SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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Commission File Number 0-19799
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PILGRIM AMERICA CAPITAL CORPORATION
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F/K/A/ EXPRESS AMERICA HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 86-0670679
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 417-8100
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
3,864,130 Shares of Common Stock outstanding on May 9, 1997
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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<S> <C> <C>
Item 1. Financial Statements
(a) Condensed Consolidated Financial Statements........................... 3
(b) Notes to Condensed Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................... 10
Item 6. Exhibits and Reports on Form 8-K............................................. 10
Signatures................................................................................. 11
</TABLE>
2
<PAGE>
Item 1. FINANCIAL STATEMENTS
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 160 $ 238
Investments 2,449 2,462
Accounts receivable 240 216
Notes receivable 3,623 3,587
Costs assigned to management contracts acquired, less
accumulated amortization of $2,588 and $1,943 29,675 30,320
Furniture, fixtures and equipment, less accumulated depreciation
of $1,452 and $1,378 983 1,144
Deferred taxes 8,539 1,750
Deferred acquisition costs, less accumulated amortization of
$368 and $131 3,753 1,939
Other assets 1,157 899
--------------- ---------------
Total assets $ 50,579 42,555
=============== ===============
- --------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Liabilities:
Net liabilities of discontinued operations $ 5,491 $ 3,392
Notes payable 3,915 3,600
Accounts payable and accrued expenses 2,476 5,775
--------------- ---------------
Total liabilities 11,882 12,767
--------------- ---------------
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized,
5,377,860 shares issued, with 3,860,130 shares outstanding 54 54
Additional paid-in capital 48,759 48,759
Less: Treasury stock, 1,517,730 shares (8,623) (8,623)
Unrealized gain on investments 266 333
Accumulated deficit (1,759) (10,735)
--------------- ---------------
Total stockholders' equity 38,697 29,788
--------------- ---------------
Total liabilities and stockholders' equity $ 50,579 $ 42,555
=============== ===============
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Management and administrative fees $ 4,244 $ 3,011 $ 8,174 $ 5,992
Distribution fees 552 254 1,018 466
Investment and other income 274 224 538 353
------------ ----------- ----------- -----------
Total revenues 5,070 3,489 9,730 6,811
------------ ----------- ----------- -----------
- -------------------------------------------------------------------------------------------------------------
Expenses
General and administrative 1,868 1,874 3,791 3,931
Selling 1,211 1,776 2,455 3,123
Amortization and depreciation 569 483 1,097 951
------------ ----------- ----------- -----------
Total expenses 3,648 4,133 7,343 8,005
------------ ----------- ----------- -----------
Earnings (loss) before taxes 1,422 (644) 2,387 (1,194)
Tax benefit 6,589 -- 6,589 --
------------ ----------- ----------- -----------
Net earnings (loss) $ 8,011 $ (644) $ 8,976 $ (1,194)
=========== ========== =========== ===========
- -------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common and common
share equivalent $ 1.97 $ (0.13) 2.24 (0.24)
============ ========== =========== ===========
Shares used in per share calculation 4,066,328 4,877,860 4,006,047 4,877,860
============ ========== =========== ===========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended March 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 8,976 $ (1,194)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Amortization and depreciation 1,097 951
Increase in accounts receivable (60) (249)
Decrease in operating liabilities (3,299) (361)
Increase in deferred acquisition costs (2,061) (689)
Increase in deferred tax asset (6,789) --
(Increase) decrease in other operating assets (279) 36
-------------- ---------------
Net cash used in operating activities (2,415) (1,506)
-------------- ---------------
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment in Pilgrim America Funds (54) --
Sales of furniture, fixtures and equipment 8 115
Purchases of furniture, fixtures and equipment (31) (208)
Cash provided by discontinued operations 2,099 779
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Net cash provided by investing activities 2,022 686
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- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Redemption of preferred stock -- (338)
Term debt borrowing 315 --
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Net cash provided by (used in) financing activities 315 (338)
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Net decrease in cash and cash equivalents (78) (1,158)
Cash and cash equivalents, beginning of period 238 1,858
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Cash and cash equivalents, end of period $ 160 $ 700
============== ===============
- -------------------------------------------------------------------------------------------------------------
Supplemental disclosures
Interest paid $ 212 $ 35
Income taxes paid -- 2
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
Name Change. On April 25, 1997, Express America Holdings Corporation
changed its name to Pilgrim America Capital Corporation (NASDAQ: PACC) (the
"Company") in order to better reflect that the Company's operating business is
managing six open-end and two closed-end mutual funds under the Pilgrim America
name.
Principles of Consolidation. The accompanying condensed consolidated
financial statements of the Company were prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation have been
included. Operating results for the three and six months ended March 31, 1997
are not necessarily indicative of the results which may be expected for the
fiscal year ending September 30, 1997. For additional information, refer to the
consolidated financial statements for the fiscal year ended September 30, 1996
which are included in the Company's Form 10-K.
The condensed consolidated financial statements include the Company's
wholly owned subsidiary, Pilgrim America Group, Inc. ("PAG") and PAG's
subsidiaries, Pilgrim America Investments, Inc., a registered investment
advisor, and Pilgrim America Securities, Inc., a registered broker/dealer
(collectively "Pilgrim America"). Pilgrim America commenced operations upon the
acquisition (the "Acquisition") of certain assets of Pilgrim Group, Inc. on
April 7, 1995. The condensed consolidated financial statements also include the
Company's wholly-owned mortgage banking subsidiaries, Express America TC, Inc.,
EAMC Liquidation Corp., the successor (as of December 27, 1996) to Express
America Mortgage Corporation ("EAMC"), and EAMC's wholly-owned subsidiaries,
Wesav Investment Corporation and Wesav Investment Inc.-2.
Prior to April 7, 1995, the Company's principal business consisted of
mortgage banking activities, including the origination, sale, and servicing of
loans collateralized by first mortgages on residential real estate. On February
28, 1995 the Company announced the discontinuance of the remainder of its
mortgage banking operations. Consequently, all of the operating results of the
Company's mortgage banking activities are reported as loss from discontinued
operations.
After the Acquisition, the continuing operating activities of the
Company consist primarily of providing investment management and related
services to various open-end and closed-end investment companies operating under
the Pilgrim and Pilgrim America names (the "Funds"). The results of continuing
operations reported in the condensed consolidated financial statements reflect
these investment management activities.
Reclassifications. Certain reclassifications have been made to prior
period financial statements to conform with current period presentation.
6
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Costs Assigned to Management Contracts Acquired. Costs assigned to
management contracts acquired represents the fair value of the investment
management rights acquired through the Acquisition and also represents the
excess of the purchase price (including liabilities assumed) over the fair value
of net assets acquired and resulting costs from the Acquisition. These amounts
are being amortized on a straight-line basis over 25 years.
The Company analyzes costs assigned to management contracts acquired
periodically to determine whether any impairment in value has occurred. Based
upon anticipated future income from operations, in the opinion of management
there has been no impairment.
Income Tax. Deferred tax assets are initially recognized for temporary
differences between the consolidated financial statement carrying amount and the
tax bases of assets and liabilities which will result in future deductible
amounts and operating loss and tax credit carryforwards. A valuation allowance
is then established to reduce the deferred tax asset to the level at which it is
"more likely than not" that the tax benefits will be realized. The Company
recorded an income tax benefit during the three months ended March 31, 1997 as a
result of a change in the valuation allowance for the Company's deferred tax
asset. The change in the valuation allowance resulted from management's
determination that it is more likely than not that the deferred asset will be
realized.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The Company is a holding company that, through its wholly-owned
subsidiaries, provides investment management and related services for six
open-end and two closed-end funds (each a "Fund" and collectively the "Pilgrim
America Funds" or the "Funds"). The Company commenced its investment management
operations on April 7, 1995, when it consummated the acquisition (the
"Acquisition") of certain of the net assets of Pilgrim Group, Inc.
(now known as Atlas Financial Group, Inc.) for $28.1 million.
Prior to the Acquisition, the Company was engaged in the mortgage
banking business, deriving revenues primarily from mortgage loan servicing and
origination. On February 28, 1995, the Company announced the discontinuance of
all remaining mortgage banking operations and continues to wind-down its
mortgage operations by selling its remaining mortgage banking related assets.
Results of Operations
The following table presents comparative quarterly data regarding Fund
assets under management and Fund sales for the five quarters ended March 31,
1997:
7
<PAGE>
<TABLE>
<CAPTION>
Pilgrim America Funds
Selected Fund Data (Unaudited)
($000,000)
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March 31, June 30 September 30, December 31, March 31,
1996 1996 1996 1996 1997
----------- --------- --------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Direct Sales $ 31.5 $ 40.5 $ 38.3 $ 49.0 $ 74.0
Exchanges Out (1) (1.8) (1.2) (0.5) (1.1) 0.4
Redemptions (11.0) (9.1) (9.8) (15.9) (16.6)
----------- --------- --------------- -------------- -----------
Net Sales $ 18.7 $ 30.2 $ 28.0 $ 32.0 $ 57.8
=========== ========= =============== ============== ===========
Ending Assets Under
Management (2) $ 1,413.1 $1,451.7 $ 1,704.5 $ 2,022.6 $ 2,138.0
=========== ========= =============== ============== ===========
</TABLE>
(1) Net Exchanges from (to) the Company's sponsored money market fund.
(2) Includes net assets plus borrowings by Pilgrim America Prime Rate Trust for
investment purposes of $323 million , $286 million and $179 million at March
31, 1997, December 31, 1996 and September 30, 1996, respectively.
Quarter Ended March 31, 1997 Compared to the Quarter Ended March 31, 1996
Net earnings for the March 31, 1997 quarter amounted to $8.0 million,
or $1.97 per share compared to a net loss of $644,000, or $0.13 per share for
the quarter ended March 31, 1996. Net earnings for the March 31, 1997 quarter
consist of pre-tax income from the Company's continuing investment management
business of $1.4 million, or $0.35 per share, and a tax benefit of $6.6 million,
or $1.62 per share, related to prior operating losses.
Revenues. Revenues for the March 31, 1997 quarter increased by $1.6
million over revenues for the March 31, 1996 quarter. This increase primarily
resulted from an increase in management and administrative fees of $1.2 million.
Management and administrative fees are based on assets under management which
averaged $2.07 billion during the current quarter and $1.39 billion during the
March 31, 1996 quarter.
In addition, higher sales of open-end funds during the current quarter
as compared to the March 31, 1996 quarter resulted in increased distribution
fees of $298,000. Distribution fees are realized from the sale of certain fund
shares.
Expenses. Total expenses for the current quarter decreased by $485,000
compared to the March 31, 1996 quarter. This decrease in expenses primarily
resulted from lower personnel costs due to a reduction in staff and lower
selling expenses.
Amortization and depreciation expenses increased by $86,000 between the
two quarters primarily as a result of an increase in the amortization of
deferred acquisition costs. Deferred acquisition costs are commissions paid on
the sale of certain fund shares. These commissions are capitalized and amortized
over a six year period.
8
<PAGE>
Six Months Ended March 31, 1997 Compared to the Six Months Ended March 31,1996.
Net earnings for the six months ended March 31, 1997 were $9.0 million,
or $2.24 per share, compared to a net loss of $1.2 million, or $0.24 per share
for the six months ended March 31, 1996. Net earnings for the current reporting
period consisted of pre-tax income from the Company's continuing investment
management business of $2.4 million, or $0.60 per share, and a tax benefit of
$6.6 million, or $1.64 per share, related to prior operating losses.
Revenues. Revenues for the six months ended March 31, 1997 increased by
$2.9 million over revenues for the six months ended March 31, 1996. This
increase primarily resulted from an increase in management and administrative
fees of $2.2 million. Management and administrative fees are based on assets
under management which averaged $2.0 billion during the first half of fiscal
1997 and $1.4 billion during the first half of 1996.
In addition, higher sales of open-end funds during the current
reporting period as compared to the March 31, 1996 reporting period resulted in
increased distribution fees of $552,000. Distribution fees are realized from the
sale of certain fund shares.
Expenses. Total expenses for the six months ended March 31, 1997
decreased by $662,000 compared to the six months ended March 31, 1996. This
decrease primarily resulted from lower personnel costs due to a reduction in
staff and lower selling expenses.
Amortization and depreciation expenses increased by $146,000 between
the two reporting periods primarily as a result of an increase in the
amortization of deferred acquisition costs. Deferred acquisition costs are
commissions paid on the sale of certain fund shares. These commissions are
capitalized and amortized over a six year period.
Liquidity
The Company intends to continue funding its investment management
operations with cash provided by operations and with borrowings obtained under
its credit agreement discussed in the Company's Annual Report on Form 10-K for
the year ended September 30, 1996. The Company believes that it will have
adequate cash necessary to meet expected cash needs both from cash generated
from operations and borrowings available under its credit agreement. The
Company's ability to borrow under its credit agreement expires July 1997. The
Company expects to either extend its credit facility, replace it or simply rely
on cash generated from operations.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company acquired its now discontinued mortgage banking operation
from the Resolution Trust Corporation ("RTC") on May 16, 1991 following a
competitive bidding process. The Company previously disclosed that the RTC filed
a complaint in the United States District Court, District of Arizona on December
8, 1995, against the Company and other defendants. The RTC asked for at least
$20 million in actual damages and at least $60 million in punitive damages from
all defendants. The RTC ceased operating on December 31,1995 and the Federal
Deposit Insurance Corporation (the "FDIC") assumed responsibility for the case.
The Company notified its Officer and Director liability carrier of the
FDIC action in January 1996 seeking coverage as permitted by the policy in
connection with the losses which it may incur in connection with the FDIC
action. On March 19, 1997, the Company received a payment from the Officer and
Director liability carrier in settlement of the Company's claim.
The Company and the FDIC have reached preliminary agreement to settle
all claims in this action and a written settlement agreement is being prepared
by the FDIC. Upon execution of the written agreement, the action will be
dismissed with prejudice. No charge to earnings will result from this
settlement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on February 26,
1997, for the purpose of electing two directors to the Company's Board of
Directors. At the meeting, a quorum being present, votes cast in the election of
directors were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Against Votes Withheld Broker Nonvotes
- ------- --------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Roy A. Herberger, Jr. 3,485,163 0 23,240 0
Stephen A McConnell 3,485,163 0 23,240 0
</TABLE>
No matters other than the election of two directors were before the
meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Performance Share Plan. Incorporated by reference to Exhibit
4.1 in the Registrant's Registration Statement on Form S-8
(SEC File No. 333-23051)
27.0 Financial Data Schedules
(b) Reports on Form 8-K.
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PILGRIM AMERICA CAPITAL CORPORATION
Date: May 9, 1997 By: /s/ James R. Reis
------------------------------------
James R. Reis
Vice-Chairman and Chief Financial Officer
(Principal Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 160
<SECURITIES> 2449
<RECEIVABLES> 240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46747
<PP&E> 983
<DEPRECIATION> 0
<TOTAL-ASSETS> 50579
<CURRENT-LIABILITIES> 11882
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 38643
<TOTAL-LIABILITY-AND-EQUITY> 50579
<SALES> 0
<TOTAL-REVENUES> 5070
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129
<INCOME-PRETAX> 1422
<INCOME-TAX> (6589)
<INCOME-CONTINUING> 8011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8011
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 0
</TABLE>
