increase the taxable income of one party while
decreasing that of another party. Accordingly, the Tax Agreement is intended to
assure that taxes are borne by the Company on the one hand and the Existing
Stockholders on the other only to the extent that such parties received the
related income. The Tax Agreement generally provides that the Company will
indemnify the Existing Stockholders against any liabilities of the Company after
the Reorganization, and the Existing Stockholders will indemnify the Company
against any tax liabilities of the Existing Stockholders prior to the date of
the Reorganization (in each case such indemnified amounts include interest and
penalties and related costs and expenses). The Company will also indemnify the
Existing Stockholders for all taxes imposed upon them as the result of their
receipt of an indemnification payment under the Tax Agreement. Any payment made
by the Company to the Existing Stockholders pursuant to the Tax Agreement may be
considered by the Internal Revenue Service or state taxing authorities to be
non-deductible by the Company for income tax purposes. The Tax Agreement also
provides that the Company will reimburse the Existing Stockholders for any taxes
that result from the disallowance of deductions taken by the Existing
Stockholders, the result of which is to permit the Company or JGW or the General
Partners to take such disallowed deductions after completion of the
Reorganization. None of the parties' obligations under the Tax Agreement is
secured, and, as such, there can be no assurance that the Existing Stockholders
or the Company will have funds available to make any payments which may become
due under the Tax Agreement. See "The Reorganization and Change in Tax Status."
The Company and the Existing Stockholders are expected to enter into the
Registration Rights Agreement setting forth the obligations of the Company to
effect the registration under the Securities Act of the shares of Common Stock
to be issued to the Existing Stockholders in the Reorganization. It is expected
that the Registration Rights Agreement will give the Existing Stockholders
rights to piggy-back on registrations initiated by the Company and, subject to
customary limits and other considerations, to initiate one registered offering
at the Company's expense during each twelve month period beginning after the
first anniversary of the Offering.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, and 5,000,000 shares of preferred stock, $.01 par value (the
"Preferred Stock"). Upon giving effect to the Reorganization but before
completion of the Offering, the Company will have 12,466,667 shares of Common
Stock outstanding. Upon completion of the Offering, the Company will have
16,466,667 shares of Common Stock outstanding. No shares of Preferred Stock are
currently outstanding.
COMMON STOCK
The holders of Common Stock are entitled to receive dividends, when and as
declared by the Board of Directors, out of funds legally available therefor and
to receive pro rata the assets of the Company legally available for distribution
upon liquidation after payment to holders of preferred stock having a
liquidation preference over the Common Stock. In addition, holders of Common
Stock are entitled to one vote per share on all matters voted on by stockholders
generally, including the election of directors, and do not have cumulative
voting rights. There are no preemptive, conversion or redemption rights
applicable to the shares of the Common Stock. Accordingly, holders of a majority
of the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. The shares of Common Stock to
be issued pursuant to the Reorganization are, and the shares of Common Stock
offered by the Company hereby, upon issuance by the Company against receipt of
the purchase price or other applicable consideration therefor, will be, fully
paid and non-assessable. The Company's Certificate of Incorporation and By-laws
provide that any action requiring stockholder approval, other than the election
of directors, shall require the affirmative vote of shares entitled to cast a
majority of all votes entitled to be cast at the meeting of Common Stock.
PREFERRED STOCK
The Board of Directors is empowered by the Company's Certificate of
Incorporation to designate and issue from time to time one or more classes or
series of Preferred Stock without any action of the stockholders. The Board of
Directors may fix and determine the relative rights, preferences and limitations
of each class or series so authorized. The issuance of, or the ability to issue,
the Preferred Stock could adversely affect the voting power and other rights of
the holders of the Common Stock or could have the effect of decreasing the
market price of the Common Stock or discouraging or making difficult any attempt
by a person or group to obtain control of the Company, including any attempt
involving a bid for the Common Stock at a premium over the then market price.
The Company has no present intention to issue any shares of Preferred Stock.
ANTI-TAKEOVER PROVISIONS
The Company's classified Board of Directors and the authority of the Board
to issue Preferred Stock and to determine the price, rights, preferences and
privileges with respect to those shares without any further vote or action by
the stockholders of the Company could have the effect of delaying, impeding or
discouraging the acquisition of control of the Company in a transaction not
approved by the Board of Directors. The Company's By-laws, including the
provision classifying the Board of Directors, may be repealed or amended by a
vote of stockholders entitled to cast 66 2/3% of the votes at a meeting of
stockholders. In addition, the Company may obtain stockholder approval for
certain actions without calling a meeting or soliciting proxies because the
Certificate of Incorporation and the Company's By-laws permit actions by written
consent of the stockholders without a meeting.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner or unless the interested
stockholder acquired at least 85% of the corporation's voting stock (excluding
shares held by certain designated stockholders) in the transaction in which it
became an interested stockholder. A "business combination" includes mergers,
asset sales
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and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the
previous three years did own, 15% or more of the corporation's voting stock.
LIMITATIONS OF LIABILITY; INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation and By-laws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides that
directors of the Company may not be held personally liable to the Company or its
stockholders for monetary damages for a breach of fiduciary duty, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, relating to prohibited dividends,
distributions and repurchases or redemptions of stock, or (iv) for any
transaction from which the director derives an improper benefit. However, such
limitation does not limit the availability of non-monetary relief in any action
or proceeding against a director. In addition, the Company's Certificate of
Incorporation and By-laws provide that the Company shall indemnify its directors
and officers to the fullest extent authorized by Delaware law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 16,466,667 shares of
Common Stock outstanding. Of these shares, the 5,286,738 shares of Common Stock
sold in the Offering will be freely tradeable without restriction or
registration under the Securities Act. The remaining 11,179,929 shares of Common
Stock outstanding as of the date of this Prospectus are "restricted securities"
as defined by Rule 144, all of which are held by the Selling Stockholders. Under
the terms of the Registration Rights Agreement, the Selling Stockholders will
have the right to cause the Company to register their restricted securities
under certain circumstances beginning one year after the completion of the
Offering. See "Certain Relationships and Related Party Transactions --
Transactions in Connection with the Formation."
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately 164,667 shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner and notice of sale.
In addition, affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of Common Stock which are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two year holding period may resell such shares without
compliance with the foregoing requirements.
The Company, the Selling Stockholders, directors, executive officers and
certain other stockholders of the Company, owning upon completion of the
Offering, in the aggregate, 11,179,929 shares of Common Stock, have agreed that
they will not, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company or any other securities convertible into,
or exercisable or exchangeable for, any shares of Common Stock, or other capital
stock of the Company, for a period of 180 days from the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except that during such period shares of Common
Stock may be issued upon the exercise of outstanding stock options which are
exercisable after the 180th day after the date of this Prospectus. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the securities subject to such lock-up
agreements.
Upon completion of the Offering, it is expected that there will be 650,000
shares of Common Stock issuable upon exercise of options granted under the 1997
Stock Incentive Plan, which will vest in four equal annual installments
beginning on the first anniversary of the completion of the Offering. Pursuant
to the Underwriting Agreement, the Company has agreed not to file, at any time
prior to the date 180 days from the date of this Prospectus, a registration
statement under the Securities Act covering any of such shares. The Company,
however, intends to file a Form S-8 registration statement covering a portion of
these shares within one year from the date of this Prospectus. The shares
registered under such registration statement will be available for resale in the
open market upon the exercise of vested options, subject to Rule 144 volume
limitations applicable to affiliates.
Prior to the Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of the Common Stock in the public
market following the Offering could adversely affect the market price of the
Common Stock, and could impair the Company's future ability to raise capital
through an offering of its equity securities.
67
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, CIBC Oppenheimer Corp. and Furman Selz LLC are acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions contained in the Underwriting Agreement to purchase
from the Company and the Selling Stockholders the number of shares of Common
Stock set forth below opposite their respective names:
NUMBER
UNDERWRITERS OF SHARES
---------
Prudential Securities Incorporated.......
CIBC Oppenheimer Corp....................
Furman Selz LLC..........................
---------
Total............................... 5,286,738
=========
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby, if any are purchased.
The Underwriters, through the Representatives, have advised the Company and
the Selling Stockholders that they propose to offer the Common Stock initially
at the public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $ per
share; and that such dealers may reallow a concession of $ per share to
certain other dealers. After the initial public offering, the public offering
price and the concessions may be changed by the Representatives.
The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
793,011 additional shares of Common Stock at the initial public offering price,
less underwriting discounts and commissions, as set forth on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table.
The Company, the Selling Stockholders, directors, executive officers and
certain other stockholders of the Company have agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company or any other securities convertible into, or
exchangeable or exercisable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except that during such period, shares of Common
Stock may be issued upon the exercise of outstanding stock options and the
Company may issue employee stock options which are exercisable after the 180th
day after the date of this Prospectus. Prudential Securities Incorporated may,
in its sole discretion, at any time and without notice, release all or any
portion of the shares of Common Stock subject to such lock-up agreements.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
68
<PAGE>
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in making such determination will be prevailing market conditions,
the Company's financial and operating history and condition, its prospects and
prospects for the industry in general, the management of the Company and the
market prices of securities for companies in businesses similar to that of the
Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the selling
Underwriters by selling more Common Stock in connection with the Offering then
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position, up to 793,011 shares of Common Stock,
by exercising the Underwriters' over-allotment option referred to above. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of the other Underwriters, the selling concession with
respect to the Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if any is undertaken, it may be discontinued at any time.
Pursuant to Rule 2720(c)(3) of the rules of the NASD, if 10% or more of the
net proceeds of a public offering of securities are intended to be paid to
members of the NASD or affiliated or associated persons that are participating
in the distribution of the offering, the initial public offering price at which
the securities are distributed to the public must be no higher than that
recommended by a "qualified independent underwriter," as defined in Rule
2720(c)(3) of the Conduct Rules of the NASD. ING, an Existing Stockholder and an
affiliate of Furman Selz LLC, one of the Representatives, will be participating
in the Offering as a Selling Stockholder and, following completion of the
Offering, will own approximately 16.3% of the outstanding Common Stock. ING also
will be paid $1.4 million from the proceeds of the Offering in connection with
the termination of ING's role as placement agent in the securitizations. The
Company also intends to use a substantial portion of the net proceeds of the
Offering to pay down amounts outstanding on the Credit Facilities, in connection
with which ING serves as agent. Accordingly, ING is expected to receive in the
aggregate more than 10% of the net proceeds of the Offering. Pursuant to Rule
2720(b)(1)(B)(ii) of the rules of the NASD, due to ING's ownership interest in
the Company and the relationship among ING, Furman Selz and the Company, the
Company is deemed to be an affiliate of Furman Selz, one of the Representatives.
Prudential Securities Incorporated has agreed to act as the qualified
independent underwriter in connection with this Offering, has performed a due
diligence investigation and has reviewed and participated in the preparation of
this Prospectus and the registration statement of which this Prospectus forms a
part. The initial public offering price of the Common Stock as set forth on the
cover of this Prospectus will not be higher than that recommended by Prudential
Securities Incorporated.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Wolf, Block, Schorr and Solis-Cohen LLP, Philadelphia, Pennsylvania.
Certain legal matters relating to the Offering will be passed upon for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
69
<PAGE>
EXPERTS
The balance sheet of J.G. Wentworth & Company, Inc. as of October 10, 1997;
the combined balance sheets as of December 31, 1995, 1996 and September 30,
1997; and the combined statements of operations, changes in equity and cash
flows of the J.G. Wentworth Affiliated Companies for each of the three years in
the period ended December 31, 1996 and the nine months ended September 30, 1997
included in this Prospectus and the Registration Statement have been included
herein in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the shares of Common Stock, reference is hereby made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices located at Seven World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained at prescribed rates from the Public Reference Section of
the Commission, Washington, D.C. 20549. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") systems are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
ANNUAL AND QUARTERLY REPORTS
After the Offering, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith will file reports, proxy statements and other information
with the Commission. The Company intends to furnish its stockholders with annual
reports containing financial statements audited by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited condensed financial information.
70
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
J.G. WENTWORTH & COMPANY, INC.
Report of Independent Accountants..................................... F-2
Balance Sheet as of October 10, 1997.................................. F-3
Note to Financial Statement........................................... F-4
J.G. WENTWORTH AFFILIATED COMPANIES
Report of Independent Accountants..................................... F-5
Combined Balance Sheets as of December 31, 1995, 1996 and September
30, 1997............................................................ F-6
Combined Statements of Operations for the years ended December 31,
1994, 1995, 1996 and the nine months ended September 30, 1996
(unaudited) and 1997................................................ F-7
Combined Statements of Changes in Equity (Deficit) for the years ended
December 31, 1994, 1995, 1996 and the nine months ended September
30, 1997............................................................ F-8
Combined Statements of Cash Flows for the years ended December 31,
1994, 1995, 1996 and the nine months ended September 30, 1996
(unaudited) and 1997................................................ F-9
Notes to Combined Financial Statements................................ F-10
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of J.G. Wentworth & Company, Inc.:
We have audited the accompanying balance sheet of J.G. Wentworth & Company,
Inc. (the "Company") as of October 10, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of October 10, 1997 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
November 11, 1997
F-2
<PAGE>
J.G. WENTWORTH & COMPANY, INC.
BALANCE SHEET
OCTOBER 10, 1997
ASSETS
Cash........................................................ $300
----
Total assets........................................ $300
====
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized; 300 shares issued and outstanding.......... $ 3
Additional paid-in capital................................ 297
----
Total stockholders' equity............................. 300
----
Total liabilities and stockholders' equity.......... $300
====
The accompanying note is an integral part of the financial statement.
F-3
<PAGE>
J.G. WENTWORTH & COMPANY, INC.
NOTE TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
J.G. Wentworth & Company, Inc. (the "Company"), a Delaware corporation, was
formed on October 10, 1997 pursuant to a plan to pursue an initial public
offering (the "Offering") of common stock. Immediately prior to the consummation
of the Offering, the Company will reorganize (the "Reorganization") whereby it
will exchange shares of its common stock for all of the respective limited
partnership interests or capital stock of the following affiliated entities:
J.G. Wentworth Management Company, Inc., (JGW); J.G. Wentworth S.S.C. Limited
Partnership (SSC); J.G. Wentworth Structured Settlement Funding Corporation
(SSFC); J.G. Wentworth Funding Corporation, (FC); J.G. Wentworth MFC Associates,
L.P. (MFC); and SSC Management Company, Inc. (SSC Management Company).
For accounting purposes, the Reorganization will be treated as a reverse
acquisition whereby SSC will acquire the ownership interests in JGW, SSFC, MFC,
FC, SSC Management and the Company.
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Partners of
J.G. Wentworth Affiliated Companies:
We have audited the accompanying combined balance sheets of the J.G. Wentworth
Affiliated Companies (the "Company") as of December 31, 1995, 1996, and
September 30, 1997, and the related combined statements of operations, changes
in equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1996 and the nine months ended September 30, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly in all material respects, the combined financial position of the J.G.
Wentworth Affiliated Companies as of December 31, 1995 and 1996 and September
30, 1997 and the combined results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 and the nine
months ended September 30, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
November 11, 1997
F-5
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
($ IN THOUSANDS)
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
ASSETS
Cash and cash equivalents............... $ 1,509 $ 102 $ 98
Finance receivables, net of allowance
for credit losses of $0 in 1995, $500
in 1996 and $2,743 at September 30,
1997.................................. 60,104 90,430 42,668
Finance receivables in the process of
sale.................................. -- -- 28,714
Office equipment, net of accumulated
depreciation of $73 in 1995, $111 in
1996 and $228 at September 30, 1997... 98 524 912
Office equipment under capital lease.... -- -- 1,422
Servicing asset......................... -- -- 1,328
Retained interests...................... -- -- 7,290
Restricted cash......................... -- -- 1,019
Other assets............................ 1,276 919 1,582
------- ------- -------
Total assets...................... $62,987 $91,975 $85,033
======= ======= =======
LIABILITIES
Notes payable, banks.................... $56,907 $91,858 $71,866
Overdraft payable....................... 955 1,457 865
Accounts payable........................ 2,299 1,541 1,966
Accrued expenses........................ 88 798 5,044
Claims payable.......................... 1,694 724 1,547
Capital lease obligations............... -- -- 1,622
Partners distribution payable........... -- -- 2,025
------- ------- -------
Total liabilities................. 61,943 96,378 84,935
======= ======= =======
Commitments and contingencies (note 10)
EQUITY (DEFICIT)
Common stock, 3,000 shares authorized,
1,300 shares issued and outstanding... 2 2 2
Additional paid-in capital.............. 261 261 261
Retained earnings (deficit)............. 512 285 (1,915)
Partner capital (deficit) accounts...... 269 (4,732) 1,781
Due from stockholders or partners....... -- (219) (31)
------- ------- -------
Total equity (deficit)............ 1,044 (4,403) 98
------- ------- -------
Total liabilities and equity
(deficit)......................... $62,987 $91,975 $85,033
======= ======= =======
The accompanying notes are an integral part of these
combined financial statements.
F-6
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------------
1994 1995 1996 1996 1997
------ ------ ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income....................... $2,755 $8,560 $10,426 $ 6,926 $ 12,621
Gain on sale of receivables........... -- 268 576 576 18,246
Other income.......................... 417 894 785 461 870
------ ------ ------- ------- --------
Total revenues...................... 3,172 9,722 11,787 7,963 31,737
------ ------ ------- ------- --------
Expenses:
Interest expense...................... 1,541 4,995 6,380 4,486 6,620
Marketing expenses.................... 148 224 3,606 2,230 6,686
Salaries and benefits................. 686 1,509 1,992 1,564 3,593
Other expenses........................ 873 1,350 3,384 2,432 2,485
Provision for credit losses........... -- -- 500 325 2,866
------ ------ ------- ------- --------
Total expenses...................... 3,248 8,078 15,862 11,037 22,250
------ ------ ------- ------- --------
Income (loss) before extraordinary
loss.................................. (76) 1,644 (4,075) (3,074) 9,487
Extraordinary loss...................... -- (876) -- -- --
------ ------ ------- ------- --------
Net income (loss)..................... $ (76) $ 768 $(4,075) $(3,074) $ 9,487
====== ====== ======= ======= ========
(Unaudited) Pro forma information:
Pro forma benefit (provision) for
taxes................................. $ 1,508 $ (3,510)
Pro forma net income (loss)............. $(2,567) $ 5,977
Pro forma net income (loss) per share... $ (.20) $ .48
Pro forma number of shares
outstanding........................... 12,579,122 12,579,122
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-7
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
COMBINED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNER
ADDITIONAL CAPITAL DUE FROM
COMMON PAID-IN RETAINED (DEFICIT) STOCKHOLDERS
STOCK CAPITAL EARNINGS ACCOUNTS OR PARTNERS TOTAL
------ ---------- --------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994...... $1 $249 $ 53 $ 401 $ -- $ 704
Net income (loss)............. -- -- (256) 180 -- (76)
-- ---- ------- ------- ----- -------
Balance, December 31, 1994.... 1 249 (203) 581 -- 628
Capital contributions......... 1 12 -- 450 -- 463
Distributions and dividends... -- -- (22) (793) -- (815)
Net income.................... -- -- 737 31 -- 768
-- ---- ------- ------- ----- -------
Balance, December 31, 1995.... 2 261 512 269 -- 1,044
Capital contributions......... -- -- -- 762 -- 762
Distributions and dividends... -- -- (285) (1,630) -- (1,915)
Net income (loss)............. -- -- 58 (4,133) -- (4,075)
Receivable from partner....... -- -- -- -- (219) (219)
-- ---- ------- ------- ----- -------
Balance, December 31, 1996.... 2 261 285 (4,732) (219) (4,403)
Repayments.................... -- -- -- -- 188 188
Distributions and dividends... -- -- (866) (4,308) -- (5,174)
Net income.................... -- -- (1,334) 10,821 -- 9,487
-- ---- ------- ------- ----- -------
Balance, September 30, 1997... $2 $261 $(1,915) $ 1,781 $ (31) $ 98
== ==== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-8
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1994 1995 1996 1996 1997
------- -------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (76) $ 768 $(4,075) $ (3,074) $ 9,487
Adjustments to reconcile net income (loss) to net cash
used in operations:
Amortization and depreciation......................... 632 1,516 1,360 929 2,633
Accretion of unearned income.......................... (2,968) (8,718) (12,303) (7,727) (14,899)
Gain on sale of receivables........................... -- (268) (576) (576) (18,246)
Provision for credit losses........................... -- -- 500 325 2,866
Changes in assets and liabilities:
(Increase) decrease in other assets................... (43) (311) 357 514 (663)
Increase (decrease) in accounts payable............... 305 1,656 (743) (1,007) 425
Increase in accrued expenses.......................... -- 17 710 213 4,246
Increase (decrease) in claims payable................. -- 1,506 (970) (1,694) 823
------- -------- ------- -------- --------
Total adjustments................................ (2,074) (4,602) (11,665) (9,023) (22,815)
------- -------- ------- -------- --------
Net cash used in operations........................... (2,150) (3,834) (15,740) (12,097) (13,328)
------- -------- ------- -------- --------
Cash flows from investing activities:
Finance receivable collections............................ 4,152 44,328 50,857 37,266 35,040
Finance receivable purchases, including acquisition
costs................................................... (32,721) (62,351) (76,755) (57,576) (80,423)
Proceeds from sale of receivables, net.................... -- -- 6,671 6,671 83,767
Increase in restricted cash............................... -- -- -- -- (1,019)
Proceeds from disposition of equipment.................... -- 44 53 -- --
Purchase of equipment..................................... (34) (45) (559) (387) (2,118)
------- -------- ------- -------- --------
Net cash provided by (used in) investing activities... (28,603) (18,024) (19,733) (14,026) 35,247
------- -------- ------- -------- --------
Cash flows from financing activities:
Net draws (repayments) against notes payable, banks....... 29,572 24,256 34,951 25,746 (19,992)
Partners' capital distributions and dividends to
stockholders............................................ -- (815) (1,915) (1,413) (3,149)
Partners' and stockholders' capital contributions......... 11 463 762 562 --
(Decrease) increase in overdraft payable.................. 981 (355) 502 (108) (592)
Receipts (payments) under capital lease obligations....... (1) (15) (15) -- 1,622
Payments for financing costs.............................. (32) (215) -- -- --
Repayments on amounts due from stockholders or partners... -- -- -- -- 188
Borrowings from stockholders or partners.................. 310 -- (219) -- --
Repayment of investor notes............................... (145) -- -- -- --
------- -------- ------- -------- --------
Net cash provided by (used in) financing activities... 30,696 23,319 34,066 24,787 (21,923)
------- -------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (57) 1,461 (1,407) (1,336) (4)
Cash and cash equivalents, beginning of period.............. 105 48 1,509 1,509 102
------- -------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 48 $ 1,509 $ 102 $ 173 $ 98
======= ======== ======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 1,466 $ 4,333 $ 5,624 $ 4,061 $ 6,195
Noncash transactions:
Gross charge-offs......................................... $ -- $ -- $ -- $ -- $ 623
Refinancing of notes payable.............................. $ -- $ 56,014 $ -- $ -- $ --
Retained interests........................................ $ -- $ -- $ -- $ -- $ 7,290
Servicing asset........................................... $ -- $ -- $ -- $ -- $ 1,382
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-9
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The Combined Financial Statements include the accounts of the following
affiliated entities under common management: J.G. Wentworth Management Company,
Inc. (formerly J.G. Wentworth & Company, Inc. a Pennsylvania corporation)
("JGW"), J.G. Wentworth Structured Settlement Funding Corporation ("SSFC"), J.G.
Wentworth S.S.C., Limited Partnership ("SSC"), J.G. Wentworth Funding Corp.
("FC"), J.G. Wentworth MFC Associates, L.P. ("MFC") and SSC Management Company,
Inc. ("SSC Management"), (collectively referred to herein as the "J.G. Wentworth
Affiliated Companies" or the "Company"). All significant transactions between
the affiliated entities have been eliminated in the accompanying combined
financial statements.
JGW is a Pennsylvania corporation, incorporated on January 8, 1991, whose
primary purpose is to provide management services to the affiliated entities in
connection with the administration of insurance and lottery claims. SSFC is a
Delaware corporation that serves as the General Partner in SSC, a Delaware
limited partnership. Both SSFC and SSC commenced operations on August 25, 1995.
FC is a Pennsylvania corporation that serves as the General Partner in MFC, a
Delaware limited partnership. Both FC and MFC commenced operations on June 11,
1993. SSC Management commenced operations on June 6, 1996.
SSC acquires the seller's right to receive payments with respect to settled
insurance company claims and annuities ("structured settlements") and state
lottery winnings ("lottery claims") which are paid to the recipient over a
period of years in return for a discounted lump sum payment to the seller. MFC
acquires settled bodily injury claims ("BI Claims") made to the New Jersey
Automobile Full Insurance Underwriting Association ("JUA"), the New Jersey
Market Transition Facility ("MTF") or other affiliated entities, for which
payment has been deferred twelve or eighteen months. The JUA and MTF pay BI
Claims on a specific date with interest accruing at 6% annually and payable to
MFC. MFC is restricted in its ability to purchase additional BI Claims since the
MTF has discontinued the deferral of claims. Structured settlements, lottery
claims and BI Claims are collectively referred to herein as finance receivables.
Prior to the completion of the initial public offering, the Company will
legally reorganize (the "Reorganization") whereby the limited partners of SSC
and MFC will contribute all of their limited partnership interests and the
stockholders of SSFC, FC, JGW and SSC Management will contribute all of their
capital stock in exchange for shares of common stock of a newly formed
corporation, entitled J.G. Wentworth & Company, Inc. ("Registrant"), a Delaware
corporation. For accounting purposes, the Reorganization will be treated as a
business combination using the purchase method of accounting whereby SSC is
deemed to acquire the Registrant and the remaining entities within the combined
group, including MFC, SSFC, FC, SSC Management and JGW. SSC has been deemed to
be the accounting acquirer for the transaction as the partners of SSC represent
the ownership group receiving the majority voting interests in the combined
company. Furthermore, while Registrant is the legal acquirer, the entity is
currently a company with no substantive operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Finance Receivables
The Company purchases finance receivables at a discount from their maturity
value. This discount is recorded as unearned income and is netted against
finance receivables in the accompanying combined financial statements. Unearned
income on finance receivables is recognized as interest income using the
interest method over the life of the related finance receivables.
Certain direct acquisition costs are capitalized and recognized as an
adjustment to interest income over the contractual lives of the related finance
receivables utilizing the interest method. Direct acquisition costs include
direct personnel cost, legal, search fees, and courier costs incurred in
connection with originations.
F-10
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level that
management considers adequate to provide for potential losses in the finance
receivable portfolio based upon current economic conditions, past experience,
known and inherent risks in the portfolio and other relevant factors. These
credit losses principally result from individual payments not collected on
finance receivables. The Company will charge-off the defaulted payment balance
at the time it determines it to be uncollectible or if there has been no
progress toward restoration of the defaulted payments for a twelve-month period.
The Company calculates the allowance for credit losses in accordance with
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan. Management considers the portfolio of structured
settlements to be homogeneous, except finance receivables in excess of $250,000.
Management individually determines the valuation of impairment on large
structured settlements and collectively evaluates the remaining portfolio for
impairment.
Securitizations
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities ("SFAS 125"). SFAS 125, which
is effective for transfers and extinguishments occurring after December 31,
1996, provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
Gains or losses on securitization transactions are determined based upon
the difference between the proceeds of the receivables sold and the allocation
of recorded investment therein. The Company allocates the recorded investment in
the receivables among the receivables sold, the portion retained, and the
servicing asset based on their respective fair values on the date of sale.
Currently, the Company does not classify finance receivables held for sale
at the time of origination or at a reporting period. The Company intends to
continue to sell finance receivables from time to time in the future based on
eligibility requirements determined at the time of each transaction.
Retained Interests
Retained interests represent subordinated interests and excess cash flows
retained by the Company in connection with securitizations. Those amounts, which
are based on the relative fair value of carrying amounts of assets sold, are
classified as held to maturity and carried at amortized cost in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as the underlying cash flows are not
subject to prepayment risk and the Company has both the ability and intent to
hold these securities to maturity.
Servicing Asset
A servicing asset is determined by allocating the finance receivables,
previous carrying amount between the servicing asset, the finance receivables
that were sold, and the interest retained, if any, based on their relative fair
values at the date of sale. The fair value of the servicing asset is initially
calculated from market estimates of other servicing arrangements using a market
discount rate that management believes is appropriate. The servicing asset is
amortized in proportion to, and over the period of, estimated net servicing
income. Management stratifies servicing assets by each individual securitization
pool since the finance receivables sold have similar characteristics and are not
subject to prepayment. The servicing asset recorded at September 30, 1997
amounted to $1,328,000, net of amortization of $54,000.
Impairment of the servicing asset and the retained interests for each
securitization transaction are periodically assessed utilizing a fair value
method incorporating discounted cash flows. Under this approach, the carrying
amounts are compared to the present value of the estimated expected future cash
F-11
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
flows to determine whether any adjustments should be made to the carrying value
or amortization schedule.
The net cash flows underlying the servicing asset and retained interests
are not subject to prepayment. Impairment of a servicing asset or retained
interests is recognized through a valuation allowance and a charge to current
period earnings if it is considered to be temporary, or, through a direct
write-down of the asset and a charge to current period net income if it is
considered other than temporary. Currently, the Company has not recorded a
valuation allowance or a write-down for these assets.
Restricted Cash
In connection with its securitization transactions, the Company is required
to maintain a cash reserve account with the trustee. This amount has been
presented on the combined balance sheet as restricted cash.
Income Taxes
Affiliated entities within the Company are currently taxed as S
corporations or partnerships under the Internal Revenue Code and under
applicable provisions of Pennsylvania law. Accordingly, no provision has been
made for income taxes since all income is taxed and losses and tax credits are
utilized directly by the stockholders or partners.
The affiliated entities will terminate their S corporation status upon the
Reorganization. Subsequent to the Reorganization, the Company intends to file a
consolidated federal income tax return. Upon termination of the tax status and
completion of the Reorganization, the Company will apply SFAS No. 109,
Accounting for Income Taxes ("SFAS 109"), to its arising temporary differences.
Under the asset and liability method prescribed by SFAS 109, deferred tax assets
and liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis (temporary differences) using
currently enacted tax rates. The effect on deferred tax assets or liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date of the tax change. Under SFAS 109, deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards, and then a valuation allowance is established to reduce
that deferred tax asset if it is "more likely than not" that the related tax
benefits will not be realized.
On a pro forma basis, the net deferred tax liability at September 30, 1997
resulted primarily from differences in the financial statement and tax treatment
of income earned from the finance receivables and the gain on sale of
receivables. The net deferred tax liability will be recorded as a non-cash
charge to the provision for taxes in the quarter in which the proposed initial
public offering is completed.
Marketing Expenses
The Company's policy is to expense marketing costs as incurred.
Cash Flow Statement
For purposes of the combined statement of cash flows, the Company considers
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. The Company's cash management program
utilizes zero balance accounts. Accordingly, book overdraft balances have been
reclassified to overdraft payable.
Recent Accounting Pronouncements
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings per Share ("SFAS 128") which supersedes Accounting Principles
Board Opinion No. 15, Earnings per Share ("APB 15"), and is effective for the
Company for the year ending December 31, 1997. This statement requires
restatement of all prior-period earnings per share data presented. SFAS 128
establishes standards by simplifying the computation and presentation of
earnings per share ("EPS"),
F-12
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
and applies to entities with publicly held common stock or potential common
stock. It replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB 15. If EPS had been calculated in accordance with
SFAS 128, the basic EPS and diluted EPS for the six months ended June 30, 1997
would have been the same as primary EPS under APB 15.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"), which is effective for the
Company for the year ending December 31, 1998, and requires restatement of all
prior-period financial statements presented for comparative purposes. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements and SFAS 130 requires that all items are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It is anticipated that the
adoption of SFAS 130 will not have a material effect on the combined financial
position or results of operations of the Company.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the amount of revenues and expenses during the reported
period. Actual results may differ from those estimates.
Pro Forma Earnings Per Share
The pro forma income (loss) per share is computed based on 12,466,667
shares outstanding before the initial public offering giving effect to the
Reorganization and reflects the issuance of 112,455 shares of Common Stock which
would be needed to generate the cash to fund the S corporation distribution at
the assumed initial public offering price of $11.00 per share.
Unaudited Information
In the opinion of management, the unaudited Combined Financial Statements
and related notes for the nine months ended September 30, 1996 reflect all
adjustments (which include normal recurring adjustments) necessary to present
fairly the combined statements of operations and cash flows for the period
presented. The combined results for the interim periods are not necessarily
indicative of combined results to be expected for the full year.
F-13
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCE RECEIVABLES
Finance receivables consist of the following:
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(000'S) (000'S)
Structured settlements.................. $13,639 $133,365 $ 69,494
BI claims............................... 56,583 30,668 13,668
Lottery claims.......................... 4,598 2,028 71
Other claims............................ -- -- 319
------- -------- --------
Maturity value........................ 74,820 166,061 83,552
Unearned income......................... (15,348) (83,656) (42,574)
Deferred acquisition costs, net......... 632 8,525 4,433
------- -------- --------
Carrying value........................ 60,104 90,930 45,411
Allowance for credit losses............. -- (500) (2,743)
------- -------- --------
Finance receivables, net.............. $60,104 $ 90,430 $ 42,668
======= ======== ========
At December 31, 1996 and September 30, 1997, the contractual maturities of
finance receivables were as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(000'S) (000'S)
1997.................. $ 32,048 $ 6,630
1998.................. 8,342 17,408
1999.................. 12,626 9,600
2000.................. 6,897 7,952
2001.................. 17,726 6,497
2002 and thereafter... 88,422 35,465
-------- --------
$166,061 $ 83,552
======== ========
Through September 30, 1997, the Company sold structured settlements
totalling $72,627,000 (the receivables) to outside investors (the "A Certificate
Holders") through private placement securitization transactions. Proceeds of the
securitizations amounted to $85,617,000 which resulted in Gain on sale of
receivables of $18,111,000. The Company sold the receivables for cash, and
retained subordinate interests in any remaining cash flows, after expenses, of
the securitized receivables. The A Certificate Holders' recourse to the Company
is limited to the retained interest and the required cash reserve balance. The
Company services the receivables sold for a fee.
Changes in the allowance for credit losses during the periods indicated
were as follows:
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(000'S) (000'S)
Balance, beginning of period............ $ -- $ -- $ 500
Provision for credit losses............. -- 500 2,866
Charge-offs............................. -- -- (623)
------- -------- --------
Balance, end of period.................. $ 0 $ 500 $ 2,743
======= ======== ========
There were no finance receivables that were individually identified as
impaired for the periods ended December 31, 1995, 1996 and September 30, 1997
and therefore the allowance for credit losses attributed to impaired loans
amounted to $0, $0 and $0 at December 31, 1995 and 1996, and September 30, 1997,
respectively.
F-14
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCE RECEIVABLES -- (CONTINUED)
Finance receivables in process of sale totalling $28,714,000 at September
30, 1997 represent structured settlement receivables sold by SSC on October 1,
1997. SSC received cash of $34,436,000 and recorded a gain of $8,020,000 in
connection with this sale.
4. OFFICE EQUIPMENT
Office equipment at December 31, 1995 and 1996 and September 30, 1997 was
as follows:
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
(000'S) (000'S)
Equipment............................... $65 $109 $ 138
Furniture............................... 35 193 202
Data processing systems................. 71 333 601
Leasehold Improvements.................. -- -- 199
--- ---- ------
171 635 1,140
Less accumulated depreciation......... (73) (111) (228)
--- ---- ------
$98 $524 $ 912
=== ==== ======
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was $21,000, $46,000 and $114,000, and for the nine months ended September 30,
1996 and 1997 was $57,000 and $308,000, respectively.
5. NOTES PAYABLE TO BANKS
A summary of Notes Payable to Banks is as follows:
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(000'S) (000'S)
Notes Payable-MFC (a)... $49,616 $27,414 $12,062
Notes Payable-SSC (b)... 7,291 64,444 59,804
------- ------- -------
$56,907 $91,858 $71,866
======= ======= =======
(A) NOTES PAYABLE, MFC
On May 26, 1995, MFC consummated a $90,000,000 revolving credit agreement
with lenders which replaced the revolving credit and term loan and subordinated
term loan agreements outstanding on December 31, 1994. Pursuant to an amendment
dated March 20, 1996, the credit facility was reduced to $80,000,000. MFC has
the option to convert all or any portion of the loan accruing interest at the
Base Rate Option to a fixed rate loan with a stated maturity date (the "Fixed
Rate Option"). At December 31, 1996, $25,968,000 has been converted to fixed
rates and with maturities less than 1 year. The credit agreement, as amended in
1997, was reduced to $20,000,000 and expires on May 20, 1998. Interest is
payable monthly until all principal has been repaid in full at the greater of
Chemical Bank or Citibank's prime rate minus 1.5% or LIBOR plus 1.5% (the "Base
Rate Option"). The weighted average interest rate on the borrowings under this
agreement were 10.2%, 8.8%, 8.8% and 7.2% in 1994, 1995, 1996, and the nine
months ended September 30, 1997, respectively. Borrowings under this agreement
are collateralized by BI Claims and substantially all other remaining assets of
MFC.
In connection with the revolving credit agreement, MFC is obligated to pay
a commitment fee of 1/4% per annum on the average daily unused portion of the
revolving credit agreement. The commitment fee amounted to $91,000, $39,000 and
$42,000 in 1994, 1995, and 1996, respectively, and $17,000 for the nine months
ended September 30, 1997.
F-15
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE TO BANKS -- (CONTINUED)
Under the terms of the revolving credit agreement, the most restrictive
covenant is a minimum net worth requirement, as defined in the agreement.
The MFC notes payable are personally guaranteed by two of the partners of
MFC.
(B) NOTES PAYABLE, SSC
On August 25, 1995, SSC consummated a three-year, $20,000,000 revolving
credit and term loan agreement with two banks, one of which is ING which is one
of the Limited Partners of SSC. Through December 31, 1996, the agreement was
amended twice and the line increased to $75,000,000. Effective February 1997,
the revolving credit agreement was amended to reflect an increase to
$105,000,000 and addition of another bank was added to the facility. On
September 30, 1997, a wholly owned subsidiary of SSC became the obligor of the
notes payable. Interest is payable monthly on the average daily borrowings under
the revolving credit agreement at the greater of the lender's prime rate plus
0.5% or LIBOR plus 3.5%. Principal is repaid as the underlying finance
receivables are collected. The agreement expires on August 25, 1998 and if not
extended will convert to a term loan arrangement subject to certain conditions.
Borrowings under this agreement are collateralized by structured settlements and
related assets of SSC. The weighted average interest rate during 1995 and 1996,
and the nine months ended September 30, 1997 was 9.8%, 9.8%, and 9.3%,
respectively. At December 31, 1996 and September 30, 1997, the interest rate on
the outstanding loan balance was 8.6% and 9.1% respectively.
In connection with the revolving credit agreement SSC is obligated to pay a
commitment fee of 0.5% per annum on the average daily unused portion of the
revolving credit agreement. This fee amounted to $15,000 in 1995, $45,000 in
1996 and $82,000 in 1997 from the nine months ended September 30, 1997.
Under the terms of the revolving credit agreement, the most restrictive
covenant relates to the payment of dividends or distribution of assets.
6. LEASES
The Company has commitments under long-term operating leases, principally
for building space which are for a five year term. The following summarizes
future minimum lease payments under non-cancelable operating leases.
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(000'S) (000'S)
1997......... $ 535 $ 134
1998......... 550 567
1999......... 544 547
2000......... 538 538
2001......... 538 538
Thereafter... 331 467
------ ------
$3,036 $2,791
====== ======
Rent expense was approximately $133,000 in 1994, $135,000 in 1995, $195,000
in 1996 and $340,000 for the nine months ended September 30, 1997.
In September 1997, the Company entered into a sale/leaseback arrangement
for certain office equipment. The proceeds received under the arrangement were
$1,622,000. The transaction is accounted for as a financing whereby the
equipment remains on the books and continues to be depreciated. The term of the
lease is for 48 months with a monthly payment of approximately $39,000.
F-16
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. GAIN ON SALE OF LOTTERY CLAIMS
From time to time, SSC will enter into an agreement to sell lottery claims.
The sale of the lottery claims resulted in gains of $268,000 in 1995, $576,000
in 1996, and $135,000 in the nine months ended at September 30, 1997, which is
included in Gain on sale of receivables in the accompanying Combined Financial
Statements. The proceeds from the sale of the lottery claims were used to pay
down the Note Payable-SSC.
8. EXTRAORDINARY ITEM
On March 29, 1995, MFC refinanced all of its outstanding notes payable. The
Company incurred an extraordinary loss in the amount of $876,000 as a result of
the refinancing which has been reported as a separate line item in the
accompanying combined statement of operations. Deferred financing costs in the
amount of $456,000 were recorded as a loss on that date, as well as the
profit-sharing provision of the subordinated loan agreement which amounted to
$420,000.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, ("SFAS 107") as amended by Statement of
Financial Accounting Standards No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, requires disclosure of the
estimated fair value of an entity's assets and liabilities considered to be
financial instruments. The majority of the combined assets and liabilities are
considered financial instruments as defined in SFAS 107. These amounts represent
estimates of fair value of financial instruments at a point-in-time. Significant
estimates using available market information and appropriate valuation
methodologies were used for the purposes of this disclosure. The estimates are
not necessarily indicative of the amounts the Company could realize in a current
market exchange, and the use of different market assumptions or methodologies
could have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------- --------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 1,509 $ 1,509 $ 102 $ 102 $ 98 $ 98
Finance receivables owned
and in the process of
sale................... 60,104 60,104 90,430 104,038 71,382 82,267
Liabilities:
Notes payable............. 56,907 56,907 91,858 91,858 71,866 71,866
Capital lease
obligations............ -- -- -- -- 1,622 1,622
</TABLE>
The Company using the following methods and assumptions to estimate fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents: The carrying value is a reasonable estimate of
fair value.
Finance Receivables: At December 31, 1995, the carrying amount in the
Combined Financial Statements approximates fair value because of the relatively
short period of time between the origination of the receivables and their
expected realization. At December 31, 1996 and September 30, 1997, the fair
value is based on the discounted value of the expected future cash flows from
the receivables, using a discount rate that management believes is appropriate
based on aggregate risk factors.
Notes Payable: The carrying value is a reasonable estimate of fair value
due to the variable rate nature of existing SSC notes and the short-term nature
of the MFC notes.
Capital Lease Obligations: The carrying value is a reasonable estimate of
fair value as the Company entered into the obligation in September 1997.
F-17
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company currently maintains a contractual relationship with an
independent party whereby the party performs verification, quality control and
collection procedures with respect to finance receivables. The agreement for
lottery claims and other finance receivables will automatically renew for two
successive terms of three years each with subsequent terms of two years each,
unless terminated by either party to the contract.
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the combined financial position or the
results of operations of the Company.
ING Capital Corporation has a right of first refusal to act as placement
agent in connection with securitizations of structured settlement receivables of
up to an aggregate of $200.0 million. At October 3, 1997, ING had acted as
placement agent in connection with the securitization of an aggregate of $60.5
million. Accordingly, ING retains a right of first refusal with respect to
$139.5 million in future securitizations (see Note 14).
11. RELATED PARTY TRANSACTIONS
The Company has an agreement with Gemini Media, Inc. ("Gemini") in which
Gemini will provide marketing and advertising services to the Company. An
employee of the Company is the owner of Gemini. Fees paid to Gemini for
marketing services were $0, $0, $2,362,000 and $6,297,000 for the years ended
December 31, 1994, 1995, 1996 and the nine months ended September 30, 1997,
respectively. At December 31, 1996 and September 30, 1997 there was $500,000 and
$1,099,000, respectively of prepaid expenses to Gemini included in other assets.
The Company receives consulting and legal services from a law firm whose
general partner is a limited partner of SSC. Fees paid for consulting and legal
services by the Company for the years ended December 31, 1995, 1996 and the nine
months ended September 30, 1997 were $5,000, $70,000, and $88,000, respectively.
There were no accrued legal expenses for these services as of December 31, 1995,
1996 and September 30, 1997.
An affiliate of ING Capital Corporation, a 25% owner of SSC, acts as a
lending institution for both MFC and SSC and acts as the private placement agent
in connection with SSC's securitization transactions for SSC. Both MFC and SSC
maintained revolving lines of credit with ING. Interest expense incurred on
Notes payable to banks by the Company for the years ended December 31, 1994,
1995, 1996 and the nine months ended September 30, 1997 were $1,541,000,
$4,995,000, $6,380,000, and $6,380,000 respectively. Accrued interest expense
was $51,000, $476,000 and $901,000 as of December 31, 1995 and 1996, and
September 30, 1997. Commitment fees paid on average daily unused lines of credit
are disclosed in Note 6. There were no bank fees paid or accrued for
securitizations in 1994, 1995 and 1996. The Company paid ING a fee of $2,422,000
in 1997 as a placement fee for securitizations, including $697,000 for the
October 1, 1997 securitization (see Note 10).
The Company performs management services for affiliated companies not
included in the accompanying Combined Financial Statements. These fees amounted
to $0, $0, $139,000 and $529,000 in 1994, 1995, 1996, and the nine months ended
September 30, 1997 respectively.
In addition, the Company had noninterest bearing receivables from partners
in the amounts of $0 and $219,000 at December 31, 1995, 1996 and $31,000 at
September 30, 1997 respectively.
JGW purchased $244,000 of Finance Receivables from a Company owned by its'
stockholders. The $244,000 is included in accounts payable in the accompanying
Combined Financial Statements.
12. EMPLOYEE BENEFIT PLAN
The Company maintains a Savings Plan under section 401(k) of the Internal
Revenue Code (the "Plan"). The Plan was established effective January 1, 1997
and covers substantially all employees of
F-18
<PAGE>
J.G. WENTWORTH AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE BENEFIT PLAN -- (CONTINUED)
the Company. Under the plan contributions are at the discretion of the Board of
Directors. No contributions have been made by the Company to the Plan.
13. RISKS AND UNCERTAINTIES
The Company's finance receivable balances are primarily obligations of
insurance companies, state lottery divisions, and states and municipalities. The
Company's exposure to concentration of credit risk with respect to these
receivables is generally limited due to the large number of insurance companies
comprising the Company's receivable base, their dispersion across geographical
areas, and state insurance guarantee funds. As of September 30, 1997, two
insurance companies comprise approximately 10% of the total originations,
respectively, while three states represent in excess of 10% of the total
originations, respectively. The Company's exposure to credit loss in the event
of non-performance of these entities is represented by the finance receivable
balance.
The Company's earnings are dependent upon the level of net interest income
that is earned annually. Accordingly, the earnings are subject to risks and
uncertainties surrounding its exposure to changes in the interest rate
environment and ability to maintain sufficient effective yields in the future.
The Company retains interest rate risk resulting from mismatches between
the fixed discount rates of finance receivables in relation to the variable rate
notes payable to a bank maturing or repricing within a given time period. An
increase in interest rates could significantly affect the Company's net interest
income.
The Company is also subject to numerous risks associated with structured
settlements. The risks include, but are not limited to, restrictions on
assignability of structured settlements, a change in the U.S. tax law, diversion
by a seller of scheduled payments to the Company, insolvency of a seller or
insurance company, and other potential risks of regulation and/or legislation.
The Company has and will continue to experience negative cash flow from
operations. As a result of its anticipated growth, the Company will remain
dependent on its credit facilities and access to the securitization markets.
Significant estimates are made by management in determining the allowance
for credit losses, servicing assets, the fair value of securitized assets
retained and certain deferred acquisition costs. Consideration is given to a
variety of factors in establishing these estimates, including current economic
conditions, the results of internal review processes, delinquencies and the
results of internal time analysis. Since the allowance for credit losses is
dependent on general and other economic conditions beyond the Company's control,
it is at least reasonably possible that the estimates could differ materially
from currently reported values in the term.
14. SUBSEQUENT EVENTS
On October 1, 1997, the Company sold approximately $28,714,000, in carrying
value of structured settlement finance receivables that generated a gain on sale
of receivables of $8,020,000. The Company plans to continue to perform servicing
of these receivables for a fee. The proceeds from the sale of the receivables
were used to pay down the revolving credit facility. The Company plans to
continue to originate structured settlement finance receivables.
SSC declared a distribution to its partners of $2,025,000 on September 30,
1997 which was paid on October 8, 1997. This distribution has been accrued in
the accompanying combined financial statements. Furthermore, SSC declared a
distribution totalling $2,000,000 on October 13, 1997 which was paid on October
31, 1997.
In November 1997, the Company reached an agreement with ING whereby the
Company will pay ING $1.4 million from the proceeds of the Offering in
consideration for ING's agreement to release the Company from a commitment to
use ING as placement agent for future securitizations.
F-19
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
The Reorganization and Change in Tax Status................. 20
Use of Proceeds............................................. 21
Distributions and Dividend Policy........................... 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Combined Financial Data............................ 24
Pro Forma Financial Information............................. 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 32
Business.................................................... 42
Management.................................................. 56
Principal and Selling Stockholders.......................... 60
Certain Relationships and Related Party Transactions........ 61
Description of Capital Stock................................ 65
Shares Eligible for Future Sale............................. 67
Underwriting................................................ 68
Legal Matters............................................... 69
Experts..................................................... 70
Additional Information...................................... 70
Annual and Quarterly Reports................................ 70
Index to Combined Financial Statements...................... F-1
5,286,738 Shares
[LOGO]
J.G. WENTWORTH
&
COMPANY, INC.
Common Stock
----------
PROSPECTUS
----------
PRUDENTIAL SECURITIES INCORPORATED
CIBC OPPENHEIMER
FURMAN SELZ
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth expenses in connection with the issuance and
distribution of the securities being registered, all of which are being borne by
the Registrant.
Securities and Exchange Commission registration fee.............. $ 29,477
National Association of Securities Dealers, Inc. fee............. 10,276
Nasdaq Stock Market Inc./National Market listing fee............. 50,000
Printing and engraving expenses.................................. 200,000
Accountants' fees and expenses................................... 225,000
Legal fees and expenses.......................................... 200,000
Blue Sky qualification fees and expenses......................... 8,000
Transfer agent's fees and expenses............................... 10,000
Director's and officer's insurance............................... 230,000
Miscellaneous.................................................... 37,247
----------
TOTAL....................................................... $1,000,000
==========
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee, and
the Nasdaq Stock Market fee are estimates.
ITEM 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, as amended, the
Registrant has the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
his being a director or officer of the Registrant if it is determined that he
acted in accordance with the applicable standard of conduct set forth in such
statutory provision.
Article VIII of the Registrant's Bylaws filed as Exhibit 3.2 hereby
provides indemnification to directors, officers and other agents of the
Registrant against all expenses, liability and loss incurred as a result of such
person's being a party to, or threatened to be made a party to, any action, suit
or proceeding by reason of the fact that he or she is or was a director or
officer of the Registrant or is or was serving at the request of the Registrant
as a director, officer, employee or agent of another enterprise, to the fullest
extent authorized by the Delaware General Corporation Law. Article VIII further
permits the Registrant to maintain insurance, at its expense, to protect itself
and any such director or officer of the Registrant or another enterprise against
any such expenses, liability or loss, whether or not the Registrant would have
the power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law. Amendments, repeals or modifications of
Article VIII can only be prospective and such changes require the affirmative
vote of not less than two-thirds of the outstanding shares of stock of the
Registrant entitled to vote in elections of directors.
The Registrant has purchased directors' and officers' liability insurance
including coverage for liabilities of the officers, directors and Selling
Stockholders in connection with the Offering.
See Article 7 of the Underwriting Agreement, filed as Exhibit 1 hereto,
pursuant to which the Underwriters agree to indemnify the Registrant, its
directors, officers and controlling persons against certain liabilities,
including liabilities under the Securities Act of 1933.
ITEM 15. Recent Sales of Unregistered Securities.
In connection with its formation in October 1997, J.G. Wentworth & Company,
Inc. issued an aggregate of 300 shares to the Principals. Immediately prior to
the completion of the Offering, the Company will issue to the Existing
Stockholders an additional 12,466,367 shares of Common Stock in exchange for the
contribution by the Existing Stockholders of their interests in the J.G.
Wentworth Affiliated Companies. Both of these sales are exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act.
II-1
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company.
*3.2 -- By-laws of the Company.
+5 -- Opinion of Wolf, Block, Schorr and Solis-Cohen LLP with
respect to the legality of the securities being offered.
*10.1 -- 1997 Stock Incentive Plan.
*10.2 -- Form of Employment Agreement by and between the Company and
James D. Delaney.
*10.3 -- Form of Employment Agreement by and between the Company and
Gary Veloric.
*10.4 -- Form of Employment Agreement by and between the Company and
Michael B. Goodman.
*10.5 -- Employment Agreement by and between the Company and Andrew
S. Hillman dated October 13, 1997.
*10.6 -- Form of Contribution Agreement by and among the Company and
the Existing Stockholders.
*10.7 -- Form of Tax Indemnity Agreement by and among the Company,
JGW, the General Partners and the Existing Stockholders.
*10.8 -- Amended and Restated Credit Agreement, by and among SSC, the
Lenders listed therein and ING and a Bank, dated February
11, 1997.
*10.9 -- Credit Agreement among MFC, the MFC Funding, the Lenders
listed therein and ING dated May 26, 1995.
*10.10 -- Master Trust Indenture and Security Agreement by and among
J.G. Wentworth Receivables III LLC ("Receivables III"), JGW
and a Bank dated as of September 30, 1997.
*10.11 -- Master Trust Indenture and Security Agreement, Series 1997-A
Supplement by and among Receivables III, JGW and a Bank
dated as of September 30, 1997.
*10.12 -- Purchase and Contribution Agreement by and among SSC and
Receivables II dated as of September 30, 1997.
*10.13 -- Purchase and Contribution Agreement (Issuer-Purchase
Agreement) by and among Receivables II and Receivables III
dated as of September 30, 1997.
*10.14 -- Note Purchase Agreement by and among the Note Purchasers,
named therein, and Receivables III dated as of September 30,
1997.
*10.15 -- Amended and Restated Collateral Trust and Intercreditor
Agreement by and among ING, a Bank, as Servicing Agent,
other Lender referred to therein, Receivables I, Receivables
III, SSC, Receivables II and JGW dated as of September 30,
1997.
*10.16 -- Collateral Trust and Intercreditor Agreement by and among
ING, a Bank, other Lender referred to therein, J.G.
Wentworth Receivables I LLC ("Receivables I"), SSC and JGW
dated as of June 13, 1997.
*10.17 -- Certificate Purchase Agreement by and among the Purchasers
set forth therein, SSC Master Trust I ("Trust I"),
Receivables I and a Bank dated as of June 13, 1997.
*10.18 -- Purchase Agreement between SSC and Receivables I dated as of
June 13, 1997.
*10.19 -- Pooling and Servicing Agreement, Series 1997-I Supplement,
by and among Receivables I, JGW and a Bank dated as of June
13, 1997.
*10.20 -- Pooling and Servicing Agreement, Trust I, by and among
Receivables I, JGW and a Bank dated as of June 13, 1997.
*10.21 -- Form of Registration Rights Agreement by and among the
Company and the Existing Stockholders.
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
+23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
as part of Exhibit 5).
*24 -- Power of Attorney (included on signature page of this
Registration Statement).
*27 -- Financial Data Schedule.
*99.1 -- Consent to be Named as a Proposed Director, for Gerard E.
Bisbee, Jr.
*99.2 -- Consent to be Named as a Proposed Director, for Philip J.
Kendall.
*99.3 -- Consent to be Named as a Proposed Director, for Anthony C.
Salvo.
- ------------------
* Previously filed
+ Filed herewith
(b) Financial Statement Schedules
No Schedules are required to be filed with this Registration Statement.
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Philadelphia, Pennsylvania on the 11th day of December, 1997.
J.G. WENTWORTH & COMPANY, INC.
By: /s/ JAMES D. DELANEY
---------------------------------------
James D. Delaney
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GARY VELORIC Chairman of the Board of December 11, 1997
- ------------------------------ Directors
Gary Veloric
/s/ JAMES D. DELANEY President, Chief Executive December 11, 1997
- ------------------------------ Officer and Director
James D. Delaney (principal executive
officer)
* Vice President and Chief December 11, 1997
- ------------------------------ Financial Officer (principal
James J. O'Malley financial and accounting
officer)
* Executive Vice President, December 11, 1997
- ------------------------------ Chief Operating Officer and
Michael B. Goodman Director
* Director December 11, 1997
- ------------------------------
Edward S. Stone
*By: /s/ GARY VELORIC
- ------------------------------
Gary Veloric
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION EXHIBIT NO.
- ------- ----------- -----------
<S> <C> <C> <C>
*1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company.
*3.2 -- By-laws of the Company.
*5 -- Opinion of Wolf, Block, Schorr and Solis-Cohen LLP with
respect to the legality of the securities being offered.
*10.1 -- 1997 Stock Incentive Plan.
*10.2 -- Form of Employment Agreement by and between the Company and
James D. Delaney.
*10.3 -- Form of Employment Agreement by and between the Company and
Gary Veloric.
*10.4 -- Form of Employment Agreement by and between the Company and
Michael B. Goodman.
*10.5 -- Employment Agreement by and between the Company and Andrew
S. Hillman dated October 13, 1997.
*10.6 -- Form of Contribution Agreement by and among the Company and
the Existing Stockholders.
*10.7 -- Form of Tax Indemnity Agreement by and among the Company,
JGW, the General Partners and the Existing Stockholders.
*10.8 -- Amended and Restated Credit Agreement, by and among SSC, the
Lenders listed therein and ING and a Bank, dated February
11, 1997.
*10.9 -- Credit Agreement among MFC, the MFC Funding, the Lenders
listed therein and ING dated May 26, 1995.
*10.10 -- Master Trust Indenture and Security Agreement by and among
J.G. Wentworth Receivables III LLC ("Receivables III"), JGW
and a Bank dated as of September 30, 1997.
*10.11 -- Master Trust Indenture and Security Agreement, Series 1997-A
Supplement by and among Receivables III, JGW and a Bank
dated as of September 30, 1997.
*10.12 -- Purchase and Contribution Agreement by and among SSC and
Receivables II dated as of September 30, 1997.
*10.13 -- Purchase and Contribution Agreement (Issuer-Purchase
Agreement) by and among Receivables II and Receivables III
dated as of September 30, 1997.
*10.14 -- Note Purchase Agreement by and among the Note Purchasers,
named therein, and Receivables III dated as of September 30,
1997.
*10.15 -- Amended and Restated Collateral Trust and Intercreditor
Agreement by and among ING, a Bank, as Servicing Agent,
other Lender referred to therein, Receivables I, Receivables
III, SSC, Receivables II and JGW dated as of September 30,
1997.
*10.16 -- Collateral Trust and Intercreditor Agreement by and among
ING, a Bank, other Lender referred to therein, J.G.
Wentworth Receivables I LLC ("Receivables I"), SSC and JGW
dated as of June 13, 1997.
*10.17 -- Certificate Purchase Agreement by and among the Purchasers
set forth therein, SSC Master Trust I ("Trust I"),
Receivables I and a Bank dated as of June 13, 1997.
*10.18 -- Purchase Agreement between SSC and Receivables I dated as of
June 13, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION EXHIBIT NO.
- ------- ----------- -----------
<S> <C> <C> <C>
*10.19 -- Pooling and Servicing Agreement, Series 1997-I Supplement,
by and among Receivables I, JGW and a Bank dated as of June
13, 1997.
*10.20 -- Pooling and Servicing Agreement, Trust I, by and among
Receivables I, JGW and a Bank dated as of June 13, 1997.
*10.21 -- Form of Registration Rights Agreement by and among the
Company and the Existing Stockholders.
+23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
as part of Exhibit 5).
*24 -- Power of Attorney (included on signature page of the
Registration Statement as filed on October 14, 1997).
*27 -- Financial Data Schedule
*99.1 -- Consent to be Named as a Proposed Director, for Gerard E.
Bisbee, Jr.
*99.2 -- Consent to be Named as a Proposed Director, for Philip J.
Kendall.
*99.3 -- Consent to be Named as a Proposed Director, for Anthony C.
Salvo.
</TABLE>
- ------------------
* Previously filed
+ Filed herewith
Consent of Independent Accountants
We consent to the inclusion in this Post-Effective Amendment No. 1 to the
registration statement on Form S-1 of our reports dated November 11, 1997, on
our audits of the financial statement of J.G. Wentworth & Company, Inc. and the
combined financial statements of J.G. Wentworth Affiliated Companies. We also
consent to the reference to our firm under the captions "Experts" and "Selected
Combined Financial Data."
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
December 10, 1997
