S-1/A 1 s000086x3_s1a.htm FORM S-1/A

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As filed with the Securities and Exchange Commission on October 28, 2013

Registration No. 333-191585 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 

 

 

 JGWPT HOLDINGS INC. 

(Exact name of registrant as specified in its charter)

 

Delaware 6199 46-3037859
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)

 

201 King of Prussia Road, Suite 501
Radnor, Pennsylvania 19087-5148
(484) 434-2300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices) 

 

 Stephen Kirkwood
Executive Vice President, General Counsel and Corporate Secretary
201 King of Prussia Road, Suite 501
Radnor, Pennsylvania 19087-5148
(484) 434-2300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) 

 

 

(Copies of all communications, including communications sent to agent for service)

 

Andrea L. Nicolas, Esq.
Richard B. Aftanas, Esq.
Steven J. Daniels, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
(212) 735-3000

Peter M. Labonski, Esq. 

Keith L. Halverstam, Esq. 

Ian D. Schuman, Esq. 

Latham & Watkins LLP 

885 Third Avenue 

New York, NY 10022-4834 

(212) 906-1200 

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of 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: o

 

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. o

 

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.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered   Proposed Maximum Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(1)
Class A Common Stock, par value $0.00001 per share     $287,500,000   $37,030
 

 

(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. $25,760 was previously paid.
(2)Includes offering price of shares of common stock that the underwriters have the option to purchase pursuant to their option to purchase additional shares.

 

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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 
 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated October 28, 2013

 

P R O S P E C T U S

 

12,200,000 CLASS A SHARES

 

 

JGWPT HOLDINGS INC.

 

Common Stock

 

This is JGWPT Holdings Inc.’s initial public offering. We are offering 12,200,000 shares of our Class A common stock, par value $0.00001 per share, or the Class A Shares. We currently expect that the initial public offering price of our Class A Shares will be between $19.00 and $22.00 per share. These shares will represent 100% of our Class A Shares outstanding (and 40.8% of our Class A Shares on a fully diluted basis) immediately following this offering. JGWPT Holdings Inc. is a newly formed company and prior to this offering will have no assets or operations.

 

We will use the net proceeds that we receive from this offering to purchase common membership interests in JGWPT Holdings, LLC, which we refer to as JGWPT Common Interests. There is no market for the JGWPT Common Interests. The purchase price for the JGWPT Common Interests will be equal to the public offering price of our Class A Shares less the amount of offering expenses incurred by us, including the underwriting discount referred to below.

 

We will use $181.1 million of the net proceeds of this offering to purchase newly issued JGWPT Common Interests directly from JGWPT Holdings, LLC, and we will use the estimated $47.0 million of remaining net proceeds of this offering to purchase 2,450,000 JGWPT Common Interests currently owned by certain of the existing holders of JGWPT Common Interests, including certain members of our management. We collectively refer to the holders of JGWPT Common Interests before and after this offering, other than us, as Common Interestholders. Upon completion of this offering, we will have acquired 12,200,000 JGWPT Common Interests representing a 43.1% economic interest in JGWPT Holdings, LLC and will be the sole managing member of JGWPT Holdings, LLC. JGWPT Holdings, LLC will use a portion of the net proceeds it receives from us in connection with this offering to repay a portion of the amount outstanding under our term loan and the remaining amount for general corporate purposes, including acquisitions. JGWPT Holdings, LLC will not receive any proceeds from our purchase of JGWPT Common Interests from the Common Interestholders.

 

Immediately after the sale of 12,200,000 Class A Shares in this offering and the related purchase of JGWPT Common Interests with a portion of the net proceeds therefrom, we will issue and sell at par value an aggregate of 11,753,161 shares of our Class B common stock, par value $0.00001 per share, or the Class B Shares, to the Common Interestholders (other than PGHI Corp.) in respect of the equal number of JGWPT Common Interests then owned by such holders. No Class B Shares will be issued in respect of any Common Interest we purchase in connection with this offering. Each Class B Share will have ten (10) votes per share, while each Class A Share will have one (1) vote per share. As a result, the 12,200,000 Class A Shares sold in this offering will represent 9.4% of the combined voting power of our common stock immediately after the sale of such Class A Shares and the 11,753,161 Class B Shares will represent the remaining 90.6%. However, the Class A Shares sold in this offering will represent 100% of the economic interest in us and 43.1% of the economic interest in JGWPT Holdings, LLC.

 

Currently no public market exists for our Class A Shares. We have applied to have the Class A Shares listed on the New York Stock Exchange, or the NYSE, under the symbol “JGW.”

 

We are an “emerging growth company” under applicable federal securities laws and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

 

Investing in our Class A Shares involves risks that are described in the “Risk Factors” section beginning on page 27 of this prospectus.

 
   Per Class A Share  Total
Public offering price  $   $ 
Underwriting discount (1)  $   $ 
Proceeds, before expenses, to us  $   $ 
 

(1) See “Underwriting” for a description of the compensation payable to the underwriters and our financial advisor.

 

We have granted the underwriters an option to purchase up to an additional 1,830,000 Class A Shares from us at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus, solely to cover over-allotments, if any. We intend to use the net proceeds from any exercise of the option to purchase a corresponding number of JGWPT Common Interests from the Common Interestholders. If we purchase JGWPT Common Interests from the Common Interestholders upon exercise of the over-allotment option, a corresponding number of Class B Shares held by them will automatically be redeemed and cancelled by us.

 

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The Class A Shares will be ready for delivery on or about                        , 2013.

 
Barclays Credit Suisse

Deutsche Bank Securities Jefferies Keefe, Bruyette & Woods
A Stifel Company
 
JMP Securities Stephens Inc.
 

Prospectus dated                     , 2013.

 
 

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We are responsible for the information contained in this prospectus and in any related free-writing prospectus we may prepare or authorize to be delivered to you. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

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ABOUT THIS PROSPECTUS i
PROSPECTUS SUMMARY 1
RISK FACTORS 27
THE TRANSACTIONS 46
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 57
USE OF PROCEEDS 59
DIVIDEND POLICY 60
CAPITALIZATION 61
DILUTION 62
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA 64
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION 66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 73
BUSINESS 88
MANAGEMENT 108
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 124
PRINCIPAL STOCKHOLDERS 131
DESCRIPTION OF CAPITAL STOCK 133
SHARES ELIGIBLE FOR FUTURE SALE 140
U.S. FEDERAL TAX CONSEQUENCES FOR NON-UNITED STATES  HOLDERS OF CLASS A SHARES 142
UNDERWRITING 145
LEGAL MATTERS 150
EXPERTS 150
WHERE YOU CAN FIND MORE INFORMATION 151
INDEX TO FINANCIAL STATEMENTS F-1

 

 

 
 

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ABOUT THIS PROSPECTUS

 

Non-GAAP Financial Measures

 

The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of “non-GAAP financial measures,” such as Adjusted Net Income. These measures are derived on the basis of methodologies other than in accordance with generally accepted accounting principles, or GAAP.

 

We have included non-GAAP financial measures in this prospectus, including Adjusted Net Income. See “Summary—Summary Historical Consolidated Financial Data” for a description of the calculation of Adjusted Net Income, as well as a reconciliation of our Adjusted Net Income to net income (loss).

 

Industry and Market Data and Forecasts

 

This prospectus includes industry and market data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources we believe are reliable, but there can be no assurance as to the accuracy or completeness of such information. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. In other cases, such as statements as to our market position and ranking, such information is based on estimates made by our management, based on their industry and market knowledge and information from third-party sources. However, this data is subject to change and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be reliable.

 

Trademarks, Service Marks and Copyrights

 

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website names and addresses are our service marks or trademarks. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Some of the trademarks we own or have the right to use include “J.G. Wentworth” and “Peachtree Financial Solutions.” We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, the trademarks, service marks, tradenames and copyrights referred to in this prospectus are listed without the ©, ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and tradenames.

 

Certain Definitions

 

“A.M. Best” means A.M. Best Company, Inc.

 

“CFPB” means the Consumer Financial Protection Bureau.

 

“Class B Management Interests” means the Class B management interests in JGWPT Holdings, LLC.

 

“Code” means the Internal Revenue Code of 1986.

 

“Common Interestholders” means holders of JGWPT Common Interests before and after this offering, other than us.

 

“DBRS” means Dominion Bond Rating Services, Ltd.

 

“DGCL” means the Delaware General Corporation Law.

 

“Dodd-Frank” or “Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 

“Exchange Act” means the Securities Exchange Act of 1934.

 

“GAAP” means generally accepted accounting principles.

 

“IFRS” means International Financial Reporting Standards.

 

“JGWPT Common Interests” means the common membership interests in JGWPT Holdings, LLC.

 

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“JLL” means JLL Partners.

 

“JOBS Act” means the Jumpstart Our Business Startups Act of 2012.

 

“NASPL” means the North American Association of State and Provincial Lotteries.

 

“NYSE” means the New York Stock Exchange.

 

“Order” means the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

 

“Peachtree Merger” means our merger with Orchard Acquisition Company, LLC and its subsidiaries on July 12, 2011, as described more fully herein.

 

“Restricted JGWPT Common Interests” means common membership interests in JGWPT Holdings, LLC subject to certain forfeiture provisions as apply to the Class B Management Interests.

 

“SEC” means the Securities and Exchange Commission.

 

“Securities Act” means the Securities Act of 1933.

 

“Settlement Act” means the Periodic Payment Settlement Act of 1982.

 

“SSPA” means a state structured settlement protection act.

 

“Tax Relief Act” means the Victims of Terrorism Tax Relief Act of 2001.

 

“VIE” means a variable interest entity, which is a legal entity subject to consolidation according to the provisions of the Variable Interest Entities subsection of ASC Subtopic 810-10.

 

Financial Statement Presentation

 

This prospectus includes certain historical consolidated financial data for J.G. Wentworth, LLC and its subsidiaries. J.G. Wentworth, LLC is the predecessor of the issuer, JGWPT Holdings Inc., for financial reporting purposes. JGWPT Holdings Inc. will be the audited financial reporting entity following this offering. The consolidated statement of operations data for each of the years in the two-year period ended December 31, 2012 and the consolidated balance sheet data as of December 31, 2012 and 2011 included in this prospectus are derived from the audited consolidated financial statements of J.G. Wentworth, LLC and its subsidiaries contained herein. The consolidated statement of operations data for the six months ended June 30, 2013 and 2012 and the consolidated balance sheet data as of June 30, 2013 are derived from the unaudited condensed consolidated financial statements of J.G. Wentworth, LLC and its subsidiaries contained herein. In the opinion of our management, such unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for those periods.

 

This prospectus also includes certain pro forma consolidated statements of operation for the year ended December 31, 2012 and for the six months ended June 30, 2013, which present our consolidated results of operations giving pro forma effect to the Transactions as if such transactions occurred on January 1, 2012.  The unaudited pro forma consolidated statement of financial condition as of and for the period ending June 30, 2013 presents our consolidated financial condition giving pro forma effect to the Transactions as if such transactions occurred on June 30, 2013.  The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect on a pro forma basis the impact of these transactions on the historical financial information of J.G. Wentworth, LLC.

 

The unaudited pro forma consolidated financial information and notes included in this prospectus are presented for illustrative purposes only. The pro forma adjustments are based upon available information and methodologies that are factually supportable and directly related to this offering and related transactions.  The unaudited pro forma financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future.  For further discussion of these matters, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included in this prospectus. 

 

Other than the inception balance sheet, the financial statements of JGWPT Holdings Inc. have not been included in this prospectus as it is a newly incorporated entity, has no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.

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PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that is important to you. Before investing in our Class A Shares, you should carefully read this prospectus in its entirety, especially the risks of investing in our Class A Shares that we discuss in the “Risk Factors” section of this prospectus beginning on page 27 of this prospectus and the financial statements and related notes. The following summary is qualified in its entirety by the more detailed information and financial statements and related notes included elsewhere in this prospectus.

 

In this prospectus, unless otherwise stated or the context otherwise requires, references to “we,” “us,” “our” and similar references refer: (i) following the consummation of this offering and the related concurrent transactions, collectively, to JGWPT Holdings Inc., and unless otherwise stated, all of its subsidiaries, and (ii) prior to the completion of this offering and the related concurrent transactions, collectively, to J.G. Wentworth, LLC, and unless otherwise stated, all of its subsidiaries. “Peachtree” refers to Peachtree Financial Solutions.

 

Our Company

 

We are a leading direct response marketer that provides liquidity to our customers by purchasing structured settlement, annuity and lottery payment streams, as well as interests in the proceeds of legal claims, in the United States. We do not make loans or take consumer credit risk as part of our business but instead purchase future payment streams owed to the customer by a high quality institutional counterparty. In 2012, approximately 90% of the counterparties to structured settlement payment streams that we purchased had an investment grade rating of “A3” or better by Moody’s. We act as an intermediary that identifies, underwrites and purchases individual payment streams from our customers, aggregates those payment streams and then finances them in the institutional market at discount rates below our cost to purchase. We believe our scale allows us to operate more efficiently and cost effectively than our competition, generating strong profitability while offering a low-cost source of liquidity for our customers, as compared to alternative sources of liquidity such as personal loans or cash advances on credit cards.

 

We operate two market leading and highly recognizable brands, JG Wentworth and Peachtree, each of which generates a significant volume of inbound inquiries. Brand awareness is critical to our marketing efforts, as there are no readily available lists of holders of structured settlements, annuities or potential pre-settlement customers. Since 1995, we have invested approximately $585 million in marketing to establish our brand names and increase customer awareness through multiple media outlets. According to Kantar Media, since 2008, each of JG Wentworth and Peachtree has spent approximately five-times the amount spent by the nearest industry competitor on television advertising and together have spent over 80% of the total amount spent by all of the major participants in the industry. As a result of our substantial marketing investment, we believe that our core brands, JG Wentworth and Peachtree, are the #1 and/or #2 most recognized brands in their product categories. In addition, since 1995 we have been building proprietary databases of current and prospective customers, which we continue to grow through our significant marketing efforts and which we consider a key differentiator from our competitors. As of July 31, 2013, our customer databases include more than 121,000 current and prospective structured settlement customers with approximately $31 billion of unpurchased structured settlement payment streams which includes all potential payment streams that customers disclosed to us at our initial contact with them. Since July 31, 2013, we have continued to add to our customer databases and to purchase structured settlement payment streams from our customers who may also sell payment streams to others and, therefore, the amount of unpurchased structured settlement payment streams in our databases may now be greater or smaller. We also maintain databases of pre-settlement and lotteries customers. The strength of our databases and the resulting predictable pipeline of opportunities is demonstrated by the level of repeat business we experience with our customers. Of the total structured settlement customers we have served since 1995, the average customer has completed two separate transactions with us. These additional purchasing opportunities come with low incremental acquisition costs.

 

For the year ended December 31, 2012 and the six months ended June 30, 2013, we had revenue of $467 million and $250 million, respectively, net income of $119 million and $68 million, respectively, and Adjusted Net Income of $76 million and $34 million, respectively. See “Summary—Summary Historical and Consolidated Financial and Other Data” for a reconciliation of Adjusted Net Income to net income.

 

We currently provide liquidity to our customers through the following products:

 

Structured settlements are contractual agreements to settle a tort claim involving physical injury or illness whereby a claimant is compensated for damages through a series of payments over time rather than by a single upfront payment. These payments fall into two categories: guaranteed structured settlement pay-

 

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ments, which are paid out until maturity regardless of the status of the beneficiary, and life contingent structured settlement payments, which cease upon the death of the beneficiary. We purchase all or part of these structured settlement payments at a discount to the aggregate face amount of the future payments in exchange for a single up-front payment. These future structured settlement payments are generally disbursed to us directly by an insurance company. Since the enactment of the federal Tax Relief Act in 2002, every one of our structured settlement payment stream purchases has been reviewed and approved by a judge. Since 1995, we have purchased over $9.1 billion of structured settlement payment streams. Based on information provided by the National Association of Settlement Purchasers, we believe we are the largest purchaser of structured settlement payments in the United States. Revenue generated from our structured settlement payment purchasing business was $416 million for the year ended December 31, 2012 and $222 million for the six months ended June 30, 2013, accounting for 89% of our revenue in both periods.

 

Annuities are insurance products purchased by individuals from insurance companies entitling the beneficiary to receive a pre-determined stream of periodic payments. We purchase all or part of the annuity payments at a discount to the aggregate face amount of future payments in exchange for a single up-front payment. Since 1995, we have purchased over $206 million in annuity payment streams. Revenue generated from our annuity payment purchasing business was $10 million for the year ended December 31, 2012 and $6 million for the six months ended June 30, 2013, accounting for 2% of our revenue in both periods.

 

Lotteries are prizes that generally have periodic payments and are typically backed by state lottery commission obligations or insurance company annuities. We purchase all or part of the lottery receivables at a discount to the aggregate face amount of future payments in exchange for a single up-front payment to the lottery winners. As in the case of structured settlement payments, every one of our purchases of lottery receivables is reviewed and approved by a judge. Since 1999, we have purchased over $884 million in lottery receivables. Revenue generated from our lottery payment purchasing business was $27 million for the year ended December 31, 2012 and $15 million for the six months ended June 30, 2013, accounting for 6% of our revenue in both periods.

 

Pre-settlement funding is a transaction with a plaintiff with a pending personal injury claim to provide liquidity while awaiting settlement. These are not loans; rather, we are assigned an interest in the settlement proceeds of the claim and, if and when a settlement occurs, payment is made to us directly via the claim payment waterfall, not from the claimant. If the plaintiff’s claim is unsuccessful, the purchase price and accrual of fees thereon are written off. Since 2005, we have completed over $184 million in pre-settlement funding. Revenue from our pre-settlement funding business was $14 million for the year ended December 31, 2012 and $7 million for the six months ended June 30, 2013, accounting for 3% of our revenue in both periods.

 

Recent Developments

 

Financial Results

 

Management has made preliminary estimates of our total revenue, net income, total receivables balance, or TRB, purchases and Adjusted Net Income for the quarter ended September 30, 2013. These preliminary estimates are subject to revision as we prepare our quarterly financial statements, including all disclosures required by GAAP, as of and for the quarter ended September 30, 2013 and as our auditors conduct their review of these financial statements. Ernst & Young LLP has not audited, reviewed, examined, compiled or performed any procedures with respect to the preliminary estimates and its audit report included herein relates solely to the historical financial information referenced therein. Factors that could cause these preliminary estimates to differ include, but are not limited to: (i) additional adjustments in the calculation of financial results for the quarter ended September 30, 2013, (ii) discovery of new information that alters expectations about financial results or affects valuation methodologies underlying these results, and (iii) any accounting changes required by GAAP.

 

We estimate that, when finally determined, our total revenue, net income and TRB purchases for the quarter ended September 30, 2013 will be in the following ranges:

 

Total revenue: $92 million to $98 million as compared to $108 million for the quarter ended September 30, 2012. The estimated decline in quarterly revenue is due primarily to decreases in unrealized gains on VIE and other finance receivables, long term securitization debt and derivatives as a result of an increased interest rate environment, as well as realized and unrealized gains (losses) on marketable securities, net.

 

 

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Net income (loss): ($2.0) million to ($0.1) million as compared to $21.2 million for the quarter ended September 30, 2012. The estimated decrease in quarterly net income is due primarily to the decline in total revenue described earlier combined with increases in interest expense as a result of our $575 million term loan that was not outstanding in 2012, general and administrative expense, and provision for losses on finance receivables that were partially offset by a reduction in installment obligations expense and compensation and benefits expense.

 

Total TRB purchases: $288 million to $309 million as compared to $282 million for the quarter ended September 30, 2012. The estimated increase in total TRB purchases is primarily driven by an increase in securitized product purchases partially offset by a decline in other purchases.

 

We also estimate that, when finally determined, our adjusted net income for the quarter ended September 30, 2013 will be in the range of $0.4 million to $1.8 million as compared to $19.7 million for the quarter ended September 30, 2012. The decrease in adjusted net income is primarily due to a decline in revenue and increases in interest expense as a result of our $575 million term loan that was not outstanding in 2012.

 

Acquisitions

 

We are currently in discussions with six companies that are potential acquisition targets participating in certain of our existing markets. While no definitive terms have been discussed, we may go forward with at least one such potential acquisition in the near term. We estimate that the purchase price for any such potential acquisition would be in the range of $5 million to $75 million, which may be payable in cash, stock or a combination thereof. The various market participants under consideration have annual revenues ranging between $5 million and $40 million. If we consummated an acquisition of any one of these six market participants, we estimate that our annual Adjusted Net Income would increase by between $5 million and $20 million. We have not signed a letter of intent or definitive agreement with respect to any of these potential acquisitions and therefore the timing terms and consideration have not been determined and we may not proceed with any of these potential acquisitions and, if we do proceed, we may not be able to consummate any transaction on commercially reasonable terms or at all. If we do consummate one or more these potential acquisitions, the financial benefits we actually receive, including our projected revenues and adjusted net income related thereto, may be materially lower than the benefits we expect to realize and may be realized substantially later than we currently expect, if they are realized at all. See “Risk Factors—We may pursue acquisitions or strategic alliances that we may not successfully integrate or that may divert our management’s attention and resources” for additional risks regarding the consideration and consummation of any acquisitions by us.

 

2013 Distributions and Potential Refinancing of Credit Facility

 

During 2013, we made total distributions of $475.9 million, consisting of (i) a $16.3 million distribution to PGHI Corp. of assets originally acquired by us in connection with the Peachtree Merger, and (ii) $459.6 million in cash distributions to all Common Interestholders. Of these distributions, $150 million was made in connection with the amendment to our senior secured credit facility pursuant to which we obtained an additional $150 million term loan on the same terms as the pre-existing $425 million term loan. Our current $575 million term loan bears interest at either (i) LIBOR plus 7.5% with a LIBOR floor of 1.5% or (ii) Prime plus 6.5% with a Prime floor of 2.5%, at our election. As of June 30, 2013, we had elected the LIBOR option and the interest rate on the term loan was 9.0%. For the six months ended June 30, 2013, interest expense with respect to this term loan was $16.3 million.

 

Subsequent to the 2013 distributions described above, we had member’s capital of $38.4 million and negative tangible equity (member’s capital less intangible assets and goodwill) of ($96.2) million as of June 30, 2013. Common Interestholders selling a portion of their Common Interests to us in connection with this offering will receive approximately $19.17 per interest (assuming the Class A Shares are sold at $20.50 per share in this offering). The amount they will receive per interest will exceed the pro forma net tangible book value (which is equivalent to tangible equity) per Class A Share after this offering by $16.17 per share. If you invest in our Class A Shares, your interest in us will be diluted to the extent of the difference between the initial public offering price per Class A Share and the pro forma net tangible book value per Class A Share after this offering. Assuming we sell the Class A Shares at $20.50 per share in this offering, the extent of your dilution will be $17.50 per share. See “Dilution” for additional information.

 

We intend to use approximately $151.9 million of the net proceeds of this offering to repay a portion of the $575 million term loan described above, including prepayment penalties applicable thereto and the remaining amount for general corporate purposes, including possible acquisitions. We are also seeking to refinance this term loan at prevailing market rates subsequent to this offering. However, we may not be able to refinance this term loan at a more favorable rate or at all.

 

 

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Recent Securitization

 

On October 18, 2013, we closed our 2013-3 securitization which generated net proceeds of $32.3 million.

 

Industry Overview

 

Structured Settlements

 

The use of structured settlements was established in 1982 when Congress passed the Periodic Payment Settlement Act of 1982, or the Settlement Act, which allows periodic payments made as compensation for a personal injury to be free of all federal taxation to the payee, provided certain conditions are met. By contrast, the investment earnings on a single up-front payment are generally taxable, leading structured settlements to proliferate as a means of settling lawsuits. Following the emergence of structured settlements, a secondary market developed in response to the changing financial needs of the holders of structured settlements over time, with many requiring short-term liquidity for a variety of reasons, including debt reduction, housing, automotive, business opportunities, education and healthcare costs. Purchasers in the structured settlement secondary market provide an upfront cash payment in exchange for an agreed-upon stream of periodic payments from a holder of a structured settlement. Each purchased structured settlement payment stream requires local court approval by a judge, who must rule that the transfer of the structured settlement payments and its terms are in the best interests of the payee, taking into account the welfare of the payee and the payee’s dependents.

 

We estimate that since 1975 over $350 billion in undiscounted structured settlement payment streams have been issued in the United States. Of these structured settlement payment streams, we estimate that at least $140 billion are currently outstanding of which approximately $130 billion remain available for purchase. We believe this indicates that there is significant opportunity to grow our customer databases and our revenue.

 

We estimate that approximately 25% of all structured settlements have a life contingent component. Life contingent structured settlements are similar to guaranteed structured settlements, however, unlike guaranteed structured settlements, which pay out until maturity regardless of the status of the beneficiary, life contingent structured settlement payments cease upon death of the beneficiary. We have developed a proprietary financing model that allows us to purchase these life contingent structured settlement payments without assuming any mortality risk.

 

Our main competitors in the structured settlement payments purchasing market are Stone Street Capital, Imperial Holdings, Novation Capital, SenecaOne, Woodbridge, Symetra Financial and Client First Settlement Funding, none of which have a comparable scale to us.

 

Annuities

 

According to LIMRA International, Inc., a life insurance market research organization, approximately $80 billion in annuities were issued during 2012. Annuities are most often purchased to provide a reliable cash flow or a financial cushion for unexpected expenses during retirement or received by individuals via inheritance. The secondary market for annuities provides liquidity to holders, regardless of how they obtained their annuity. The purchasing and underwriting process for annuities is substantially similar to that for structured settlements. However, purchases of annuities do not require court approval. Our main competitors in the annuities payments purchasing market are Stone Street Capital, Imperial Holdings and Novation Capital, none of which have a comparable scale to us.

 

Lotteries

 

According to the North American Association of State and Provincial Lotteries, or NASPL, 43 states and the District of Columbia currently offer government-operated lotteries. During 2012, United States lottery sales totaled approximately $78 billion. For those lottery winners that have either elected or have been required to receive their lottery prize payout in the form of periodic payments, the secondary market provides liquidity and payment flexibility not otherwise provided by their current payment schedule. 24 states have enacted statutes that permit lottery winners to voluntarily assign all or a portion of their future lottery prize payments. Similar to structured settlements, the voluntary assignment of a lottery prize requires a court order. Our main competitors in the lotteries receivable payments purchasing market are Stone Street Capital, SenecaOne, Advanced Funding Solutions, Client First Settlement Funding and NuPoint Funding.

 

Pre-Settlement Funding

 

Total United States tort settlements were approximately $122 billion in 2010 and have remained consistent since 2003. Pre-settlement funding provides the plaintiff with immediate cash, which can be used by the plaintiff to fund

 

 

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out of pocket expenses, allowing the plaintiff to continue the suit and to reject inadequate settlement offers. The regulatory framework for pre-settlement funding is in its early stages, and we expect that many states that do not currently have a regulatory framework for pre-settlement transactions will enact laws that may or may not enable us to conduct business in such states. The few competitors in the pre-settlement funding market with comparable volume to us include Oasis Legal Finance, LawCash, US Claims, Pegasus Legal Funding and Global Financial. Beyond these competitors, the industry is characterized by small players and ad hoc fundings, such as attorneys funding colleagues’ clients.

 

Competitive Strengths

 

We believe the following competitive strengths position us for continued growth:

 

Leading Market Position in a Highly Fragmented Industry. Our strong brands and direct response marketing platform have enabled us to establish a leading position, based on purchases of payment streams during 2012, within the large and underpenetrated structured settlement payments purchasing market. Based on information provided by the National Association of Settlement Purchasers, we believe we are the largest purchaser of structured settlement payments in the United States. We have built this leading market position by leveraging our iconic brands, JG Wentworth and Peachtree, which we believe are the #1 and/or #2 most recognized brands in their product categories. While we are a market leader, our industry remains fragmented. Given our favorable positioning and scale we believe there are significant opportunities to further grow market share through organic growth and targeted acquisitions.

 

Established Brands Reinforce Highly Effective Direct Marketing Capabilities. Our direct marketing campaigns and brand recognition from current and prospective customers are critical to our go-to-market strategy. We have consistently invested in our brands over the years and our marketing investment since 1995 is approximately $585 million, including a significant investment of $216 million over the past three years. We employ a multi-channel approach to access our target customers, with a particular competency in the use of television and the internet. Both

JG Wentworth and Peachtree have developed iconic TV brands through a number of innovative, and in the case of JG Wentworth award winning, direct TV campaigns. Our strong marketing capabilities have supported our growth, and in an average four week period we generate over 510 million impressions resulting in 80% of our target audience viewing our advertisements five or more times during that four week period.

 

  Extensive Proprietary Customer Databases. Our diverse marketing strategy spanning television, search engine marketing, social media, mobile, and direct mail marketing techniques combine to attract inbound inquiries to our purchasing group, enabling us to accumulate robust databases of customers. Given the lack of readily available lists of structured settlement and annuity holders or potential pre-settlement customers, we view these databases as a significant competitive advantage. Furthermore, many of the customers in our databases generate repeat business with minimal incremental marketing cost. For example, the average structured settlement payments customer has completed approximately two transactions with us. In 2012, approximately 45% of JG Wentworth’s and 51% of Peachtree’s structured settlement asset purchases were generated from existing customers. Since August 2008, JG Wentworth’s database of guaranteed structured settlement payment customers has grown at a compound annual growth rate of 6%.

 

Low Cost of Funds Through Our Warehouse Funding and Market Leading Securitization Platforms. We believe that our large and diversified warehouse funding and financing platform together with our established securitization and private placement program provide us with a lower cost of capital than our competitors and the financing required for future growth and stability in adverse market conditions. We undertake a thorough and proven process for all purchases of payment streams and, as a result, have experienced less than 0.08% cumulative total losses on our purchases of guaranteed structured settlement payments since 2002, enabling us to obtain financing on what we believe to be industry leading terms. We currently have over $685 million of warehouse and financing capacity through a number of facilities from leading financial institutions. Our $600 million of guaranteed structured settlement and annuity warehouse facilities provide us with committed long-term financing through three independent financing arrangements.

 

We utilize three independent financing arrangements for our guaranteed structured settlement and annuity warehouse facilities. Each of these arrangements has multiple years of revolving and amortization periods or provides for an evergreen maturity and two of these arrangements, which represent $300 million of capacity, are structured with fixed advance rates with no mark-to-market exposure. For the twelve month period ended August 31, 2013, we had an average balance of $39 million and a peak balance of $90 million in our structured settlement and annuity warehouse facilities. This low usage is a result of the consistent replenishment of our warehouse capacity through our

 

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established securitization program. The structure and capacity of our structured settlement and annuity warehouse facilities provides stability of funding in various economic environments. We have permanent financing of $50 million for our life contingent structured settlement and life contingent annuity businesses and a $35 million revolving credit facility for the pre-settlement business with a leading commercial bank. Lottery receivables are sold by us directly to institutional investors or, more recently, are being securitized. Since our first securitization in 1997, we have established ourselves as the only regular issuer of structured settlement and annuity payment stream asset-backed securities. We have developed a diversified institutional investor base of repeat investors that participate in our regular and predictable securitization program. Our securitizations are structured with rated senior and subordinated bonds that are placed with institutional investors and a residual tranche that since 2002 has been retained by us. Our securitization entities have over $5.1 billion in total issuance volume, representing $8.0 billion of payment streams and over 90% of the total outstanding guaranteed structured settlement and annuity payment stream asset- backed security market. As of October 21, 2013, $612 million of our $685 million total warehouse and financing capacity was available.

 

Expertise in Navigating a Complex Legal and Regulatory Environment. The regulatory framework for structured settlement payment secondary transactions has been in place for over a decade. Each purchased structured settlement payment stream requires local court approval by a judge, who must rule that the transfer is in the best interest of the payee, taking into account the welfare of the payee and the payee’s dependents. We have operational processes in place to ensure that we comply with such laws and regulations providing us with a strong competitive advantage, as settlement purchasers must be able to navigate the complex court process in an efficient and cost-effective manner. There are also state-by-state legal differences that must be managed and we have a nationwide network of attorneys covering each of the over 3,000 counties in the United States and relationships and experience with more than 200 insurance companies that have an administrative role in the structured settlement payment transfer. As a result of our experience and operational processes, approximately 95% of our structured settlement payment purchase cases brought to a judge have been approved by the courts. We believe this expertise would be difficult and expensive for competitors to replicate at this scale and will allow us to expand into adjacent product categories.

 

Attractive Cash Flow Profile. Our business model allows us to generate positive cash flow during the financing of a structured settlement payment purchasing transaction. We experience an immediate benefit at purchase, as the dollar amount advanced from our warehouse facilities is greater than the purchase price paid to the customer. After the initial purchase, we collect the cash flows from purchased assets until they are securitized. The amount we receive upon permanent financing is in excess of our warehouse repayment obligations and operating costs, allowing us to invest in the growth of our existing products as well as fund our expansion into adjacent product categories. Additionally, we receive cash payouts from the residual interests after the structured settlement payments are securitized. For the year ended December 31, 2012 and for the six months ended June 30, 2013, we generated cash of $314.8 and $131.3 million, respectively, from the net financing activities related to our warehouse financing and permanent securitization financing facilities. This cash was used to fund operations including the purchase of additional payment streams. The cash generated for the six months ended June 30, 2013 does not include the $29.9 million of cash generated from our recent securitization, which closed in July 2013. For the year ended December 31, 2012 and for the six months ended June 30, 2013, we used cash of $225.7 million and $163.3 million respectively in operating activities. We operate a tax efficient business model which generates losses for tax purposes due to significant up front marketing expenses and revenue that is recognized over the term of the purchased cash flow streams. Our accounting treatment of revenue under GAAP is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

 

We believe our strong cash flows will enable us to maximize shareholder value through reducing our debt, strategically deploying our capital to fund organic growth and finance value-enhancing acquisitions.

 

Experienced Management Team. We have an experienced and proven management team that has been integral in creating our market leading positions, strengthening and diversifying our funding and financing platform, developing new products, improving the efficiency of our operations and increasing our profitability. On average, the members of our management team have over 18 years of experience in the financial services industry. This management team has led us to the significant growth we have experienced over the last decade, including through the business integration in connection with the Peachtree Merger, and has experience managing our business through various economic cycles. We also believe that our management team has positioned us to capitalize on future growth opportunities.

 

 

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Our Growth Strategy

 

Our strategy is to capitalize on our competitive strengths to increase our revenue, profitability and cash flow across each of our product offerings, although there can be no assurance that these strategies will increase revenue, profitability, or cash flows.

 

Structured Settlements. We estimate that since 1975 over $350 billion in undiscounted structured settlement payment streams have been issued in the United States. Of these structured settlement payment streams, we estimate that at least $140 billion are currently outstanding of which approximately $130 billion remain available for purchase. We believe this indicates that there is significant opportunity to grow our customer databases and our revenue. We envision a three-pronged strategy to further penetrate and grow our structured settlement payments purchasing business:

 

Utilize direct response marketing to identify new structured settlement holders. We currently generate significant volumes of new customer leads each month through our multi-platform direct response advertising campaigns. This marketing effort has resulted in significant growth of our databases of structured settlement holders. We continue to refine and develop our marketing efforts to drive leads through a continued focus on daytime television, a further expansion of direct mail campaigns, robust public relations campaigns to enhance our brand awareness and reputation, and an increased use of online marketing and social media.

 

Drive transactions with identified leads who have not yet done a transaction with us. Our databases of structured settlement holders currently contain many potential customers who have yet to complete a transaction with us. We believe that these leads represent a compelling opportunity to generate new transactions with low customer acquisition costs in comparison to identifying structured settlement holders of whom we are not already aware.

 

Execute repeat transactions with existing customers. Our proprietary databases of structured settlement holders currently contain numerous current customers with remaining payments outstanding. We have been able to generate significant repeat transaction volume over our history. For example, historically, the average structured settlement payments customer has completed approximately two transactions with us.

  

Annuities. We believe that we are uniquely positioned to define and expand the annuities purchasing market, given our significant marketing capabilities and industry-leading funding platform for the purchase of annuities receivables.  Annuities represent a multi-trillion dollar market and, according to our estimates, a large proportion of those annuities remain unsold. The market is characterized by significant variation in the terms contained in annuities contracts and, accordingly, we continually review unique contractual language to identify whether annuities are of the type that we will purchase.  While this review process takes time, we believe that our volume of advertising provides us greater exposure to annuity contracts than our competitors, enabling us to identify purchasable annuities faster than our competition and providing us with a competitive advantage. 

 

Pre-Settlement Funding. We believe that pre-settlement funding represents a large and underpenetrated market opportunity. Total United States tort settlements were approximately $122 billion in 2010. We believe that our market-leading brands and marketing capabilities make us uniquely positioned to capitalize on this opportunity. Structured settlement advertising typically generates significant inbound communications from potential customers seeking pre-settlement funding. JG Wentworth previously brokered these pre-settlement leads, but we gained the ability to provide pre-settlement funding in connection with the Peachtree Merger in July 2011. The ability to fund (rather than broker) pre-settlements was viewed as attractive given the risk-adjusted returns of the business and our ability to generate higher profits. In addition, the combination of Peachtree’s pre-settlement funding platform and JG Wentworth’s brand and marketing platform has generated significant synergies by substantially increasing the number of pre-settlement leads Peachtree receives.

 

Pursue Selective Acquisitions. Given our strong market position and the highly fragmented markets in which we participate, we believe there continue to be significant opportunities to grow market share by obtaining new customers through targeted acquisitions in our existing markets. We believe there are also substantial opportunities for acquisitions in new markets where we can utilize our marketing, financing and operational expertise. We intend to follow a disciplined strategy in exploring future acquisitions on both a qualitative and quantitative basis, analyzing the strategic merits, financial impact and alternative opportunities which may be available to us.  

 

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Expand into Adjacent Product Categories. Our direct response marketing attracts a large volume of inquiries from individuals with a wide array of financial needs. We use the information we gain from these inquiries to identify new and underserved product categories in which we believe we can become a market leader by leveraging our existing platforms and brands. For example, our pre-settlement funding business has grown as we have received inbound calls from potential customers inquiring about pre-settlement transactions in response to our structured settlement advertising. We will continue to evaluate expanding into other complementary adjacent product categories, for example as an originator in secured credit cards, personal loans, mortgages, or peer-to-peer lending, that can leverage our strengths, including direct marketing, brands, funding platform and management.

 

Our Sponsor

 

As further described below, our business is presently conducted through JGWPT Holdings, LLC and its direct and indirect subsidiaries. The current members of JGWPT Holdings, LLC include JLL JGW Distribution, LLC, which is owned by pooled investment vehicles sponsored or managed by JLL, and JGW Holdco, LLC, which is over 99% owned by JLL JGW Distribution, LLC. These affiliates currently hold in the aggregate an approximately 50.3% economic and voting interest in JGWPT Holdings, LLC and immediately after this offering will hold in the aggregate an approximately 25.9% economic interest and 56.6% voting interest in us.

 

Founded in 1988, JLL Partners, or JLL, is a North American-focused private equity firm with a strategy of making value-oriented, middle market control investments. Since its inception, JLL has invested approximately $4.1 billion across six funds in 36 separate transactions. JLL’s investment philosophy is to extract fundamentally sound companies from complicated situations and partner with outstanding management teams to build companies that they can continue to grow into market leaders. JLL has deep and specific industry expertise in areas such as financial services, building products, healthcare services, education, business services, and aerospace. In addition to JGWPT Holdings, LLC, JLL’s current portfolio of companies includes American Dental Partners, BioClinica, Education Affiliates, FC Holdings, IASIS Healthcare, Loar Group, Medical Card System, Patheon, PGT Industries and Ross Education.

 

 

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Our Structure

 

The diagram below depicts our organizational structure immediately after the consummation of this offering and related transactions. See “—The Transactions.”

 

 
(1) Sole managing member of JGWPT Holdings, LLC with a 43.1% economic interest.

 

(2)

Class B Holders includes JLL Holders, Employee Holders and Other Holders of JGWPT Common Interests, which hold Class B Common Stock in JGWPT Holdings Inc. All Class B Holders also hold Common Interests. See footnotes 5, 6 and 7 for further information. Collectively, Class B Holders also hold a 56.9% economic interest in JGWPT Holdings, LLC.  

 

(3) The economic interests of this group of Common Interestholders prior to this offering are described under “—JGWPT Holdings, LLC.”

 

(4) PGHI Corp. holds Class A Warrants in JGWPT Holdings Inc. representing 0% of the voting power and 0% of the economic interest; PGHI Corp. also holds a 15.4% economic interest in JGWPT Holdings, LLC.

 

(5) JLL Holders hold Class B Common Stock in JGWPT Holdings Inc. representing 56.6% of the voting power and 0% of the economic interest; JLL Holders also hold a 25.9% economic interest in JGWPT Holdings, LLC.

 

(6) Employee Holders hold Class B Common Stock in JGWPT Holdings Inc. representing 15.2% of the voting power and 0% of the economic interest; Employee Holders also hold a 7.0% economic interest in JGWPT Holdings, LLC.

 

(7) Other Holders of JGWPT Common Interests hold Class B Common Stock in JGWPT Holdings Inc. representing 18.8% of the voting power and 0% of the economic interest; Other Holders of JGWPT Common Interests also hold a 8.6% economic interest in JGWPT Holdings, LLC.

 

(8) Prior to this offering, the current company named JGWPT Holdings, LLC will be merged with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger and changing its name to JGWPT Holdings, LLC immediately after the merger.

 

(9) Our term loan is guaranteed by certain of our subsidiaries.

 

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JGWPT Holdings, LLC. The sole asset of the current company named JGWPT Holdings, LLC is its ownership of 100% of J.G. Wentworth, LLC, the holding company for the operating subsidiaries of the businesses. Immediately prior to and in connection with this offering, the current company called JGWPT Holdings, LLC will merge with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger. Immediately after the merger and prior to the consummation of this offering, the surviving, newly formed subsidiary will change its name to JGWPT Holdings, LLC.

 

The current members of JGWPT Holdings, LLC are described below. Immediately after the merger described above, the members of JGWPT Holdings, LLC will hold these interests in the newly formed company surviving the merger as described below.

 

JLL JGW Distribution, LLC, which is owned by pooled investment vehicles sponsored or managed by JLL, holds an approximately 4.8% economic interest in JGWPT Holdings, LLC through its ownership of 945,151 JGWPT Common Interests.

 

JGW Holdco, LLC, which is over 99% owned by JLL JGW Distribution, LLC, holds an approximately 43.0% economic interest in JGWPT Holdings, LLC through its ownership of 8,400,024 JGWPT Common Interests. We collectively refer to JGW Holdco, LLC and JLL JGW Distribution, LLC as the JLL Holders.

 

PGHI Corp., the current stockholders of which include affiliates of Credit Suisse Group AG and DLJ Merchant Banking Partners IV, L.P. and former members of Peachtree management, holds an approximately 27.3% economic interest in JGWPT Holdings, LLC on a fully diluted basis through its ownership of (i) 4,360,623 non-voting JGWPT Common Interests and (ii) Class C Profits Interests. The Class C Profits Interests will be cancelled in connection with this offering and PGHI Corp. will receive non- transferable warrants to purchase up to 488,521 Class A Shares at an exercise price of $35.40 per share and 488,521 Class A Shares at an exercise price of $62.33 per share beginning 180 days after the date of this prospectus and until July 12, 2021.

 

Certain of our officers and other employees, whom we collectively refer to as the Employee Members, hold an approximately 11.5% economic interest in JGWPT Holdings, LLC through their ownership of (i) an aggregate of 367,350 JGWPT Common Interests and (ii) JGWPT Holdings, LLC Class B Management Interests which will be converted into an aggregate of 1,880,125 restricted JGWPT Common Interests (with a corresponding number of Class B Shares) in connection with this offering in a manner that reflects the percentage of the current company named JGWPT Holdings, LLC currently owned by the Class B Management Interest holders, taking into account their current distribution entitlement and the fair value of JGWPT Holdings, LLC based on the offering price. A substantial amount of converted interests will be subject to forfeiture at the time of the conversion and will only vest if the holder remains employed by us through the applicable period. The conversion will have no direct or indirect economic effect on us.

 

Other members who are not employed by us or affiliated with JLL or PGHI Corp., whom we refer to as the Other Members, hold an approximately 13.4% economic interest in JGWPT Holdings, LLC through their ownership of an aggregate of 2,615,877 JGWPT Common Interests.

 

During 2013, JGWPT Holdings, LLC made $459.6 million in cash distributions to the Common Interestholders in connection with our obtaining an additional term loan under the credit facility. JGWPT Holdings, LLC also made a $16.3 million distribution to PGHI Corp. of assets originally acquired by us in connection with the Peachtree Merger. As of June 30, 2013, we had member’s capital of $38.4 million and negative tangible equity (member’s capital less intangible assets and goodwill) of ($96.2) million.

 

JGWPT Holdings Inc. Upon completion of the offering, JGWPT Holdings Inc. will use the net proceeds received to acquire an aggregate of 2,450,000 JGWPT Common Interests in the newly formed company to be named JGWPT Holdings, LLC from certain Common Interestholders, including certain members of our management, and 9,750,000 newly issued JGWPT Common Interests directly from the newly formed company to be named JGWPT Holdings, LLC. Immediately after our acquisition of these JGWPT Common Interests, our only material asset will be our ownership of 43.1% of the total JGWPT Common Interests and our only business will be acting as the sole managing member of JGWPT Holdings, LLC. You should note, in particular, that:

 

We will be the sole managing member of JGWPT Holdings, LLC.

   

 

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Investors in this offering will own 100% of our Class A Shares (and 40.8% of our Class A Shares on a fully diluted basis). The outstanding Class A Shares will represent 100% of the economic interest in us, but initially only 9.4% of our voting power, and we will own 43.1% of the economic interest in JGWPT Holdings, LLC. Our Class A Shares and Class C common stock, par value 0.00001 per share, or the Class C Shares, will entitle the holders to receive 100% of any distributions we make, except that each Class B Share will entitle the holder thereof to receive the par value of $0.00001 per Class B Share upon our liquidation, dissolution or winding up. The holders of Class A Shares and Class C Shares will also be entitled to receive the par value of $0.00001 per Class A Share or Class C Share, as the case may be, upon our liquidation, dissolution or winding up, but unlike the Class B Shares, these holders also will be entitled to share ratably in all other assets available for distribution after payment of our liabilities. Immediately after the completion of this offering, the only outstanding Class A Shares will be the Class A Shares issued pursuant to this offering.

  

Except in respect of any tax distributions we receive from JGWPT Holdings, LLC, if JGWPT Holdings, LLC makes a distribution to its members, including us, we will be required to make a corresponding distribution to each of our holders of Class A Shares and holders of Class C Shares, subject only to applicable law.

 

The Common Interestholders other than PGHI Corp. will own 100% of our Class B Shares, which will vote together with the Class A Shares as a single class. Each Class A Share has one vote per share and each Class B Share has 10 votes per share. The Class B Shares will represent, upon completion of this offering, 90.6% of the combined voting power of our common stock. The Class B Shares do not represent an economic interest in us and are therefore not entitled to any dividends that we may pay. The Common Interestholders other than PGHI Corp. will hold substantially more than 50% of the combined voting power of our common stock since they will hold all the Class B Shares.

 

Upon completion of this offering, we will enter into a Director Designation Agreement with the JLL Holders and PGHI Corp. Under this agreement, the JLL Holders will have the right to designate four director designees to our board of directors so long as the JLL Holders own at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011, and PGHI Corp. will have the right to designate one director so long as PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate at least 436,104 JGWPT Common Interests. These director designees will be voted upon and possibly elected by our stockholders.

 

Moreover, pursuant to the Voting Trust Agreement to be entered into by the JLL Holders and certain of the Employee Members, the JLL Holders, as trustees, will be able to direct the vote of the Class B Shares held by these Employee Members.

 

Under the terms of the Voting Agreement that the JLL Holders, PGHI Corp. and certain other Common Interestholders intend to enter into upon completion of this offering, each of the parties thereto will agree to vote all of their Class A Shares and Class B Shares, as applicable, in favor of the election to our board of directors of our Chief Executive Officer, four designees of the JLL Holders and one designee of PGHI Corp.

 

Pursuant to our certificate of incorporation, the four directors designated by the JLL Holders will each be entitled to two votes on each matter presented to the board of directors until the earlier to occur of such time as we cease to be a “controlled company” within the meaning of the NYSE corporate governance standards or such time as the JLL Holders cease to hold, in the aggregate, at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011.

 

While the Class B Shares, as indicated above, do not represent any economic interest in us, each holder of a Class B Share also owns an economic interest in JGWPT Holdings, LLC through a corresponding JGWPT Common Interest.

 

 

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  PGHI Corp. is an affiliate of DLJ Merchant Banking Partners IV, L.P. and Credit Suisse Group AG. Due to certain requirements under the Bank Holding Company Act of 1956, as amended, and the regulations promulgated thereunder to which DLJ Merchant Banking Partners IV, L.P. and Credit Suisse Group AG are subject, PGHI Corp. does not hold voting stock or voting interests in JGWPT Holdings, LLC. Accordingly, PGHI Corp. will continue to hold non-voting JGWPT Common Interests and will not be issued any of our Class B Shares. The JGWPT Common Interests held by PGHI Corp. will be non-vesting securities and will be exchangeable for our Class C Shares, which are not entitled to any voting rights, but are convertible into Class A Shares. The warrants issued to PGHI Corp. in connection with this offering, however, will be exercisable for our Class A Shares, and the JGWPT Common Interests held by PGHI Corp. will be exchangeable for our Class C Shares, which will in turn be convertible at any time into Class A Shares.

 

Pursuant to the operating agreement of JGWPT Holdings, LLC, in order to provide liquidity to the Common Interestholders each JGWPT Common Interest held by a Common Interestholder will be exchangeable for (i) one of our Class A Shares, or, in the case of PGHI Corp., one of our Class C Shares, or (ii) at the option of JGWPT Holdings, LLC cash equal to the market value of one of our Class A Shares or Class C Shares, at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests). The exchange of the JGWPT Common Interests for our Class A Shares, and the concurrent redemption and cancellation of the Class B Shares corresponding to these JGWPT Common Interests, will increase the number of outstanding Class A Shares and decrease the number of outstanding Class B Shares, except in the case of an exchange by PGHI Corp. of JGWPT Common Interests for our Class C Shares.

 

PGHI Corp. and, in some cases, its transferees, will have the right to exchange their non-voting JGWPT Common Interests for our Class C Shares, or, at the option of JGWPT Holdings, LLC, cash equal to the market value of one of our Class C Shares, at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests), as more fully described under “The Transactions—Operating Agreement of JGWPT Holdings, LLC-Exchange Rights.” Class C Shares are generally not entitled to vote on any matter but do share ratably in dividends and other distributions. Class C Shares, however, may be converted at any time into Class A Shares. See “Description of Capital Stock-Class C Shares.”

 

JLL owns a portion of its investment through an existing corporation and the owners of PGHI Corp., including DLJ Merchant Banking Partners IV, L.P. and affiliates of Credit Suisse Group AG, own their investment through PGHI Corp. JLL and the equity holders of PGHI Corp. have the right to elect to require that, instead of exchanging for Class A Shares the JGWPT Common Interests held by JLL’s corporation or PGHI Corp. for Class A Shares, we engage in a merger in which the JLL entity owning this corporation or the stockholders of PGHI Corp., as applicable, receive Class A Shares directly and we become the owner of the JLL corporation or PGHI Corp., as applicable, or its assets. Provided that the conditions to the exercise of these rights have been met, the exercise of either of these transactions will not be subject to any affiliate transaction covenants or similar restrictive provisions. However, it is a condition to each of these transactions that the acquisition not result in material liabilities to us.

 

Under the Operating Agreement JGWPT Holdings, LLC will be prohibited from repurchasing any JGWPT Common Interests unless it has also offered to purchase a pro rata number of JGWPT Common Interests from each Common Interestholder. Pursuant to our certificate of incorporation, in the event that JGWPT Holdings, LLC repurchases any of our JGWPT Common Interests, we will be required to use the corresponding proceeds received from JGWPT Holdings, LLC to repurchase Class A Shares.

 

Following this offering, the members of the newly formed company to be named JGWPT Holdings, LLC, other than us, will consist of JGW Holdco, LLC, JLL JGW Distribution, LLC, PGHI Corp., the Employee Members and the Other Members.

 

Certain Attributes of our Structure. Our structure following this offering will be designed to accomplish a number of objectives, the most important of which are as follows:

 

The structure will allow us to serve as a holding company, with our sole asset being our ownership interest in the newly formed company to be named JGWPT Holdings, LLC. The Common Interestholders, how-

  

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    ever, will retain their economic investment in the form of direct interests in JGWPT Holdings, LLC, rather than through our Class A Shares. Following this offering, all of the businesses operated by JGWPT Holdings, LLC or its subsidiaries prior to this offering, and all of the interests held by JGWPT Holdings, LLC and its subsidiaries in such businesses prior to this offering, will be operated or held, as the case may be, by JGWPT Holdings, LLC and its subsidiaries, and our current management will continue to manage these businesses. As a result, we and the Common Interestholders will participate in the net operating results of JGWPT Holdings, LLC on a pari passu basis, in accordance with our respective ownership of JGWPT Holdings, LLC.

 

In connection with this offering, we will issue the Common Interestholders, other than PGHI Corp., non-economic Class B “vote-only” shares that as a percentage of the combined voting power of our common stock will be equal to 10 times their economic ownership in JGWPT Holdings, LLC.

 

In the event that a Common Interestholder wishes to exchange JGWPT Common Interests for Class A Shares, the holder must deliver the JGWPT Common Interests to JGWPT Holdings, LLC, together with a corresponding number of Class B Shares (except in the case of PGHI Corp), and in exchange therefor:

 

we will deliver to JGWPT Holdings, LLC a number of Class A Shares corresponding to the number of JGWPT Common Interests delivered to JGWPT Holdings, LLC;

 

JGWPT Holdings, LLC will deliver to us a number of newly issued JGWPT Common Interests equal to the number of JGWPT Common Interests surrendered to JGWPT Holdings, LLC by the exchanging holder;

 

we will redeem any Class B Shares delivered to JGWPT Holdings, LLC and cancel them; and

 

JGWPT Holdings, LLC will cancel the JGWPT Common Interests surrendered to JGWPT Holdings, LLC by the exchanging holder.

 

As noted above, JGWPT Common Interests held by PGHI Corp. will be exchangeable for our Class C Shares. Such exchanges generally will follow the procedures outlined above, except that PGHI Corp. will not be required to deliver Class B Shares for cancellation in connection with the exchange. Pursuant to our certificate of incorporation, Class C Shares may be converted at any time into Class A Shares.

 

Under the terms of the operating agreement of JGWPT Holdings, LLC, Common Interestholders will be able to exchange their JGWPT Common Interests for Class A Shares at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests), subject to applicable rules and restrictions imposed by us.

 

The Transactions

 

In connection with this offering:

 

JGWPT Holdings, LLC will merge with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger. Pursuant to the merger and prior to the consummation of this offering, the surviving, newly formed subsidiary will change its name to JGWPT Holdings, LLC. The operating agreement of JGWPT Holdings, LLC will provide, among other things, (i) for us to act as the sole managing member and (ii) that JGWPT Common Interests held by the Common Interestholders will be exchangeable for (i) one of our Class A Shares, or, in the case of PGHI Corp., one of our Class C Shares, or (ii) at the option of JGWPT Holdings, LLC cash equal to the market value of one of our Class A Shares or Class C Shares, as applicable, at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) in order to provide liquidity to these holders.

 

We will issue the Class A Shares for net proceeds of $228.1 million.

 

We will use $181.1 million of the net proceeds that we receive from this offering to purchase newly issued JGWPT Common Interests directly from JGWPT Holdings, LLC, and we will use the estimated $47.0 million of remaining net proceeds that we receive from this offering to purchase 2,450,000 JGWPT

 

 

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    Common Interests from certain Common Interestholders, including certain members of our management. Upon completion of the offering, we will have acquired JGWPT Common Interests representing a 43.1% interest in the newly formed company to be named JGWPT Holdings, LLC.

 

  JGWPT Holdings, LLC will use a portion of the net proceeds it receives from us in connection with this offering to repay a portion of the amount outstanding under its subsidiary’s term loan. JGWPT Holdings, LLC will not receive any proceeds from our purchase of JGWPT Common Interests from the Common Interestholders.

 

  We will enter into a registration rights agreement with all of the Common Interestholders pursuant to which (i) we will be required to use our reasonable best efforts to file a shelf registration statement upon the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) providing for the exchange of all JGWPT Common Interests held by the Common Interestholders for an equivalent number of Class A Shares and the resale of such Class A Shares at any time and from time to time thereafter, subject to applicable rules and restrictions imposed by us, and (ii) the Common Interestholders will be entitled to sell certain of such Class A Shares issuable to them upon exchange of their JGWPT Common Interests or issuable to them upon conversion from Class C Shares in any public underwritten offerings by us after the expiration or earlier termination (if any) of the lock-up agreements referred to above, subject to customary pro rata cutbacks. Any Class A Shares issued upon exchange of Restricted JGWPT Common Interests will remain subject to the same vesting restrictions applicable to the exchanged Restricted JGWPT Common Interests. In addition, the JLL Holders and other significant Common Interestholders will have demand registration rights.

 

We will enter into a tax receivable agreement with all Common Interestholders who hold in excess of approximately 1% of the JGWPT Common Interests immediately prior to this offering. See “The Transactions—Tax Receivable Agreement.”

  

We will amend and restate our certificate of incorporation to provide for, among other things, the issuance of our Class A common stock, Class B common stock, and Class C common stock.

 

We refer to the foregoing collectively as the “Transactions.” No fairness opinion was sought nor was one obtained for any aspect of the Transactions. The selling Common Interestholders will receive an aggregate of $47.0 million of the net proceeds of this offering in exchange for selling an aggregate of 2,450,000 Common Interests to us. If you invest in our Class A Shares, your interest in us will be diluted to the extent of the difference between the initial public offering price per Class A Share and the pro forma net tangible book value per Class A Share after this offering. Assuming we sell the Class A Shares in this offering at $20.50 per share, the extent of your dilution will be $17.50 per share. Common Interestholders selling a portion of their current holdings to us in connection with this offering will receive approximately $19.17 per interest (assuming the Class A Shares are sold at $20.50 per share), which exceeds the pro forma net tangible book value per Class A Share after this offering by $16.17 per share. See “Dilution” for further information.

 

JGWPT Holdings, LLC Common Interest Purchase Agreements. Pursuant to one or more Common Interest Purchase Agreements, we will use a portion of the proceeds from this offering to purchase JGWPT Common Interests held by certain Common Interestholders. These Common Interestholders will provide customary representations regarding their ownership of the JGWPT Common Interests and related matters.

 

Operating Agreement of JGWPT Holdings, LLC. Upon the consummation of this offering, the operating agreement of JGWPT Holdings, LLC will, among other things:

 

provide for us to serve as the sole managing member of JGWPT Holdings, LLC;

 

provide for the exchange of JGWPT Common Interests for (i) one of our Class A Shares, or, in the case of PGHI Corp., one of our Class C Shares, or (ii) at the option of JGWPT Holdings, LLC cash equal to the market value of one of our Class A Shares or Class C Shares, at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests), subject to applicable rules and restrictions imposed by us, as more fully described below under “The Transactions—Operating Agreement of JGWPT Holdings, LLC—Exchange Rights;” and

 

 

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restrict our ability, as managing member, to conduct any business other than the management and ownership of JGWPT Holdings, LLC and its subsidiaries, or own any other assets (other than cash or cash equivalents to be used to satisfy liabilities or other assets held on a temporary basis).

 

Pursuant to the operating agreement of JGWPT Holdings, LLC, each Common Interestholder (other than PGHI Corp.) and its permitted transferees will have the right to exchange JGWPT Common Interests for an equal number of our Class A Shares, and PGHI Corp. and certain of its transferees will have the right to exchange the non-voting JGWPT Common Interests they hold for an equal number of Class C Shares, which are in turn convertible at any time into Class A Shares or, in each case, at the option of JGWPT Holdings, LLC, cash. We have reserved for issuance 11,753,161 Class A Shares and 4,360,623 Class C Shares for exchanges by the Common Interestholders.

 

Registration Rights Agreement. In connection with the completion of this offering, we intend to enter into a registration rights agreement with all of the Common Interestholders pursuant to which we will be required to register the exchange under the federal securities laws of the JGWPT Common Interests held by them for Class A Shares. We have agreed, at our expense, to use our reasonable best efforts to file with the SEC a shelf registration statement providing for the exchange of the JGWPT Common Interests for Class A Shares and the resale of such shares thereafter upon the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) and to cause and maintain the effectiveness of this shelf registration statement until such time as all JGWPT Common Interests covered by this shelf registration statement have been exchanged. Further, the JLL Holders and other significant Common Interestholders will be entitled to cause us, at our expense, to register the resale of the Class A Shares they will receive upon exchange of their JGWPT Common Interests or upon conversion of their Class C Shares, which we refer to as their “demand” registration rights. 

 

All Common Interestholders (as well as their permitted transferees) will be entitled to exercise “piggyback” rights in connection with any future public underwritten offerings we engage in for our account or for the account of others to whom we have granted registration rights after the expiration or earlier termination (if any) of the lock-up agreements referred to above, subject to pro rata reduction if it is determined that the sale of additional shares would be harmful to the success of the offering. All fees, costs and expenses of underwritten registrations will be borne by us, other than underwriting discounts and selling commissions, which will be borne by each stockholder selling its shares. Our registration obligations will be subject to certain restrictions on, among other things, the frequency of requested registrations, the number of shares to be registered and the duration of these rights.

 

Tax Receivable Agreement. A portion of the proceeds of this offering will be used to purchase JGWPT Common Interests from certain of the Common Interestholders. In addition, as described under “The Transactions—Operating Agreement of JGWPT Holdings, LLC,” Common Interestholders may in the future exchange JGWPT Common Interests for Class A Shares or, in the case of PGHI Corp., Class C Shares, on a one-for-one basis or, in each case, at the option of JGWPT Holdings, LLC, cash. The newly formed company to be named JGWPT Holdings, LLC is expected to have in effect an election under Section 754 of the Code, which may result in an adjustment to our share of the tax basis of the assets owned by JGWPT Holdings, LLC at the time of such initial sale of and subsequent exchanges of JGWPT Common Interests. The sale and exchanges may result in increases in our share of the tax basis of the tangible and intangible assets of JGWPT Holdings, LLC that otherwise would not have been available. Any such increases in tax basis are, in turn, anticipated to create incremental tax deductions that would reduce the amount of tax that we would otherwise be required to pay in the future. We intend to enter into a tax receivable agreement with all Common Interestholders who hold in excess of approximately 1% of the JGWPT Common Interests outstanding immediately prior to this offering. The tax receivable agreement will require us to pay those Common Interestholders 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize in any tax year beginning with 2013 (a “covered tax year”) from increases in tax basis realized as a result of (i) the sale by any Common Interestholders of any of their JGWPT Common Interests to us in exchange for a portion of the proceeds of this offering, or (ii) any future exchanges by Common Interestholders of their JGWPT Common Interests for Class A Shares or Class C Shares (or cash). We expect to benefit from the remaining 15% of cash savings, if any, in income tax that we actually realize during a covered tax year. The cash savings in income tax paid to any such Common Interestholders will reduce the cash that may otherwise be available to us for our operations and to make future distributions to holders of Class A Shares, including the investors in this offering.

 

For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability for a covered tax year to the amount of such taxes that we would have been required to pay for such covered tax year had there been no increase to our share of the tax basis of the tangible and intangible

 

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assets of JGWPT Holdings, LLC as a result of such sale and any such exchanges and had we not entered into the tax receivable agreement. The tax receivable agreement continues until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the tax receivable agreement upon a change of control for an amount based on the remaining payments expected to be made under the tax receivable agreement. See “The Transactions—Tax Receivable Agreement.”

 

JLL owns a portion of its investment through an existing corporation.  In the event we engage in a merger with such corporation in which the shareholders of that corporation receive the Class A Shares directly, we will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement requires us to pay the shareholders of such corporation for the use of any such attributes in the same manner as payments made for cash savings from increases in tax basis as described above. 

 

The owners of PGHI Corp., including DLJ Merchant Banking Partners IV, L.P. and affiliates of Credit Suisse Group AG, own their investment through PGHI Corp. In the event we engage in a merger with such corporation in which the shareholders of that corporation receive the Class C Shares directly, we will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement requires us to pay the shareholders of such corporation for the use of any such attributes above a specific amount in the same manner as payments made for cash savings from increases in tax basis as described above.

 

While the actual amount and timing of any payments under this agreement will vary depending upon a number of factors (including the timing of exchanges, the amount of gain recognized by an exchanging Common Interestholder, the amount and timing of our income and the tax rates in effect at the time any incremental tax deductions resulting from the increase in tax basis are utilized) we expect that the payments that we may make to the Common Interestholders that are parties to the tax receivable agreement could be substantial during the expected term of the tax receivable agreement.

 

Director Designation Agreement.  Upon completion of this offering, we will enter into a Director Designation Agreement with the JLL Holders and PGHI Corp. Under this agreement, the JLL Holders will have the right to designate four director designees to our board of directors so long as the JLL Holders own at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011, and PGHI Corp. will have the right to designate one director so long as PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate at least 436,104 JGWPT Common Interests. These director designees will be voted upon and possibly elected by our stockholders.

 

Voting Agreement. In connection with this offering, the JLL Holders, PGHI Corp. and certain other Common Interestholders intend to enter into a Voting Agreement pursuant to which they will agree to vote all of their Class A Shares (if any) and Class B Shares (if any) in favor of the election to our board of directors of our Chief Executive Officer, four designees of the JLL Holders, and one designee of PGHI Corp. Under the terms of the Voting Agreement, the parties will no longer be obligated to vote in favor of the election of the designee of PGHI Corp. if PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate fewer than 872,136 JGWPT Common Interests. While the parties to the Voting Agreement have agreed to vote their Class A Shares (if any) and Class B Shares (if any) as described above, the agreement will be effective in determining the composition of our board of directors only for so long as the holders parties thereto have the requisite voting power to determine the outcome of such vote. Upon completion of this offering, the Class B Shares held by the parties to the Voting Agreement will represent approximately 65% of the combined voting power of our common stock (these holders will hold no Class A Shares immediately after the completion of this offering).

 

Voting Trust Agreement. In connection with this offering, the JLL Holders and certain of the Employee Members will enter into a Voting Trust Agreement pursuant to which, subject to the terms and conditions specified therein, the Employee Members will deposit their Class B Shares into a voting trust and appoint the JLL Holders as trustees. Pursuant to the Voting Trust Agreement, all Class B Shares subject to the voting trust will be voted proportionately with the Class A Shares (if any) and Class B Shares (if any) held by the JLL Holders directly or indirectly. Upon completion of this offering, the Class B Shares held by the parties to the Voting Trust Agreement will represent approximately 65% of the combined voting power of our common stock (these holders will hold no Class A Shares immediately after the completion of this offering). 

 

Director Voting Power. Pursuant to our certificate of incorporation, the four directors designated by the JLL Holders will each be entitled to cast two votes on each matter presented to our board of directors until the earlier to

 

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occur of such time as we cease to be a “controlled company” within the meaning of the NYSE corporate governance standards or such time as the JLL Holders cease to hold, in the aggregate, at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011. Thereafter, the four directors designated by the JLL Holders will be entitled to each cast one vote on each matter presented to our board of directors. All other directors will each be entitled to cast one vote on each matter presented to our board of directors.

 

Controlled Company Status

 

As a result of the significant ownership of our Class B Shares by the JLL Holders and the Director Designation Agreement, Voting Agreement and Voting Trust Agreement described above, more than 50% of the combined voting power of our common stock will be held by the JLL Holders. As a result, we will be considered a “controlled company” under the rules of the NYSE and, therefore, be exempt from certain of the NYSE’s corporate governance rules. Following this offering, we intend to use some or all of these exemptions. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE. See “Management” for further information.

 

In addition, the JLL Holders will be able to significantly influence the outcome of all matters requiring a stockholder vote, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our certificate of incorporation and our bylaws; and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders or deprive holders of Class A Shares of an opportunity to receive a premium for their Class A Shares as part of a sale of our business and it is possible that the interests of the JLL Holders may in some cases conflict with our interests and the interests of our other holders of Class A Shares, including you. 

 

2009 Reorganization

 

Our results in 2008 and 2009 were impacted by the financial crisis, which resulted in a lack of purchasers of our asset-backed securitizations and a resultant lack of capital availability from our warehouse facilities. We were forced to limit transaction volume without access to the securitization market and with limited warehouse capacity. We significantly scaled back new transactions, resulting in insufficient cash flow relative to our corporate leverage.  On March 31, 2009,  J.G. Wentworth, LLC failed to make an interest payment on certain debt and on related interest rate swap contracts. On May 7, 2009, J.G. Wentworth, LLC, J.G. Wentworth, Inc., and JGW Holdco, LLC filed for

protection under Chapter 11 of the United States Bankruptcy Code. On June 4, 2009, J.G. Wentworth, LLC and certain of its affiliates completed a reorganization under Chapter 11 of the Bankruptcy Code and emerged with a restructured balance sheet.

 

Corporate Information

 

Our principal executive offices are located at 201 King of Prussia Road, Suite 501, Radnor, Pennsylvania 19087-5148 and our telephone number at that address is (484) 434-2300. JGWPT Holdings, LLC’s website is located at http://www.jgwpt.com. This website and the information contained therein is not part of this prospectus, and you should rely only on the information contained in this prospectus when making a decision as to whether to invest in our Class A Shares.

 

Implications of being an emerging growth company

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, we have included detailed compensation information for only our three most highly compensated executive officers and have not included a compensation discussion and analysis (CD&A) of our executive compensation programs in this prospectus. In addition, for so long as we are an emerging growth company, we will not be required to:

 

engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;”

 

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparison of the chief executive officer’s compensation to median employee compensation;

 

adopt certain accounting standards until those standards would otherwise apply to private companies.

 

We will remain an emerging growth company until the earliest to occur of:

 

our reporting $1 billion or more in annual gross revenues;

 

our issuance, in a three year period, of more than $1 billion in non-convertible debt;

 

the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and

 

the end of fiscal 2018.

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THE OFFERING

 

Class A Shares being offered by us 12,200,000 Class A Shares
   
Underwriters’ option to purchase additional Class A Shares 1,830,000 Class A Shares
   
Class A Shares to be outstanding immediately after this offering 12,205,366 Class A Shares(1)
   
Class A Shares to be outstanding immediately after this offering, assuming the exchange of all JGWPT Common Interests 28,319,150 Class A Shares. See “Exchange Rights” below.
   
Class B Shares to be held by the holders of JGWPT Common Interests immediately after this offering 11,753,161 Class B Shares
   
Voting Each of our Class A Shares will entitle its holder to one vote on all matters to be voted on by stockholders generally. Each of our Class B Shares will entitle its holder to 10 votes on all matters to be voted on by stockholders generally. Except as required by law, our Class A Shares and Class B Shares will vote together on all matters submitted to a vote of our stockholders. Our Class C Shares are not entitled to any voting rights.
   
Use of proceeds

The net proceeds from this offering will be approximately $228.1 million, after deducting underwriting discounts and estimated offering expenses payable by us (assuming the Class A Shares are sold at $20.50 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus). The issuer will use (a) approximately $181.1 million of the net proceeds of this offering to purchase 9,750,000 JGWPT Common Interests directly from JGWPT Holdings, LLC and (b) the remaining estimated $47.0 million of net proceeds to purchase an aggregate of 2,450,000 JGWPT Common Interests from certain Common Interestholders, including certain members of our management.

   
  JGWPT Holdings, LLC, our principal operating company, will use the $181.1 million in net proceeds it receives as follows:
   
  $151.9 million to repay amounts outstanding under our term loan, including prepayment penalties applicable thereto;
     
  $29.2 million for general corporate purposes, including potential acquisitions.
   
  The $47.0 million in net proceeds received by Common Interestholders will not result in any net proceeds to JGWPT Holdings, LLC (our principal operating company) or any of our other subsidiaries.

(1) Excludes the 1,830,000 Class A Shares that we may issue and sell upon the exercise of the underwriters’ over-allotment option but includes 5,366 restricted Class A Shares to be granted to our two independent directors concurrently with this offering.
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The net proceeds from any exercise of the underwriters’ overallotment option will be used to purchase a corresponding additional number of JGWPT Common Interests from the Common Interestholders and therefore, similarly, will not result in any proceeds to JGWPT Holdings, LLC.

 

Upon completion of this offering, we will have acquired JGWPT Common Interests representing a 43.1% interest in JGWPT Holdings, LLC.

 

JGWPT Holdings, LLC will not receive any proceeds from our purchase of JGWPT Common Interests from the holders thereof.

 

See “Use of Proceeds.”

 

Exchange rights

Subject to the terms and conditions of the operating agreement of JGWPT Holdings, LLC, each Common Interestholder other than PGHI Corp. will have the right to exchange JGWPT Common Interests together with, if applicable, the corresponding number of our Class B Shares, for (i) our Class A Shares, or, (ii) at the option of JGWPT Holdings, LLC, cash equal to the fair value of the Class A Shares issuable upon exchange. See “The Transactions—Operating Agreement of JGWPT Holdings, LLC—Exchange Rights.” To effect an exchange, a Common Interestholder must simultaneously deliver its JGWPT Common Interests to JGWPT Holdings, LLC for cancellation and (other than PGHI Corp.) deliver a corresponding number of Class B Shares to JGWPT Holdings, LLC for redemption by us. Unless JGWPT Holdings, LLC exercises its option to pay cash in lieu of Class A Shares, we will deliver an equivalent number of Class A Shares to JGWPT Holdings, LLC for further delivery to the exchanging holder and receive a corresponding number of newly issued JGWPT Common Interests. The Class B Shares surrendered by the exchanging holder will be redeemed for their $0.00001 value per share and cancelled, and the exchanging holder’s surrendered JGWPT Common Interests will be cancelled by JGWPT Holdings, LLC. As a holder exchanges his JGWPT Common Interests, our percentage of economic ownership of JGWPT Holdings, LLC will be correspondingly increased.

 

As noted above, JGWPT Common Interests held by PGHI Corp. will be exchangeable for our Class C Shares. Such exchanges generally will follow the procedures outlined above, except that PGHI Corp. will not be required to deliver Class B Shares for cancellation in connection with the exchange. Pursuant to our certificate of incorporation, Class C Shares may be converted at any time into Class A Shares.

   
Registration Rights In connection with the completion of this offering, we will enter into a registration rights agreement with all of the Common Interestholders pursuant to which (i) we

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  will be required to use our reasonable best efforts to file a shelf registration statement upon the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) providing for the exchange of all JGWPT Common Interests held by the Common Interestholders other than PGHI Corp. for an equivalent number of Class A Shares and the resale of such Class A shares at any time and from time to time thereafter, subject to applicable rules and restrictions imposed by us, and (ii) all Common Interestholders will be entitled to sell certain of such Class A Shares issuable to them upon exchange of their JGWPT Common Interests or upon conversion from Class C Shares in any public underwritten offerings by us after the expiration or earlier termination (if any) of the lock-up agreements referred to above, subject to customary pro rata cutbacks. Any Class A Shares issued upon exchange of Restricted JGWPT Common Interests will remain subject to the same vesting restrictions applicable to the exchanged Restricted JGWPT Common Interests. In addition, the JLL Holders and other significant Common Interestholders will have demand registration rights. See “The Transactions—Registration Rights Agreement.”
   
Dividend policy

The declaration and payment of future dividends to holders of Class A Shares and Class C Shares will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our board of directors deems relevant. Except in respect of any tax distributions we receive from JGWPT Holdings, LLC, if JGWPT Holdings, LLC makes a distribution to its members, including us, we will be required to make a corresponding distribution to each holder of Class A Shares and Class C Shares. See “Risk Factors—We are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends.”

 

 

During 2013, JGWPT Holdings, LLC made $459.6 million in cash distributions to the Common Interestholders. As JGWPT Holdings Inc. was not a Common Interestholder at the time of these distributions, investors in this offering will not be entitled to receive any dividend from us as a result of these prior distributions.

 

   
Proposed NYSE symbol “JGW.”
   
Risk factors You should read the “Risk Factors” section of this prospectus beginning on page 27 for a discussion of the factors to consider carefully before deciding to purchase any of our Class A Shares.

 

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The number of shares outstanding after this offering and other information based thereon in this prospectus excludes:

 

up to 583,019 Class A Shares issuable upon exercise of stock options we intend to grant to our executive officers and employees concurrently with this offering;

 

up to 2,340,064 Class A Shares expected to be available for future grant under our proposed stock incentive plan after the consummation of this offering;

 

up to 11,753,161 Class A Shares and 4,360,623 Class C Shares issuable upon exchange of JGWPT Common Interests by the current holders thereof;

 

up to 4,360,623 Class A Shares issuable upon conversion of the Class C Shares issuable upon exchange of JGWPT Common Interests held by PGHI Corp.;

 

up to 977,042 Class A Shares issuable upon exercise of the warrants to be issued to PGHI Corp. concurrently with this offering; and

 

up to 1,830,000 Class A Shares that the underwriters may purchase from us to the extent that they exercise their over-allotment option.

 

The number of shares outstanding after this offering and other information based thereon in this prospectus includes all of our outstanding Class B Shares and Class C Shares.

 

Except as otherwise indicated, all information in this prospectus assumes an initial public offering price of $20.50 per Class A Share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.

 

 

 

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Summary Historical and Pro Forma Consolidated Financial and Other Data

 

The following tables present the summary historical consolidated financial and other data for J.G. Wentworth, LLC, the audited operating company of JGWPT Holdings, LLC, and its subsidiaries. J.G. Wentworth, LLC is the predecessor of the issuer, JGWPT Holdings Inc., for financial reporting purposes. The consolidated statement of operations data for each of the years in the two-year period ended December 31, 2012 and the consolidated balance sheet data as of December 31, 2012 and 2011 set forth below are derived from the audited consolidated financial statements of J.G. Wentworth, LLC and its subsidiaries included in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2013 and 2012 and the consolidated balance sheet data as of June 30, 2013 are derived from the unaudited condensed consolidated financial statements of J.G. Wentworth, LLC and its subsidiaries included in this prospectus. In the opinion of management, such unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for those periods.

 

The summary unaudited pro forma financial data of JGWPT Holdings Inc. presented below have been derived by the application of pro forma adjustments to the historical consolidated financial statement of J.G. Wentworth, LLC included elsewhere in this prospectus. See “Unaudited Pro Forma Consolidated Financial Information.” The summary unaudited pro forma financial data for the year ended December 31, 2012 and as of and for the six months ended June 30, 2013 give effect to the Transactions as described in “The Transactions” as if all such transactions had occurred on January 1, 2012, in the case of the unaudited pro forma consolidated statement of operations data, and on June 30, 2013, in the case of the unaudited pro forma consolidated balance sheet data.

 

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The information set forth below should be read together with the “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.

 

The historical financial statements of JGWPT Holdings Inc. have not been presented in this Summary Historical Consolidated Financial and Other Data as it is a newly incorporated entity, had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

   Historical
J.G. Wentworth, LLC
  Pro Forma
JGWPT
Holdings Inc.
   Year Ended December 31,  Six Months Ended June 30,  Last Twelve Months
Ended June 30,
  Year Ended
December 31,
  Six Months
Ended June 30,
   2012  2011  2013  2012  2013  2012  2013
   (in thousands) 
Statement of Operations Data                     
Revenues:                                   
Interest income  $177,748   $142,697   $80,582   $89,349   $168,981   $ 177,748    $ 80,582  
Unrealized gains on VIE and other finance receivables, long-term debt, and derivatives   270,787    127,008    163,843    130,895    303,735     270,787      163,843  
(Loss)/gain on swap termination, net   (2,326)   (11,728)   (174)   374    (2,874)    (2,326 )     (174 )
Servicing, broker and other fees   9,303    7,425    2,536    5,292    6,547     9,303      2,536  
Other   (856)   816    (53)   260    (1,169)    (856 )     (53 )
Realized loss on notes receivable, at fair market value   —      —      (1,862)   —      (1,862)    —      (1,862 )
Realized and unrealized gains (losses) on marketable securities, net   12,741    (12,953)   4,997    6,970    10,768     12,741      4,997  
Total revenue  $467,397   $253,265   $249,869   $233,140   $484,126   $ 467,397    $ 249,869  
                                    
Expenses:                                   
Advertising  $73,307   $56,706   $33,803   $37,769   $69,341   $ 73,307    $ 33,803  
Interest expense   158,631    123,015    85,970    79,558    165,043     146,347 (a)     79,638 (a)
Compensation and benefits   43,584    34,635    23,396    22,031    44,949     44,954 (f)     24,081 (f)
General and administrative   14,913    12,943    10,361    7,455    17,819     14,913      10,361  
Professional and consulting   15,874    14,589    9,098    7,618    17,354     15,874      9,098  

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   Historical
J.G. Wentworth, LLC
  Pro Forma
JGWPT
Holdings Inc.
   Year Ended December 31,  Six Months Ended June 30,  Last Twelve Months
Ended June 30,
  Year Ended
December 31,
  Six Months
Ended June 30,
   2012  2011  2013  2012  2013  2012  2013
   (in thousands) 
Debt prepayment and termination   —      9,140    —      —      —       —         —   
Debt issuance   9,124    6,230    3,072    3,623    8,573     9,124      3,072  
Securitization debt maintenance   5,208    4,760    2,984    2,239    5,953     5,208      2,984  
Provision for losses on finance receivables   3,805    727    2,683    1,546    4,942     3,805      2,683  
Depreciation and amortization   6,385    3,908    2,763    3,132    6,016     6,385      2,763  
Installment obligations expense (income), net   17,321    (9,778)   6,519    8,618    15,222     17,321      6,519  
Total expenses  $348,152   $256,875   $180,649   $173,589   $355,212   $ 337,238    $ 175,002  
Income (loss) before taxes  $119,245   $(3,610)  $69,220   $59,551   $128,914   $ 130,159    $ 74,867  
Provision for (benefit from) income taxes   (227)   (345)   1,155    (84)   1,012     20,818 (b)     13,244 (b)
Net income (loss)    119,472    (3,265)   68,065    59,635    127,902     109,341      61,623  
Less non-controlling interest in earnings (loss) of affiliate  $2,731   $660   $—     $2,735   $(4)  $ 2,731    $ —    
Net income (loss) attributable to J.G. Wentworth, LLC  $116,741   $(3,925)  $68,065   $56,900   $127,906   $ 106,610    $ 61,623  
Less net income attributable to other noncontrolling interest                        72,700      41,979  
Net income attributable to Class A Shares                         33,910 (c)       19,644 (c)  
Pro forma basic earnings per share                           $ 2.78     $ 1.61  
Pro forma diluted earnings per share                           $ 2.78     $ 1.61  
Securitized Product Total Receivables Balance (TRB) Purchases(2)  $917,214   $ 765,178    $484,698   $443,604   $958,309   $ 917,214    $ 484,698  
Other TRB Purchases(3)  $152,313   $ 44,937    $80,471   $64,830   $167,954   $ 152,313    $ 80,471  
Total TRB Purchases  $1,069,527   $ 810,115    $565,169   $508,434   $1,126,263   $ 1,069,527    $ 565,169  
Adjusted Net Income(1)   $ 76,401     $ 36,618     $ 34,051     $ 32,724     $ 77,728     $ 88,685     $ 40,383  
Adjusted Net Income Margin(4)    7.14 %    4.52 %   6.02%    6.44 %    6.90 %    8.29 %    7.15 %

 

   Historical
J.G. Wentworth, LLC
  Pro Forma
JGWPT
Holdings Inc.
   As of December 31,  As of June 30,  As of June 30,
   2012  2011  2013  2012  2013
   (in thousands)   
Summary Balance Sheet Data           
Assets:                         
Cash and cash equivalents  $103,137   $70,171   $30,150   $69,871   $ 59,378 (d)
Restricted cash and investments  $112,878   $155,361   $111,685   $106,414   $ 111,685  
VIE and other finance receivables, at fair market value  $3,615,188   $3,041,090   $3,759,736   $3,385,149   $ 3,759,736  
VIE and other finance receivables, net of allowance for losses  $150,353   $157,560   $136,692   $154,596   $ 136,692  
Company retained interest in finance receivables, at fair market value(5)  $189,441   $128,673   $240,255   $152,805   $ 189,441  
Total assets  $4,298,597   $3,764,378   $4,362,402   $4,023,557   $ 4,387,537  
                         
Liabilities:                        
Term loan payable  $142,441   $171,519   $557,205   $162,229   $ 421,287 (e)
VIE borrowings under revolving credit facilities and other similar borrowings  $27,380   $82,404   $72,355   $66,930   $ 72,355  
VIE long-term debt  $162,799   $164,616   $157,464   $151,177   $ 157,464  
VIE long-term debt issued by securitization and permanent financing trusts at fair market value  $3,229,591   $2,663,873   $3,278,477   $2,951,291   $ 3,278,477  
Total liabilities  $3,855,779   $3,421,395   $4,323,965   $3,639,921   $ 4,363,405  
Member’s capital/shareholders’ equity  $442,818   $342,983   $38,437   $383,636   $ 24,132
Total liabilities & member’s capital/shareholders’ equity  $4,298,597   $3,764,378   $4,362,402   $4,023,557   $ 4,387,537

 

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(1)We use Adjusted Net Income (a non-GAAP financial measure) as a measure of our results from operations, which we define as our net income under U.S. GAAP before the amounts related to the consolidation of the securitization and permanent financing trusts we use to finance our business, certain non-cash compensation expenses, certain other expenses and provision for or benefit from income taxes. We use Adjusted Net Income to measure our overall performance because we believe it represents the best measure of our operating performance without regard to our financing vehicles. You should not consider Adjusted Net Income in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because not all companies use identical calculations, our presentation of Adjusted Net Income may not be comparable to other similarly titled measures of other companies.
(2)Securitized Product TRB Purchases includes purchases during the period of assets that will be securitized (guaranteed structured settlements, annuities, and lottery payment streams).
(3)Other TRB Purchases includes the receivables purchased from life contingent structured settlements and the purchase price of pre-settlement fundings during the period.
(4)Adjusted Net Income Margin is adjusted net income divided by the Total TRB Purchases during the period.
(5)The amount of company retained interest in finance receivables at fair market value is included in the VIE and other finance receivables at fair market value on our consolidated balance sheets. We have financed certain of the retained interests under a residual term facility. The amount outstanding under this facility was $56 million as of December 31, 2011 and $70 million as of December 31, 2012 and June 30, 2013.
(a) Reflects the reduction in interest expense as a result of the $140.0 million repayment of the term loan payable made from the proceeds of this offering.
(b) Following this offering we will be subject to U.S. federal income taxes, in addition to state and local taxes with respect to our allocable share of any net taxable income of JGWPT Holdings, LLC, which will result in higher income taxes. As a result, the pro forma statement of operations reflects an adjustment to our provision for U.S. federal income taxes and assumes the applicable statutory rates apportioned to each state and local jurisdiction.
(c) As described in “The Transactions”, JGWPT Holdings Inc. will become the sole managing member of JGWPT Holdings, LLC. JGWPT Holdings Inc. will initially own less than 100% of the economic interest in JGWPT Holdings, LLC but will have 100% of the voting power and control the management of JGWPT Holdings, LLC. Immediately following this offering, the non-controlling interest will be 57%. The percentage of the net income attributable to the non-controlling interest will vary from these percentages due to the differing level of income taxes applicable to the controlling interest. For the year ended December 31, 2012 and six months ended June 30, 2013, the non-controlling interest was allocated 0% of the pro forma provision (benefit) income tax adjustment of $21,045 and $12,089, respectively.
(d) Reflects the net effect on cash and cash equivalents of the receipt of the net offering proceeds of $181.1 million and the use of proceeds described in “Use of Proceeds”.
(e) Reflects the repayment of $140.0 million of the term loan payable, net of debt discount, made from the proceeds from the offering.
(f) Reflects the increase in share based compensation expense associated with the issuance of stock options for 583,019 Class A Shares we intend to grant to our executive officers and employees concurrently with this offering.

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The following table provides a reconciliation of historical J.G. Wentworth, LLC and pro forma JGWPT Holdings Inc. net income (loss) to Adjusted Net Income.

 

   Historical
J.G. Wentworth, LLC
  Pro Forma
JGWPT
Holdings Inc.
   Year Ended December 31,  Six Months Ended June 30,  Last Twelve Months Ended
June 30,
  Year Ended December 31,  Six Months Ended June 30,
   2012  2011  2013  2012  2013  2012  2013
   (in thousands) 
Net income (loss) attributable to J.G. Wentworth, LLC  $116,741   $(3,925)  $68,065   $56,900   $127,906   $ 106,610    $ 61,623  
Adjustments to reflect deconsolidation of securitizations:                                   
Elimination of unrealized gain (loss) on finance receivables, long-term debt and derivatives from post securitization due to changes in interest rates   (51,599)    18,601     (46,661)   (27,659)   (70,601)    (51,599 )     (46,661 )
Elimination of interest income from securitized finance receivables    (149,883 )    (122,548)   (69,750)    (75,624 )     (144,009 )     (149,883 )     (69,750 )
Interest income on retained interests in finance
receivables
    16,372     10,377     9,128      7,064      18,436      16,372      9,128  
Servicing income on securitized finance receivables   5,949    4,087    2,857     3,100      5,706      5,949       2,857  
Elimination of interest expense on long-term debt related to securitization and permanent financing trusts    126,650      101,686     57,955     64,283      120,322      126,650       57,955  
Professional fees relating to securitizations   5,341    4,796    3,024    2,238    6,127     5,341       3,024  
Other adjustments:                                   
Share based compensation   2,393    1,827    1,071    1,271    2,193     3,763       1,756  
Income tax (benefit)/ provision   (227)   (345)   1,155    (84)   1,012     20,818     13,244  
Severance, M & A and consulting expenses    4,364     7,596    3,324    1,235     6,453      4,364       3,324  
Non-recurring debt and swap termination fee   —      13,753    —      —      —              
Other non-recurring expenses   300    713    3,883    —      4,183     300       3,883  
Adjusted Net Income  $ 76,401    $ 36,618    $ 34,051    $ 32,724    $ 77,728    $ 88,685    $ 40,383  

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RISK FACTORS

 

Any investment in our Class A Shares involves a high degree of risk. You should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our Class A Shares. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occur, our business, financial condition and results of operations may be adversely affected. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this prospectus.

 

RISKS RELATED TO OUR BUSINESS OPERATIONS

 

Failure to implement our business strategy could materially adversely affect our business, financial position and results of operations.

 

Our business, financial condition and results of operations depend on our management’s ability to execute our business strategy. Key factors involved in the execution of our business strategy include:

 

our continued investment in and the effectiveness of our direct response marketing programs;

 

maintaining our profit margins through changing economic cycles and interest rate environments;

 

increases in the volumes of structured settlement payments purchased;

 

growth in our various business lines;

 

increased penetration of our existing markets and penetration of complementary markets; and

 

our ability to continue to access our financing platform on favorable terms.

 

Our failure or inability to execute any element of our business strategy could materially adversely affect our business, financial position and results of operations.

 

We may not successfully enter new lines of business and broaden the scope of our current businesses.

 

We intend to enter into new lines of business that are adjacent to our existing lines of business and broaden the scope of our current businesses. We may not achieve our expected growth if we do not successfully enter these new lines of business and broaden the scope of our current businesses. In addition, entering new lines of business and broadening the scope of our current businesses may require significant upfront expenditures that we may not be able to recoup in the future. These efforts may also divert management’s attention and expose us to new risks and regulations. As a result, entering new lines of business and broadening the scope of our current businesses may have material adverse effects on our business, financial condition and results of operations.

 

Competition may limit our ability to acquire structured settlement, annuity or lottery payment streams and could also affect the pricing of those payment streams.

 

Our profitability depends, in large part, on our ability to acquire structured settlement, annuity and lottery payment streams at attractive discount rates. In acquiring these assets, we compete with other purchasers of those payment streams. In the future, it is possible that some competitors may have a lower cost of funds or access to funding sources that may not be available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of asset purchases and establish more relationships than us. Furthermore, competition for purchases of structured settlement, annuity and lottery payment streams may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. The competitive pressures we face may have a material adverse effect on our business, financial condition and results of operations.

 

Unfavorable press reports about our business model may reduce our access to securitization markets or make prospective customers less willing to sell structured settlement, annuity and lottery payment streams to us or to accept pre-settlement funding from us.

 

The industry in which we operate is periodically the subject of negative press reports from the media and consumer advocacy groups. Our industry is relatively new and is susceptible to confusion about the role of purchasers of structured settlement, annuity and lottery payment streams and other alternative financial assets. We depend upon

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direct response marketing and our reputation to attract prospective customers and maintain existing customers. A sustained campaign of negative press reports could adversely affect our access to securitization markets or the public’s perception of us and our industry as a whole. If people are reluctant to sell structured settlement, annuity and lottery payment streams and other assets to us, our revenue would decline.

 

We have access to personally identifiable confidential information of current and prospective customers and the improper use or failure to protect that information could adversely affect our business and reputation.

 

Our business often requires that we handle personally identifiable confidential information, the use and disclosure of which is significantly restricted under federal and state privacy laws. If our employees improperly use or disclose such confidential information, we could be subject to legal proceedings or regulatory sanctions or suffer serious harm to our reputation. It is not always possible to deter misconduct by our employees, vendors and business partners, and the precautions we take to prevent this activity may not be effective in all cases. If any of our employees, vendors or business partners engage in misconduct, or if they are accused of misconduct, our business and reputation could be adversely affected. Our business may also be subject to security breaches which may lead to improper use or disclosure of personally identifiable confidential information. The precautions we take to prevent security breaches may not be effective in all cases, and the improper disclosure of such information as a result of a breach may have an adverse effect on our business, financial condition and results of operations.

 

If the identities of structured settlement or annuity holders or of current litigants become readily available, it could have an adverse effect on our structured settlement or annuity payment purchasing or pre-settlement funding business, financial condition and results of operations.

 

We expect to continue to build and enhance our databases of holders of structured settlements and annuities and of current litigants through a combination of commercial and internet advertising campaigns, social media activities and targeted marketing efforts. If the identities of structured settlement or annuity holders or of current litigants in our databases were to become readily available to our competitors or to the general public, including through the physical or cyber theft of our databases, we could face increased competition and the value of our proprietary databases would be diminished, which would have a negative effect on our structured settlement and annuity payment purchasing and pre-settlement funding businesses, financial condition and results of operations.

 

Problems with the technologies and third parties that we rely upon may diminish our ability to manage essential business functions.

 

The computer networks and third-party services upon which our operations are based are complex and may contain undetected errors or suffer unexpected failures. We are exposed to the risk of failure of our proprietary computer systems and back-up systems, some of which are deployed, operated, monitored and supported by third parties whom we do not control. We also rely on third parties for software development and system support. Any failure of our systems and any loss of data could damage our reputation and increase our costs or reduce our revenue.

 

We depend on a number of third parties for the successful and timely implementation of our business strategy and the failure of any of those parties to meet certain deadlines could adversely impact our ability to generate revenue.

 

Our ability to purchase structured settlement payments and lottery receivables depends on the entry of related court orders. Our ability to complete a securitization and operate our business depends on a number of third parties, including rating agencies, notaries, outside counsel, insurance companies, investment banks, the court system, servicers, sub-servicers, collateral custodians and entities that participate in the capital markets to buy the related debt. We do not control these third parties and a failure to perform according to our requirements or acts of fraud by such parties could materially impact our business. For example, there have in the past and may be in the future deficiencies in court orders obtained on our behalf by third parties that result in those court orders being invalid, including as a result of failures to perform according to our requirements and acts of fraud, in which case we would need to take additional steps to attempt to cure the deficiencies. We may or may not be successful in curing these deficiencies and, if successful, there may nonetheless be a delay in our receipt of payment streams pursuant to the court orders and if unsuccessful, we may have to repurchase such payment streams from our securitization facilities. Any delay in the receipt of, or the invalidation of, a significant number of court orders or any delay in the closing of a securitization would significantly and adversely affect our earnings.

 

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We are heavily dependent on direct response marketing and if we are unable to reach prospective customers in a cost-effective manner, it would have a material adverse effect on our business and financial results.

 

We use direct response marketing to generate the inbound communications from prospective customers that are the basis of our purchasing activities. As a result, we have spent considerable money and resources on advertising to reach holders of structured settlements and similar products and intend to continue to do so. Our marketing efforts may not be successful or cost-effective and if we are unable to reach prospective customers in a cost-effective manner, it would have a material adverse effect on our business, financial condition and results of operations. In addition, we are heavily dependent on television and internet advertising and a change in television viewing habits or internet usage patterns could adversely impact our business. For example, the use of digital video recorders that allow viewers to skip commercials reduces the efficacy of our television marketing. There has also been a recent proliferation of new marketing platforms, including cellphones and tablets, as well as an increasing use of social media. If we are unable to adapt to these new marketing platforms, this may reduce the success and/or cost-effectiveness of our marketing efforts and have a material adverse effect on our business, financial condition and results of operations. Further, an event that reduces or eliminates our ability to reach potential customers or interrupts our telephone system could substantially impair our ability to generate revenue.

 

We are dependent on a small number of individuals, and if we lose these key personnel, our business will be adversely affected.

 

Many of the key responsibilities of our business have been assigned to a relatively small number of individuals. Our future success depends to a considerable degree on the skills, experience and effort of our senior management. We may add additional senior personnel in the future. If we lose the services of any of our key employees, it could have an adverse effect on our business. We do not carry “key man” insurance for any of our management executives. Competition to hire personnel possessing the skills and experience we require could contribute to an increase in our employee turnover rate. Our business model depends heavily on staffing our call center with highly trained personnel. High turnover or an inability to attract and retain qualified replacement personnel could have an adverse effect on our business, financial condition and results of operations.

 

Following the offering, our board of directors intends to engage an outside compensation consultant to review the compensation of our named executive officers and other key personnel, and to make recommendations to the board on items relating to future salaries, bonuses, and equity grants for these individuals. The board will consider these recommendations, taking into account our compensation objectives and the compensation paid to executives of peer companies, when seeking to enter into future compensation arrangements with these individuals. To the extent that we are not able to develop a compensation program that is mutually satisfactory to us and to these named executive officers and other key personnel, as well as our employees in general, we may lose the services of these named executive officers and other key personnel and have difficulty hiring and retaining qualified personnel in addition to or in replacement thereof, and our business could suffer.  

 

We may pursue acquisitions or strategic alliances that we may not successfully integrate or that may divert our management’s attention and resources.

 

We are currently in discussion with parties regarding potential acquisition opportunities and we may pursue other acquisitions, joint ventures or strategic alliances in the future. However, we may not be able to identify and secure suitable opportunities. Our ability to consummate and integrate effectively any future acquisitions or enter into strategic alliances on terms that are favorable to us may be limited by a number of factors, such as competition for attractive targets and, to the extent necessary for larger acquisitions, our ability to obtain financing on satisfactory terms, if at all.

 

In addition, if a potential candidate is identified, we may fail to enter into a definitive agreement for the candidate on commercially reasonable terms or at all. The negotiation and completion of potential acquisitions, joint ventures or strategic alliances, whether or not ultimately consummated, could also require significant diversion of management’s time and resources and potential disruption of our existing business. Further, the expected synergies from future acquisitions or strategic alliances may not be realized and we may not achieve the expected results. We may also have to incur significant charges in connection with future acquisitions. Future acquisitions or strategic alliances could also potentially result in the incurrence of additional indebtedness, costs and contingent liabilities. We may also have to obtain approvals and licenses from the relevant government authorities for the acquisitions and to comply with any applicable laws and regulations, which could result in increased costs and delay. Future strategic alliances or acquisitions may also expose us to potential risks, including risks associated with:

 

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failing to successfully integrate new operations, products and personnel;

 

unforeseen or hidden liabilities;

 

the diversion of financial or other resources from our existing businesses;

 

our inability to generate sufficient revenue to recover costs and expenses of the strategic alliances or acquisitions; and

 

potential loss of, or harm to, relationships with employees and customers.

 

Any of the above risks could significantly impair our ability to manage our business and materially and adversely affect our business, financial condition and results of operations.

 

If we are unable to implement our operational and financial information systems or expand, train, manage and motivate our workforce, our business may be adversely affected.

 

The success of our business strategy depends in part on our ability to expand our operations in the future. Our growth has placed, and will continue to place, increased demands on our information systems and other resources and further expansion of our operations will require substantial financial resources. To accommodate our past and anticipated future growth and to compete effectively, we will need to continue to integrate our financial information systems and expand, train, manage and motivate our workforce. Furthermore, focusing our financial resources on the expansion of our operations may negatively impact our financial results. Any failure to implement our operational and financial information systems, or to expand, train, manage or motivate our workforce, may adversely affect our business.

 

We depend on uninterrupted computer access and the reliable operation of our information technology systems; any prolonged delays due to data interruptions or revocation of our software licenses could adversely affect our ability to operate our business and cause our customers to seek alternative service providers.

 

Many aspects of our business are dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processing capabilities. Our success is dependent on high-quality and uninterrupted access to our computer systems, requiring us to protect our computer equipment, software and the information stored in servers against damage by fire, natural disaster, power loss, telecommunications failures, unauthorized intrusion and other catastrophic events. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors or other technological problems could impair our ability to provide certain products. A system failure, if prolonged, could result in reduced revenues, loss of customers and damage to our reputation, any of which could cause our business to materially suffer. In addition, due to the highly automated environment in which we operate our computer systems, any undetected error in the operation of our business processes or computer software may cause us to lose revenues or subject us to liabilities for third party claims. While we carry property and business interruption insurance to cover operations, the coverage may not be adequate to compensate us for losses that may occur.

 

Our business may suffer if our trademarks, service marks or domain names are infringed.

 

We rely on trademarks, service marks and domain names to protect our brands. Many of these trademarks, service marks and domain names have been a key part of establishing our business. We believe these trademarks, service marks and domain names have significant value and are important to the marketing of our products. We cannot assure you that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours. In addition, although we believe we have the right to use our trademarks, service marks and domain names, we cannot assure you that our trademarks, service marks and domain names do not or will not violate the proprietary rights of others, that our trademarks, service marks and domain names will be upheld if challenged, or that we will not be prevented from using our trademarks, service marks and domain names, any of which occurrences could harm our business.

 

Annuity providers and other payors could change their payment practices for assignments of structured settlement, annuity and lottery payment streams, which could have a material adverse impact on our business, results of operations and financial conditions in future periods.

 

We currently have established relationships and experience with more than 200 insurance companies as well as state lottery commissions and other payors. Purchases of structured settlement, annuity and lottery payment streams require that the payors of such payment streams redirect payments from the initial payee and change the payee

 

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records within their operational and information technology systems in order to direct the purchased payment streams to us. Often, when we purchase less than all payment streams related to a receivable, the insurance company or other payor directs all of the payments streams to us, and we then take on the administrative responsibility to direct un-purchased payments to the seller or other payees. Moreover, if we complete more than one purchase transaction with a seller, the payor of the payment stream may be required to make further changes in their operational and information technology systems to cover such additional purchase and to allow us to assume additional administrative payment responsibility in order to direct multiple payment streams to different payees. Often, insurance companies or other payors are paid a fee by us in consideration for their costs and expenses in redirecting payments and updating their operational and information technology systems.

 

If, however, in the future, one or more of such insurance companies, lottery commissions or other payors were to no longer be willing to redirect payments to new payees, or allow us to assume administrative responsibility for directing payment, it could become more expensive or no longer possible to purchase structured settlement payments or other receivables paid by such payors, which could have a material adverse impact on business, results of operations and financial condition in future periods of our business.

 

RISKS RELATED TO OUR FINANCIAL POSITION

 

An increase in the cost of our financing sources, especially relative to the discount rate at which we purchase assets, may reduce our profitability.

 

Our ability to monetize our structured settlement, annuity, and lottery payment stream purchases and pre-settlement funding depends on our ability to obtain temporary and/or permanent financing at attractive rates, especially relative to our purchase discount rate. If the cost of our financing increases relative to the discount rate at which we are able to purchase assets, our profits will decline. A variety of factors can materially and adversely affect the cost of our financing, including, among others, an increase in interest rates or an increase in the credit spread on our financings relative to underlying benchmark rates. Similarly, a variety of factors can materially adversely affect our purchase discount rate including, among others, increased competition, regulatory and legislative changes, including the imposition of additional or lower rate caps to those currently in effect in certain states in which we operate, the views of the courts and other regulatory bodies and the efforts of consumer advocacy groups. For further detail regarding the effect of increases in the cost of our financing sources on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk.”

 

We are exposed to interest rate volatility risk as interest rates can fluctuate in the period between when we purchase payment streams and when we securitize such payment streams.

 

We purchase structured settlement, annuity and lottery payment streams at a discount rate based on, among other factors, our then estimates of the future interest rate environment. Once a critical mass of payment streams is achieved, those payment streams are then securitized or otherwise financed. The discount rate at which a securitization is sold to investors is based on the current interest rates as of the time of such securitization. Interest rates may fluctuate significantly during the period between the purchase and financing of payment streams, which can reduce the spread between the discount rate at which we purchased the payment streams and the discount rate at which we securitize such payment streams, which would reduce our revenues. Volatile interest rate environments can lead to volatility in our results of operations. If we are unable to finance the payment streams we purchase at a discount rate that is sufficiently lower than the discount rate at which we make such purchases, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our ability to continue to purchase structured settlement payments and other financial assets and to fund our business is dependent on the availability of credit from our financing resources.

 

We are currently highly dependent on obtaining financing to fund our purchases of structured settlement payments and other financial assets. We currently depend on our committed warehouse lines to finance our purchase of structured settlement, annuity, and lottery payment streams prior to their securitization. We are also dependent on a committed revolving credit facility for the financing of our pre-settlement funding and a permanent financing facility for our life contingent structured settlement payments and life contingent annuity payments purchases. In order to access these facilities we are required to meet certain conditions to borrowing. In the future we may not be able to meet these conditions in which case we would be unable to borrow under one or all of our facilities. In

 

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addition, these warehouse lines and other financing facilities may not continue to be available to us beyond their current maturity dates at reasonable terms or at all. If we are unable to extend or replace any of our financing sources, we will have to limit our purchasing activities, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

If we are unable to complete future securitizations or other financings on favorable terms, then our business will be adversely affected.

 

Our business depends on our ability to aggregate and securitize many of the financial assets that we purchase, including structured settlement, annuity and lottery payment streams, in the form of privately offered asset-backed securities, private placements or other term financings. The availability of financing sources which depends in part on factors outside of our control. For example, our results in 2008 and 2009 were impacted by the financial crisis, which resulted in a lack of purchasers of our asset-backed securitizations and a resultant lack of capital availability from our warehouse facilities. We were forced to limit transaction volume without access to the securitization market and with limited warehouse capacity. We significantly scaled back new transactions, resulting in insufficient cash flow relative to our leverage.  On March 31, 2009,  J.G. Wentworth, LLC failed to make an interest payment on certain debt and on related interest rate swap contracts. On June 4, 2009, J.G. Wentworth, LLC and certain of its affiliates completed a reorganization under Chapter 11 of the Bankruptcy Code and emerged with a restructured balance sheet. In the future, we may not be able to continue to securitize our structured settlement payments at favorable rates or obtain financing through borrowings or other means on acceptable terms or at all, in which case we may be unable to satisfy our cash requirements. Our financings generate cash proceeds that allow us to repay amounts borrowed under our committed warehouse lines, finance the purchase of additional financial assets and pay our operating expenses. Changes in our asset-backed securities program could materially adversely affect our earnings and ability to purchase and securitize structured settlement, annuity, or lottery payment streams on a timely basis. These changes could include:

 

 

a delay in the completion of a planned securitization;

 

negative market perception of us;

 

a change in rating agency criteria with regards our asset class,

 

delays from rating agencies in providing ratings on our securitizations, and

 

failure of the financial assets we intend to securitize to conform to rating agency requirements.

 

We plan to continue to access the securitization market frequently. If for any reason we were not able to complete a securitization, it could negatively impact our cash flow during that period. If we are unable to consummate securitization transactions in the future of if there is an adverse change in the asset-backed securities market for structured settlement, annuity, or lottery payment streams generally, we may have to curtail our activities, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We have a substantial amount of indebtedness, which may adversely affect our cash flow and ability to operate or grow our business.

 

As of June 30, 2013, on a pro forma basis after giving effect to this offering and related Transactions, we would have had $421.3 million total of indebtedness (not including indebtedness related to our warehouse facilities and asset-backed securitizations, which is recourse only to the VIE assets on our balance sheet). In addition, on the same basis, we would have had the ability to incur $20.0 million of additional indebtedness under our revolving credit facility. Our substantial indebtedness could have a number of important consequences. For example, our substantial indebtedness could:

 

make it more difficult for us to satisfy our obligations under our indebtedness or comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, which could result in an event of default under one or more agreements governing our indebtedness;

 

make us more vulnerable to adverse changes in the general economic, competitive and regulatory environment;

 

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the cash available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

place us at a competitive disadvantage compared to our competitors that are less highly leveraged, as they may be able to take advantage of opportunities that our leverage prevents us from exploiting; and

 

limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.

 

Any of the above listed factors could materially adversely affect our business, financial condition, results of operations and cash flows. Further, subject to compliance with our financing agreements, we have the ability to incur additional indebtedness, which would exacerbate the risks associated with our existing debt.

 

We are dependent on the opinions of certain rating agencies for the valuation of the credit quality of our assets to access the capital markets.

 

Standard & Poor’s, Moody’s and A.M. Best evaluate some, but not all, of the insurance companies that are the payors on the structured settlement, annuity and certain lottery payment streams that we purchase. Similarly, Standard & Poor’s, Moody’s, A.M. Best and DBRS evaluate some, but not all, of our securitizations of those assets. We may be negatively impacted if any of these rating agencies stop covering these insurance companies or decide to downgrade their ratings or change their methodology for rating insurance companies or our securitizations. A downgrade in the credit rating of the major insurance companies that write structured settlements could negatively affect our ability to access the capital or securitization markets. In addition, we may be negatively impacted if any of these rating agencies stop rating our securitizations, which would adversely affect our ability to sell our securitizations and the price that we receive for them. These events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Changes in tax or accounting policies applicable to our business could have a material adverse effect on our future profitability or presentation of our results.

 

Our GAAP income is significantly higher than our tax income due to current tax and accounting laws and policies. The tax rules applicable to our business are complex and we continue to evaluate our positions and processes. If these laws and policies were to change, we could owe significantly more in income taxes than the cash generated by our operations. If we were unable for any reason to continue purchasing structured settlement annuity or lottery payment streams or other products, as well as generate current operating and marketing expenses, we could generate significant tax liabilities without a corresponding cash flow to cover those liabilities. In addition, changes in tax or accounting policies applicable to our business could also have a material adverse effect on our future profitability or presentation of our results.

 

Residuals from prior securitizations represent a significant portion of our assets, but there is no established market for those residuals and residuals related to payment streams purchased prior to 2002 may be subject to additional risks.

 

After a securitization is executed, we retain a subordinated interest in the receivables, referred to as the residuals, which we include within our balance sheet within the caption VIE and other finance receivables, at fair market value. We have financed certain of our residuals under a term facility. The amount outstanding under this term facility at June 30, 2013 was $70 million. If we are required to sell our residuals to pay down debt or to otherwise generate cash for operations, we may not be able to generate proceeds that reflect the value of those residuals on our books or that are sufficient to repay the related indebtedness. In addition, a sale of the residuals under those circumstances would likely generate taxable income without sufficient cash to pay those taxes. Changes in interest rates, credit spreads and the specific credit of the underlying assets may lead to unrealized losses that negatively affect our GAAP income.

 

Additionally, certain risk retention requirements promulgated under the Dodd Frank Act and similar national and international laws could limit our ability to sell or finance our residual interests in the future and this could also have a material adverse effect on our business, financial condition, results of operations and cash flows. 

 

Further, a portion of our residuals relate to payment streams that were purchased prior to the enactment of the federal Tax Relief Act in 2002.  These earlier purchases were not approved by a court and are based solely on a contract.  As a result, the sale of these payment streams may be vulnerable to diversion by the original seller.   If such a diversion was successful, the payments diverted would be received by the original seller and we would lose the benefit of the payments in the related residual. 

 

 

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We are exposed to underwriting risk, particularly with respect to our pre-settlement funding.

 

The profitability of our pre-settlement funding depends on our ability to accurately underwrite both the likelihood that a personal injury case will result in a settlement as well as the amount of the settlement that is reached. Although we attempt to deploy a conservative underwriting profile by funding only a small fraction of case types with consistent settlement values and having all cases evaluated by our experienced team of in-house attorneys and paralegals, significant differences between our expected and actual collections on pre-settlement funding could have a material adverse impact on our business, financial condition, results of operations and cash flows.

 

In addition, the profitability of our purchases of structured settlement, annuity and lottery payment streams depends on our selection of high quality counterparties and confirmation that there is no senior claim on the payment stream, such as child support or bankruptcy. In the event that one or more of our counterparties is unable or unwilling to make scheduled payments on a payment stream we have purchased, this may have a material adverse effect on our earnings and financial condition.

 

The senior management team has a great deal of discretion in determining what assets are included in our securitization program.

 

A substantial portion of our cash flow is generated on the closing of a securitization. Our senior management team decides how many securitizations we conduct per year and what asset types and amounts to include in our securitization program, based on numerous facts and circumstances. If our senior management does not accurately gauge the appropriate asset mix or timing for a securitization, this may have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our business could be adversely affected if the Bankruptcy Code is changed or interpreted in a manner that affects our rights to scheduled payments with respect to a payment stream we have purchased.

 

If a holder of a structured settlement, annuity or lottery payment stream were to become a debtor in a case under the Bankruptcy Code, a court could hold that the scheduled payments transferred by the holder under the applicable purchase agreement do 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 us, or any securitization vehicle, to establish our 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 our business. 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 us.

 

Furthermore, a general creditor or representative of the creditors, such as a trustee in bankruptcy, of a special purpose vehicle to which an insurance company assigns its obligations to make payments under a structured settlement, annuity or lottery payment stream could make the argument that the payments due from the annuity provider are the property of the estate of such special purpose vehicle (as the named owner thereof). To the extent that a court accepted this argument, the resulting delays or reductions in payments on our receivables could have a material adverse effect on our business, financial condition and results of operations.

 

Also, many of our financing facilities are structured using “bankruptcy remote” special purpose entities to which structured settlement, annuity and lottery payment streams are sold in connection with such financing facilities. Under current case, law, courts generally uphold such structures, the separateness of such entities and the sales of such assets if certain factors are met. If, however, a bankruptcy court were to find that such factors did not exist in the financing facilities or current case law was to change, there would be a risk that defaults would occur under the financing facilities. Moreover, certain subsidiaries may be consolidated upon a bankruptcy of one of our subsidiaries or the sales may not be upheld as true sales by a reviewing court. This could have a material adverse effect on our business, financial condition and results of operations. 

 

We have certain indemnification and repurchase obligations under our various financing facilities.

 

In the ordinary course of our financing activities, we provide customary indemnities to counterparties in certain financing and other transactions. No assurance can be given that these counterparties will not call upon us to discharge these obligations in the circumstances under which they are owed. In addition, in connection with financing transactions, in certain instances we retain customary repurchase obligations with respect to any assets sold into or financed under those transactions that fail to meet the represented objective eligibility criteria. Although we believe our origination practices are sufficient to assure material compliance with such criteria, certain instances have and may occur in which we are required to repurchase such assets.

 

 

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Payor insolvency and similar events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

In instances where insurance companies or other payors of the assets we purchase go bankrupt, become insolvent, or are otherwise unable to pay the purchased payment streams on time, we may not be able to collect all or any of the scheduled payments we have purchased. For example, on September 1, 2011, in the Matter of the Rehabilitation of Executive Life Company of New York, or ELNY, in the Supreme Court of the State of New York, County of Nassau, the Superintendent of Insurance of the State of New York filed an Agreement of Restructuring in connection with the liquidation of ELNY under Article 75 of the New York Insurance Laws. This restructuring plan was subsequently approved by the court. Under this plan, payment streams to be paid on certain receivables purchased by us were reduced. In the future, bankruptcies, additional insolvencies and other events may occur which limit the ability of payors to pay on time and in full, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

RISKS RELATED TO OUR LEGAL AND REGULATORY ENVIRONMENT

 

Certain changes in current tax law could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The use of structured settlements is largely the result of their favorable federal income tax treatment. In 1979, the Internal Revenue Service issued revenue rulings that the income tax exclusion of personal injury settlements applied to related periodic payments. Thus, claimants receiving installment payments as compensation for a personal injury were exempt from all federal income taxation, provided certain conditions were met. This ruling, and its subsequent codification into federal tax law in 1982 with the passing of the Settlement Act, resulted in the proliferation of structured settlements as a means of settling personal injury lawsuits. Changes to tax policies that eliminate this exemption of structured settlements from federal taxation could have a material adverse effect on our future profitability. Congress has previously considered and may revisit legislation that could make our transactions less attractive to prospective customers, including legislation that would reduce or eliminate the benefits derived from the tax deferred nature of structured settlements and annuity products. If the tax treatment for structured settlements was changed adversely by a statutory change or a change in interpretation, the dollar volume of structured settlements issued could be reduced significantly, which would, in turn, reduce the addressable market of our structured settlements payment purchasing business. In addition, if there were a change in the federal tax code or a change in interpretation that would result in adverse tax consequences for the assignment or transfer of structured settlement payments, such change could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Changes in existing state laws governing the transfer of structured settlement or lottery payments or in the interpretation thereof may adversely impact our business or reduce our growth.

 

The structured settlement and lottery payments secondary markets are highly regulated and require court approval for each sale under applicable transfer statutes. These transfer statutes, as well as states’ uniform commercial codes, insurance laws and rules of civil procedure, help ensure the validity, enforceability and tax characteristics of the structured settlement payments and lottery receivables purchasing transactions in which we engage. States may amend their transfer statutes, uniform commercial codes and rules of civil procedure in a manner that inhibits our ability to conduct business, including by means of retroactive laws, which would adversely impact our business. Failing to comply with the terms of a transfer statute when purchasing payments could potentially result in forfeiture of both the right to receive the payments and any unrecovered portion of the purchase price we paid for the payments.

 

Changes to statutory, licensing and regulatory regimes governing structured settlement, annuity and lottery payment streams including the means by which we conduct such business, could have a material adverse effect on our activities and revenues.

 

The structured settlements, annuities and lottery payments industries are subject to extensive and evolving federal, state and local laws and regulations. As a purchaser of structured settlement, annuity and lottery payment streams, we are subject to extensive and increasing regulation by a number of governmental entities at the federal, state and local levels with respect to the above laws.

 

Changes to statutory, licensing and regulatory regimes could result in the enforcement of stricter compliance measures or adoption of additional measures on us or on the insurance companies and other payors that stand behind

 

 

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the structured settlement payments and other assets that we purchase, either of which could have a material adverse impact on our business, financial condition and results of operations. Any change to the regulatory regime covering the resale of any of such asset classes, including any change specifically applicable to our activities or to investor eligibility, could restrict our ability to finance, acquire or securitize such assets or could lead to significantly increased compliance costs.

 

In recent years, both federal and state government agencies have increased civil and criminal enforcement efforts relating to the specialty finance industry and how companies interact with potential customers. This heightened enforcement activity increases our potential exposure to damaging lawsuits, investigations and other enforcement actions. Any such investigation or action could force us to expend considerable resources to respond to or defend against such investigation or action and could adversely affect our business, financial condition, results of operations and cash flows.

 

The regulatory environment for pre-settlement funding, including the means by which we conduct such business, is uncertain, and changes to statutory, licensing and regulatory regimes governing pre-settlement funding could have a material adverse effect on our activities.

 

The regulatory framework for pre-settlement funding is still in its early stages and is evolving rapidly. Most states currently do not have any laws specifically addressing pre-settlement funding, and the regulatory framework is based on state-specific case laws. We have adopted a highly conservative approach to regulatory risk, only providing pre-settlement funding in the states in which we are comfortable in the regulatory regime. We expect that a consistent national regulatory framework will develop in the future, and while we are currently working with relevant trade organizations to draft a model act, there exists considerable uncertainty as to the form of this regulatory framework. This future regulation could force us to significantly alter our strategy or restrict our ability to provide pre-settlement funding.

 

Our purchases of certain assets may be viewed as consumer lending, which could subject us to adverse regulatory limitations and litigation.

 

From time to time, we have been named as defendant in suits involving attempts to recharacterize the purchase of non-court-ordered structured settlement payments or other assets as loan transactions. If a transaction is characterized as a loan rather than a sale, then various consumer lending laws apply, such as usury statutes, consumer credit statutes or truth-in-lending statutes. If a court finds any of our transactions are subject to consumer lending laws, we may not have complied in all respects with the requirements of the applicable statutes. The failure to comply could result in remedies including the rescission of the agreement under which we purchased the right to the stream of periodic payments and the repayment of amounts we received under that agreement.

 

Adverse judicial developments could have an adverse effect on our business, financial condition and results of operations.

 

Adverse judicial developments have occasionally occurred and could occur in the future in the industries in which we do business. In the structured settlement payment purchasing industry, adverse judicial developments have occurred with regard to anti-assignment concerns and issues associated with non-disclosure of material facts and associated misconduct. Most of the settlement agreements that give rise to the structured settlement receivables that we purchase contain anti-assignment provisions that purport to prohibit assignments or encumbrances of structured settlement payments due under the agreement. If anti-assignment provisions are included in an agreement, a claimant or a payor could attempt to invoke the anti-assignment provision to invalidate a claimant’s transfer of structured settlement payments to the purchaser, or to force the purchaser to pay damages. In addition, under certain circumstances, interested parties other than the related claimant or payor could challenge, and potentially invalidate, an assignment of structured settlement payments made in violation of an anti-assignment provision. Whether the presence of an anti-assignment provision in a settlement agreement can be used to invalidate a prior transfer depends on various aspects of state and federal law, including case law and the form of Article 9 of the Uniform Commercial Code adopted in the applicable state.

 

For example, in the 2008 case of 321 Henderson Receivables, LLC v. Tomahawk, the California County Superior Court (Fresno County, Case No. 08CECG00797—July 2008 Order (unreported)) ruled that (i) certain structured settlement payment sales were barred by anti-assignment provisions in the settlement documents, (ii) the transfers were loans, not sales, that violated California’s usury laws and (iii) for similar reasons numerous other

 

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court-approved structured settlement sales may be void. Although the Tomahawk decision was subsequently reversed by the California Court of Appeal, the Superior Court decision for a time had a negative effect on the structured settlement payment purchasing industry by casting doubt on the ability of a structured settlement recipient to sell the payment streams.

 

More recently, the Appellate Court of Illinois, 4th District (acting through the 5th District due to case assignment) held that Illinois courts did not have authority to approve certain sales of structured settlement payments due to anti-assignment provisions in the settlement documents. The court also concluded that the related court orders were void ab initio due to a finding by the Appellate Court that Peachtree Settlement Funding’s counsel had not adequately disclosed the anti-assignment provisions to the court approving the plaintiff’s transfers. If this decision is upheld, it may adversely impact other court-approved structured payment sales previously approved in the state of Illinois. Any similar adverse judicial developments calling into doubt laws and regulations related to structured settlements, annuities, lotteries and pre-settlements could materially and adversely affect our investments in such assets and our financing market.

 

Potential litigation, regulatory proceedings or adverse federal or state tax rulings could have a material adverse impact on our business, results of operations and financial condition in future periods.

 

We are currently subject to lawsuits that could cause us to incur substantial expenditures and generate adverse publicity. We may also be subject to further litigation in the future, including potential class actions and/or trade practices litigation or litigation arising from the Peachtree Merger or other transactions we have undertaken, as well as possibly those engaged in by certain of our affiliates or former affiliates. For example, we are currently subject to allegations by a competitor of improper lead generation and customer acquisition practices, improper disclosure of information in connection with structured settlement payment transfer orders, violations of structured settlement payment transfer statutes and other similar claims. We may also become subject to attempted class action or similar types of mass transaction review due to negative court rulings, such as those described in the preceding risk factor. The consequences of an adverse ruling in any current or future litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows. Defense of any lawsuit, even if successful, could require substantial time and attention of our senior management that would otherwise be spent on other aspects of our business and could require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits may also result in significant payments and modifications to our operations.

 

We are also subject to regulatory proceedings and other governmental investigations, and we could suffer monetary losses or restrictions on our operations from interpretations of state laws in those regulatory proceedings, even if we are not a party to those proceedings. In addition, any adverse federal or state tax rulings or proceedings could have a material adverse effect on our business, financial condition and results of operations.

 

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank or the Dodd-Frank Act, authorizes the Consumer Financial Protection Bureau, or CFPB, to adopt rules that could potentially have a serious impact on our business, and it also empowers the CFPB and state officials to bring enforcement actions against companies that violate federal consumer financial laws.

 

Title X of the Dodd-Frank Act established the CFPB, which has regulatory, supervisory and enforcement powers over providers of consumer financial products and services. Included in the powers afforded the CFPB is the authority to adopt rules describing specified acts and practices as being “unfair,” “deceptive” or “abusive,” and hence unlawful. The CFPB could adopt rules imposing new and potentially burdensome requirements and limitations with respect to our lines of business. In addition to Dodd-Frank’s grant of regulatory powers to the CFPB, Dodd-Frank gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws.

 

In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution, rescission or reformation of contracts, payment of damages, refund or disgorgement, as well as other kinds of affirmative relief) and civil monetary penalties ranging from $5,000 per day for violations of federal consumer financial laws (including the CFPB’s own rules) to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials believe we have violated the foregoing laws, they could exercise their enforcement powers in ways that would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

 

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Increased regulation of asset-backed securities offerings under the Dodd-Frank Act and other laws and regulations could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

On March 29, 2011, the Office of the Comptroller of the Currency, the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency and Department of Housing and Urban Development issued a joint notice of proposed rulemaking proposing rules to implement the credit risk retention requirements of section 15G of the Securities Exchange Act of 1934, or the Exchange Act, as amended by section 941 of the Dodd-Frank Act. The Dodd-Frank Act provides that the sponsor or an affiliate of the sponsor must retain at least 5% of the credit risk of any asset pool that is securitized. The proposed rule outlines other requirements, options and exemptions that were not specified in the Dodd-Frank Act itself. The risk-retention requirements will become effective 2 years after the final rule is published. We cannot predict what effect the proposed rules will have, if adopted, on the marketability of our asset-backed securities or our ability to structure and complete future asset-backed securitizations and other financings. Moreover, we cannot predict whether other similar rules and restrictions will be promulgated in the future, including, without limitation, revisions by the Securities and Exchange Commission to Regulation AB. Such regulations, rules and laws could have a material adverse effect on our business, financial condition and results of operations.

 

RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE

 

Our only material asset after completion of this offering will be our economic interest in JGWPT Holdings, LLC, and we are accordingly dependent upon distributions from JGWPT Holdings, LLC to pay our expenses, taxes and dividends (if and when declared by our board of directors).

 

We will be a holding company and will have no material assets other than our ownership of JGWPT Common Interests. We will have no independent means of generating revenue. We intend to cause JGWPT Holdings, LLC to make distributions to us, as its managing member, in an amount sufficient to cover all expenses, applicable taxes payable and dividends, if any, declared by our board of directors. To the extent that we need funds and JGWPT Holdings, LLC is restricted from making such distributions under applicable law or regulation or under any present or future debt covenants or is otherwise unable to provide such funds, it could materially adversely affect our business, financial condition, results of operations and cash flows. 

 

We will be required to pay certain Common Interestholders for most of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of any tax basis step-up we receive in connection with the sale of Common Interests by certain Common Interestholders to us in exchange for a portion of the proceeds of this offering and any future exchanges of JGWPT Common Interests and related transactions with JGWPT Holdings, LLC.

 

A portion of the proceeds of this offering will be used to purchase JGWPT Common Interests from certain of the Common Interestholders. In addition, as described under “The Transactions—Operating Agreement of JGWPT Holdings, LLC—Exchange Rights,” Common Interestholders may in the future exchange JGWPT Common Interests for Class A Shares or, in the case of PGHI Corp., Class C Shares, on a one-for-one basis (or, at JGWPT Holdings, LLC’s option, cash). The newly formed company to be named JGWPT Holdings, LLC is expected to have in effect an election under Section 754 of the Code, which may result in an adjustment to our share of the tax basis of the assets owned by JGWPT Holdings, LLC at the time of such initial sale of and subsequent exchanges of JGWPT Common Interests. The sale and exchanges may result in increases in our share of the tax basis of the tangible and intangible assets of JGWPT Holdings, LLC that otherwise would not have been available. Any such increases in tax basis are, in turn, anticipated to create incremental tax deductions that would reduce the amount of tax that we would otherwise be required to pay in the future.

 

We intend to enter into a tax receivable agreement with all Common Interestholders who hold in excess of approximately 1% of the JGWPT Common Interests outstanding immediately prior to this offering that will require us to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize in any tax year beginning with 2013 from increases in tax basis realized as a result of (i) the sale by any Common Interestholders of any of their JGWPT Common Interests to us in exchange for a portion of the proceeds of this offering, or (ii) any future exchanges by Common Interestholders of their JGWPT Common Interests for Class A Shares or Class C Shares (or cash). We expect to benefit from the remaining 15% of cash savings, if any, in income

 

 

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tax that we actually realize during a covered tax year. The cash savings in income tax paid to any such Common Interestholders will reduce the cash that may otherwise be available to us for our operations and to make future distributions to holders of Class A Shares, including the investors in this offering.

 

For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability for a covered tax year to the amount of such taxes that we would have been required to pay for such covered tax year had there been no increase to our share of the tax basis of the tangible and intangible assets of JGWPT Holdings, LLC as a result of such sale and any such exchanges and had we not entered into the tax receivable agreement. The tax receivable agreement continues until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the tax receivable agreement upon a change of control for an amount based on the remaining payments expected to be made under the tax receivable agreement.

 

JLL owns a portion of its investment through an existing corporation.  In the event we engage in a merger with such corporation in which the shareholders of that corporation receive the Class A Shares directly, we will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement requires us to pay the shareholders of such corporation for the use of any such attributes in the same manner as payments made for cash savings from increases in tax basis as described above. 

 

The owners of PGHI Corp., including DLJ Merchant Banking Partners IV, L.P. and affiliates of Credit Suisse Group AG, own their investment through PGHI Corp. In the event we engage in a merger with such corporation in which the shareholders of that corporation receive the Class C Shares directly, we will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement requires us to pay the shareholders of such corporation for the use of any such attributes above a specific amount in the same manner as payments made for cash savings from increases in tax basis as described above.

 

While the actual amount and timing of any payments under this agreement will vary depending upon a number of factors (including the timing of exchanges, the amount of gain recognized by an exchanging Common Interestholder, the amount and timing of our income and the tax rates in effect at the time any incremental tax deductions resulting from the increase in tax basis are utilized) we expect that the payments that we may make to the Common Interestholders that are parties to the tax receivable agreement could be substantial during the expected term of the tax receivable agreement. A tax authority may challenge all or part of the tax basis increases or the amount or availability of any tax attributes discussed above, as well as other related tax positions we take, and a court could sustain such a challenge. The Common Interestholders that are party to the tax receivable agreement will not reimburse us for any payments previously made to them in the event that, due to a successful challenge by the IRS or any other tax authority of the amount of any tax basis increase or the amount or availability of any tax attributes, our actual cash tax savings are less than the cash tax savings previously calculated and upon which prior payments under the tax receivables were based. As a result, in certain circumstances we could make payments under the tax receivable agreement to the Common Interestholders that are party thereto in excess of our cash tax savings. A successful challenge to our tax reporting positions could also adversely affect our other tax attributes and could materially increase our tax liabilities.

 

In certain cases, payments under the tax receivable agreement to the Common Interestholders may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement, and if the tax reporting positions we determine are not respected, our tax attributes could be adversely affected and the amount of our tax liabilities could materially increase.

 

The tax receivable agreement provides that upon certain changes of control, we will be required to pay the Common Interestholders amounts based on assumptions regarding the remaining payments expected to be made under the tax receivable agreement (at our option, these payments can be accelerated into a single payment at the time of the change of control). As a result, we could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement, and the upfront payment may be made years in advance of any actual realization of such future benefits. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity, and there can be no assurance that we will be able to finance our obligations under the tax receivable agreement.

 

Payments under the tax receivable agreement will be based on the tax reporting positions that we determine, and we will not be reimbursed by the Common Interestholders for any payments previously made under the tax receivable agreement.  As a result, in certain circumstances, payments we make under the tax receivable agreement could

 

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significantly exceed the cash tax or other benefits, if any, that we actually realize.  In addition, if the tax reporting positions we determine are not respected, our tax attributes could be adversely affected and the amount of our tax liabilities could materially increase.

 

Control by the JLL Holders of 56.6% of the combined voting power of our common stock and the fact that they are holding their economic interest through JGWPT Holdings, LLC may give rise to conflicts of interest.

 

Upon consummation of this offering, the JLL Holders will control 56.6% of the combined voting power of our common stock. As a result, the JLL Holders will be able to significantly influence the outcome of all matters requiring a stockholder vote, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our certificate of incorporation and our bylaws; and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders or deprive holders of Class A Shares of an opportunity to receive a premium for their Class A Shares as part of a sale of our business.

 

The interests of the JLL Holders may not always coincide with our interests or the interests of our other stockholders. JLL has significant relationships which it has developed over the years or may develop in the future and these relationships may affect who we work with to implement our strategy and could be influenced by motivations that may not directly benefit us, subject to applicable fiduciary or contractual duties. Also, the JLL Holders may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. This concentration of ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal Stockholders” and “Description of Capital Stock—Certain Provisions of Delaware Law and Certain Charter and Bylaw Provisions.” 

 

In addition, because the JLL Holders hold economic interests in JGWPT Holdings, LLC directly, rather than through us, the JLL Holders may have conflicting interests with holders of Class A Shares. For example, the JLL Holders will have different tax positions from the holders of Class A Shares which could influence their decisions regarding whether and when to dispose of assets, and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. In addition, the structuring of future transactions may take into consideration the JLL Holders’ tax considerations even where no similar benefit would accrue to us. Also, JGWPT Holdings, LLC may sell additional JGWPT Common Interests to its current equity holders or to third parties, which could dilute the indirect aggregate economic interest of the holders of the Class A Shares in JGWPT Holdings, LLC. Any such issuance would be subject to our approval as the managing member of JGWPT Holdings, LLC.

 

The influence of the JLL Holders over our policies is further enhanced by the terms of the Director Designation Agreement that we intend to enter into with the JLL Holders and PGHI Corp. upon completion of this offering, the Voting Agreement that the JLL Holders, PGHI Corp. and certain other Common Interestholders intend to enter into upon completion of this offering and by the provisions of our certificate of incorporation. Under the terms of the Director Designation Agreement, the JLL Holders will have the right to designate four director designees to our board of directors so long as the JLL Holders own at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011, and PGHI Corp. will have the right to designate one director so long as PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate at least 436,104 JGWPT Common Interests. The parties to the Voting Agreement will agree to vote all of their Class A Shares (if any) and Class B Shares (if any) in favor of the election to our board of directors of our Chief Executive Officer, four designees of the JLL Holders and one designee of PGHI Corp. Pursuant to our certificate of incorporation, the four directors designated by the JLL Holders will each be entitled to cast two votes on each matter presented to our board of directors until the earlier to occur of such time as we cease to be a “controlled company” within the meaning of the NYSE corporate governance standards or such time as the JLL Holders cease to hold, in the aggregate, at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011. Because our board is expected to consist of fewer than twelve directors, the four directors designated by the JLL Holders will, for so long as such directors have the right to cast two votes, be able to determine the outcome of all matters presented to the board for approval.

 

 

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Our directors who are affiliated with JLL, the JLL Holders, DLJ Merchant Banking Partners IV, L.P., PGHI Corp. and their respective investment funds will not have any obligation to report corporate opportunities to us.

 

Alexander R. Castaldi, Kevin Hammond, Paul S. Levy, Robert N. Pomroy and Francisco J. Rodriguez serve as our directors and also serve as partners, principals, directors, officers, members, managers, and/or employees of one or more of JLL, the JLL Holders, DLJ Merchant Banking Partners IV, L.P., PGHI Corp., and their respective affiliates and investment funds, which we refer to as the Corporate Opportunity Entities. See “Management—Our Directors and Executive Officers.” Because the Corporate Opportunity Entities may engage in similar lines of business to those in which we engage, our certificate of incorporation allocates corporate opportunities between us and these entities. Specifically, none of the Corporate Opportunity Entities has any duty to refrain from engaging, directly or indirectly, in the same or similar business activities or lines of business as do we. In addition, if any of them acquires knowledge of a potential transaction that may be a corporate opportunity for us and for the Corporate Opportunity Entities, subject to certain exceptions, we will not have any expectancy in such corporate opportunity, and they will not have any obligation to communicate such opportunity to us. By becoming our stockholder, you will be deemed to have notice of and to have consented to these provisions of our certificate of incorporation.

 

The above provision shall automatically, without any need for any action by us, be terminated and void at such time as the Corporate Opportunity Entities beneficially own less than 15% of our shares of common stock.

 

RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR CLASS A SHARES

 

As a controlled company, we will not be subject to all of the corporate governance rules of the NYSE.

 

Upon the listing of our common stock on the NYSE in connection with this offering, we will be considered a “controlled company” under the rules of the NYSE. Controlled companies are exempt from the NYSE’s corporate governance rules requiring that listed companies have (i) a majority of the board of directors consist of “independent” directors under the listing standards of the NYSE, (ii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting the NYSE’s requirements, and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of the NYSE. Following this offering, we intend to use some or all of these exemptions. As a result, we may not have a majority of independent directors, our nomination and corporate governance committee and compensation committee may not consist entirely of independent directors and such committees may not be subject to annual performance evaluations. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE. See “Management” for further information.

 

We are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends.

 

We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries, which own our operating assets. As a result, we will be dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends on our Class A Shares. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. If we are unable to obtain funds from our subsidiaries, we may be unable to, or our board may exercise its discretion not to, pay dividends.

 

The obligations associated with being a public company will require significant resources and management attention, which may divert from our business operations.

 

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur.

 

Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our business strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our

 

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internal controls, including IT controls, and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations. In addition, we cannot predict or estimate the amount of additional costs we may incur to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses.

 

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of shareholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our Class A Shares less attractive as a result. The result may be a less active trading market for our Class A Shares and our stock price may be more volatile.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period. As a result, our financial statements may not be comparable to companies that comply with public company effective dates.We could remain an “emerging growth company” for up to five years or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities during the preceding three-year period.

 

We have not previously been required to assess the effectiveness of our internal controls over financial reporting and we may identify deficiencies when we are required to do so.

 

Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC. We have not previously been subject to this requirement, and, in connection with the implementation of the necessary procedures and practices related to internal controls, including information technology controls, and over financial reporting, we may identify deficiencies. We may not be able to remediate any future deficiencies in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404(a) thereof. In addition, failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.  

An active trading market for our Class A Shares may never develop or be sustained.

 

Although we intend to apply to list our Class A Shares for trading on the NYSE, an active trading market for our Class A Shares may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. Accordingly, if an active trading market for our Class A Shares does not develop or is not maintained, the liquidity of our Class A Shares, your ability to sell your Class A Shares when desired and the prices that you may obtain for your Class A Shares will be adversely affected.

 

The market price and trading volume of our Class A Shares may be volatile, which could result in rapid and substantial losses for our stockholders.

 

Even if an active trading market develops, the market price of our Class A Shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A Shares may fluctuate and cause

 

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significant price variations to occur. The initial public offering price of our Class A Shares will be determined by negotiation between us and the representatives of the underwriters based on a number of factors and may not be indicative of prices that will prevail in the open market following the completion of this offering. If the market price of our Class A Shares declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our Class A Shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our Class A Shares include:

 

variations in our quarterly or annual operating results;

 

changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

 

the contents of published research reports about us or our industry or the failure of securities analysts to cover our Class A Shares after this offering;

 

additions or departures of key management personnel;

 

any increased indebtedness we may incur in the future;

 

announcements by us or others and developments affecting us;

 

actions by institutional stockholders;

 

litigation and governmental investigations;

 

legislative or regulatory changes;

 

changes in government programs and policies;

 

changes in market valuations of similar companies;

 

speculation or reports by the press or investment community with respect to us or our industry in general;

 

increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

 

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

 

general market, political and economic conditions, including any such conditions and local conditions in the markets in which we conduct our operations.

 

These broad market and industry factors may decrease the market price of our Class A Shares, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

Future offerings of debt or equity securities by us may adversely affect the market price of our Class A Shares.

 

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional Class A Shares or offering debt or other equity securities. In particular, future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset-based acquisition financing and/or cash from operations.  

 

Issuing additional Class A Shares or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our Class A Shares or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Class A Shares. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our Class A Shares bear the risk that our future offerings may reduce the market price of our Class A Shares and dilute their stockholdings in us. See “Description of Capital Stock.”

 

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The market price of our Class A Shares could be negatively affected by sales of substantial amounts of our Class A Shares in the public markets.

 

After this offering, there will be 12,205,366 Class A Shares outstanding, or 14,035,366 Class A Shares outstanding if the underwriters exercise their option to purchase additional shares in full. Of our issued and outstanding shares, all the Class A Shares sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following completion of this offering, the Common Interestholders will own 16,113,784 JGWPT Common Interests in the aggregate. We have agreed to register the exchange of all these interests upon the expiration or earlier termination (if any) of their lock-up agreements with the underwriters of this offering which expire 180 days after the date of this prospectus with respect to 14,485,703 JGWPT Common Interests, 135 days with respect to 814,041 JGWPT Common Interests and 90 days with respect to 814,041 JGWPT Common Interests. The Class A Shares received upon exchange may be freely resold into the public market unless held by a Common Interestholder which is an affiliate of us. Certain of these holders (as well as other Common Interestholders) will have the right to demand that we register the resale of their Class A Shares received upon exchange and certain “piggyback” registration rights. See “Shares Eligible For Future Sale.”  

 

We and our executive officers, directors and certain Common Interestholders have agreed with the underwriters that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any Class A Shares or any securities convertible into or exercisable or exchangeable for Class A Shares, or in any manner transfer all or a portion of the economic consequences associated with the ownership of Class A Shares, or cause a registration statement covering any Class A Shares to be filed, without the prior written consent of Barclays Capital Inc. and Credit Suisse Securities (USA) LLC, except that the underwriters have agreed that one-third of the JGWPT Common Interests held by any Other Member as of the date of this prospectus shall be released from such restrictions after each of 90, 135 and 180 days following the date of this prospectus. See “Underwriting—No Sales of Similar Securities.” Barclays Capital Inc. and Credit Suisse Securities (USA) LLC may waive these restrictions at their discretion.

 

The market price of our Class A Shares may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our Class A Shares might impede our ability to raise capital through the issuance of additional Class A Shares or other equity securities.

 

In connection with the completion of this offering, we intend to enter into a registration rights agreement with all of the Common Interestholders pursuant to which we will be required to register the exchange under the federal securities laws of the JGWPT Common Interests held by them for Class A Shares. We will also be required to allow the Common Interestholders to “piggyback” on an offering by us in certain circumstances. Any such sales, or the prospect of any such sales, could materially impact the market price of our Class A Shares. For a further description of our registration rights agreement, see “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

The future issuance of additional Class A Shares in connection with our incentive plans, acquisitions, warrants or otherwise will dilute all other stockholdings.

 

After this offering, assuming the underwriters exercise their option to purchase additional shares in full, we will have an aggregate of 487,211,615 Class A Shares authorized but unissued and not reserved for issuance under our incentive plans. We may issue all of these Class A Shares without any action or approval by our stockholders, subject to certain exceptions. Any Class A Shares issued in connection with our incentive plans, the exercise of outstanding stock options or warrants or otherwise would dilute the percentage ownership held by the investors who purchase Class A Shares in this offering.

 

You will incur immediate dilution as a result of this offering.

 

If you purchase Class A Shares in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate dilution of $ 17.50 per share, representing the difference between the initial public offering price of $ 20.50 per share and our as adjusted net tangible book value per share after giving effect to this offering. See “Dilution.”

 

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We will have broad discretion in the use of a significant part of the net proceeds from this offering and may not use them effectively.

 

Our management currently intends to use the net proceeds from this offering in the manner described in “Use of Proceeds” and will have broad discretion in the application of a significant part of the net proceeds from this offering. The failure by our management to apply these funds effectively could affect our ability to operate and grow our business.

 

Delaware law and our organizational documents, as well as our existing and future debt agreements, may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

 

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our certificate of incorporation and bylaws that will be effective upon completion of this offering may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. Among other things, these provisions:

 

provide for a classified board of directors with staggered three-year terms;

 

do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

delegate the sole power of a majority of the board of directors to fix the number of directors;

 

provide the power of our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

entitle the four directors designated by the JLL Holders pursuant to the Director Designation Agreement to cast two votes on each matter presented to the board of directors until the earlier to occur of such time as we cease to be a “controlled company” within the meaning of the NYSE corporate governance standards or such time as the JLL Holders cease to hold, in the aggregate, at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011;

 

authorize the issuance of “blank check” preferred stock without any need for action by stockholders;

 

eliminate the ability of stockholders to call special meetings of stockholders; and

 

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

 

In addition, the documents governing certain of our debt agreements impose, and we anticipate documents governing our future indebtedness may impose, limitations on our ability to enter into change of control transactions. Under these documents, the occurrence of a change of control transaction could constitute an event of default permitting acceleration of the indebtedness, thereby impeding our ability to enter into certain transactions.

 

The foregoing factors, as well as the significant common stock ownership by JLL, could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock. See “Description of Capital Stock.”

 

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THE TRANSACTIONS

 

The diagram below depicts our organizational structure immediately after the consummation of this offering and related transactions.

 

 

 
(1) Sole managing member of JGWPT Holdings, LLC with a 43.1% economic interest.

 

(2) Class B Holders includes JLL Holders, Employee Holders and Other Holders of JGWPT Common Interests, which hold Class B Common Stock in JGWPT Holdings Inc. All Class B Holders also hold Common Interests. See footnotes 5, 6 and 7 for further information. Collectively, Class B Holders also hold a 56.9% economic interest in JGWPT Holdings, LLC.

 

(3) The economic interests of this group of Common Interestholders prior to this offering are described under “—JGWPT Holdings, LLC.”

 

(4) PGHI Corp. holds Class A Warrants in JGWPT Holdings Inc. representing 0% of the voting power and 0% of the economic interest; PGHI Corp. also holds a 15.4% economic interest in JGWPT Holdings, LLC.

 

(5) JLL Holders hold Class B Common Stock in JGWPT Holdings Inc. representing 56.6% of the voting power and 0% of the economic interest; JLL Holders also hold a 25.9% economic interest in JGWPT Holdings, LLC.

 

(6) Employee Holders hold Class B Common Stock in JGWPT Holdings Inc. representing 15.2% of the voting power and 0% of the economic interest; Employee Holders also hold a 7.0% economic interest in JGWPT Holdings, LLC.

 

(7) Other Holders of JGWPT Common Interests hold Class B Common Stock in JGWPT Holdings Inc. representing 18.8% of the voting power and 0% of the economic interest; Other Holders of JGWPT Common Interests also hold a 8.6% economic interest in JGWPT Holdings, LLC.

 

 

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(8) Prior to this offering, the current company named JGWPT Holdings, LLC will be merged with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger and changing its name to JGWPT Holdings, LLC immediately after the merger.

 

(9) Our term loan is guaranteed by certain of our subsidiaries.

 

JGWPT Holdings, LLC. The sole asset of the current company named JGWPT Holdings, LLC is its ownership of 100% of J.G. Wentworth, LLC, the holding company for the operating subsidiaries of the businesses. Immediately prior to and in connection with this offering, the current company named JGWPT Holdings, LLC will merge with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger. Immediately after the merger and prior to the consummation of this offering, the surviving, newly formed subsidiary will change its name to JGWPT Holdings, LLC. 

 

The current members of JGWPT Holdings, LLC are described below. Immediately after the merger described above, the members of JGWPT Holdings, LLC will hold these interests in the newly formed company surviving the merger as described below.

 

JLL JGW Distribution, LLC, which is owned by pooled investment vehicles sponsored or managed by JLL, holds an approximately 4.8% economic interest in JGWPT Holdings, LLC through its ownership of 945,151 JGWPT Common Interests.

 

JGW Holdco, LLC, which is over 99% owned by JLL JGW Distribution, LLC, holds an approximately 43.0% economic interest in JGWPT Holdings, LLC through its ownership of 8,400,024 JGWPT Common Interests. We collectively refer to JGW Holdco, LLC and JLL JGW Distribution, LLC as the JLL Holders.

 

PGHI Corp., the current stockholders of which include affiliates of Credit Suisse Group AG and DLJ Merchant Banking Partners IV, L.P. and former members of Peachtree management, holds an approximately 27.3% economic interest in JGWPT Holdings, LLC through its ownership of (i) 4,360,623 non- voting JGWPT Common Interests and (ii) Class C Profits Interests. The Class C Profits Interests will be cancelled in connection with this offering and PGHI Corp. will receive non-transferable warrants to purchase up to 488,521 Class A Shares at an exercise price of $35.40 per share and 488,521 Class A Shares at an exercise price of $62.33 per share beginning 180 days after the date of this prospectus and until July 12, 2021.

 

Certain of our officers and other employees, whom we collectively refer to as the Employee Members, hold an approximately 11.5% economic interest in JGWPT Holdings, LLC through their ownership of (i) an aggregate of 367,350 JGWPT Common Interests and (ii) JGWPT Holdings, LLC Class B Management Interests. The Class B Management Interests will be converted into an aggregate of 1,880,125 Restricted JGWPT Common Interests (with a corresponding number of Class B Shares) in connection with this offering in a manner that reflects the percentage of the current company named JGWPT Holdings, LLC currently owned by the Class B Management Interest holders, taking into account their current distribution entitlement and the fair value of JGWPT Holdings, LLC based on the offering price. A substantial amount of converted interests will be subject to forfeiture at the time of the conversion and will only vest if the holder remains employed by us through the applicable period. The conversion will have no direct or indirect economic effect on us.

 

Other members who are not employed by us or affiliated with JLL or PGHI Corp., whom we refer to as the Other Members, hold an approximately 13.4% economic interest in JGWPT Holdings, LLC through their ownership of an aggregate of 2,615,877 JGWPT Common Interests.

 

JGWPT Holdings Inc. Upon completion of the offering, we will use the net proceeds we receive to acquire an aggregate of 2,450,000 JGWPT Common Interests in the newly formed company to be named JGWPT Holdings, LLC from certain Common Interestholders, including certain members of our management, and 9,750,000 newly issued JGWPT Common Interests directly from the newly formed company to be named JGWPT Holdings, LLC. Immediately after our acquisition of these JGWPT Common Interests, our only material asset will be our ownership of 43.1% of the total JGWPT Common Interests and our only business will be acting as the sole managing member of JGWPT Holdings, LLC. You should note, in particular, that:

 

We will be the sole managing member of JGWPT Holdings, LLC.

 

  Investors in this offering will own 100% of our Class A Shares (and 40.8% of our Class A Shares on a fully diluted basis). The outstanding Class A Shares will represent 100% of the economic interest in us, but

 

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  initially only 9.4% of our voting power, and we will own 43.1% of the economic interest in JGWPT Holdings, LLC. Our Class A Shares outstanding from time to time will entitle the holders to receive 100% of any distributions we make, except that each Class B Share will entitle the holder thereof to receive the par value of $0.00001 per Class B Share upon our liquidation, dissolution or winding up. The holders of Class A Shares and Class C Shares will also be entitled to receive the par value of $0.00001 per Class A Share or Class C Share, as the case may be, upon our liquidation, dissolution or winding up, but unlike the Class B Shares, these holders also will be entitled to share ratably in all other assets available for distribution after payment of our liabilities. Immediately after the completion of this offering, the only outstanding Class A Shares will be the Class A Shares issued pursuant to this offering.

Except in respect of any tax distributions we receive from JGWPT Holdings, LLC, if JGWPT Holdings, LLC makes a distribution to its members, including us, we will be required to make a corresponding distribution to each of our holders of Class A Shares and holders of Class C Shares, subject only to applicable law.

 

The Common Interestholders other than PGHI Corp. will own 100% of our Class B Shares, which will vote together with the Class A Shares as a single class. Each Class A Share has one vote per share and each Class B Share has 10 votes per share. The Class B Shares will represent, upon completion of this offering, 90.6% of the combined voting power of our common stock. The Class B Shares do not represent an economic interest in us and are therefore not entitled to any dividends that we may pay. The Common Interestholders other than PGHI Corp. will hold substantially more than 50% of the combined voting power of our common stock since they will hold all the Class B Shares.

 

Upon completion of this offering, we will enter into a Director Designation Agreement with the JLL Holders and PGHI Corp. Under this agreement, the JLL Holders will have the right to designate four director designees to our board of directors so long as the JLL Holders own at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011, and PGHI Corp. will have the right to designate one director so long as PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate at least 436,104 JGWPT Common Interests. These director designees will be voted upon and possibly elected by our stockholders.

 

Moreover, pursuant to the Voting Trust Agreement to be entered into by the JLL Holders and certain of the Employee Members, the JLL Holders, as trustees, will be able to direct the vote of the Class B Shares held by these Employee Members. Under the terms of the Voting Agreement that the JLL Holders, PGHI Corp. and certain other Common Interestholders intend to enter into upon completion of this offering, each of the parties thereto will agree to vote all of their Class A Shares and Class B Shares, as applicable, in favor of the election to our board of directors of our Chief Executive Officer, four designees of the JLL Holders and one designee of PGHI Corp.

 

Pursuant to our certificate of incorporation, the four directors designated by the JLL Holders will each be entitled to two votes on each matter presented to the board of directors until the earlier to occur of such time as we cease to be a “controlled company” within the meaning of the NYSE corporate governance standards or such time as the JLL Holders cease to hold, in the aggregate, at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011.

 

While the Class B Shares, as indicated above, do not represent any economic interest in us, each holder of a Class B Share also owns an economic interest in JGWPT Holdings, LLC through a corresponding JGWPT Common Interest.

 

PGHI Corp. is an affiliate of DLJ Merchant Banking Partners IV, L.P. and Credit Suisse Group AG. Due to certain requirements under the Bank Holding Company Act of 1956, as amended, and the regulations promulgated thereunder to which DLJ Merchant Banking Partners IV, L.P. and Credit Suisse Group AG are subject, PGHI Corp. does not hold voting stock or voting interests in JGWPT Holdings, LLC. Accordingly, PGHI Corp. will continue to hold non-voting JGWPT Common Interests and will not be issued any of our

 

 

 

 

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    Class B Shares. The warrants issued to PGHI Corp. in connection with this offering, however, will be exercisable for our Class A Shares, and the JGWPT Common Interests held by PGHI Corp. will be exchangeable for our Class C Shares, which will in turn be convertible at any time into Class A Shares.

  Pursuant to the operating agreement of JGWPT Holdings, LLC, in order to provide liquidity to the Common Interestholders each JGWPT Common Interest held by a Common Interestholder will be exchangeable for (i) one of our Class A Shares, or, in the case of PGHI Corp., one of our Class C Shares, or (ii) at the option of JGWPT Holdings, LLC cash equal to the market value of one of our Class A Shares or Class C Shares, at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests). The exchange of the JGWPT Common Interests for our Class A Shares, and the concurrent redemption and cancellation of the Class B Shares corresponding to these JGWPT Common Interests, will increase the number of outstanding Class A Shares and decrease the number of outstanding Class B Shares, except in the case of an exchange by PGHI Corp. of JGWPT Common Interests for our Class C Shares.

  PGHI Corp. and, in some cases, its transferees will have the right to exchange their non-voting JGWPT Common Interests for our Class C Shares, or, at the option of JGWPT Holdings, LLC, cash equal to the market value of one of our Class C Shares at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests). Class C Shares are generally not entitled to vote on any matter but do share ratably in dividends and other distributions. Class C Shares, however, may be converted at any time into Class A Shares. See “Description of Capital Stock—Class C Shares.”  

 

  JLL owns a portion of its investment through an existing corporation and the owners of PGHI Corp., including DLJ Merchant Banking Partners IV, L.P. and affiliates of Credit Suisse Group AG, own their investment through PGHI Corp. JLL and the equity holders of PGHI Corp. have the right to elect to require that, instead of exchanging for Class A Shares the JGWPT Common Interests held by JLL’s corporation or PGHI Corp. for Class A Shares, we engage in a merger in which the JLL entity owning this corporation or the stockholders of PGHI Corp., as applicable, receive Class A Shares directly and we become the owner of the JLL corporation or PGHI Corp., as applicable, or its assets. Provided that the conditions to the exercise of these rights have been met, the exercise of either of these transactions will not be subject to any affiliate transaction covenants or similar restrictive provisions. However, it is a condition to each of these transactions that the acquisition not result in material liabilities to us.

 

Under the operating agreement, LLC, JGWPT Holdings, LLC will be prohibited from repurchasing any JGWPT Common Interests unless it has also offered to purchase a pro rata number of JGWPT Common Interests from each Common Interestholder. Pursuant to our certificate of incorporation, in the event that JGWPT Holdings, LLC repurchases any of our JGWPT Common Interests, we will be required to use the corresponding proceeds received from JGWPT Holdings, LLC to repurchase Class A Shares.

 

Following this offering, the members of the newly formed company to be named JGWPT Holdings, LLC, other than us, will consist of JGW Holdco, LLC, JLL JGW Distribution, LLC, PGHI Corp., the Employee Members and the Other Members.

 

Certain Attributes of our Structure. Our structure following this offering will be designed to accomplish a number of objectives, the most important of which are as follows:

 

The structure will allow us to serve as a holding company, with our sole asset being our ownership interest in the newly formed company to be named JGWPT Holdings, LLC. The Common Interestholders, however, will retain their economic investment in the form of direct interests in JGWPT Holdings, LLC, rather than through our Class A Shares. Following this offering, all of the businesses operated by JGWPT Holdings, LLC or its subsidiaries prior to this offering, and all of the interests held by JGWPT Holdings, LLC and its subsidiaries in such businesses prior to this offering, will be operated or held, as the case may be, by JGWPT Holdings, LLC and its subsidiaries, and our current management will continue to manage these businesses. As a result, we and the Common Interestholders will participate in the net operating results of JGWPT Holdings, LLC on a pari passu basis, in accordance with our respective ownership of JGWPT Holdings, LLC.

  

 

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  In connection with this offering, we will issue the Common Interestholders, other than PGHI Corp., non-economic Class B “vote-only” shares that as a percentage of the combined voting power of our common stock will be equal to 10 times their economic ownership in JGWPT Holdings, LLC.

In the event that a Common Interestholder wishes to exchange JGWPT Common Interests for Class A Shares, the holder must deliver the JGWPT Common Interests to JGWPT Holdings, LLC, together with a corresponding number of Class B Shares (except in the case of PGHI Corp.), and in exchange therefor:

 

we will deliver to JGWPT Holdings, LLC a number of Class A Shares corresponding to the number of JGWPT Common Interests delivered to JGWPT Holdings, LLC;

 

JGWPT Holdings, LLC will deliver to us a number of newly issued JGWPT Common Interests equal to the number of JGWPT Common Interests surrendered to JGWPT Holdings, LLC by the exchanging holder;

 

we will redeem any Class B Shares delivered to JGWPT Holdings, LLC and cancel them; and

 

JGWPT Holdings, LLC will cancel the JGWPT Common Interests surrendered to JGWPT Holdings, LLC by the exchanging holder.

 

As noted above, JGWPT Common Interests held by PGHI Corp. will be exchangeable for our Class C Shares. Such exchanges generally will follow the procedures outlined above, except that PGHI Corp. will not be required to deliver Class B Shares for cancellation in connection with the exchange. Pursuant to our certificate of incorporation, Class C Shares may be converted at any time into Class A Shares.

 

Under the terms of the operating agreement of JGWPT Holdings, LLC, Common Interestholders will be able to exchange their JGWPT Common Interests for Class A Shares at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests).

 

The Transactions

 

In connection with this offering:

 

JGWPT Holdings, LLC will merge with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger. Pursuant to the merger and prior to the consummation of this offering, the surviving, newly formed subsidiary will change its name to JGWPT Holdings, LLC. The operating agreement of JGWPT Holdings, LLC will provide, among other things, (i) for us to act as the sole managing member and (ii) that JGWPT Common Interests held by the Common Interestholders will be exchangeable for (i) one of our Class A Shares, or, in the case of PGHI Corp., one of our Class C Shares, or (ii) at the option of JGWPT Holdings, LLC cash equal to the market value of one of our Class A Shares or Class C Shares, at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) in order to provide liquidity to those holders.

 

We will issue the Class A Shares for net proceeds of $228.1 million.

 

We will use $181.1 million of the net proceeds that we receive from this offering to purchase 9,750,000 newly issued JGWPT Common Interests directly from the newly formed company to be named JGWPT Holdings, LLC, and we will use the estimated $47.0 million of remaining net proceeds that we receive from this offering to purchase 2,450,000 JGWPT Common Interests from certain Common Interestholders, including certain members of our management. Upon completion of the offering, we will have acquired JGWPT Common Interests representing a 43.1% interest in the newly formed company to be named JGWPT Holdings, LLC.

 

JGWPT Holdings, LLC will use a portion of the net proceeds it receives from us in connection with this offering to repay a portion of the amount outstanding under its subsidiary’s term loan. JGWPT Holdings, LLC will not receive any proceeds from our purchase of JGWPT Common Interests from the Common Interestholders.

 

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  We will enter into a registration rights agreement with all of the Common Interestholders pursuant to which (i) we will be required to use our reasonable best efforts to file a shelf registration statement upon the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) providing for the exchange of all JGWPT Common Interests held by the Common Interestholders for an equivalent number of Class A Shares and the resale of such Class A Shares at any time and from time to time thereafter and (ii) the Common Interestholders will be entitled to sell certain of such Class A Shares issuable to them upon exchange of their JGWPT Common Interests or issuable to them upon conversion from Class C Shares in any public underwritten offerings by us after the expiration or earlier termination (if any) of the lock-up agreements referred to above, subject to customary pro rata cutbacks. Any Class A Shares issued upon exchange of Restricted JGWPT Common Interests will remain subject to the same vesting restrictions applicable to the exchanged Restricted JGWPT Common Interests. In addition, the JLL Holders and other significant Common Interestholders will have demand registration rights.

We will enter into a tax receivable agreement with all Common Interestholders who hold in excess of approximately 1% of the JGWPT Common Interests immediately prior to this offering.

 

We will amend and restate our certificate of incorporation to provide for, among other things, the issuance of our Class A common stock, Class B common stock, and Class C common stock.

 

 JGWPT Holdings, LLC Common Interest Purchase Agreements

 

Pursuant to one or more Common Interest Purchase Agreements, we will use a portion of the proceeds from this offering to purchase JGWPT Common Interests held by certain Common Interestholders. These Common Interestholders will provide customary representations regarding their ownership of the JGWPT Common Interests and related matters.

 

Operating Agreement of JGWPT Holdings, LLC

 

Reorganization. Immediately prior to this offering, the current company named JGWPT Holdings, LLC will merge with and into a newly formed subsidiary of JGWPT Holdings Inc., with the newly formed subsidiary surviving the merger. Pursuant to the merger and prior to the consummation of this offering, the surviving, newly formed subsidiary will change its name to JGWPT Holdings, LLC. In connection with this merger, (i) all of the currently outstanding Class B Management Interests will be cancelled and holders will receive in the merger JGWPT Common Interests that are subject to vesting requirements, which we refer to as the Restricted JGWPT Common Interests, and (ii) all of the currently outstanding Class C Profits Interests will be cancelled and holders will receive in the merger warrants to purchase Class A Shares, as further described below. As a result of this exchange of membership interests in the merger, all of the Common Interestholders will hold the same class of JGWPT Common Interests, except that (i) certain JGWPT Common Interests held by Employee Members will remain subject to vesting and (ii) the JGWPT Common Interests held by PGHI Corp. will continue to be non-voting. In addition, we will be appointed as the managing member of JGWPT Holdings, LLC.

 

As a result of this reorganization, we will operate our business through JGWPT Holdings, LLC and its consolidated subsidiaries. The operations of JGWPT Holdings, LLC, and the rights and obligations of the Common Interestholders, will be set forth in the operating agreement of JGWPT Holdings, LLC. The following description of the JGWPT Holdings, LLC operating agreement is not complete and is qualified by reference to the full text of the agreement.

 

Governance . We will serve as the sole managing member of JGWPT Holdings, LLC. As such, we will control its business and affairs and be responsible for the management of its business. No members of JGWPT Holdings, LLC, in their capacity as such, will have any authority or right to control the management of JGWPT Holdings, LLC or to bind it in connection with any matter. As noted above, however, the Common Interestholders other than PGHI Corp. will have the ability to exercise majority voting control over us by virtue of their ownership of Class B Shares. In addition, our board of directors will, pursuant to the Director Designation Agreement, initially be composed of a total of five designees appointed by the JLL Holders and PGHI Corp. who will exercise a majority of the director voting power on all matters presented to the board of directors. Under the terms of the Voting Agreement that the JLL Holders, PGHI Corp. and certain other Common Interestholders intend to enter into upon completion of this offering, each of the parties to the Voting Agreement will agree to vote all of their Class A Shares (if any) and Class B Shares (if any) in favor of the election to our board of directors of our Chief Executive Officer, four designees of the JLL Holders and one designee of PGHI Corp.

 

 

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Rights of Members. JGWPT Holdings, LLC will issue JGWPT Common Interests to us and to the Common Interestholders. Each Common Interest will entitle the holder to equal economic rights. Common Interestholders will have no voting rights by virtue of their ownership of JGWPT Common Interests, except for the right to approve certain amendments to the operating agreement of JGWPT Holdings, LLC, certain changes to the capital accounts of the members of JGWPT Holdings, LLC, any conversion of JGWPT Holdings, LLC to a corporation other than for purposes of a sale transaction, certain issuances of membership interests in JGWPT Holdings, LLC, certain mergers, consolidations or sale transactions and any dissolution of JGWPT Holdings, LLC. See “—Amendments.” Common Interestholders other than PGHI Corp. will hold Class B Shares, enabling them to exert a significant percentage of our voting power. See “Risk Factors—Control by the JLL Holders of 56.6% of the combined voting power of our common stock and the fact that they are holding their economic interest through JGWPT Holdings, LLC may give rise to conflicts of interest.”

 

As noted above, JGWPT Holdings, LLC currently has outstanding profits interests that were issued to certain of its employees. These profits interests are subject to forfeiture or repurchase by JGWPT Holdings, LLC under some circumstances in connection with a termination of the employee member’s employment. Although these profits interests will be converted into Restricted JGWPT Common Interests of JGWPT Holdings, LLC immediately prior to this offering, to the extent that the previously outstanding profits interests were subject to forfeiture or repurchase at the time of conversion, then the Restricted JGWPT Common Interests issued upon conversion generally also will be subject to forfeiture or repurchase on the same terms. We do not intend to cause JGWPT Holdings, LLC to issue profits interests in the future, although the operating agreement of JGWPT Holdings, LLC does preserve the right of JGWPT Holdings, LLC to do so.

 

 Net profits and net losses and distributions of JGWPT Holdings, LLC generally will be allocated and made to its members pro rata in accordance with the number of JGWPT Common Interests they hold, whether or not vested.

 

Exchange of Class C Profits Interests for Warrants. In connection with the Transactions, the Class C Profits Interests of JGWPT Holdings, LLC held by PGHI Corp. will be cancelled and holders will receive warrants to purchase Class A Shares.

 

The warrants issued in respect of the Tranche C-1 profits interests will entitle the holders thereof to purchase up to 488,521 Class A Shares, an amount equal to 2.5% of our outstanding common stock or other equity interests (on a fully-diluted basis after giving effect to such warrants and any other options or rights to purchase common stock or other equity interests then outstanding (excluding the Class B Shares)). These warrants will have an exercise price of $35.40 per share.

 

The warrants issued in respect of the Tranche C-2 profits interests shall entitle the holders thereof to purchase up to 488,521 Class A Shares, an amount equal to 2.5% of our outstanding common stock or other equity interests (on a fully-diluted basis after giving effect to such warrants and any other options or rights to purchase common stock or other equity interests then outstanding (excluding the Class B Shares)). These warrants will have an exercise price of $62.33 per share.

 

These warrants will be exercisable beginning 180 days after the date of this prospectus and until July 12, 2021, and may not be transferred.

 

Coordination of JGWPT Holdings Inc. and JGWPT Holdings, LLC. At any time we issue a Class A Share for cash, the net proceeds received by us will be promptly transferred to JGWPT Holdings, LLC, and JGWPT Holdings, LLC will issue to us one of its JGWPT Common Interests. At any time we issue a Class A Share pursuant to our proposed equity incentive plan or upon exercise of our warrants we will contribute to JGWPT Holdings, LLC all of the proceeds that we receive (if any) and JGWPT Holdings, LLC will issue to us one of its JGWPT Common Interests, having the same restrictions, if any, attached to the Class A Shares issued under the proposed equity incentive plan or warrants. Conversely, if we redeem or repurchase any of our Class A Shares, JGWPT Holdings, LLC will, immediately prior to our redemption or repurchase, redeem or repurchase an equal number of JGWPT Common Interests held by us, upon the same terms and for the same price, as the Class A Shares are redeemed or repurchased. We can only redeem or repurchase Class A Shares if JGWPT Holdings, LLC first redeems or repurchases JGWPT Common Interests we hold.

 

Under the terms of the JGWPT Holdings, LLC operating agreement, subject to the approval of the Common Interestholders, we may in the future cause JGWPT Holdings, LLC to issue JGWPT Common Interests or other, newly created classes of JGWPT Holdings, LLC securities to one or more investors having such rights, preferences

 

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and other terms as we determine, and in such amount as we may determine. In addition, we may in the future elect to compensate our employees by granting them JGWPT Common Interests, whether or not subject to forfeiture, or profits interests or other securities. Any such issuance would have a dilutive effect on the economic interest we hold in JGWPT Holdings, LLC. In addition, we currently intend to issue our Class B Shares having 10 votes per share on a one-for-one basis in connection with any future issuances of JGWPT Common Interests, which would have a dilutive effect on the voting power of our then current holders of Class A Shares. The Tax Receivable Agreement would cover any exchanges of JGWPT Common Interests issued to the current parties to that agreement after the offering, and it is possible that new investors in the JGWPT Common Interests issued after the offering may become parties to the Tax Receivable Agreement as well.

 

Pursuant to the JGWPT Holdings, LLC operating agreement, we will agree, as managing member, that we will not conduct any business other than the management and ownership of JGWPT Holdings, LLC and its subsidiaries, or own any other assets (other than cash or cash equivalents to be used to satisfy liabilities or other assets held on a temporary basis). In addition, JGWPT Common Interests, as well as our common stock, will be subject to equivalent stock splits, dividends and reclassifications.

 

 Issuances and Transfer of JGWPT Common Interests. Membership interests in JGWPT Holdings, LLC may only be issued to persons or entities to which we agree to permit the issuance of such interests in exchange for cash or other consideration, including, if applicable, the services of employees of JGWPT Holdings, LLC or its affiliates. The JGWPT Common Interests held by us from time to time are non-transferable. JGWPT Common Interests held by the Common Interestholders may be transferred without our consent only under limited circumstances, including to certain permitted transferees (i.e., by bequest or for estate planning purposes) or upon exchanges for Class A Shares or Class C Shares following this offering. A holder of JGWPT Common Interests (other than PGHI Corp.) may not transfer any JGWPT Common Interests to any person unless he transfers an equal number of our Class B Shares to the same transferee.

 

Exchange Rights. We have reserved for issuance 16,113,784 Class A Shares in respect of aggregate number of Class A Shares expected to be issued over time upon the exchanges of JGWPT Common Interests by the Common Interestholders and the conversion of Class C Shares unless JGWPT Holdings, LLC exercises its option to pay cash in lieu of Class A Shares for some or all of such exchanged JGWPT Common Interests. As noted above, we may in the future cause JGWPT Holdings, LLC to issue additional JGWPT Common Interests that would also be exchangeable for Class A Shares. We have also reserved for issuance 4,360,623 Class C Shares, which is the aggregate number of Class C Shares expected to be issued over time upon the exchanges by holders of non-voting JGWPT Common Interests (including PGHI Corp.), unless JGWPT Holdings, LLC exercises its option to pay cash in lieu of Class C Shares for some or all of such exchanged non-voting JGWPT Common Interests.

 

Common Interestholders may exchange their JGWPT Common Interests at any time and from time to time after the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests, subject to applicable rules and restrictions imposed by us).

 

Redemption of Class B Shares. Any holder (other than PGHI Corp.) seeking to exchange JGWPT Common Interests for Class A Shares must also deliver a corresponding number of Class B Shares for redemption and cancellation by us.

 

Indemnification and Exculpation. To the extent permitted by applicable law, JGWPT Holdings, LLC will indemnify us, as its managing member, its authorized officers, its other employees and agents from and against any losses, liabilities, damages, costs, expenses, fees or penalties incurred by any acts or omissions of these persons, provided that the acts or omissions of these indemnified persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.

 

We, as the managing member, and the authorized officers and other employees and agents of JGWPT Holdings, LLC, will not be liable to JGWPT Holdings, LLC, its members or their affiliates for damages incurred by any acts or omissions of these persons, provided that the acts or omissions of these exculpated persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.

 

 

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Amendments. The operating agreement of JGWPT Holdings, LLC may be amended with the consent of the managing member and the holders of a majority in voting power of the outstanding JGWPT Common Interests not held by the managing member (not including non-voting JGWPT Common Interests and Restricted JGWPT Common Interests). In addition, the managing member may, without the consent of any Common Interestholder, make certain amendments that, generally, are not expected to adversely affect Common Interestholders. Notwithstanding the foregoing, no amendment to the operating agreement of JGWPT Holdings, LLC will be effective with respect to a Common Interestholder not voting in favor thereof if such amendment would adversely affect such Member in any material respect in a manner that is disproportionately adverse to such Common Interestholder, and amendments to certain provisions that are for the benefit of PGHI Corp. will require the approval of PGHI Corp. or its permitted transferees.

 

Registration Rights Agreement

 

In connection with the completion of this offering, we intend to enter into a registration rights agreement with all of the Common Interestholders pursuant to which we will be required to register the exchange under the federal securities laws of the JGWPT Common Interests held by them for Class A Shares. We have agreed, at our expense, upon the expiration or earlier termination (if any) of the lock-up agreement between the underwriters of this offering and each Common Interestholder (other than holders of a de minimis amount of JGWPT Common Interests) to use our reasonable best efforts to file with the SEC a shelf registration statement providing for the exchange of the JGWPT Common Interests for Class A Shares and the resale of such Class A Shares at any time and from time to time thereafter, subject to applicable rules and restrictions imposed by us, and to cause and maintain the effectiveness of this shelf registration statement until such time as all JGWPT Common Interests covered by this shelf registration statement have been exchanged. Further, the JLL Holders and other significant Common Interestholders will be entitled to cause us, at our expense, to register the resale of the Class A Shares they will receive upon exchange of their JGWPT Common Interests, or upon conversion of their Class C Shares, which we refer to as their “demand” registration rights.

 

All Common Interestholders (as well as their permitted transferees) will be entitled to exercise “piggyback” rights in connection with any future public underwritten offerings we engage in for our account or for the account of others to whom we have granted registration rights after the expiration or earlier termination (if any) of the lock-up agreements referred to above, subject to pro rata reduction if it is determined that the sale of additional shares would be harmful to the success of the offering. All fees, costs and expenses of underwritten registrations will be borne by us, other than underwriting discounts and selling commissions, which will be borne by each stockholder selling its shares. Our registration obligations will be subject to certain restrictions on, among other things, the frequency of requested registrations, the number of shares to be registered and the duration of these rights.

 

Tax Receivable Agreement

 

A portion of the proceeds of this offering will be used to purchase JGWPT Common Interests from certain of the Common Interestholders. In addition, as described under “The Transactions—Operating Agreement of JGWPT Holdings, LLC,” Common Interestholders may in the future exchange JGWPT Common Interests for (i) one of our Class A Shares, or, in the case of PGHI Corp., one of our Class C Shares, or (ii) at the option of JGWPT Holdings, LLC cash equal to the market value of one of our Class A Shares or Class C Shares. The newly formed company to be named JGWPT Holdings, LLC is expected to have in effect an election under Section 754 of the Code, which may result in an adjustment to our share of the tax basis of the assets owned by JGWPT Holdings, LLC at the time of such initial sale and any subsequent exchanges of JGWPT Common Interests. The sale and exchanges may result in increases in our share of the tax basis of the tangible and intangible assets of JGWPT Holdings, LLC that otherwise would not have been available. Any such increases in tax basis are, in turn, anticipated to create incremental tax deductions that would reduce the amount of tax that we would otherwise be required to pay in the future.

 

We intend to enter into a tax receivable agreement with all Common Interestholders who hold in excess of approximately 1% of the JGWPT Common Interests outstanding immediately prior to this offering. The tax receivable agreement will require us to pay those Common Interestholders 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize in any tax year beginning with 2013 (a “covered tax year”) from increases in tax basis realized as a result of (i) the sale by any Common Interestholders of any of their JGWPT Common Interests to us in exchange for a portion of the proceeds of this offering, or (ii) any future exchanges by Common Interestholders of their JGWPT Common Interests for Class A Shares or Class C Shares (or

 

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cash). We expect to benefit from the remaining 15% of cash savings, if any, in income tax that we actually realize during a covered tax year. The cash savings in income tax paid to any such Common Interestholders will reduce the cash that may otherwise be available to us for our operations and to make future distributions to holders of Class A Shares, including the investors in this offering.

 

For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability for a covered tax year to the amount of such taxes that we would have been required to pay for such covered tax year had there been no increase to our share of the tax basis of the tangible and intangible assets of JGWPT Holdings, LLC as a result of such sale and any such exchanges and had we not entered into the tax receivable agreement. The tax receivable agreement continues until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the tax receivable agreement upon a change of control for an amount based on the remaining payments expected to be made under the tax receivable agreement. 

 

JLL owns a portion of its investment through an existing corporation.  In the event we engage in a merger with such corporation in which the shareholders of that corporation receive the Class A Shares directly, we will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement requires us to pay the shareholders of such corporation for the use of any such attributes in the same manner as payments made for cash savings from increases in tax basis as described above.

 

The owners of PGHI Corp., including DLJ Merchant Banking Partners IV, L.P. and affiliates of Credit Suisse Group AG, own their investment through PGHI Corp. In the event we engage in a merger with such corporation in which the shareholders of that corporation receive the Class C Shares directly, we will succeed to certain tax attributes, if any, of such corporation. The tax receivable agreement requires us to pay the shareholders of such corporation for the use of any such attributes above a specific amount in the same manner as payments made for cash savings from increases in tax basis as described above.

 

While the actual amount and timing of any payments under this agreement will vary depending upon a number of factors (including the timing of exchanges, the amount of gain recognized by an exchanging Common Interestholder, the amount and timing of our income and the tax rates in effect at the time any incremental tax deductions resulting from the increase in tax basis are utilized) we expect that the payments that we may make to the Common Interestholders that are party to the tax receivable agreement could be substantial during the expected term of the tax receivable agreement. A tax authority may challenge all or part of the tax basis increases or the amount or availability of any tax attributes discussed above, as well as other related tax positions we take, and a court could sustain such a challenge. The Common Interestholders that are party to the tax receivable agreement will not reimburse us for any payments previously made to them in the event that, due to a successful challenge by the IRS or any other tax authority of the amount of any tax basis increase or the amount or availability of any tax attributes, our actual cash tax savings are less than the cash tax savings previously calculated and upon which prior payments under the tax receivables were based. As a result, in certain circumstances we could make payments under the tax receivable agreement to the Common Interestholders that are party thereto in excess of our cash tax savings. A successful challenge to our tax reporting positions could also adversely affect our other tax attributes and could materially increase our tax liabilities.

 

The tax receivable agreement provides that upon certain changes of control, we will be required to pay the Common Interestholders amounts based on assumptions regarding the remaining payments expected to be made under the tax receivable agreement (at our option, these payments can be accelerated into a single payment at the time of the change of control). As a result, we could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement, and the upfront payment may be made years in advance of any actual realization of such future benefits. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity, and there can be no assurance that we will be able to finance our obligations under the tax receivable agreement.

 

Payments under the tax receivable agreement will be based on the tax reporting positions that we determine, and we will not be reimbursed by the Common Interestholders for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, payments we make under the tax receivable agreement could significantly exceed the cash tax or other benefits, if any, that we actually realize. In addition, if the tax reporting positions we determine are not respected, our tax attributes could be adversely affected and the amount of our tax liabilities could materially increase.

 

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Director Designation Agreement

 

Upon completion of this offering, we will enter into a Director Designation Agreement with the JLL Holders and PGHI Corp. Under this agreement, the JLL Holders will have the right to designate four director designees to our board of directors so long as the JLL Holders own at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011, and PGHI Corp. will have the right to designate one director so long as PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate at least 436,104 JGWPT Common Interests. These director designees will be voted upon and possibly elected by our stockholders.

 

Voting Agreement

 

In connection with this offering, the JLL Holders, PGHI Corp. and certain other Common Interestholders intend to enter into a Voting Agreement pursuant to which they will agree to vote all of their Class A Shares (if any) and Class B Shares (if any) in favor of the election to our board of directors of our Chief Executive Officer, four designees of the JLL Holders and one designee of PGHI Corp. Under the terms of the Voting Agreement, the parties will no longer be obligated to vote in favor of the election of the designee of PGHI Corp. if PGHI Corp. (together with its then-current stockholders) or its assignee holds in the aggregate fewer than 872,136 JGWPT Common Interests. While the parties to the Voting Agreement have agreed to vote their Class A Shares (if any) and Class B Shares (if any) as described above, the agreement will be effective in determining the composition of our board of directors only for so long as the holders parties thereto have the requisite voting power to determine the outcome of such vote. By virtue of the Voting Trust Agreement described below, the JLL Holders will be entitled to vote all Class B Shares held by certain of the Employee Members, representing 65% of the combined voting power of our common stock, in favor of the election to our board of directors of the foregoing board designees.

 

Voting Trust Agreement

 

In connection with this offering, the JLL Holders and certain of the Employee Members will enter into a Voting Trust Agreement pursuant to which, subject to the terms and conditions specified therein, the Employee Members will deposit their Class B Shares into a voting trust and appoint the JLL Holders as trustees. Pursuant to the Voting Trust Agreement, all Class B Shares subject to the voting trust will be voted proportionately with the Class A Shares (if any) and Class B Shares (if any) held by the JLL Holders directly or indirectly. Upon completion of this offering, the Class B Shares held by the parties to the Voting Trust Agreement will represent approximately 65% of the combined voting power of our common stock (these holders will hold no Class A Shares immediately after the completion of this offering).

 

Director Voting Power

 

Pursuant to our certificate of incorporation, the four directors designated by the JLL Holders will each be entitled to cast two votes on each matter presented to the board of directors until the earlier to occur of such time as we cease to be a “controlled company” within the meaning of the NYSE corporate governance standards or such time as the JLL Holders cease to hold, in the aggregate, at least 934,488 JGWPT Common Interests and at least 20% of the aggregate number of JGWPT Common Interests held on such date by members of JGWPT Holdings, LLC who were members of JGWPT Holdings, LLC (or its predecessor of the same name) on July 12, 2011. Thereafter, the four directors designated by the JLL Holders will be entitled to each cast one vote on each matter presented to the board of directors. All other directors will each be entitled to cast one vote on each matter presented to the board of directors.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements which reflect management’s expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. All statements, other than statements of historical fact, are forward-looking statements. You can identify such statements because they contain words such as “plans,” “expects” or “does expect,” “budget,” “forecasts,” “anticipates” or “does not anticipate,” “believes,” “intends” and similar expressions or statements that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur or be achieved. Although the forward-looking statements contained in this prospectus reflect management’s current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements.

 

A number of factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in the forward-looking statements, including those listed in the “Risk Factors” section of this prospectus. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause our actual results, performance and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things:

 

our ability to continue to purchase structured settlement payments and other assets;

 

our ability to complete future securitizations on beneficial terms;

 

availability of or increases in the cost of our financing sources relative to our purchase discount rate;

 

our dependence on the opinions of certain rating agencies;

 

our dependence on the effectiveness of our direct response marketing;

 

the compression of the yield spread between the price we pay for and the price at which we sell assets;

 

changes in tax or accounting policies applicable to our business;

 

the lack of an established market for the subordinated interest in the receivables that we retain after a securitization is executed;

 

our exposure to underwriting risk;

 

our ability to remain in compliance with the terms of our substantial indebtedness;

 

any changes to any preliminary financial results disclosed in the prospectus;

 

changes in existing state laws governing the transfer of structured settlement payments or the interpretation thereof;

 

the insolvency of a material number of structured settlement holders;

 

any change in current tax law relating to the tax treatment of structured settlements;

 

changes to statutory, licensing and regulatory regimes;

 

the impact of the Consumer Financial Protection Bureau and any regulations it issues;

 

adverse judicial developments;

 

potential litigation and regulatory proceedings;

 

unfavorable press reports about our business model;

 

our access to personally identifiable confidential information of current and prospective customers and the improper use or failure to protect that information;

 

the public disclosure of the identities of structured settlement holders;

 

our business model being susceptible to litigation;

 

our dependence on a small number of key personnel;

 

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our ability to successfully enter new lines of business and broaden the scope of our business;

 

changes in our expectations regarding the likelihood, timing or terms of any potential acquisitions described herein;

 

our computer systems being subject to security and privacy breaches; and

 

infringement of our trademarks or service marks.

 

Although we have attempted to identify important risks and factors that could cause actual actions, events or results to differ materially from those described in or implied by our forward-looking statements, other factors and risks may cause actions, events or results to differ materially from those anticipated, estimated or intended. We cannot assure you that forward-looking statements will prove to be accurate, as actual actions, results and future events could differ materially from those anticipated or implied by such statements. Accordingly, as noted above, readers should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date of this offering circular and, except as required by law, we assume no obligation to update or revise them to reflect new events or circumstances.

 

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USE OF PROCEEDS

 

The net proceeds from this offering will be approximately $228.1 million, after deducting underwriting discounts and estimated offering expenses payable by us (assuming the Class A Shares are sold at $20.50 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus). The issuer will use (a) approximately $181.1 million of the net proceeds of this offering to purchase 9,750,000 JGWPT Common Interests directly from JGWPT Holdings, LLC and (b) the remaining estimated $47.0 million of net proceeds to purchase an aggregate of 2,450,000 JGWPT Common Interests from certain Common Interestholders, including certain members of our management.

 

JGWPT Holdings, LLC, our principal operating company, will use the $181.1 million in net proceeds it receives as follows:

 

$151.9 million to repay amounts outstanding under our term loan, including prepayment penalties applicable thereto;

 

$29.2 million for general corporate purposes, including potential acquisitions.

 

The $47.0 million in net proceeds received by Common Interestholders will not result in any net proceeds to JGWPT Holdings, LLC (our principal operating company) or any of our other subsidiaries.

 

The net proceeds from any exercise of the underwriters’ overallotment option will be used to purchase a corresponding additional number of JGWPT Common Interests from the Common Interestholders and therefore, similarly, will not result in any proceeds to JGWPT Holdings, LLC.

 

Our term loan is a $575 million senior secured facility which matures in February 2019. The term loan bears interest at either (i) LIBOR plus 750 basis points with a LIBOR floor of 1.5 or (ii) Prime plus 650 basis points with a Prime floor of 2.5%, at our election. As of June 30, 2013, we had elected the LIBOR rate and the interest rate on the term loan was 9.0%. Certain affiliates of Jefferies LLC are lenders and agents under our term loan, and as a result will receive certain of the proceeds of this offering. Certain affiliates of Credit Suisse Securities (USA) LLC and Jefferies LLC are selling a portion of their JGWPT Common Interests in connection with the offering, and as a result will receive certain of the proceeds of this offering.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $20.50 per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds by $9.1 million, assuming the number of Class A Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us. Such increase (decrease) would be allocated pro rata to our purchase of JGWPT Common Interests directly from JGWPT Holdings, LLC and our purchase of JGWPT Common Interests from certain Common Interestholders.

 

 

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DIVIDEND POLICY

 

The declaration and payment of future dividends to holders of Class A Shares and Class C Shares will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our board of directors deems relevant. Except in respect of any tax distributions we receive from JGWPT Holdings, LLC, if JGWPT Holdings, LLC makes a distribution to its members, including us, we will be required to make a corresponding distribution to each of our holders of Class A Shares and Class C Shares. See “Risk Factors—We are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends.”

 

 

 

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CAPITALIZATION

 

The following sets forth the cash and cash equivalents and capitalization as of June 30, 2013:

 

of J.G. Wentworth, LLC on an actual basis;

 

of JGWPT Holdings Inc. on a pro forma basis to give effect to the Transactions.

 

You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus.

 

   As of June 30, 2013
   Actual
J.G. Wentworth,
LLC
  Pro Forma
JGWPT
Holdings Inc.
   (in thousands)
       
Cash and cash equivalents  $30,150   $ 59,378 (a)(b)
           
Debt          
VIE borrowings under revolving credit facilities and other similar
borrowings
   72,355     72,355  
Term loan payable   557,205     421,287  
VIE long-term debt   157,464     157,464  
VIE long-term debt issued by securitization and permanent financing trusts, at fair market value   3,278,477     3,278,477  
Total debt  $4,065,501   $ 3,929,583  
           
Stockholders’ equity/members’ capital:          
Class A Shares, par value $0.00001 per share, 500,000,000 shares authorized, 0 shares issued and outstanding actual, 12,200,000 shares issued and outstanding pro forma           
Class B Shares, par value $0.00001 per share, 500,000,000 shares authorized, 0 shares issued and outstanding actual, 11,753,161 shares issued and outstanding pro forma           
Class C Shares, par value $0.00001 per share, 500,000 shares authorized, 0 shares issued and outstanding actual, 0 shares issued and outstanding pro forma           
Additional paid-in capital/member’s capital    36,353     93,625  
Accumulated other comprehensive income     2,084     896  
Noncontrolling interests         113,601  
Accumulated deficit         (183,990 )
Total stockholders’ equity/member’s capital   38,437     24,132
Total capitalization  $4,103,938   $ 3,953,715  
 
(a) Includes $29.2 million of additional proceeds from this offering to be used for general corporate purposes. See “Use of Proceeds.”

 

(b) On October 18, 2013, JG Wentworth, LLC closed its 2013-3 securitization, which generated net proceeds of $32.3 million which is not included.

 

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DILUTION

 

If you invest in our Class A Shares, your interest will be diluted to the extent of the difference between the offering price per Class A Share and the pro forma net tangible book value per Class A Share after this offering. Dilution results from the fact that the per share offering price of the Class A Shares is substantially in excess of the net tangible book value per share attributable to the existing equity holders. Net tangible book value represents net book equity excluding intangible assets, if any.

 

Our pro forma net tangible book value (deficit) as of June 30, 2013, was $(96.2) million or $(5.18) per Class A Share, assuming that Common Interestholders initially exchange their JGWPT Common Interests for our Class A Shares on a one-for-one basis.

 

After giving effect to the sale of 9,750,000 Class A Shares at an assumed offering price of $20.50 per share, the mid-point of the price range set forth on the cover page of this prospectus in this offering, after deducting the underwriting discounts, estimated offering expenses and other related transaction costs payable by us, our pro forma net tangible book value as of June 30, 2013 was $84.9 million or $3.00 per Class A Share, assuming that current Common Interestholders initially exchange their JGWPT Common Interests for our Class A Shares on a one-for-one basis.

 

The following table illustrates the pro forma immediate increase in book value of $8.18 per share for existing equity holders and the immediate dilution of $17.50 per share to purchasers of Class A Shares in this offering, assuming the underwriters do not exercise their option to purchase up to 1,830,000 additional shares.

 

Initial public offering price per share     $ 20.50  
Pro forma net tangible book value (deficit) per share as of June 30, 2013     (5.18 )    
Increase in net tangible book value per Class A Share attributable to New investors     8.18    
Pro forma net tangible book value per share after this offering         3.00
Dilution to new investors per share      $ 17.50  

 

 

A $1.00 increase (decrease) in the assumed offering price of $20.50 per Class A Share would increase (decrease) our net tangible book value after this offering by $9.1 million, our pro forma net tangible book value per share after this offering by $0.32 per share, and the dilution to new investors by $0.68 per share, assuming the number of Class A Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and offering expenses payable by us.

 

The following table summarizes, on the same pro forma basis as of June 30, 2013, the differences between the existing equity holders, assuming that each of them initially exchange their JGWPT Common Interests for Class A Shares on a one-for-one basis, and the new investors with respect to the number of shares (or interest, as applicable) purchased from us, the total consideration paid, and the average price per share (or interest, as applicable) paid before deducting the underwriting discount and estimated offering expenses.

 

   Shares Purchased  Total Consideration  Average Price per Share
    Number    Percent    $    Percent  
Existing Equity Holders     16,113,784      57.0 %  $ 38,437      13.3 %  $ 2.38
Investors in this offering     12,200,000      43.0 %  $ 250,100      86.7 %  $ 20.50
Total    28,313,784      100.0 %  $ 288,537      100.0 %  $ 10.19

 

A $1.00 increase (decrease) in the assumed offering price of $20.50 per Class A Share would increase (decrease) total consideration paid by new investors in this offering by $9.1 million, and would increase (decrease) the average price per share paid by new investors by $1.00, assuming the number of Class A Shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and offering expenses payable by us in connection with this offering.

 

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If the underwriters’ option to purchase up to 1,830,000 additional Class A Shares is exercised in full, the pro forma net tangible book value per share after this offering as of June 30, 2013 would be $3.00 per share and the dilution in pro forma net tangible book value per share to new Class A stockholders would be $17.50 per share. Furthermore, the percentage of our common stock owned (on a fully-diluted basis) by existing equity owners would decrease to 55.8% and the percentage of our common stock owned (on a fully-diluted basis) by new Class A stockholders would increase to 44.2%.

 

If the options to purchase an aggregate of 583,019 Class A Shares that we intend to grant concurrently with this offering were exercised in full by all the holders thereof, the pro forma net tangible book value per share after this offering as of June 30, 2013 would be $3.35 per share and the dilution in pro forma net tangible book value per share to new Class A stockholders would be $17.15 per share.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table presents the historical consolidated financial data for J.G. Wentworth, LLC and its subsidiaries. J.G. Wentworth, LLC is the predecessor of the issuer, JGWPT Holdings Inc., for financial reporting purposes. The consolidated statement of operations data for each of the years in the two-year period ended December 31, 2012 and the consolidated balance sheet data as of December 31, 2012 and 2011 set forth below are derived from the audited consolidated financial statements of J.G. Wentworth, LLC and its subsidiaries included in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2013 and 2012 and the consolidated balance sheet data as of June 30, 2013 are derived from the unaudited condensed consolidated financial statements of J.G. Wentworth, LLC and its subsidiaries included in this prospectus. In the opinion of our management, such unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for those periods.

 

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

 

The financial statements of JGWPT Holdings Inc. have not been presented in this Selected Historical Consolidated Financial Data as it is a newly incorporated entity, had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

   Year Ended December 31,  Six Months Ended June 30,
   2012  2011  2013  2012
   (in thousands)
Statement of Operations Data            
Revenues:                    
Interest income  $177,748   $142,697   $80,582   $89,349 
Unrealized gains on VIE and other finance receivables, long-term debt, and derivatives   270,787    127,008    163,843    130,895 
(Loss)/gain on swap termination, net   (2,326)   (11,728)   (174)   374 
Servicing, broker and other fees   9,303    7,425    2,536    5,292 
Other   (856)   816    (53)   260 
Realized loss on notes receivable, at fair market value   —      —      (1,862)   —   
Realized and unrealized gains (losses) on marketable securities, net   12,741    (12,953)   4,997    6,970 
Total revenue  $467,397   $253,265   $249,869   $233,140 
                     
Expenses:                    
Advertising  $73,307   $56,706   $33,803   $37,769 
Interest expense   158,631    123,015    85,970    79,558 
Compensation and benefits   43,584    34,635    23,396    22,031 
General and administrative   14,913    12,943    10,361    7,455 
Professional and consulting   15,874    14,589    9,098    7,618 
Debt prepayment and termination   —      9,140    —      —   
Debt issuance   9,124    6,230    3,072    3,623 
Securitization debt maintenance   5,208    4,760    2,984    2,239 
Provision for losses on finance receivables   3,805    727    2,683    1,546 
Depreciation and amortization   6,385    3,908    2,763    3,132 
Installment obligations expense (income), net   17,321    (9,778)   6,519    8,618 
Total expenses  $348,152   $256,875   $180,649   $173,589 
Income (loss) before taxes  $119,245   $(3,610)  $69,220   $59,551 
Provision for (benefit from) income taxes   (227)   (345)   1,155    (84)
Net income (loss)    119,472    (3,265)   68,065    59,635 
Less non-controlling interest in earnings of affiliate  $2,731   $660   $—     $2,735 
Net income (loss) attributable to J.G. Wentworth,
LLC
  $116,741   $(3,925)  $68,065   $56,900 

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   As of December 31,  As of June 30,
   2012  2011  2013  2012
   (in thousands)
Balance Sheet Data                    
Assets:                    
Cash and cash equivalents  $103,137   $70,171   $30,150   $69,871 
Restricted cash and investments  $112,878   $155,361   $111,685   $106,414 
VIE and other finance receivables, at fair market value  $3,615,188   $3,041,090   $3,759,736   $3,385,149 
VIE and other finance receivables, net of allowance for losses  $150,353   $157,560   $136,692   $154,596 
Total assets  $4,298,597   $3,764,378   $4,362,402   $4,023,557 
                     
Liabilities:                    
Term loan payable  $142,441   $171,519   $557,205   $162,229 
VIE borrowings under revolving credit facilities and other similar borrowings  $27,380   $82,404   $72,355   $66,930 
VIE long-term debt  $162,799   $164,616   $157,464   $151,177 
VIE long-term debt issued by securitization and permanent financing trusts at fair market value  $3,229,591   $2,663,873   $3,278,477   $2,951,291 
                     
Total liabilities  $3,855,779   $3,421,395   $4,323,965   $3,639,921 
Member’s capital  $442,818   $342,983   $38,437   $383,636 
Total liabilities & member’s capital  $4,298,597   $3,764,378   $4,362,402   $4,023,557 

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

The unaudited pro forma consolidated statements of operation for the year ended December 31, 2012 and for the six months ended June 30, 2013 present our consolidated results of operations giving pro forma effect to the Transactions as if such transactions occurred on January 1, 2012. The unaudited pro forma balance sheet as of June 30, 2013 presents our consolidated financial condition giving pro forma effect to the Transactions as if such transactions occurred on June 30, 2013. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect on a pro forma basis the impact of these transactions on the historical financial information of J.G. Wentworth, LLC.

 

The unaudited pro forma consolidated financial information and notes included in this prospectus are presented for illustrative purposes only. The pro forma adjustments are based upon available information and methodologies that are factually supportable and directly related to this offering and related transactions. The unaudited pro forma financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. For further discussion of these matters, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

 

The pro forma adjustments are described in the notes to the unaudited pro forma financial information, and principally include the following:

 

A provision for federal and state income taxes of JGWPT Holdings Inc. as a taxable corporation;

 

A reduction in interest expense representing repayment of $140.0 million of the outstanding principal amount of our term loan and $11.9 million of prepayment premiums related thereto; and

 

The issuance and sale by us of 12,200,000 Class A Shares to the public representing 43.1% of the economic interests of JGWPT Holdings Inc. at an initial offering price of $20.50 per share, the mid-point of the range set forth on the cover page of this prospectus, and the application of the net proceeds from this offering.

 

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As of June 30, 2013
   Historical
J.G. Wentworth,
LLC
  Offering and
Reorganization
Transaction Related
Adjustments
  Pro Forma for the
Offering and
Reorganization
Transaction
JGWPT
Holdings Inc.
ASSETS               
Cash and cash equivalents  $30,150   29,228 (a)   $ 59,378  
Restricted cash and investments   111,685          111,685  
VIE finance receivables, at fair market value (1)   3,730,370          3,730,370  
Other finance receivables, at fair market value   29,366          29,366  
VIE finance receivables, net of allowance for losses of $5,043(1)   120,972          120,972  
Other finance receivables, net of allowance for losses of $1,714   15,720          15,720  
Notes receivable, at fair market value(1)   6,387          6,387  
Note receivable due from affiliate   —            —    
Other receivables, net of allowance for losses of $253   14,154          14,154  
Fixed assets, net of accumulated depreciation of $3,930   7,176          7,176  
Intangible assets, net of accumulated amortization of $16,015   49,644          49,644  
Goodwill   84,993          84,993  
Marketable securities   130,217          130,217  
Deferred tax assets, net   1,668        1,668  
Other assets   29,900     (4,093 )(b)     25,807  
Total assets  $4,362,402   $ 25,135   $ 4,387,537  
                
LIABILITIES AND MEMBER’S CAPITAL               
Accounts payable  $5,978        5,978  
Accrued expenses   16,708          16,708  
Accrued interest   12,498          12,498  
VIE derivative liabilities, at fair market value   85,439          85,439  
VIE borrowings under revolving credit facilities and other similar borrowings   72,355          72,355  
VIE long-term debt   157,464          157,464  
VIE long-term debt issued by securitization and permanent financing trusts, at fair market value   3,278,477          3,278,477  
Term loan payable   557,205     (135,918 )(c)     421,287  
Deferred income tax liabilities, net   —       175,358 (d)     175,358  
Other liabilities   7,624          7,624  
Installment obligations payable   130,217          130,217  
Total liabilities  4,323,965    39,440    4,363,405  
Total J.G. Wentworth, LLC member’s capital   —       —        —    
Noncontrolling interest in affiliate   —       —        —    
Member’s capital/Shareholders equity  36,353   (36,353)  —  
Accumulated other comprehensive income   2,084   (1,188)   896 
Class A Shares, authorized to issue 500,000,000 shares, par value $0.00001 per share, 12,200,000 shares outstanding     —        —   (e)     —    
Class B Shares, authorized to issue 500,000,000 shares, par value $0.00001 per share, 11,753,161 shares outstanding     —        —   (e)     —    
Additional paid-in capital     —        93,625 (f)     93,625  
Noncontrolling interest     —        113,601 (g)     113,601  
Accumulated deficit     —        (183,990 )(h)     (183,990 )
Total liabilities and member’s capital/shareholders equity  $4,362,402   $ 25,135   $ 4,387,537  
 
(1)Pledged as collateral to credit and long-term debt facilities

 

 

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Notes to Pro Forma Balance Sheet

As of June 30, 2013  

 

a. Reflects the net effect on cash and cash equivalents of the receipt of the net offering proceeds of $181.1 million and the use of proceeds described in “Use of Proceeds.”

b. Reflects the proportionate decrease of debt issuance costs in association with the repayment of $140.0 million of the term loan payable made from the proceeds from the offering.

c. Reflects the repayment of $140.0 million of the term loan payable, net of debt discount, made from the proceeds from the offering.

d. Reflects the deferred tax liability of $175.4 million related to the difference between book and tax basis of balance sheet accounts as of June 30, 2013.

e. Represents an adjustment to stockholders’ equity reflecting the par value for Class A Shares and Class B Shares to be outstanding following this offering.   The existing owners of JGWPT Holdings, LLC will hold Class B Shares of JGWPT Holdings Inc.  Although these shares have no economic rights, they will allow our existing owners to exercise voting power at JGWPT Holdings Inc., the managing member of JGWPT Holdings, LLC, at a level that is consistent with their overall equity ownership of our business. Under the certificate of incorporation of JGWPT Holdings Inc., each holder of Class B Shares shall be entitled to 10 votes per share. Accordingly, the voting power afforded to our existing owners by their Class B Shares is automatically and correspondingly reduced as they sell their common interest in JGWPT Holdings, LLC for cash as part of the offering or subsequently exchange their common interest in JGWPT Holdings, LLC for Class A Shares of JGWPT Holdings Inc. pursuant to the operating agreement of JGWPT Holdings, LLC.  Accordingly, immediately following this offering, our existing owners, through their holdings of our Class B Shares, will collectively have 91% of the voting power of JGWPT Holdings Inc.

f. Represents an increase of $93.6 million to additional paid-in capital as a result of the amounts allocable to JGWPT Holdings Inc. of the net proceeds from this offering (offering proceeds, net of underwriting discounts, of $250.1 million, less $50.0 million used to purchase JGWPT Common Interests from certain Common Interestholders, less $18.8 million of offering expense and less par value reflected in note (e) and the elimination of member’s capital of $38.4 million upon consolidation.

g. As described in “The Transactions,” JGWPT Holdings Inc. will become the sole managing member of JGWPT Holdings, LLC. JGWPT Holdings Inc. will initially own less than 100% of the economic interest in JGWPT Holdings, LLC but will have 100% of the voting power and control the management of JGWPT Holdings, LLC. As a result, we will consolidate the financial results of JGWPT Holdings, LLC and will record non-controlling interest on our consolidated balance sheet. Immediately following this offering, the non-controlling interest, based on the assumptions to the pro forma financial information, will be $113.6 million.  Pro forma non-controlling interest represents 57% of the pro forma deficit  of JGWPT Holdings, LLC of $26.9 million without consideration of (b) above.

h. Represents the impact to equity of the recording of a deferred tax liability ($175.4 million), and the proportionate writeoff of debt issuance costs in association with the repayment of the term loan ((c) $4.1 million), the proportionate write off of the debt discount related to the term loan ((d) $4.1 million), the payment of fees in connection with the early repayment of our term loan of $11.9 million.

 

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   Six months ended June 30, 2013
Statement of Operations Data  Historical
J.G. Wentworth,
LLC
  Offering and
Reorganization
Transaction Related
Adjustments
  Pro Forma for the
Offering and
Reorganization
Transaction
JGWPT
Holdings Inc.
REVENUES               
Interest income  $80,582   $    $ 80,582  
Unrealized gains on VIE and other finance receivables, long-term debt and derivatives   163,843          163,843  
Gain (loss) on swap termination, net   (174)         (174 )
Servicing, broker, and other fees   2,536          2,536  
Other   (53)         (53 )
Realized loss on notes receivable, at fair market value   (1,862)         (1,862 )
Realized and unrealized gains (losses) on marketable securities, net   4,997          4,997  
Total revenue  $249,869   $     $ 249,869  
                
EXPENSES               
Advertising  $33,803   $    $ 33,803  
Interest expense   85,970     (6,332 )(a)     79,638  
Compensation and benefits    23,396      685  (e)     24,081  
General and administrative    10,361           10,361  
Professional and consulting   9,098          9,098  
Debt issuance   3,072          3,072  
Securitization debt maintenance   2,984          2,984  
Provision for losses on finance receivables   2,683          2,683  
Depreciation and amortization   2,763          2,763  
Installment obligations expense (income), net   6,519          6,519  
Total expenses  $180,649   $ (5,647 )   $ 175,002  
Income before taxes   $69,220   $  5,647    $ 74,867  
Provision (benefit) for income taxes   1,155      12,089 (b)     13,244  
Net income   68,065      (6,442 )    61,623  
Less noncontrolling interest in earnings of affiliate   —        —         —    
Net income attributable to J.G. Wentworth, LLC   $68,065   $  (6,442 )   $ 61,623  
Less net income attributable to other noncontrolling interest            41,979 (c)     41,979  
Net income attributable to holders of Class A Shares           $ 19,644  
               
Weighted average of Class A Shares outstanding(d)                
Basic             12,200,000  
Diluted               12,200,000  
Net income available to Class A Shares(d)                
Basic earnings per share             $ 1.61  
Diluted earnings per share             $ 1.61  

 

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Year ended December 31, 2012
Statement of Operations Data  Historical
J.G. Wentworth,
LLC
  Offering and
Reorganization
Transaction Related
Adjustments
  Pro Forma for the
Offering and
Reorganization
Transaction
JGWPT
Holdings Inc.
REVENUES               
Interest income  $177,748        $ 177,748  
Unrealized gains on VIE and other finance receivables, long-term debt and derivatives   270,787          270,787  
Gain (loss) on swap termination, net   (2,326)         (2,326 )
Servicing, broker, and other fees   9,303          9,303  
Other   (856)         (856 )
Realized and unrealized gains (losses) on marketable securities, net   12,741          12,741  
Total revenue  $467,397   $     $ 467,397  
                
EXPENSES               
Advertising  $ 73,307       73,307  
Interest expense   158,631     (12,284 )(a)     146,347  
Compensation and benefits    43,584      1,370  (e)     44,954  
General and administrative   14,913          14,913  
Professional and consulting   15,874          15,874  
Debt prepayment and termination   —            —    
Debt issuance   9,124          9,124  
Securitization debt maintenance   5,208          5,208  
Provision for losses on finance receivables   3,805          3,805  
Depreciation and amortization   6,385          6,385  
Installment obligations expense (income), net   17,321          17,321  
Total expenses  $348,152   $ (10,914 )   $ 337,238  
Income before taxes   $119,245   $   10,914    $ 130,159  
Provision (benefit) for income taxes   (227)      21,045 (b)     20,818
Net income    119,472     (10,131 )     109,341  
Less noncontrolling interest in earnings of affiliate   2,731      —         2,731  
Net income attributable to J.G. Wentworth, LLC   $116,741   $  (10,131 )   $ 106,610  
Less net income attributable to other noncontrolling interest           72,700 (c)       72,700  
Net income attributable to holders of Class A Shares            $ 33,910  
                
Weighted average of Class A Shares outstanding(d)                
Basic            12,200,000  
Diluted              12,200,000  
Net income available to Class A Shares(d )               
Basic earnings per share             $ 2.78  
Diluted earnings per share             $ 2.78  

 

 

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Notes to Pro Forma Statement of Operations  

For the year ended December 31, 2012 and For the Six Months Ended June 30, 2013

 

a. Reflects the reduction in interest expense as a result of the $140.0 million repayment of the term loan payable made from the proceeds of this offering.

b. Following this offering we will be subject to U.S. federal income taxes, in addition to state and local taxes with respect to our allocable share of any net taxable income of JGWPT Holdings, LLC, which will result in higher income taxes. As a result, the pro forma statement of operations reflects an adjustment to our provision for U.S. federal income taxes and assumes the applicable statutory rates apportioned to each state and local jurisdiction.

c.   As described in “The Transactions”, JGWPT Holdings Inc. will become the sole managing member of JGWPT Holdings, LLC. JGWPT Holdings Inc. will initially own less than 100% of the economic interest in JGWPT Holdings, LLC but will have 100% of the voting power and control the management of JGWPT Holdings, LLC. Immediately following this offering, the non-controlling interest will be 57%. The percentage of the net income attributable to the non-controlling interest will vary from these percentages due to the differing level of income taxes applicable to the controlling interest. For the year ended December 31, 2012 and six months ended June 30, 2013, the non-controlling interest was allocated 0% of the pro forma provision (benefit) income tax adjustment of $21,045 and $12,089, respectively.

d. The Class B Shares do not share in our earnings and, therefore, are not included in the weighted average shares outstanding or net income per share.

On a pro forma basis for the year ended December 31, 2012 and the six months ended June 30, 2013, the Common Interests and warrants in JGWPT Holdings, LLC were antidilutive and consequently the effect of their exchange for Class A Shares has been excluded from the calculation of diluted net income available to Class A Shares.

e.   Reflects the increase in share based compensation expense associated with the issuance of stock options for 583,019 Class A Shares we intend to grant to our executive officers and employees concurrently with this offering.

 

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JGWPT HOLDINGS INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

 

Note 1 – Basis of Presentation

 

The unaudited pro forma condensed balance sheet of JGWPT Holdings Inc. as of June 30, 2013 is based on J.G. Wentworth, LLC’s unaudited historical consolidated balance sheet and includes pro forma adjustments to give effect to the transactions as described below if they had occurred on June 30, 2013.

 

The unaudited pro forma statement of operations of JGWPT Holdings Inc. for the year ended December 31, 2012 is based on J.G. Wentworth, LLC’s audited historical consolidated statement of operations for the same period and the unaudited pro forma consolidated statement of operations of JGWPT Holdings Inc. for the six months ended June 30, 2013 is based on J.G. Wentworth, LLC’s unaudited historical consolidated statement of operations for the same period. The pro forma adjustments are included to give effect to the Transactions if they had occurred on January 1, 2012.

 

The pro forma adjustments principally include the following:

 

A provision for federal and state income taxes of JGWPT Holdings Inc. as a taxable corporation;

 

A reduction in interest expense representing repayment of $140.0 million of the outstanding principal amount of our term loan and $11.9 million of prepayment premiums related thereto; and

 

The issuance and sale by us of 12,200,000 Class A Shares to the public representing 43.1% of the economic interest of JGWPT Holdings Inc. at an initial offering price of $20.50 per share and the application of the net proceeds from this offering.

 

Note 2 – Pro forma Adjustments and Assumptions

 

Transactions

 

Reflects the pro forma adjustments to non-controlling interests, retained earnings and income attributable to non-controlling interest to reflect the ownership interests in J.G. Wentworth, LLC that will not be owned by us.

 

Following the Transactions, we will be a holding company, with our sole material assets being our indirect ownership interest of 43.1% of the limited partnership interest of JGWPT Holdings, LLC. which is the 100% owner of J.G. Wentworth LLC. The existing holders of JGWPT Holdings, LLC will own the remaining 56.9% of JGWPT Holdings, LLC.

 

Reflects the deferred tax liability related to the difference between book and tax as of June 30, 2013. In addition the statement of operations reflects incremental income taxes based on the tax consequences of the Transactions. However such amounts reflect a full valuation allowance during the periods presented. 

 

Reflects the net effect on cash and cash equivalents of: (i) the receipt of the net offering proceeds of $228.1 million from the issuance and sale of million Class A Shares at an initial public offering price of $20.50 per share, net of aggregate offering costs of $21.9 million, and (ii) the repayment of $140.0 million of the term loan payable with proceeds from the offering and 11.9 million of prepayment premiums related thereto.

 

Reflects the repayment of $140.0 million of our term loan payable from the proceeds from this offering.

 

Reflects a reduction in interest expense resulting from the repayment of $140.0 million of the term loan payable from the proceeds from the offering.

 

Reflects the change in member’s capital/shareholders equity to reflect the issuance and sale of million Class A Shares at an initial public offering price of $20.50 per share.  

 

Note 3 – Pro Forma Earnings Per Share

 

Pro forma earnings per share is determined by dividing the pro forma net income attributable to holders of Class A Shares by the number of Class A Shares expected to be outstanding following this offering. All Class A Shares were assumed to have been outstanding since January 1, 2012.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” and the “Special Note Regarding Forward-Looking Statements” sections of this offering memorandum for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a leading direct response marketer that provides liquidity to our customers by purchasing structured settlement, annuity and lottery payment streams and interests in the proceeds of legal claims in the United States. Based on information provided by the National Association of Settlement Purchasers, we believe we are the largest purchaser of structured settlement payments in the United States. We securitize or sell the payment streams that we purchase in transactions that are structured to generate cash proceeds to us that exceed the purchase price we paid for those payment streams. We have developed our market leading position as a purchaser of structured settlement payments through our highly recognizable brands and multi-channel direct response marketing platform. Our brand recognition and highly scalable platform should enable our continuing expansion into the purchase of additional assets, including annuities, lotteries and pre-settlement funding.

 

Structured settlements are financial tools used by insurance companies to settle claims on behalf of their customers. They are contractual arrangements under which an insurance company agrees to make periodic payments to an individual as compensation for a claim typically arising out of a personal injury. In 2012, approximately 90% of the counterparties to structured settlement payment streams that we purchased had an investment rating of “A3” or better by Moody’s. The structured settlement payments we purchase have long average lives of more than ten years and cannot be prepaid.

 

We serve the liquidity needs of structured settlement payment holders by providing our customers with cash in exchange for a certain number of fixed scheduled future payments. Customers desire liquidity for a variety of reasons, including debt reduction, housing, automotive, business opportunities, education and healthcare costs. Since 1995, we have purchased over $9.1 billion of structured settlement payment streams and have completed 37 asset-backed securitizations totaling over $5.1 billion in issuance.

 

For each of the historical periods presented herein, revenues by our major products are described below.

 

Revenue generated from our structured settlement payment purchasing business was $416 million and $248 million for the years ended December 31, 2012 and 2011, and $222 million and $207 million for the six months ended June 30, 2013 and 2012, respectively.

 

Revenue generated from our annuity payment purchasing business was $10 million and $6 million for the years ended December 31, 2012 and 2011, and $6 million and $5 million for the six months ended June 30, 2013 and 2012, respectively.

 

Revenue (loss) generated from our lottery payment purchasing business was $27 million and ($8 million) for the years ended December 31, 2012 and 2011, and $15 million and $14 million for the six months ended June 30, 2013 and 2012, respectively.

 

Revenue from our pre-settlement funding business was $14 million and $7 million for the years ended December 31, 2012 and 2011, and $7 million and $7 million for the six months ended June 30, 2013 and 2012, respectively.

 

Our highly recognizable brands generate significant volumes of inbound inquiries to our purchasing group. Brand awareness is critical to our marketing efforts, as there are no readily available lists of holders of structured settlements or annuities or potential pre-settlement customers. We have made significant investments in direct response marketing to establish our brand names and product awareness through multiple media outlets. According to Kantar Media, since 2008, each of JG Wentworth and Peachtree has spent on television advertising approximately five-times the amount spent by the nearest industry competitor and together have spent over 80% of the total amount

 

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spent by all of the major participants in the industry. As a result of our substantial marketing investment as compared to our competitors, we believe that our core brands, JG Wentworth and Peachtree, are the #1 and/or #2 most recognized brands in their product categories. In addition, since 1995, we have been building proprietary databases of current and prospective customers. Our significant marketing efforts have helped to establish our customer databases, which, as of July 31, 2013, include more than 121,000 current and prospective structured settlement customers with approximately $31 billion of unpurchased structured settlement payment streams which includes all potential payment streams that customers disclosed to us at our initial contact with them. Since July 31, 2013, we have continued to add to our customer databases and to purchase structured settlement payment streams from our customers who may also sell payment streams to others and, therefore, the amount of unpurchased structured settlement payment streams in our databases may now be greater or smaller. Historically, the average structured settlement payments customer has completed approximately two transactions with us and, as a result, we believe our databases provide us with a strong pipeline of predictable purchasing opportunities with low incremental acquisition cost.

 

We act as an intermediary that identifies, underwrites and purchases individual payment streams from our customers, aggregates the payment streams and then finances them in the institutional market at financing rates that are below our cost to purchase the payment streams. We purchase future payment streams from our customers for a single up-front cash payment. Such payment is based upon a discount rate that is negotiated with each of our customers. We fund our purchases of payment streams with low cost short and long-term non-recourse financing. We initially fund our purchase of structured settlement payments and annuities through committed warehouse lines. Our guaranteed structured settlement and annuity warehouse facilities totaled $600 million at July 31, 2013. We intend to undertake a sale or securitization of these assets approximately three times per year, subject to our discretion, in transactions that generate excess cash proceeds over the purchase price we paid for those assets and the amount of warehouse financing used to fund that purchase price. We finance the purchase of other payment steams using a combination of other committed financing sources and our operating cash flow.

 

Because our purchase and financing of periodic payment streams is undertaken on a positive cash flow basis with minimal retained risk, we view our ability to purchase payment streams as key to our business model. Another key feature of our business model is our ability to aggregate payment streams from many individuals and from a well-diversified base of payment counterparties. We continuously monitor the efficiency of marketing expenses and the hiring and training of personnel engaged in the purchasing process.

 

We use Adjusted Net Income (a non-GAAP financial measure) as a measure of our results from operations, which we define as our net income under U.S. GAAP before certain non-cash compensation expenses, certain other expenses, provision for or benefit from income taxes and the amounts related to the consolidation of the securitization and permanent financing trusts we use to finance our business. We use Adjusted Net Income to measure our overall performance because we believe it represents the best measure of our operating performance, as the operations of the variable interest entities and other excluded items do not impact business performance. You should not consider Adjusted Net Income in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because not all companies use identical calculations, our presentation of Adjusted Net Income may not be comparable to other similarly titled measures of other companies.

 

While we anticipate advertising spend for the full year 2013 to be flat with 2012, in future periods we may increase our advertising expenditures and other operating costs to sustain the growth of our core structured settlement payments business and our initiatives in annuities, lotteries and pre-settlement products. We expect to achieve moderate operating efficiencies in structured settlement products that will be offset by our investment spending in other products resulting in a stable overall ratio of expenditures to revenue. We do not anticipate any significant capital expenditures in the foreseeable future. We do not anticipate any significant changes in the competitive environment in the foreseeable future.

 

This section discusses the financial condition and result of operations of J.G. Wentworth, LLC, the audited operating company of JGWPT Holdings, LLC, and its subsidiaries. As a result, the terms “we,” us” and “our” in this section refers to J.G. Wentworth, LLC and its subsidiaries. The financial statements of JGWPT Holdings Inc. are not discussed in this section as it is a newly incorporated entity, had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

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Results of Operations

 

Comparison of Consolidated Results for the Years Ended December 31, 2012 and 2011

 

Our results of operations for the year ended December 31, 2011 include the results of operations from our July 2011 merger with Orchard Acquisition Company, LLC and its subsidiaries, which we refer to as the Peachtree Merger, from July 12, 2011, which was the date of consummation of the merger. Our results of operations for the year ended December 31, 2012 include the results of operations from the Peachtree Merger for the full period.

 

Revenues

 

Revenues increased by $214.1 million, or 84.5%, to $467.4 million for the year ended December 31, 2012 from $253.3 million for the year ended December 31, 2011, due primarily to the Peachtree Merger and a lower interest rate environment. The average interest rate of our securitizations was 5.12% for the year ended December 31, 2011, versus 4.45% for the year ended December 31, 2012. Unrealized gains on finance receivables, long-term debt, and derivatives was $270.8 million for the year ended December 31, 2012, an increase of $143.8 million, or 113.2%, from $127.0 million for the year ended December 31, 2011 due to the Peachtree Merger (approximately 56%), as well as funding volume increases (approximately 5%) and a lower interest rate environment (approximately 39%) which increased the net carrying value of our VIE and other finance receivables at fair market value and long-term debt at fair market value. Interest income increased $35.1 million, or 24.6%, to $177.7 million for the year ended December 31, 2012, from $142.7 million for the year ended December 31, 2011, mainly as a result of increased accretion income on securitized assets from the Peachtree Merger as well as additional interest accretion from 2012 payment stream purchases. Servicing, broker, and other fees revenue increased 25.3% to $9.3 million for the year ended December 31, 2012, from $7.4 million for the year ended December 31, 2011, resulting mainly from the Peachtree Merger. Realized and unrealized gains on marketable securities, net, increased $25.7 million from a loss of $13.0 million for the year ended December 31, 2011, to a gain of $12.7 million for the year ended December 31, 2012. This increase was offset by a corresponding increase in installment obligations expense, net. These amounts relate to the marketable securities and installment obligations payable items on our consolidated balance sheet. The marketable securities are owned by us, but are held to fully offset our installment obligation liability and therefore increases or decreases in marketable securities will have no impact on our net income.

 

Operating Expenses

 

Total expenses for the year ended December 31, 2012 were $348.2 million, an increase of $91.3 million, or 35.5%, from $256.9 million for the year ended December 31, 2011, due primarily to the Peachtree Merger, partially offset by decreases from synergies realized through the Peachtree Merger, such as reductions in compensation and general and administrative expense. Advertising expenses, including direct mail, television, internet, radio, and other related expenses, increased 29.3% to $73.3 million for the year ended December 31, 2012, from $56.7 million for the year ended December 31, 2011, as a result of the Peachtree Merger as well as continued investment to increase awareness of our core product offerings. Interest expense, which includes interest on our securitization debt, warehouse facilities, and credit facility, increased 29.0% to $158.6 million for the year ended December 31, 2012, from $123.0 million for the year ended December 31, 2011. This increase was driven by the additional securitizations and term loan debt acquired in the Peachtree Merger and an increase in our warehouse facility capacity during 2012, offset in part by decreases in rates on the securitizations completed during 2012. Compensation and benefits increased 25.8% to $43.6 million for the year ended December 31, 2012, compared to $34.6 million for the year ended December 31, 2011, driven by increased costs related to retained employees from the Peachtree Merger, as well as an increase in costs to accommodate our growth and transaction volumes. General and administrative costs increased $2.0 million, or 15.2%, to $14.9 million for the year ended December 31, 2012, from $12.9 million for the year ended December 31, 2011, and professional and consulting costs increased $1.3 million, or 8.8%, to $15.9 million for the year ended December 31, 2012, from $14.6 million for the year ended December 31, 2011, due primarily to the impact of a full year of the Peachtree Merger. Installment obligations expense, net, increased $27.1 million to $17.3 million for the year ended December 31, 2012, from a gain of $9.8 million for the year ended December 31, 2011, offsetting the increase in realized and unrealized gains on marketable securities, net, which is included in revenues.

 

Income (loss) before taxes

 

Income before taxes for the year ended December 31, 2012 was $119.2 million, compared to a loss of ($3.6) million for the year ended December 31, 2011. This includes the benefit of a lower interest rate environment and a full year of results of operations from the Peachtree Merger, as compared to the period from July 12, 2011 (the date of the consummation of the Peachtree Merger) to December 31, 2011.

 

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Income Taxes

 

We and the majority of our subsidiaries operate in the U.S. as non-income tax paying entities, and are treated as pass-through entities for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. In addition, certain of our wholly owned subsidiaries are operating as corporations within the U.S. and subject to U.S. federal and state income tax. As non-income tax paying entities, the majority of our net income or loss is included in the individual or corporate returns of JGWPT Holdings, LLC’s members. The current and deferred taxes relate only to our income tax-paying corporate entities.

 

Net income (loss) attributable to J.G. Wentworth, LLC

 

Net income attributable to J.G. Wentworth, LLC for the year ended December 31, 2012 was $116.7 million, an increase of $120.7 million from a loss of $3.9 million for the year ended December 31, 2011. The primary drivers were due to a lower interest rate environment impacting the value of our finance receivables as well as the results from the Peachtree Merger. See explanation under “Income (loss) before taxes” above.

 

Comparison of Consolidated Results for the Six Months Ended June 30, 2013 and 2012

 

Revenues

 

Revenues for the six months ended June 30, 2013 were $249.9 million, an increase of $16.7 million, or 7.2%, from $233.1 million for the six months ended June 30, 2012. The increase in revenues is primarily attributable to funding volume increases, in addition to a more favorable interest rate environment for the majority of the six month period. Interest income for the six months ended June 30, 2013 was $80.6 million, a decrease of $8.8 million, or 9.8%, from $89.3 million for the six months ended June 31, 2012, due to lower interest rates. Unrealized gains on finance receivables, long-term debt, and derivatives was $163.8 million, an increase of $32.9 million from $130.9 million for the six months ended June 30, 2012, due to a lower interest rate environment, which impacts the carrying value of our finance receivables. Realized and unrealized gain on marketable securities, net, was $5.0 million for the six months ended June 30, 2013, a decrease of $2.0 million from $7.0 million for the six months ended June 30, 2012. This decrease was offset by a corresponding decrease in installment obligations expense, net. These amounts relate to the marketable securities and installment obligations payable items on our consolidated balance sheet. The marketable securities are owned by us, but are held to fully offset our installment obligations liability, and therefore increases or decreases in marketable securities will have no impact on our net income.

 

Operating Expenses

 

Total expenses for the six months ended June 30, 2013 were $180.6 million, an increase of $7.1 million, or 4.1%, from $173.6 million for the six months ended June 30, 2012. Advertising, which consists of our marketing costs including direct mail, television, internet, radio, and other related expenses, decreased 10.5% to $33.8 million for the six months ended June 30, 2013, from $37.8 million for the six months ended June 30, 2012, primarily due to the timing of our advertising initiatives. Interest expense, which includes interest on our securitization debt, warehouse facilities and credit facility, increased 8.1% to $86.0 million for the six months ended June 30, 2013, from $79.6 million for the six months ended June 30, 2012, due primarily to the larger principal balance on our term loan. Compensation and benefits increased 6.2% to $23.4 million for the six months ended June 30, 2013, compared to $22.0 million for the six months ended June 30, 2012, due to employee severance cost associated with the downsizing of the Boynton Beach office. General and administrative costs increased $2.9 million to $10.4 million for the six months ended June 30, 2013, from $7.5 million for the six months ended June 30, 2012, and professional and consulting costs increased $1.5 million to $9.1 million for the six months ended June 30, 2013, from $7.6 million for the six months ended June 30, 2012, due to overall growth in our business, outside legal fees, and costs associated with the expansion of our office space, such as rent expense. Installment obligations expense, net decreased $2.1 million to $6.5 million for the six months ended June 30, 2013, from $8.6 million for the six months ended June 30, 2012, offsetting the increase in realized and unrealized gains on marketable securities, net, which is included in revenues.

 

Restructure Expense

 

In April 2013, we announced our intention to restructure our Boynton Beach office. In connection with the announcement, we recorded a restructure charge of $3.2 million for, primarily, severance and related expense. The $3.2 million charge for the six months ended June 30, 2013 was recorded in the following statement of operations

 

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line items: compensation and benefits, $2.8 million and general and administrative, $0.4 million. The associated workforce reductions were substantially completed during the three-months ended June 30, 2013 and the remaining actions are expected to be completed by December 31, 2013.

 

Income before taxes

 

For the six months ended June 30, 2013, we had income before taxes of $69.2 million, an increase of 16.2%, or $9.7 million, from $59.6 million for the six months ended June 30, 2012, primarily due to increased revenue from funding volume increases and a more favorable interest rate environment, partially offset by higher expenses.

 

Income Taxes

 

We and the majority of our subsidiaries operate in the U.S. as non-income tax paying entities, and are treated as pass-through entities for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. In addition, certain of our wholly owned subsidiaries are operating as corporations within the U.S. and subject to U.S. federal and state income tax. As non-income tax paying entities, the majority of our net income or loss is included in the individual or corporate returns of JGWPT Holdings, LLC’s members. The current and deferred taxes relate only to our income tax-paying corporate entities.

 

Net income attributable to J.G. Wentworth, LLC

 

Net income attributable to J.G. Wentworth, LLC for the six months ended June 30, 2013 was $68.1 million, an increase of $11.2 million, or 19.6%, from $56.9 million for the six months ended June 30, 2012, due to the reasons noted above.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and commitments (excluding interest rate swaps which are discussed in “Derivatives and Other Hedging Instruments”) as of December 31, 2012, and the future periods in which such obligations are expected to be settled in cash. The table also reflects the timing of principal and interest payments on outstanding debt based on scheduled and/or expected repayment dates and the interest rates in effect as of December 31, 2012. Additional details regarding these obligations are provided in the notes to the consolidated financial statements as referenced in the table:

 

   Total  2013  2014  2015  2016  2017  Thereafter
   (dollars in thousands)
Operating leases  $14,629   $2,224   $1,582   $1,545   $1,422   $1,292   $6,564 
Capital leases(a)   745    745    —      —      —      —      —   
Revolving credit facilities & other similar borrowings(a)   27,380    17,679    —      5,530    4,171    —      —   
Related interest & fees   11,998    5,329    4,424    2,090    156    —      —   
Long-term debt(a)   172,929    13,095    14,576    15,107    17,192    12,443    100,516 
Related interest   71,260    10,072    9,282    8,708    7,547    6,588    29,062 
Long-term debt issued by securitization and permanent financing trusts(a)   3,013,339    239,484    258,277    248,059    223,790    214,166    1,829,563 
Related interest & fees   1,290,380    134,746    125,593    115,974    107,418    98,803    707,846 
Term loan(a),(b)   142,441    142,441    —      —      —      —      —   
Related interest & fees   10,304    10,304    —      —      —      —      —   
Installment obligation payable(a)   131,114    15,514    15,158    14,702    16,152    11,805    57,783 
   $4,886,519   $591,633   $428,892   $411,715   $377,849   $345,097   $2,731,334 
 

(a)

Included in the Consolidated Financial Statements.
(b) In February 2013, the term loan payable assumed in connection with the Peachtree Merger was refinanced with a new senior secured credit facility consisting of a $425 million term loan and a $20 million revolving commitment maturing in February 2019 and August 2017, respectively. In May 2013, the senior secured credit facility was amended to provide for an additional term loan of $150 million on the same terms as the existing term loan. Total outstanding borrowings under the new senior credit facility were $575 million as of June 30, 2013.

 

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Liquidity and Capital Resources

 

Cash flows from operating activities.

 

Cash used in operating activities was $225.7 million for the year ended December 31, 2012, a decrease of $71.0 million from the $296.8 million of cash used in operating activities for the year ended December 31, 2011. The decrease in cash used in operating activities was driven primarily by a $122.7 million increase in net income due to a favorable interest rate environment and the Peachtree Merger, a $137.6 million increase in collections of finance receivables due to increasing portfolio balances and a $106.0 million increase in the change in restricted cash and investments driven by the timing of securitization financing. These factors were partially offset by a $143.8 million net increase in cash used in operating activities resulting from changes in unrealized gains/losses on finance receivables, long-term debt, and derivatives, an $87.7 million increase in purchases of finance receivables and a $64.8 million increase related to the accretion of interest income and interest expense.

 

Net cash used in operating activities was $163.3 million for the six months ended June 30, 2013, an increase of $85.6 million from the $77.8 million of cash used in operating activities for the six months ended June 30, 2012. The increase in cash used in operating activities was primarily driven by a $32.9 million increase related to the net change in unrealized gains/losses on finance receivables, long-term debt and derivatives, a $29.0 million increase in purchases of finance receivables and a $47.8 million reduction in the change in restricted cash and investments due to the timing of our securitization in 2013. These amounts were partially offset by an $11.0 million increase in collections of finance receivables and the $8.4 million increase in net income which was driven by a favorable interest rate environment.

 

Cash flows from investing activities.

 

Cash used in investing activities for the year ended December 31, 2012 was $4.3 million as compared to cash provided by investing activities of $15.5 million for the year ended December 31, 2011. The primary drivers for the difference between the periods was the $11.6 million in cash acquired from the Peachtree Merger in July 2011 and the $5.0 million note receivable from an affiliate executed in 2012.

 

Net cash provided by investing activities for the six months ended June 30, 2013 was $5.4 million as compared to $1.1 million for the six months ended June 30, 2012. The $4.3 million increase in net cash provided by investing activities was driven by the repayment of a note receivable from an affiliate during the six months ended June 30, 2013.

 

Cash flows from financing activities.

 

Cash provided by financing activities for the year ended December 31, 2012 was $263.0 million, a decrease of $30.4 million from the $293.4 million in cash provided by financing activities for the year ended December 31, 2011. The decrease was primarily driven by an $84.2 million increase in net repayments on our revolving credit facility due to increased purchases of finance receivables, a $24.5 million increase in repayments under our term loan due to strong cash conversion, and a $17.4 million increase in distributions to noncontrolling interest investors. These amounts were partially offset by a $95.1 million increase in long-term debt resulting from favorable interest rates and increased purchase volume.

 

Cash provided by financing activities for the six months ended June 30, 2013 was $84.9 million, which represented an increase of $8.6 million from the cash provided by financing activities for the six months ended June 30, 2012 of $76.3 million. The increase was primarily driven by the new credit facility that was executed during the six months ended June 30, 2013 and which generated proceeds of $557.2 million. In connection with the new facility $459.6 million of members’ distribution and an increase of $133.8 million in repayments under our term loan were made during the six months ended June 30, 2013. Additional drivers of the increase in cash provided by financing activities was a $27.0 million increase in proceeds from our revolving credit facility and $27.4 million decrease in net repayments under our revolving credit facility.

 

Funding Sources

 

We utilize a number of different funding sources to finance our different business lines. These sources are targeted to allow us to maximize our cash proceeds from the different assets that we purchase.

 

 

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Structured Settlements and Annuities

 

We finance our guaranteed structured settlement and annuity payment stream purchases through three separate warehouse facilities with $600 million of aggregate capacity: (i) a $300 million syndicated warehouse facility with Barclays and Natixis with a revolving period that ends in July 2016; (ii) a $200 million warehouse facility with Deutsche Bank with a revolving period that ends in October 2016; and (iii) a $100 million warehouse facility with PartnerRe with a two-year evergreen feature, that requires the lender to give us 24 months’ notice prior to terminating the facility’s revolving line of credit. Subsequent to the expiration or termination of their respective revolving line of credit, each of our warehouse facilities has an amortization period of eighteen months before the final maturity, allowing us time to exit or refinance the warehouse facility after the revolving period has ended.

 

Our warehouse facilities are structured with advance rates that range from 92.5% to 95.5% and discount rates that range from 7.50% to 9.2%. The discount rate is either fixed over the term of the facility or is based on a fixed spread over a floating swap rate, which we then fix through interest rate swaps at the time of the borrowing. The discount rate is used to discount the payment streams we have purchased, and these discounted payment streams are then multiplied by the advance rate to determine the amount of funds that are available to us under the warehouse facilities. Our purchases of structured settlement and annuity payment streams are at higher discount rates than the discount rates applied to those payment streams under the warehouse facilities. As a result, the funds available to be drawn under our warehouse facilities exceed the purchase price for the payment streams we purchase. This excess cash is used to support our business and cover a portion of our operating expenses.

 

We undertake non-recourse term securitizations once we have aggregated in our warehouse facilities a sufficient aggregate value of structured settlement and annuity payment streams to undertake a securitization. At the close of each such securitization, the outstanding amount under each of the warehouse facilities is repaid. The net proceeds we receive from securitizations is typically in excess of the amount of funds required to repay the warehouse facilities, resulting in a positive cash flow at the time of securitization. We completed three securitizations in 2012 and three securitizations in 2013 and we intend, subject to market conditions, management discretion and other relevant factors, to continue to undertake approximately three securitizations per year in the future. The counterparties to the structured settlement and annuity payment streams we purchase have mostly investment grade credit ratings. In 2012, approximately 90% of the counterparties to structured settlement payment streams that we purchased were rated “A3” or better by Moody’s. This reduced credit risk, together with the long weighted average life and low pre-payment risk, results in a desirable asset class that can be securitized and sold in the asset-backed security market. Since 1997, our securitization entities have undertaken over $5.1 billion in total issuance volume, representing $8.0 billion of payment streams over 37 securitizations.

 

Life Contingent Structured Settlements and Life Contingent Annuities

 

We finance our purchases of life contingent structured settlement and life contingent annuity payment streams through a committed permanent financing facility with PartnerRe with a capacity of $50 million. This facility allows us to purchase life contingent structured settlement and life contingent annuity payment streams without assuming any mortality risk. This facility is structured as a permanent facility, whereby the life contingent structured settlement and life contingent annuity payment streams we purchase are financed for their entire life and remain within the facility until maturity. The payment streams purchased are funded at a fixed advance rate of 94%, while the discount rate used to value the payment streams is variable, depending on the characteristics of the payment streams. The life contingent structured settlement and life contingent annuity payment streams that we purchase are discounted at a higher rate than the discount rates applied to those payment streams under the committed permanent financing facility, with the result that the funds available to be drawn under the facility exceed the purchase price for the payment streams we purchase. This positive cash flow is used to support our business and cover a portion of our operating expenses.

 

Lotteries

 

Historically, we have funded the purchase of lottery payment streams through non-recourse financing as well as a diversified institutional funding base of more than five institutional investors who purchase lottery payment streams directly from us. These investors are either insurance companies or asset managers. Lottery payment streams are purchased by the investors and the transactions are structured as an asset sale to the investor. We earn the difference between the discount rate at which we purchase the lottery payment stream from the lottery prizewinner and the discount rate at which we sell the lottery payment stream to the investor.

 

 

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Recently, we have also been purchasing lottery payment streams utilizing our own balance sheet and aggregating a pool of such payment streams that we subsequently securitize together with structured settlement and annuity payment streams. Lottery payment streams were included in our last three securitizations during 2013 and we intend to continue to securitize lottery payment streams in the future. We believe that our ability to securitize lottery payment streams has the potential to assist us to achieve an industry-leading cost of capital and to drive our future growth in this asset class.

 

Pre-Settlement Funding

 

We finance our pre-settlement funding through a revolving credit facility with Capital One Bank. The facility has $35 million of capacity and is structured with a revolving period that ends in December 2014 and a subsequent 24 month amortization period. The advance rate applicable to pre-settlement funding financed through the facility is 82%. Due to the shorter duration of pre-settlement funding, we do not require a facility with as large a capacity as for the other asset types above, as the advances revolve more frequently. Positive cash flow is typically generated from the difference between the amount of proceeds we receive on settlement and the amount of the advance to the plaintiff.

 

As a result of the positive cash flow generated by our structured settlement and annuity warehouse facilities and securitization program, our life contingent structured settlement and life contingent annuity permanent financing facility, our sale or securitization of lottery payment streams and our pre-settlement funding, we currently do not require additional external capital resources to operate our business.

 

Term Loan

 

We have a widely syndicated $575 million senior secured term loan, held by our wholly-owned subsidiary Orchard Acquisition Company LLC, that matures in February 2019 and a $20 million revolving commitment that matures in August 2017. The interest rate payable by us on the senior secured term loan is LIBOR plus 750 basis points with a LIBOR floor of 1.50%. We have the option at each interest reset date to elect that the senior secured term loan be either a eurodollar loan or a base rate loan. If a eurodollar loan, interest accrues at either LIBOR or 1.5% (whichever is greater) plus a spread of 7.5%. If a base rate loan, interest accrues at prime or 2.5% (whichever is greater) plus a spread of 6.5%. The revolving commitment has the same interest rate terms as the senior secured term loan. The senior secured term loan is structured with a 1.0% amortization per annum. We may seek to opportunistically refinance our term loan from time to time and are currently engaged in discussions regarding a potential refinancing.

 

Residual Financing

 

We have a $70 million term loan residual financing facility with a leading financial institution. This facility is secured by 22 of our securitization residuals and is structured with a $56 million A1 Note due in September 2018 and a $14 million A2 Note due in September 2019. Both notes have interest rates of 8% with a step-up to 9% starting in September 2014. Starting September 2014 the A1 Note will have a minimum annual note pay down of $5.5 million and the A2 Note will have a minimum annual note pay down of $2 million.

 

Securitization Debt

 

Effective January 1, 2010, upon consolidation of our securitization-related special purpose entities, we elected fair value treatment under ASC 825 to measure the securitization issuer debt and related finance receivables. We have determined that measurement of the securitization debt issued by SPEs at fair value better correlates with the value of the finance receivables held by SPEs, which are held to provide the cash flow for the note obligations. Debt issued by SPEs is non-recourse to other subsidiaries. Certain of our subsidiaries continue to receive fees for servicing the securitized assets which are eliminated in consolidation. In addition, the risk to our non-SPE subsidiaries from SPE losses is limited to cash reserve and residual interest amounts.

 

Other Financing

 

We maintain other permanent financing arrangements that have been used in the past for longer term funding purposes. Each of these arrangements has assets pledged as collateral, the cash flows from which are used to satisfy the loan obligations. These other financing arrangements are more fully described in the J.G. Wentworth, LLC consolidated financial statements in this prospectus.

 

Short-Term Liquidity Needs

 

Our liquidity needs over the next 12 months are provided through the excess cash generated by our structured settlement and annuity payment stream warehouse facilities, life contingent structured settlement and annuity

 

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permanent financing facilities as well as our lottery sale program. Our securitization program for structured settlements, annuities and lottery payment streams also provides for both a replenishment of our warehouse capacity as well as excess cash to operate the business and make interest payments.

 

Long-Term Liquidity Needs

 

Our most significant needs for liquidity beyond the next 12 months is the repayment of the principal amount of our outstanding senior secured term loan as well as the repayment of our residual financing facility. We will use a portion of the net proceeds of the offering to repay a portion of our senior secured term loan, and we expect to meet our remaining long-term liquidity needs through excess cash flow generated through our securitization program.

 

As a consequence of the initial sales and any future exchanges of JGWPT Common Interests for our Class A Shares or Class C Shares, we may increase our share of the tax basis of the assets then owned by JGWPT Holdings, LLC. Any such increase in tax basis is anticipated to allow us the ability to reduce the amount of future tax payments to the extent that we have future taxable income. We are obligated, pursuant to our tax receivable agreement with all Common Interestholders who hold in excess of approximately 1% of the JGWPT Common Interests as of immediately prior to this offering, to pay to such Common Interestholders, 85% of the amount of income tax we save for each tax period as a result of the tax benefits generated from the initial sales and any subsequent exchange of JGWPT Common Interests for our Class A Shares or Class C Shares and from the use of certain tax attributes. We expect to fund these long-term requirements under the Tax Receivable Agreement with tax distributions received from JGWPT Holdings, LLC and, if necessary, loans from JGWPT Holdings, LLC.

 

We plan to assess our financing alternatives periodically and may attempt to access the capital markets.

 

Recently Issued Accounting Statements

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which we refer to as ASU No. 2011-05. This ASU will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option

 

to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The ASU does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for annual periods beginning after December 15, 2011. The FASB subsequently deferred the effective date of certain provisions of this standard pertaining to the reclassification of items out of accumulated other comprehensive income, pending the issuance of further guidance on that matter. ASU No. 2011-05 is effective for nonpublic entities for the fiscal years ending after December 15, 2012, and the interim and annual periods thereafter. Early adoption is permitted, because compliance with the amendments is already permitted. Since these amended principles require only additional disclosures concerning presentation of comprehensive income, when adopted they did not affect our consolidated statements of financial condition, results of operations or cash flows.

 

Intangibles – Goodwill and Other (Topic 350). In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which we refer to as ASU No. 2011-08. ASU No. 2011-08 is intended to simplify goodwill impairment testing by allowing companies the option to perform a qualitative review step to assess whether the required quantitative impairment analysis that exists today is necessary. Under the amended rule, a company making the election will not be required to calculate the fair value of a business that contains recorded goodwill unless it concludes, based on the qualitative assessment, that it is more likely than not that the fair value of that business is less than its book value. If such a decline in fair value is deemed more likely than not to have occurred, then the quantitative goodwill impairment test that exists under current US GAAP must be completed; otherwise, goodwill is deemed to be not impaired and no further testing is required until the next annual test date (or sooner if conditions or events before that date raise concerns of potential impairment in the business). The amended goodwill impairment guidance does not affect the manner in which a company estimates fair value. The new standard is effective for annual goodwill impairment tests performed for fiscal years beginning after De