SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number 0-19799
September 30, 1997
PILGRIM AMERICA CAPITAL
CORPORATION
(f/k/a Express America Holdings Corporation)
Delaware 86-0670679
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Renaissance Square
40 North Central, 12th Floor
Phoenix, Arizona 85004
(602) 417-8100
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, $.01 par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
At December 11, 1997, the Registrant had 3,866,330 shares of common
stock outstanding. On such date, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $47,173,863.
DOCUMENTS INCORPORATED BY REFERENCE
Materials have been incorporated by reference into this Report from the
following documents: Materials from the Registrant's Proxy Statement relating to
the 1998 Annual Meeting of Stockholders have been incorporated by reference into
Part III, Items 10, 11, 12 and 13.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
<S> <C>
Item 1. Business........................................................................... 3
Item 2. Properties......................................................................... 12
Item 3. Legal Proceedings.................................................................. 12
Item 4 Submission of Matters to a Vote of
Security Holders............................................................... 13
Executive Officers of the Registrant............................................... 13
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters.......................................... 14
Item 6. Selected Consolidated Financial Data............................................... 14
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations...................... 18
Item 8. Financial Statements and Supplementary Data........................................ 23
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure........................ 43
PART III.
Item 10. Directors and Executive Officers of the Registrant................................. 43
Item 11. Executive Compensation............................................................. 43
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 43
Item 13. Certain Relationships and Related Transactions..................................... 43
PART IV.
Item I4. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 44
SIGNATURES......................................................................................... 49
</TABLE>
2
<PAGE>
PART I
Item 1. Business
General
Pilgrim America Capital Corporation (formerly known as Express America
Holdings Corporation) (the "Company" or "Pilgrim America") is a holding company
that, through its wholly-owned subsidiaries, provides investment management and
related services for seven open-end funds (the "Open-end Funds") and one
closed-end fund (the "Closed-end Fund") (each a "Fund" and collectively the
"Pilgrim America Funds" or the "Funds"). Pilgrim America's common stock is
traded on the Nasdaq Stock Market National Market System (the "Nasdaq NMS")
under the symbol PACC. The Company commenced its investment management
operations on April 7, 1995, when it consummated the acquisition (the
"Acquisition") of certain of the assets of Pilgrim Group, Inc. (now known as
Atlas Financial Group, Inc.) and its subsidiaries ("Atlas").
Pilgrim America was incorporated as First Western Corporation and changed
its name to Express America Holdings Corporation on September 20, 1993 and to
Pilgrim America Capital Corporation on April 28, 1997. The terms "Company" and
"Pilgrim America" refer to the Company and its consolidated subsidiaries. Prior
to the Acquisition, the Company, primarily through the activities of Express
America Liquidation Corporation formerly known as Express America Mortgage
Corporation ("EAMC"), had been engaged in the mortgage banking business,
deriving revenues primarily from mortgage loan servicing and mortgage loan
originations. On September 30, 1994, the Company sold substantially all of its
servicing assets to NationsBanc Mortgage Corporation. On February 28, 1995, the
Company announced the discontinuance of all remaining mortgage banking
operations. The remaining mortgage banking related assets are being sold. (See
Item 7. "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" for further discussion of discontinued operations.)
The Company paid Atlas and its shareholders $28.1 million and assumed
certain liabilities. The Company recorded costs assigned to management contracts
acquired in connection with the Acquisition of $32.3 million, which included the
purchase price as well as provisions for certain transaction costs related to
the Acquisition and the cost of moving the acquired operations to Phoenix,
Arizona, which occurred in the fourth quarter of 1995.
As a result of the Acquisition, the Company became the manager of five
funds: Pilgrim America MagnaCap Fund, Pilgrim America High Yield Fund, Pilgrim
Government Securities Income Fund, Pilgrim America Prime Rate Trust and Pilgrim
America Bank and Thrift Fund, Inc. These Funds had combined net assets of $1.3
billion on the date of the Acquisition. The Company also became a distributor
and servicing agent for a money market fund.
In connection with the Acquisition, the Company formed three new
wholly-owned subsidiaries: Pilgrim America Investments, Inc. ("PAI"), a
registered investment adviser which serves as the investment manager for Pilgrim
America Funds; Pilgrim America Securities, Inc. ("PAS"), a broker-dealer
registered with the National Association of Securities Dealers, Inc. (the
"NASD"), which serves as the distributor of the Funds; and Pilgrim America
Group, Inc. ("PAG"), the parent of PAI and PAS.
On September 1, 1995, the Company introduced three new Funds: Pilgrim
America Masters Asia-Pacific Equity Fund, Pilgrim America Masters MidCap Value
Fund and Pilgrim America Masters LargeCap Value Fund. Each of these funds has
its own investment objectives and policies and originally, each fund was
subadvised by a money manager ("Sub-Advisor") selected by the Company and
approved by the applicable Fund Board based on the Sub-Advisor's extensive
knowledge and proven experience in its specialized market segment. On October
31, 1997, the Sub-Advisor to the Pilgrim America Masters LargeCap Value Fund
resigned and PAI became fully responsible for advising this Fund. Pursuant to
portfolio management agreements between the Company and each Sub-Advisor, the
Company pays subadvisory fees to the Sub-Advisors based on the average net
assets of the fund managed by each particular Sub-Advisor.
3
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On November 13, 1997, the Company was engaged by a non-U.S. issuer to
manage approximately $509 million in assets ("Private Account"). These assets
have been invested in both senior floating rate loans and high yield bonds and
are managed by the Company's current staff. The Company will receive annual
revenues for managing these assets equal to .50% of the average assets managed.
The Company is entitled to receive additional compensation if certain
performance standards are met. In addition to managing these assets, the Company
acquired a $5 million (approximately 10%) equity investment in the issuer.
Investment Management Services
The Company provides investment advisory, distribution and administrative
services for the Pilgrim America Funds under investment management and
administration agreements and distribution plans with the Funds. Pursuant to the
investment management agreements with each of the Funds, PAI provides investment
advisory services to each Fund, subject to authority of each Fund's board of
directors or trustees (the "Boards") and to each Funds' fundamental investment
objectives, policies and restrictions. The investment management agreements must
be approved annually by the Boards of the respective Funds, including a majority
of the independent trustees or directors (i.e., those who are not "interested
persons" with respect to PAI, as defined in section 2(a)(19) of the Investment
Company Act of 1940, as amended (the "Investment Company Act")). The agreements
generally are terminable by the Company or the Fund upon 60 days notice without
penalty.
All Fund's are managed by portfolio managers employed by the Company,
except the Pilgrim America Masters MidCap Value and Asia-Pacific Equity Funds
which are managed by Sub-Advisors. The Company's portfolio management staff
includes seven portfolio managers, two assistant portfolio managers, four
analysts and a chief investment officer.
Generally, the Company employs the personnel who serve as officers of the
Funds and who manage the day-to-day business operations, including maintaining
the Funds' portfolio records, answering shareholder inquiries, providing
information, creating and publishing information, monitoring compliance with
securities laws and regulations, and other administrative activities. The Funds
generally pay their own expenses such as legal and auditing fees, board and
shareholder meeting costs, Securities and Exchange Commission (the "Commission")
and state registration fees and similar expenses.
Revenues
Substantially all of the Company's revenues are derived from investment
management, administrative and distribution fees which are based on a percentage
of net assets under management plus, in the case of Pilgrim America Prime Rate
Trust, the proceeds of any borrowings (hereinafter, collectively referred to as
("Assets") (see "The Closed-end Funds" below). These revenues are earned
pursuant to agreements with the Funds. Typically, management fees earned by the
Company vary depending upon the investment style of the Fund or Account (see
"Pilgrim America Funds" below). Since the Company's revenues are largely
dependent on the total value and composition of Assets under management,
fluctuations in financial markets and in the composition of Assets could
significantly effect the Company's revenues and the results of its operations.
Pilgrim America Funds
The Open-end Funds
The Open-end Funds are marketed and distributed through PAS in accordance
with distribution plans adopted by each Fund pursuant to Rule 12b-1 of the
Investment Company Act and the rules of the NASD. Pursuant to the distribution
4
<PAGE>
plans, as underwriter to each Fund, PAS receives distribution ("12b-1") fees as
compensation or for reimbursement of expenses incurred in connection with the
offering, sale and shareholder servicing of each Fund's shares. The 12b-1 fees
are limited based upon net assets of the particular Fund and share class sold.
The distribution plans must be approved annually by the Board of the respective
Funds, including a majority of the independent directors or trustees. These
distribution plans are terminable at any time without notice or penalty. The
termination of the distribution plans would result in the loss of 12b-1 fees to
the Company.
PAS distributes the Open-end Funds on a wholesale basis through
independent financial professionals, national and regional brokerage firms, and
other financial institutions ("Authorized Dealers"). Although the Authorized
Dealers have entered into selling agreements with the Company, such agreements
(which generally are terminable by either party without penalty) do not legally
obligate the Authorized Dealers to sell any specific amount of the Company's
investment products (see "Competition and Marketing Strategy" below). PAS
maintains a sales force of wholesale sales representatives and sales assistants.
Wholesalers and their assistants work closely with the Authorized Dealers to
assist in selling shares of the Open-end Funds.
Distribution of Open-end Fund Shares
All of the Open-end Funds offer Class A, Class B and Class M shares
except Pilgrim America Bank and Thrift Fund which offers only Class A and Class
B shares. Each share of these classes represents an identical interest in the
Funds but has varying types and amounts of sales and distribution charges.
Class A shares are offered with a maximum initial sales charge of 5.75%
for equity Funds, and 4.75% for fixed income Funds. Sales charges are based on
the value of the shares sold. The majority of the sales charge is paid, or
"reallowed", to the Authorized Dealers. PAS receives the balance as an
underwriting commission of up to .75% of the value of the shares sold. PAS also
receives 12b-1 fees from the Funds at an annual rate of .25% to .30% of Class A
share average daily net assets.
Class B shares are offered with no initial sales charge. PAS pays a
commission of up to 4.00% to the Authorized Dealer at the time of sale. Such
payments are capitalized as deferred acquisition costs and are amortized over a
six-year period. The shareholder then pays a contingent sales charge to PAS in
the event shares are redeemed within a six-year period from the date of
purchase. The Company uses its own funds (which may be borrowed) to pay
commissions to Authorized Dealers. The Company "recovers" the broker commission
through a higher 12b-1 fee received from the Funds, which is paid at an annual
rate of 1.00% of Class B share average daily net assets.
Class M shares are offered with a lower initial sales charge than Class A
shares. The maximum initial sales charge is 3.50% for equity Funds, and 3.25%
for fixed income Funds. As with Class A shares, the majority of this commission
is reallowed to the Authorized Dealer. PAS receives the balance as an
underwriting commission of up to .50% of the value of the shares sold. PAS also
receives 12b-1 fees from the Funds at an annual rate of .75% of Class M share
average daily net assets.
Under the Funds' distribution plans, ongoing payments are made by PAS on
a quarterly basis to Authorized Dealers for distribution and shareholder
servicing, based on each Fund's average annual Assets at .25% for Class A
shares, .25% for Class B shares, and .40% to .65% for Class M shares. Payments
begin in the 13th month following purchase of Class A or B shares and in the 1st
month following purchase of Class M shares.
Each of the Open-end Funds has distinct investment objectives and
policies which have been developed as part of the Company's strategy to provide
core investments to investors.
5
<PAGE>
Pilgrim America Bank and Thrift Fund seeks long-term capital appreciation
with income as a secondary objective by investing primarily in equity securities
of regional banks and the bank holding companies of such banks. Management fees
for the Fund range from .70% to 1.00% of average annual net assets. Organized in
1986, Assets of the Fund at September 30, 1997 were $347.9 million. This Fund
converted from a closed-end format to an open-end format on October 20, 1997.
Pilgrim America MagnaCap Fund seeks growth of capital, with income as a
secondary consideration, through investing in equity securities determined to be
of high quality based upon its "rising dividends" criteria. Management fees for
the Fund range from .50% to 1.00% of average annual Assets. Organized in 1969,
Assets of the Fund at September 30, 1997 were $380.1 million.
Pilgrim America High Yield Fund seeks a high level of current income,
with capital appreciation as a secondary objective, through investing in a
diversified portfolio of high-yielding debt securities. Management fees for the
Fund are based on asset levels and range from .40% to .75% of average annual
Assets. Organized in 1939, Assets of the Fund at September 30, 1997 were $114.1
million.
Pilgrim Government Securities Income Fund seeks a high level of current
income, consistent with liquidity and preservation of capital, through investing
in a portfolio of securities issued or guaranteed by the U.S. Government, or
certain of its agencies and instrumentalities. Management fees for the Fund
range from .40% to .50% of average annual Assets. Organized in 1984, Assets of
the Fund at September 30, 1997 were $29.0 million.
Pilgrim America Masters Asia-Pacific Equity Fund seeks long-term
appreciation through investing in the equity securities of companies based in
the Asia-Pacific region. Management fees for the Fund are 1.25% of average
annual Assets. Organized in July 1995, Assets of the Fund at September 30, 1997
were $59.8 million.
The Sub-Advisor of the Fund is HSBC Asset Management Americas, Inc. and
HSBC Asset Management Hong Kong Limited (collectively "HSBC"), subsidiaries of
HSBC Holdings plc, which was founded as the Hong Kong and Shanghai Banking
Corporation in 1865. HSBC manages over $44 billion of assets worldwide and its
clients primarily include pension funds, institutional investors, and high net
worth individuals. HSBC's minimum investment requirement for privately managed
accounts is $10 million.
Pilgrim America Masters MidCap Value Fund seeks to provide long-term
capital appreciation through investing in equity securities of companies
believed to be undervalued and generally having market capitalization of between
$200 million and $5 billion. Management fees for the Fund are 1.00% of average
annual Assets. Organized in July 1995, Assets of the Fund at September 30, 1997
were $63.5 million.
The Sub-Advisor of the Fund is CRM Advisors, LLC ("CRM"), an affiliate of
Cramer Rosenthal McGlynn, Inc. which was established in 1973. Cramer Rosenthal
McGlynn, Inc. manages $3.6 billion of assets and its clients primarily include
pension plans, high net worth individuals, foundations, endowment funds, and
others. CRM's minimum investment requirement for privately managed accounts is
$5 million.
Pilgrim America Masters LargeCap Value Fund seeks to provide long-term
capital appreciation through investing in equity securities of companies
believed to be undervalued and generally having market capitalizations of at
least $5 billion. Management fees for the Fund are 1.00% of average annual
Assets. Organized in July 1995, Assets of the Fund at September 30, 1997 were
$29.5 million. As of October 31, 1997, the Fund Sub-advisor resigned and was
replaced by the Company; which became the sole manager of the Fund. The
Sub-Advisor of the Fund previously was Ark Asset Management Co., Inc. ("Ark"),
formerly the institutional investment management division of Lehman Brothers,
which was established in 1929.
6
<PAGE>
The Closed-end Fund
Shares of Pilgrim America Prime Rate Trust are traded on the New York
Stock Exchange. Consequently, PAS does not earn a commission on sales of shares
of this Fund.
Pilgrim America Prime Rate Trust seeks a high level of current income as
is consistent with preservation of capital by acquiring, as banks and other
financial institutions do, interests in senior collateralized corporate loans.
During May 1996, the Fund's shareholders approved permitting the Fund to
borrow for investment purposes to the extent permitted under the Investment
Company Act. The Fund entered into a credit agreement in May 1996 and entered
into an amendment in November 1996 which provides that the Fund can borrow up to
$515 million, or approximately 33 1/3% of the Funds total assets including
assets acquired with borrowed funds.
Management fees and administrative fees for the Fund range from .60% to
.85%, and .10% to .15%, respectfully, of Assets under management. Organized in
1988, Assets of the Fund at September 30, 1997 were $1.03 billion, and
borrowings were $319.0 million.
On November 19, 1996, Pilgrim America Prime Rate Trust raised net
proceeds of $157 million by issuing 18,122,963 shares of beneficial interest in
the Fund pursuant to a one for five non-transferable rights offering (the
"Offering"). After the Offering, the Fund increased its borrowings
proportionately with the increase in its net assets. Additionally, the Company
has agreed to reduce its management fees on Assets in the Fund over $1.15
billion by .05% to .60% for a period of three years following the Offering.
7
<PAGE>
The following table summarizes each Fund as of September 30, 1997:
<TABLE>
<CAPTION>
Assets Under Assets Under Assets Under Management Administrative Distribution
Management Management Management Fee (basis Fee (basis Fee (basis
(in millions) (in millions) (in millions) points) (1) points) (1) points) (2)
September September September
30, 1997 30, 1996 30, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Open-end Funds
- -------------------------------
Pilgrim America MagnaCap
Fund $ 380.1 $ 269.2 $ 215.2 50 - 100 -- 30 - 100
Pilgrim America High Yield
Fund 114.1 30.8 15.6 40 - 75 -- 25 - 100
Pilgrim Government
Securities Income Fund 29.0 36.0 42.8 40 - 50 -- 25 - 100
Pilgrim America Masters
Asia-Pacific Equity Fund 59.8 53.1 1.6 125 -- 25 - 100
Pilgrim America Masters
MidCap Value Fund 63.5 11.4 0.9 100 -- 25 - 100
Pilgrim America Masters
LargeCap Value Fund 29.5 12.2 1.2 100 -- 25 - 100
---------------------------------------------
Total Open-end Fund Assets 676.0 412.7 277.3
---------------------------------------------
Closed-end Funds
- -------------------------------
Pilgrim America Prime Rate
Trust (3) 1,354.1 1,048.2 868.0 60 - 85(4) 10 - 15 --
Pilgrim America Bank and
Thrift Fund (5) 347.9 243.6 202.3 70 - 100 -- --
---------------------------------------------
Total Closed-end Fund
Assets 1,702.0 1,291.8 1,070.3
---------------------------------------------
Private Account (6) 230.5 -- --
---------------------------------------------
Total Assets Under
Management (including
borrowings) (3) $2,608.5 $1,704.5 $1,347.6
=============================================
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
8
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(1) Fee varies based upon levels of average Assets. Table includes the
current range of fees to which each of the Fund's assets are subject.
(2) In 1995, each Open-end Fund began offering three classes of shares
(see "Distribution of Fund Shares" above). The distribution fees for Class A
Shares, Class B Shares, and Class M Shares are .25% (.30% for Pilgrim America
MagnaCap Fund), 1.0% and .75%, respectively.
(3) During the fourth quarter of Fiscal 1996, Pilgrim America Prime Rate
Trust began borrowing for investment purposes pursuant to its amended
fundamental investment policies approved by its shareholders on May 2, 1996.
Borrowings at September 30, 1997 and September 30, 1996 were $319.0 million and
$179.0 million, respectively.
(4) In effect at September 30, 1997. In connection with the Offering
completed on November 19, 1996 (see "The Closed-end Fund" above), the Company
has agreed to reduce its management fee on Assets of Pilgrim America Prime Rate
Trust over $1.15 billion from .65% to .60% for a period of three years following
the Offer.
(5) On October 20, 1997, Pilgrim America Bank and Thrift Fund
shareholders voted that the Fund become an Open-end Fund. PAS will receive a
distribution fee of .25% on Class A shares and 1.0% on Class B shares (see "The
Open-End Funds" above).
(6) On November 13, 1997, the Company entered into a transaction with a
non-U.S. issuer to manage approximately $509 million of assets ("Private
Account"). During approximately four months prior to the closing of this
transaction, the Company was appointed by the issuer to acquire assets using
funds of an affiliate of the issuer in anticipation of closing the transaction
in November. As of September 30, 1997, approximately $230 million in assets had
been acquired and the Company was paid a management fee upon the successful
closing of this transaction of .385% on the assets managed. Following the
closing, the fee increased to .50%, and the Company may be entitled to an
additional performance fee.
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The following table presents comparative yearly data regarding Fund activity:
<TABLE>
<CAPTION>
Pilgrim America Funds
Selected Fund Data
($000,000)
--------------------------------------------------------------------------
September 30, September 30, September 30,
1997 1996 1995 (3)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Open-End Funds:
Beginning assets $ 412.7 $ 277.3 $ 265.4
Direct sales 249.7 121.6 9.0
Direct redemptions (85.3) (39.1) (21.4)
Exchanges in (out)(1) 4.1 (5.0) 1.9
Investment activities (2) 94.8 57.9 22.4
----------------- ----------------- -----------------
Ending assets 676.0 412.7 277.3
Closed-End Funds:
Beginning assets 1,291.8 1,070.3 1,031.7
Rights offering proceeds 157.8 - -
Investment activities (2) 252.4 221.5 38.6
----------------- ----------------- -----------------
Ending assets 1,702.0 1,291.8 1,070.3
Private Accounts:
Beginning assets - - -
Sales 230.5 - -
----------------- ----------------- -----------------
Ending assets 230.5 - -
Total assets under
management $ 2,608.5 $ 1,704.5 $ 1,347.6
================= ================= =================
</TABLE>
(1) Net Exchanges from (to) the Company's sponsored money market fund.
(2) Investment Activities include net invesment income, realized gain/(loss),
change in appreciation/(depreciation) and net cash distributions to
shareholders. Investment Activities for closed-end funds include assets
acquired using borrowed funds.
(3) Includes Activity from the Acquisition to the year ended September 30,
1995.
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Regulation
Virtually all aspects of the Company's business are subject to various
federal and state laws and regulations. PAI is registered as an investment
adviser with the Commission under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and is registered under applicable state
securities laws. The Advisers Act imposes numerous obligations on registered
investment advisers including fiduciary, record keeping, operational and
disclosure obligations.
PAS is registered as a broker-dealer under the Securities Exchange Act of
1934, and under all applicable state securities laws. PAS is a member of the
NASD and the Securities Investor Protection Corporation. PAS is also subject to
the Commission's net capital rules designed to enforce minimum standards
regarding the general financial condition and liquidity of a broker-dealer.
Under certain circumstances, this rule limits the ability of the Company to make
withdrawals of capital and receive dividends from PAS. PAS's regulatory net
capital currently exceeds such minimum net capital requirements.
Each of the Pilgrim America Funds is registered under the Investment
Company Act. The shares of each Fund are registered with the Commission under
the Securities Act of 1933, as amended, and the shares of each Fund are
qualified (or are exempt) for sale under applicable state securities laws in all
states and in the District of Columbia in which shares are sold. The Funds have
also elected to be taxed as regulated investment companies ("RICs") under
Subchapter M of the Internal Revenue Code of 1986, as amended, in order to pass
investment income and capital gains to their shareholders without the Funds
incurring federal income taxes on such amounts distributed. In order to qualify
as a RIC, there are numerous requirements imposed on the Funds, including
diversification, distribution, and income character qualifications.
The foregoing federal and state laws and regulations generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company from carrying on its business in the event it
fails to comply with such laws and regulations. In such event, the possible
sanctions which may be imposed include limitations on the Company's business
activities for specified periods of times, revocation or suspension of
investment adviser or broker-dealer registrations, the suspension or expulsion
from the securities business of the Company, its subsidiaries, officers or
employees, and other censures, sanctions or fines.
Competition and Marketing Strategy
The investment management business and the mutual fund industry in
particular is highly competitive. In the United States, there are over 6,700
mutual funds, many with several classes of shares, of varying sizes and
investment objectives and policies whose shares are being offered to the public
by investment management firms, broker-dealers, and insurance companies, many of
whom also offer investment alternatives other than mutual funds. Many of these
financial services firms have substantially greater resources and assets under
management, and provide a broader array of investment products and services,
than does the Company.
Competition for sales of mutual fund shares is influenced by many
factors, including general securities market conditions, government regulations,
general economic conditions, portfolio performance, advertising and sales
promotional efforts, distribution channels, and the type and quality of dealer
and shareholder services. Many Authorized Dealers are large broker-dealer firms.
The retail distribution systems of these firms constitute the Company's primary
access to retail purchasers of shares of the Open-end Funds. Many of these firms
sponsor competing proprietary mutual funds. The Company believes that the
Authorized Dealers value the ability to offer their customers a broad selection
of investment alternatives and will continue to sell the Open-end Funds.
However, to the extent that these firms limit or restrict the sale of shares of
the Open-end Funds through their retail brokerage systems in favor of
proprietary mutual funds, assets under management by the Company may decline and
the Company's revenues may be adversely affected.
11
<PAGE>
The Company believes that competition within the mutual fund industry
will increase as a result of consolidation and acquisition activity. Many
industry analysts believe that economies of scale must be achieved in order to
compete economically. In order to increase assets under management, and compete
with mutual fund management companies with greater resources and assets under
management, the Company aggressively markets its Funds to the broker-dealer
community as high quality, core investments managed by seasoned investment
managers.
The Company's continued success in marketing the Pilgrim America Funds
will be highly dependent on penetration of the retail distribution systems of
Authorized Dealers, which generally offer numerous competing internally and
externally managed investment products, as well as investment performance of the
Company's Funds relative to the performance of other funds competing in the same
asset classes. The inability to compete effectively with other investment
products could have a material adverse effect on the Company's business.
Additionally, the Company may increase assets under management through
acquisition of investment management firms and investment advisory agreements.
From time to time the Company reviews acquisition prospects and may engage in
discussions or negotiations that could lead to an acquisition.
Many companies have a "Year 2000 Problem". This problem arises because
many computer programs only recognize two-digit years-00 to 99. Unless this is
modified, these programs will not be able to function in the year 2000.
The Company does not believe the Year 2000 Problem will have a
significant impact on its operations or financial results. The Company has been
advised by its primary third party service providers, including those who
provide custody, transfer agency, accounting and administrative services for the
Funds, that they are addressing this problem and do not expect that it will
materially adversely affect their operations.
Employees
At September 30, 1997, the Company had 67 full time employees, including
24 sales and marketing employees, 17 portfolio management employees, and 26
general and administrative employees. Fifty-nine employees were employed at the
Company's headquarters in Phoenix, Arizona. The Company's employees are not
represented by any collective bargaining agreement, and management believes that
it maintains good relationships with its employees.
Item 2. Properties
The principal executive and administrative offices of the Company occupy
approximately 19,000 square feet of commercial office space in Phoenix, Arizona
under a lease expiring June 15, 2002.
The Company also leases approximately 24,000 square feet of office space
in Los Angeles, California under a lease assumed as part of the Acquisition (see
"Item 1. Business-General"). This space was sublet in connection with the
relocation of the Company's operations to Phoenix, Arizona during 1995. The
lease and related sublease expire on May 31, 2000.
The Company does not own any real estate except for its interest in real
estate held in connection with its discontinued mortgage banking operations.
Item 3. Legal Proceedings
On May 23, 1997, the Company entered into an agreement with the Federal
Deposit Insurance Corporation ("FDIC") to settle all claims in a civil action
filed in December 1995 by the FDIC in the United States District Court, District
of Arizona. The FDIC action against the Company and other defendants related to
the 1991 acquisition of the Company mortgage banking subsidiary, and sought at
least $20 million in actual damages and $80 million in punitive damages. This
settlement covers all FDIC claims asserted against the Company and certain of
its officers and directors.
12
<PAGE>
The Company settled with its Director and Officer liability insurance carrier
under the policy providing coverage for this matter. No charge to earnings
resulted from this settlement.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this Report.
Executive Officers of the Registrant
Set forth below is information respecting the names, ages and positions
and offices with the Company of the executive officers of the Company at
September 30, 1997 who are not continuing directors or nominees. Information
respecting the executive officers of the Company who are continuing directors
and nominees is set forth in Item 10 of this Report.
James R. Reis, 40, has served as an executive officer of the Company in
the position of Vice Chairman and Chief Financial Officer since December 1993,
Secretary from November 1994 to April 1995, and as President and Chief Financial
Officer from its formation to December 1993. Mr. Reis serves as Vice Chairman
and Director of PAS, PAI and PAG, and as Executive Vice President of each of the
Funds since April 1995. Mr. Reis has served as EAMC's Vice Chairman since April
1993, its Secretary from May 1991 to April 1995, as Executive Vice President
from May 16, 1991 until December 1993, and as Chief Financial Officer of EAMC
from May 16, 1991 until September 1992. Mr. Reis is a certified public
accountant.
James M. Hennessy, 48, has served as Senior Vice President and Secretary
of the Company, PAS and of each of the Funds, and Senior Vice President of PAI
and PAG, since April 1995 and as Secretary of PAI and PAG since July 1995. Mr.
Hennessy has served as General Counsel of the Company since September 1995 and
also as Senior Vice President of EAMC (June 1992 to August 1994 and since April
1995) and Secretary since April 1995. Mr. Hennessy also served from January 1990
to June 1992 as President of Beverly Hills Securities Corp., a mortgage bank
acquired by the Company in June 1992.
Stanley Vyner, 47, has served as President and Chief Executive Officer of
Pilgrim America Investments, Inc. since August 16, 1996. He served as Chief
Executive Officer of HSBC Asset Management Americas, Inc. until December of
1995, and prior to that was the Chief Executive Officer of HSBC Life Assurance
Co., the largest provider of retirement services in Hong Kong where Mr. Vyner
worked for nearly 11 years. An actuary by profession, Mr. Vyner earned his
Honors Degree in Economics from Edinburgh University, UK. He is a Fellow of the
Faculty of Actuaries.
Robert Boulware, 41, has served as President and Chief Executive
Officer of Pilgrim America Securities since November 1996. Previously Mr.
Boulware served as Executive Vice President and Chief Operating Officer of PAS.
He has also served the Company in various sales and marketing positions since
April 1995. From 1992 to 1995, Mr. Boulware served in various management
positions with EAMC. Prior to joining the Company, he served as Vice President
at Bank of America from 1990-1992 and as President and CEO in his last position
with Wesav Financial Corporation from 1987 to 1990.
Howard Tiffen, 49, has served as Senior Vice President of Pilgrim
America Group, Inc and President and Chief Operating Officer of Pilgrim America
Prime Rate Trust since July, 1997. He has been the Senior Portfolio Manager of
the Trust since December, 1995. Previously, Mr. Tiffen also served as a Lending
Officer fo Bank of America from April, 1982 to November, 1995.
13
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Following the Company's initial public offering on March 17, 1992, the
Company's Common Stock has been traded on the Nasdaq NMS, under the symbol FWCO
until September 20, 1993, and under the symbol EXAM until April 28, 1997 and
PACC since such date.
The following table sets forth, for the fiscal periods shown, the high
and low per share sale prices of the Company's Common Stock, as reported by the
Nasdaq NMS.
Fiscal Year Ended September 30, 1996 High Low
----------------------------------------- --------- ---------
First Quarter $ 6 $ 3 1/2
Second Quarter 5 1/2 3 1/4
Third Quarter 4 7/8 3 7/8
Fourth Quarter 5 13/16 4 3/8
Fiscal Year Ended September 30, 1997
-----------------------------------------
First Quarter 7 5 5/8
Second Quarter 10 1/2 7 3/16
Third Quarter 17 3/8 9 1/4
Fourth Quarter 20 14 7/8
The number of stockholder accounts of record of the Common Stock as of
September 30, 1997 was approximately 323. The Company believes that there are
more than 2,200 beneficial owners of its Common Stock. The Company's stock price
closed at $22.125 per share on December 11, 1997.
The Company has not paid dividends on its Common Stock. It is the present
policy of the Company's Board of Directors to retain future earnings to finance
the growth and development of the Company's business. Any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the financial condition, capital requirements, earnings, terms of credit
agreements (which prohibit "restricted payments" -- see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources), and liquidity of the Company as well as other
factors the Company's Board of Directors may deem relevant.
Item 6. Selected Consolidated Financial Data
The following two tables of selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and the related notes thereto included elsewhere herein. The
first table presents selected data from the Consolidated Financial Statements
and other data related to the Company's continuing investment management
business. Operations of the mortgage banking business, which were discontinued
as of February 28, 1995, are presented on a condensed basis therein, as they are
in the Company's consolidated financial statements, in accordance with generally
accepted accounting principles for discontinued operations.
The second table is presented by management to provide expanded
information as to the operations of the discontinued mortgage banking business
through February 28, 1995, at which time the Company announced the
discontinuance of such operations. The selected data from this table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" with respect to periods prior to
discontinuance of the mortgage banking operations.
14
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues .................................. $ 21,288 $ 14,485 $ 6,363 $ - $ -
Expenses .................................. 14,936 15,887 6,913 - -
-------------- ------------- -------------- ------------ ---------------
Earnings (loss) from continuing
operations before taxes ................ 6,352 (1,402) (550) - -
Income tax (benefit) ...................... (4,959) (1,750) - - -
-------------- ------------- -------------- ------------ ---------------
Earnings (loss) from continuing
operations ............................. 11,311 348 (550) - -
Earnings (loss) from operations of
discontinued mortgage business, net of tax 413 - (14) (8,490) (2,057)
Loss on discontinuance of mortgage
operations ............................. - - (5,307) - -
-------------- ------------- -------------- ------------ ---------------
Net earnings (loss) ....................... $ 11,724 $ 348 $ (5,871) $ (8,490) $ (2,057)
============== ============= ============== ============ ===============
Per common share:
Primary:
Earnings (loss) from
continuing operations .................. $ 2.71 $ 0.07 $ (0.11) $ - $ -
============== ============= ============== ============ ===============
Net (earnings) loss .................... $ 2.81 $ 0.07 $ (1.19) $ (1.58) $ (0.47)
============== ============= ============== ============ ===============
Shares used in per share
calculations ........................... 4,173,866 4,866,737 4,950,044 5,377,860 4,363,015
============== ============= ============== ============ ===============
Fully Diluted:
Earnings (loss) from
continuing operations .................. $ 2.63 $ 0.07 $ (0.11) $ - $ -
============== ============= ============== ============ ===============
Net earnings (loss) .................... $ 2.72 $ 0.07 $ (1.19) $ (1.58) $ (0.47)
============== ============= ============== ============ ===============
Shares used in per share
calculations ........................... 4,302,650 4,866,737 4,950,044 5,377,860 4,363,015
============== ============= ============== ============ ===============
Consolidated Balance Sheet
Data (at period end):
Total assets (1) ......................... $ 50,647 $ 42,555 $ 43,495 $ 44,721 $ 443,313
============== ============= ============== ============ ===============
Net assets (liabilities) of
discontinued operations ................ $ (230) $ (3,392) $ (4,138) $ 35,590 $ 53,783
============== ============= ============== ============ ===============
Redeemable preferred stock ................ $ - $ - $ 338 $ 1,015 $ 1,692
============== ============= ============== ============ ===============
Total stockholders' equity ................ $ 41,753 $ 29,788 $ 35,722 $ 43,601 $ 52,091
============== ============= ============== ============ ===============
Mutual fund assets under management ....... $ 2,608,500 $ 1,704,500 $ 1,347,600 $ - $ -
- ------------------------------------------- ============== ============= ============== ============ ===============
</TABLE>
See explanation of footnotes following the tables.
15
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
DISCONTINUED OPERATIONS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discontinued Operations:
Revenues:
Loan administration ..................... $ -- $ -- $ 139 $ 23,442 $ 17,577
Loan origination ........................ -- -- (225) 3,573 8,382
Interest income ......................... -- -- 1,983 20,598 20,025
Warehouse interest expense .............. -- -- (1,090) (12,906) (10,617)
Gain on sale of servicing rights ........ -- -- 2,074 40,877 22,526
Other income ............................ -- -- 239 871 288
-------- -------- -------- -------- --------
Total revenues ...................... -- -- 3,120 76,455 58,181
Expenses:
Personnel ............................... -- -- 3,322 26,517 19,254
Amortization of purchased
servicing rights .................... -- -- 66 10,640 23,283
Write off of goodwill ................... -- -- -- 6,649 --
Other interest expense .................. -- -- 145 5,248 3,812
Other operating expenses ................ (693) -- 2,618 26,643 15,002
Restructuring charges ................... -- -- -- 5,050 --
-------- -------- -------- -------- --------
Total expenses ................... (693) -- 6,151 80,747 61,351
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes (benefit) and
extraordinary item ...................... 693 -- (3,031) (4,292) (3,170)
Income taxes (benefit) ....................... 280 -- (3,017) 2,942 (1,113)
-------- -------- -------- -------- --------
Earnings (loss) before
extraordinary item ...................... 413 -- (14) (7,234) (2,057)
Extraordinary (loss) on early
extinguishment of debt .................. -- -- -- (1,256) --
-------- -------- -------- -------- --------
Earnings (loss) from operations
of discontinued mortgage business ........ $ 413 $ -- $ (14) $ (8,490) $ (2,057)
======== ======== ======== ======== ========
Earnings (loss) before extraordinary
item per share .......................... $ 0.10 $ -- $ -- $ (1.35) $ (0.47)
======== ======== ======== ======== ========
Earnings (loss) per share
of common stock ......................... $ 0.10 $ -- $ -- $ (1.58) $ (0.47)
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See explanation of footnotes following the tables.
16
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
DISCONTINUED OPERATIONS - (Continued)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Mortgage loans held for sale .................. $ 1,128 $ 3,516 $ 2,352 $ 95,993 $ 322,648
Purchased servicing net ....................... - - - 763 56,741
Total assets .................................. 1,128 3,673 5,538 111,260 443,313
Notes payable ................................. - 1,320 - 49,025 333,929
Total liabilities ............................. 1,358 7,065 9,676 75,670 389,530
Selected Operating Data:
Volume of loans originated .................... - - 199,895 3,616,990 3,966,893
Loan servicing
portfolio (at period end) (2) ............ - - 171,861 429,304 8,065,058
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following footnotes relate to the preceeding tables of Selected Consolidated
Financial Data:
(1) Total assets prior to and including 1994 were assets of the discontinued
mortgage operations.
(2) Includes loans held for sale and loans serviced pursuant to subservicing
agreements. At September 30, 1994 and 1993, the Company subserviced loans
with an aggregate principal balance of $3.2 million, and $1.2 billion,
respectively, all but $3.2 million and $45 million, respectively, of which
represented servicing rights which were sold prior to period end, but which
had not yet been transferred to the purchaser as of the period end. No
loans were subserviced by the Company after the year ended September 30,
1994.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
General Overview. For the fiscal year ended September 30, 1997 ("Fiscal
1997"), the Company recorded net earnings of $11.7 million or $2.81 per share,
of which $11.3 million or $2.71 per share was from the continuing operation of
its investment management business, compared to net earnings for the fiscal year
ended September 30, 1996 ("Fiscal 1996") of $348,000 or $.07 per share all of
which was from continuing operations. For the fiscal year ended September 30,
1995 ("Fiscal 1995"), the Company recorded a net loss of $5.9 million or $1.19
per share, of which $550,000 or $.11 per share, was from the then newly acquired
investment management business, $14,000 from the loss of operations from the
discontinued mortgage business, and $5.3 million from loss on the discontinuance
of its remaining mortgage banking operations. The net loss for Fiscal 1995
compares to the net loss of $8.5 million for the fiscal year ended September 30,
1994 ("Fiscal 1994"), all of which was from the discontinued mortgage banking
operations. The Company commenced its investment management operations on April
7, 1995, when it consummated the Acquisition of certain investment management
assets. On February 28, 1995, the Company announced the discontinuance of its
remaining mortgage banking operations (see "Item 1. Business-General").
Net earnings included a tax benefit of $5.0 million and $1.75 million
in Fiscal 1997 and Fiscal 1996, respectively. The Company recorded these tax
benefits because the Company believes that it is more likely than not that it
will generate sufficient taxable income in future periods to allow for the
realization of the recorded benefits. As of September 30, 1997, the Company had
net operating loss carry forwards of $17.1 million, which expire between the
fiscal year ending September 30, 1997 and the fiscal year ending September 30,
2010. Regulations promulgated under Internal Revenue Code ("IRC") section 382
substantially restrict the ability of the Company to use its net operating loss
carry forwards to offset future income upon a "change of control." Generally, a
change of control is deemed to occur if the cumulative percentage of ownership
change of a company's common shares is greater than 50 percent during a
prescribed measurement period. For purposes of IRC section 382, the Company's
cumulative change of control was approximately 24% as of September 30, 1997.
Due to the Acquisition and the discontinuance of its mortgage banking
operations in Fiscal 1995, the Company does not believe that results of
operations for Fiscal 1997 and Fiscal 1996 are comparable to the results of
operations for the same periods in Fiscal 1995. Accordingly, the results of
continuing operations are discussed herein separately from the results of the
Company's discontinued operations. Furthermore, because Fiscal 1996 represented
the first full year of the Company's investment management operations, changes
in the financial results of continuing operations from Fiscal 1995 to Fiscal
1996 are primarily attributable to the increased period of operations in Fiscal
1996 (one year) compared to approximately six months of operations in Fiscal
1995, except where otherwise discussed below.
Investment Management (Continuing) Operations
Year Ended September 30, 1997 compared to Year Ended September 30, 1996
Revenues for Fiscal 1997 totaled $21.3 million, an increase of $6.8
million over Fiscal 1996 revenues. The major components of the Company's
revenues are management and administrative fees and distribution fees.
Management and administrative fees for Fiscal 1997, net of subadvisory fees of
$644,000 (see "Item 1. Business-General"), were $17.3 million, an increase of
$4.8 million over Fiscal 1996 management and administrative fees which were net
of subadvisory fees of $387,000. These fees are based on the average net assets
of the Funds plus any borrowings of Pilgrim America Prime Rate Trust (in
aggregate, "Assets") (see "Item 1. Business - Pilgrim America Funds"). Assets of
the Funds totaled $2.61 billion at September 30, 1997 versus $1.70 billion at
September 30, 1996, an increase of $904.0 million. Distribution fees were $2.5
million for Fiscal 1997, an increase of $1.3 million over Fiscal 1996.
Distribution fees are based on the Assets of the Company's Open-end Funds, which
totaled $676.0 million as of September 30, 1997 compared to $412.7 million at
September 30, 1996, an increase of $263.3 million.
18
<PAGE>
The increase of $904.0 million in Assets under management at September
30, 1997 resulted primarily from a $487.8 million increase in the market value
of managed assets and an increase in Pilgrim America Prime Rate Trust borrowings
of $140.0 million and the new Private Account asset of $230.5 million.
Additionally, direct sales of Open-end Funds accounted for $249.7 million of the
increase, while redemptions (including net exchanges into the Company-sponsored
money market fund) totaled $81.2 million and distributions paid in cash to
shareholders of both Open-end and Closed-end Funds totaled $122.8 million.
The Company's operating expenses of $14.9 million for Fiscal 1997, a
decrease of $1.0 million over Fiscal 1996, include general and administrative
expense, selling expense and amortization. General and administrative expense,
which totaled $7.8 million and $7.4 million in Fiscal 1997 and Fiscal 1996,
respectively, include compensation and related expenses, occupancy and other
operating expenses related to the Company's investment management operations and
general corporate operations. Additionally, pursuant to investment management
agreements between the Company and certain of the Funds, the Company has agreed
to limit certain expense ratios of such Funds, and reimburses the Funds for
amounts that exceed specified ratios. During Fiscal 1997 and Fiscal 1996, such
reimbursements totaled $742,000 and $606,000, respectively, and are included in
general and administrative expense.
Selling expenses are related to the distribution of the Open-end Funds,
and include salaries of sales and marketing personnel, costs related to the
production of marketing materials, and commissions and fees paid to various
Authorized Dealers in connection with the sale of Fund shares. Selling expenses
were $4.9 million in Fiscal 1997 compared to $6.5 million in Fiscal 1996. The
$1.6 million decrease in expense is due to the Company's streamlining of
marketing the Open-end Funds in Fiscal 1997, while in Fiscal 1996 the Company
was in the development stages of its marketing and sales strategies.
Amortization and depreciation of $2.3 million in Fiscal 1997, an increase
of $275,000 over Fiscal 1996, was primarily due to the amortization of deferred
acquisition costs which consists of commissions paid to Authorized Dealers in
connection with the sale of Class B share sales (see "Item 1. Business -
Distribution of Open-end Fund Shares").
Year Ended September 30, 1996 compared to Year Ended September 30, 1995
Revenues for Fiscal 1996 totaled $14.5 million, an increase of $8.1
million over Fiscal 1995 revenues, all of which were realized after the April 7,
1995 Acquisition date. The major components of the Company's revenues from
continuing operations are management and administrative fees and distribution
fees. Management and administrative fees for Fiscal 1996, net of subadvisory
fees of $387,000 (see "Item 1. Business -- General"), were $12.6 million, an
increase of $6.9 million over Fiscal 1995 which were net of subadvisory fees of
$22,000. These fees are based on the Assets of the Funds (see "Item 1. Business
- -- Pilgrim America Funds"). Assets of the Funds totaled $1.70 billion at
September 30, 1996 versus $1.35 billion at September 30, 1995, an increase of
$356.9 million. Distribution fees were $1.1 million for Fiscal 1996, an increase
of $766,000 over Fiscal 1995. Distribution fees are based on the Assets of the
Company's Open-end Funds, which totaled $412.7 million as of September 30, 1996
compared to $277.3 million at September 30, 1995, an increase of $135.4 million.
The increase of $356.9 million in Assets under management during
Fiscal 1996 resulted primarily from a $188.2 million increase in the market
value of managed assets and an increase in Pilgrim America Prime Rate Trust
borrowings of $179.0 million, substantially all of which occurred during the
fourth quarter of Fiscal 1996. Additionally, direct sales of Open-end Funds
accounted for $121.6 million of the increase, while redemptions (including net
exchanges into a money market fund for which the Company acts as servicing
agent) totaled $44.1 million and distributions paid in cash to shareholders of
both Open-end and Closed-end Funds totaled $87.8 million.
19
<PAGE>
For Fiscal 1995, Assets increased by $50.5 million between the
Acquisition date and September 30, 1995. This increase resulted primarily from a
$101.2 million increase in the market value of managed assets. Direct sales of
mutual funds were $9.0 million for the period, while redemptions totaled $21.4
million and distributions paid in cash to shareholders totaled $40.4 million.
Additionally, the Company invested $2.1 million in order to seed three funds
introduced during the period.
The Company's operating expenses of $15.9 million for Fiscal 1996, an
increase of $9.0 million over Fiscal 1995, include general and administrative
expense, selling expense and amortization. General and administrative expense,
which totaled $7.4 million and $4.0 million in Fiscal 1996 and Fiscal 1995,
respectively, include compensation and related expenses, occupancy and other
operating expense related to the Company's investment management operations and
general corporate operations. Additionally, pursuant to agreements between the
Company and certain of the Funds, the Company has agreed to limit certain
expense ratios of such Funds, and reimburse the Funds for amounts that exceed
specified ratios. During Fiscal 1996 and 1995, such reimbursements totaled
$606,000 and $94,000 respectively, and are included in general and
administrative expense.
Selling expenses are related to the distribution of the Open-end
Funds, and include salaries of sales and marketing personnel, costs related to
the production of marketing materials, and commissions and fees paid to various
Authorized Dealers in connection with the sale of Fund shares. Selling expenses
were $6.5 million in Fiscal 1996 compared to $2.0 million in Fiscal 1995. The
increase is due to a full year of operations in Fiscal 1996 compared to
approximately six months in Fiscal 1995 as well as an increase in sales and
marketing efforts during Fiscal 1996, as the Company continued to develop its
emphasis on marketing its Open-end Funds.
Amortization and depreciation of $2.0 million in Fiscal 1996, an
increase of $1.1 million over Fiscal 1995, was primarily due to amortization of
costs of management contracts acquired in connection with the Acquisition,
depreciation of furniture, fixtures and equipment and amortization of deferred
acquisition costs which consists of commissions paid to authorized dealers in
connection with the sale of Class B share sales (See "Item 1.
Business--Distribution of Open-end Fund Shares").
Mortgage Banking (Discontinued) Operations
The Company announced the discontinuance of its mortgage banking
operations on February 28, 1995 (the "Announcement Date"). The activities of the
Company's mortgage banking operations therefore have been reflected as "Loss
from operations of discontinued mortgage business" in the Company's consolidated
statements of operations. As of the Announcement Date, the Company also recorded
a provision of $986,000 for the estimated net loss from the discontinuance of
its mortgage banking operations. The provision included the anticipated mortgage
banking revenues and expenses, including severance expense and all other costs,
that the Company estimated would be incurred to phase out these operations.
Subsequent to the Announcement Date, during Fiscal 1995 the Company increased
the provision to $5.3 million, reflected as "Loss on discontinuance of mortgage
operations" in the Company's consolidated statement of operations, based on
reevaluation of its allowances for Discontinued Operations.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
The Company recorded earnings (net of tax) from discontinued
operations of $413,000 related to the reevaluation of certain loss allowances in
Fiscal 1997. The Company recorded no activity in Fiscal 1996.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
The Company recorded no activity from the discontinued mortgage banking
operations in Fiscal 1996 compared to a loss from such operations of $14,000 in
Fiscal 1995.
20
<PAGE>
Total revenues from the mortgage banking operations decreased to $0 in
Fiscal 1996 from $3.1 million in Fiscal 1995. The decrease resulted from the
discontinuance of the Company's mortgage banking operations on February 28,
1995, resulting in the inclusion of only five months of operating results that
were reported for the mortgage banking operations in Fiscal 1995.
Total expenses of the Company discontinued operations were $0 in
Fiscal 1996 compared to $6.2 million in Fiscal 1995. The decline was the result
of the Company's discontinuance of its mortgage banking business on February 28,
1995. Therefore, the Company recorded no expenses from the operation of the
mortgage operations in Fiscal 1996 compared to five months of mortgage banking
activity in Fiscal 1995.
The Company also recorded an income tax benefit, related to its
mortgage banking operations of $3.0 million in Fiscal 1995 which is included in
the loss from discontinued operations.
Liquidity and Capital Resources
The Company's principal liquidity and capital resources include cash
flows from operations and borrowings available under a credit agreement. In
Fiscal 1997 the Company had net cash flows provided by operations of $822,000,
net cash flows provided by financing activities of $1.9 million and cash used in
investment activities of $2.8 million of which $2.6 million was used for
discontinuing operations.
As of September 30, 1997 and September 30, 1996, the Company owned
mortgage loans and foreclosed real estate with principal balances aggregating
approximately $1.1 million and $3.5 million, respectively. The Company's
investments in these loans and foreclosed real estate are funded with the
Company's working capital and with borrowings. The Company also had an allowance
of $725,000 and $1.9 million to provide, at September 30, 1997 and September 30,
1996, respectively, for estimated losses to be incurred upon repurchase and
resale of loans originated and indemnified by the Company. An increase in
repurchase activity beyond that forecasted by the Company may have an adverse
effect on the Company's liquidity.
On July 31, 1997, the Company and its lender amended and restated the
Pilgrim America Credit Agreement and subsequently completed a second amendment
on September 18, 1997. The restated Agreement allows the Company or PAG to
borrow up to $25 million to be used for various purposes including: (i) general
corporate working capital; (ii) acquisition of investment management contracts;
(iii) financing of commissions paid by the Company in connection with sales of
Fund shares subject to a contingent deferred sales charge and (iv) repurchasing
Company stock. The Agreement contains restrictive covenants which require PAG
and the Company to maintain certain financial ratios and prohibits "restricted
payments" (including dividends and other payments) from PAG to the Company.
Borrowings under the Agreement are collateralized by assets of PAG, PAS and PAI,
and guaranteed by the Company. The Company's guarantee is collateralized by a
pledge to the lender of PAG's capital stock. Loans may be drawn down until July
30, 1998 and are repayable quarterly beginning on September 30, 1998 and ending
on June 30, 2000. Additionally, the Company is obligated to pay a monthly
commitment fee of 0.18%, annualized, on the amount of any unused borrowing
availability.
As of September 30, 1997, the Company had borrowed $5.5 million under the
Agreement. There were $3.6 million of borrowings under the Agreement at
September 30, 1996.
Between November 1994 and January 1995, the Company repurchased 500,000
shares of its common stock at a total purchase price of $2.0 million. These
purchases were made in open market transactions pursuant to a previously
announced authorization by the Company's board of directors to repurchase up to
500,000 shares of common stock based upon market conditions.
21
<PAGE>
On September 27, 1996, the Company repurchased 1,017,730 shares of its
common stock from two institutional stockholders at a price of $6.50 per share,
or a total of $6.6 million. These purchases were funded with borrowings under
the Agreement, $3.0 million of which was borrowed on September 27, 1996 and the
balance, $3.6 million, borrowed on October 2, 1996.
On August 5, 1997, the Company's Board of Directors approved repurchasing
up to an additional 500,000 shares of its common stock from time to time in open
market transactions. As of September 30, 1997, the Company had not repurchased
any of these shares.
During Fiscal 1996 and 1995, the Company redeemed 3,384 and 6,768 shares,
respectively, of its Series A Preferred Stock at the liquidation value of $100
per share, for an aggregate redemption price of $338,000 and $677,000,
respectively. As of September 30, 1995 there were 3,384 such shares issued and
outstanding, which were redeemed at their liquidation value on March 31, 1996.
Economic Factors
Economic changes, including changes in inflation, interest rates, and
financial market conditions, may cause investors to decide against purchasing,
or to redeem investments in, certain types of mutual funds, including those
offered by the Company. To the extent investors refrain from purchasing the
shares of the Company's Funds, or redeem significant amounts from the Funds, the
Company's revenues, and growth in such revenues which are derived from assets
under management, may be adversely affected.
Additionally, the Company relies on borrowings to finance the payment of
commissions on sales of shares sold with a contingent deferred sales charge ("B
shares"). To the extent interest rates increase substantially or the Company is
not able to secure adequate financing for commission payments, sales of B
shares, and related revenues therefrom, may be adversely affected.
The investment management business is not generally capital intensive.
Except for the effect on revenues as described above, the financial results of
continuing operations would not be significantly affected by inflation and price
changes.
Newly Adopted Accounting Standards
In March 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, ("SFAS") "Earnings Per
Share," replacing APB Opinion 15, "Earnings Per Share." This Statement provides
accounting and reporting standards for earnings per share (EPS), simplifies the
requirement for calculating EPS, and its compatible with international
standards. This Statement replaces the presentation of primary EPS with a
presentation of basic EPS. The Statement requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of any entity, similar to fully diluted EPS.
Statement No. 128 applies to entities with publicly held common stock
or potential common stock and is effective for financial statements issued for
periods ending after December 15, 1997. The adoption of the Statement is not
expected to have a material effect on the reporting of earnings per share by the
Company.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement listed required disclosures about
capital structure that had been included in a number of previously existing
separate statements and opinions. It applies to all entities, public and
private.
22
<PAGE>
Statement No. 129 is effective for financial statements for periods
ending after December 15, 1997. The adoption of this Statement is not expected
to have a material adverse effect on the disclosure of capital structure by the
Company.
In June of 1997 the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The SFAS
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The SFAS requires that an enterprise (1) classify items of other
comprehensive income by their nature in a financial statements and (2) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. No earnings per share disclosure of the effect of
comprehensive income is required under the SFAS. The SFAS is effective for
fiscal years beginning after December 15, 1997, although earlier application is
permitted and reclassification of financial statements for earlier period
provided for comparative purposes is required. The adoption of the SFAS is not
expected to have a material adverse effect on the reporting requirements of the
Company.
SFAS No. 131, "Disclosure about Segments of a Enterprise and Related
Information," issued in June, 1997, requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The SFAS also requires that all public enterprises report
information about the revenues derived from the enterprise products or services
(or groups of similar products or services), about the countries in which the
enterprise earns revenues and holds assets, and about major customers regardless
of whether the information is used in making operating decisions. However, the
SFAS does not require an enterprise to report information that is not prepared
for internal use if reporting it would be impracticable. The SFAS is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The adoption of the SFAS is not expected to have a material effect on
the reporting requirements of the Company.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of the Company as of September 30, 1997
and for each of the years in the three-year period ended September 30, 1997,
together with the related notes and the Report of KPMG Peat Marwick LLP,
independent certified public accountants, are set forth on the following pages.
Other required financial information and schedules are set forth herein, as more
fully described in Item 14.
23
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Pilgrim America Capital Corporation:
We have audited the accompanying consolidated balance sheets of Pilgrim America
Capital Corporation and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pilgrim America
Capital Corporation and subsidiaries as of September 30, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
October 17, 1997
Los Angeles, California
24
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30,
- ------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 219 $ 238
Investments 3,127 2,462
Accounts receivable 458 216
Note receivable 3,976 3,587
Costs assigned to management contracts acquired, less
accumulated amortization of $3,233 and $1,943 29,030 30,320
Furniture, fixtures and equipment, less accumulated
depreciation of $370 and $1,378 532 1,144
Deferred tax assets, net 6,420 1,750
Deferred acquisition costs, less accumulated amortization
of $772 and $131 5,891 1,939
Other assets 994 899
-------- --------
Total assets $ 50,647 $ 42,555
======== ========
- ------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Liabilities:
Net liabilities of discontinued operations $ 230 $ 3,392
Notes payable 5,475 3,600
Accrued compensation 1,285 778
Accounts payable and accrued expenses 1,904 4,997
-------- --------
Total liabilities 8,894 12,767
-------- --------
Commitment and contingencies
Stockholders' equity:
Preferred stock, $100 par value, 100,000 shares
authorized, none issued
Common stock, $.01 par value, 10,000,000 shares authorized,
5,384,060 and 5,377,860 shares issued, with 3,866,330 and
3,860,130 shares outstanding at September 30, 1997 and
September 30, 1996 54 54
Less: Treasury stock at cost, 1,517,730 shares at
September 30, 1997 and September 30, 1996 (8,623) (8,623)
Additional paid-in capital 48,795 48,759
Unrealized gain on investments 538 333
Retained earnings (accumulated deficit) 989 (10,735)
-------- --------
Total stockholders' equity 41,753 29,788
-------- --------
Total liabilities and stockholders' equity $ 50,647 $ 42,555
======== ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended September 30,
- ---------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Management and administrative fees $ 17,341 $ 12,556 $ 5,668
Distribution fees 2,483 1,143 377
Investment and other income 1,464 786 318
----------- ----------- -----------
Total revenues 21,288 14,485 6,363
----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------
Expenses
General and administrative 7,783 7,367 4,004
Selling 4,888 6,530 2,012
Amortization and depreciation 2,265 1,990 897
----------- ----------- -----------
Total expenses 14,936 15,887 6,913
----------- ----------- -----------
Earnings (loss) from continuing operations before taxes 6,352 (1,402) (550)
----------- ----------- -----------
Income tax (benefit) (4,959) (1,750) --
----------- ----------- -----------
Earnings (loss) from continuing operations 11,311 348 (550)
----------- ----------- -----------
Discontinued operations
Earnings (loss) from operations of discontinued
mortgage business, net of tax 413 -- (14)
Loss on discontinuance of mortgage operations,
including $5,307 for operating losses during
the phase out period -- -- (5,307)
----------- ----------- -----------
Earnings (loss) from discontinued operations 413 -- (5,321)
----------- ----------- -----------
Net earnings (loss) $ 11,724 $ 348 $ (5,871)
=========== =========== ===========
- ---------------------------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent share:
Primary:
Earnings (loss) from continuing operations $ 2.71 $ 0.07 $ (0.11)
=========== =========== ===========
Net earnings (loss) $ 2.81 $ 0.07 $ (1.19)
=========== =========== ===========
Shares used in per share calculation 4,173,866 4,866,737 4,950,044
=========== =========== ===========
Fully diluted:
Earnings (loss) from continuing operations $ 2.63 $ 0.07 $ (0.11)
=========== =========== ===========
Net earnings (loss) $ 2.72 $ 0.07 $ (1.19)
=========== =========== ===========
Shares used in per share calculation 4,302,650 4,866,737 4,950,044
=========== =========== ===========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Retained
Additional Unrealized Earnings Total
Common Treasury Paid-in Gain on (Accumulated Stockholders'
Stock Stock Capital Investments Deficit) Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1994 $ 54 $ -- $ 48,759 $ -- $ (5,212) $ 43,601
Repurchase of treasury stock -- (2,008) -- -- -- (2,008)
Net loss -- -- -- -- (5,871) (5,871)
- -------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1995 54 (2,008) 48,759 -- (11,083) 35,722
Repurchase of treasury stock -- (6,615) -- -- -- (6,615)
Unrealized gain on investments -- -- -- 333 -- 333
Net earnings -- -- -- -- 348 348
- -------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 54 (8,623) 48,759 333 (10,735) 29,788
Stock option purchases -- -- 36 -- -- 36
Unrealized gain on investments -- -- -- 205 -- 205
Net earnings -- -- -- -- 11,724 11,724
- -------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997 $ 54 $ (8,623) $ 48,795 $ 538 $ 989 $ 41,753
======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended September 30,
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 11,724 $ 348 $ (5,871)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations -- -- 5,321
Amortization and depreciation 2,265 1,990 891
(Increase) decrease in accounts and notes receivable (631) 954 (1,437)
Increase in deferred acquisition costs due to subscriptions (4,912) (2,023) (66)
Decrease in deferred acquisition cost due to redemptions 281 18 --
Increase in deferred tax asset (5,029) (1,750) --
Increase (decrease) in operating liabilities (2,586) 2,478 (344)
(Increase) decrease in other operating assets (290) 607 (1,111)
-------- -------- --------
Net cash provided by (used in) operating activities 822 2,622 (2,617)
-------- -------- --------
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisition of business -- -- (29,271)
Investment in Pilgrim America Funds (641) (29) (2,100)
Sale of Pilgrim America Funds 540 -- --
Sales of furniture, fixtures and equipment -- 130 68
Purchases of furniture, fixtures and equipment (72) (244) (135)
Cash provided by (used in) discontinued operations (2,579) (746) 34,669
-------- -------- --------
Net cash provided by (used in) financing activities (2,752) (889) 3,231
-------- -------- --------
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Term debt borrowing 1,875 3,600 --
Redemption of preferred stock -- (338) (677)
Proceeds from purchase of stock options 36 -- --
Purchase of treasury stock -- (6,615) (2,008)
-------- -------- --------
Net cash provided by (used in) financing activities 1,911 (3,353) (2,685)
-------- -------- --------
Net decrease in cash and cash equivalents (19) (1,620) (2,071)
Cash and cash equivalents, beginning of period 238 1,858 3,929
-------- -------- --------
Cash and cash equivalents, end of period $ 219 $ 238 $ 1,858
======== ======== ========
- --------------------------------------------------------------------------------------------------------
Supplemental disclosures
Interest paid $ 549 $ 186 $ 1,343
Income taxes paid 98 2 98
Income tax refunds received -- 12 269
Liabilities assumed relating to acquisition of business -- -- 3,536
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Corporate Background and Summary of Significant Accounting Policies
(a) Corporate Background. On April 7, 1995, Express America Holdings
Corporation and certain newly formed subsidiaries acquired investment management
assets and became engaged principally in the mutual fund management business
(see Note 2). On April 28, 1997 Express America Holdings Corporation changed its
name to Pilgrim America Capital Corporation.
(b) Consolidation. The consolidated financial statements include the
accounts of Pilgrim America Capital Corporation's ("PACC") wholly-owned
subsidiary, Pilgrim America Group, Inc. ("PAG") and PAG's subsidiaries, Pilgrim
America Investments, Inc. ("PAI"), a registered investment advisor and Pilgrim
America Securities, Inc. ("PAS"), a registered broker-dealer (collectively
"Pilgrim America"). PAG commenced operations upon the Company's acquisition (the
"Acquisition") of certain assets of Atlas Holdings, formerly the Pilgrim Group,
Inc., and its subsidiaries on April 7, 1995. The consolidated financial
statements also include the accounts of Pilgrim America's wholly owned mortgage
banking subsidiaries, Express America T.C., 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 (collectively, the "Company" unless the context
otherwise requires). All significant intercompany accounts and transactions are
eliminated in consolidation.
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 its remaining mortgage
banking operations (see Note 14). Consequently, the Company's mortgage banking
activities are reported as discontinued operations.
Subsequent to the Acquisition on April 7, 1995, the continuing operating
activities of the Company consisted principally of providing investment
management and related services to various open-end and closed-end investment
companies currently operating under the Pilgrim and Pilgrim America names (the
"Funds"). Accordingly, the results of continuing operations reported in the
consolidated financial statements reflect only such activities.
(c) Cash and Cash Equivalents. Cash and cash equivalents include all cash
balances and highly liquid investments with an original maturity of three months
or less, including money market funds which are readily convertible into cash.
(d) Fair Value of Financial Instruments. Substantially all of the
Company's financial instruments are carried at fair value or amounts
approximating fair value. Assets including cash and cash equivalents, and
certain receivables are carried at fair value or contracted amounts, which
approximate fair value. The fair value of all investments held is based on
quoted market prices. Similarly, liabilities including notes payable, certain
payables and accrued expenses are carried at amounts approximating fair value.
(e) Marketable Securities. Upon acquisition, the Company classifies its
securities into one of three categories: held to maturity securities, trading
securities or available for sale securities. Held to maturity securities are
those securities the Company has the positive intent and ability to hold to
maturity and are carried at amortized cost. Trading securities are those
securities that are bought and held principally for the purpose of selling them
in the near term and are reported at fair value, with unrealized gains and
losses included in operations. Available for sale securities are those
securities that do not fall into the other two categories and are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders' equity, net of related income taxes.
The Company currently classifies all of its marketable securities as available
for sale securities.
29
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PAS values all of its investments at market in accordance with
broker-dealer industry practice. Unrealized gains and losses are included in
income.
All realized gains and losses on security transactions are recorded on
the average cost method.
(f) Furniture, Fixtures and Equipment. Furniture, fixtures and equipment
are stated at cost, less accumulated depreciation. The Company provides for
depreciation over the assets estimated useful lives of 3 to 5 years using the
straight line method.
(g) Costs Assigned to Management Contracts Acquired. Costs assigned to
management contracts acquired represent the fair value of the investment
management rights acquired in connection with the Acquisition and also represent
the excess of the purchase price (including liabilities assumed) over the fair
value of net assets acquired and resulting costs of the Acquisition. Such
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 has occurred in its value. Based upon
anticipated future income from operations, in the opinion of Company management,
there has been no impairment.
(h) Deferred Acquisition Costs. The Company pays commissions of up to
4.00% to authorized broker-dealers at the time that Fund shares with contingent
deferred sales charges (Class B shares) are sold. These payments are capitalized
and amortized over a six-year period, which is the period during which the
contingent deferred sales charge is effective.
The Company periodically analyzes the recoverability of its Deferred
Acquisition Costs by a comparison of the carrying amount to the net future cash
flows to be received. If necessary, a valuation allowance is recorded to reflect
the difference between the carrying amount and the estimated future cash flows.
(i) Management Fees and Administrative Fees. The Company receives fees
from the Funds for investment management and administrative services performed
as set forth in the related agreements between the Company and each Fund. Such
fees, net of sub-advisor fees, are recorded as income when earned.
(j) Distribution Fee Income and Expenses. Distribution plan payments
received by the Company from the Funds are recorded as income when earned. Costs
associated with the marketing and sale (distribution) of the Funds' shares are
expensed as incurred.
(k) Distribution Costs - Managed Funds. Certain of the Funds'
distribution plans (the "reimbursement plans") reimburse the Company for
distribution costs, but limit the reimbursement to between .25% and .30% of the
respective Fund's average daily net assets determined on an annual basis.
Unreimbursed costs may be carried over for a three-year period subject to the
same annual percentage limitations. Distribution costs are currently expected to
exceed reimbursements for the next three-year period. Therefore, no receivable
is currently recorded for any unreimbursed amounts.
30
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(l) Debt Issuance Costs. Costs incurred in obtaining debt financing for
acquisitions, operations and payment of sales commissions on back-end load
mutual funds managed and distributed by the Company are deferred and amortized
using the interest method over the term of the related loan agreement.
(m) Income Taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(n) Net Earnings (Loss) Per Common Share. Net earnings (loss) per common
share is computed using the weighted average number of common shares and
dilutive common stock equivalents outstanding, including stock options, during
the period. No effect was given to stock options outstanding for the years ended
September 30, 1996 and 1995, as such options would have had an anti-dilutive
effect.
In March 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
replacing APB Opinion 15, "Earnings Per Share." This Statement provides
accounting and reporting standards for earnings per share (EPS), simplifies the
requirement for calculating EPS, and its compatible with international
standards. This Statement replaces the presentation of primary EPS with a
presentation of basic EPS. The Statement requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of any entity, similar to fully diluted EPS.
Statement No. 128 applies to entities with publicly held common stock
or potential common stock and is effective for financial statements issued for
periods ending after December 15, 1997. The adoption of the Statement is not
expected to have a material effect on the reporting of earnings per share by the
Company.
(o) Stock Option Plan. The Company accounts for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25 Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
October, 1995, the Financial Accounting Standard Board issued SFAS No. 123
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period, the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net earnings
and pro forma earnings per share disclosure for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
(p) Reclassifications. Certain prior year balances have been reclassified
to conform to current presentation.
(q) Use of Estimates. Management has made certain estimates and
assumptions relating to the reporting of assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
31
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Acquisition
On April 7, 1995, the Company acquired certain assets of Pilgrim Group,
Inc. for $28.1 million in cash and assumed certain operating liabilities. The
Acquisition was accounted for under the purchase method. The Company recorded
costs assigned to management contracts acquired in connection with the
Acquisition of $32.3 million, which included provisions for transaction costs
and the cost of moving the acquired operations to Phoenix, Arizona. In
connection with the Acquisition, the Company entered into investment advisory
and other contracts with five mutual funds with combined net assets of $1.3
billion. The Company also acquired the right to the name "Pilgrim" and certain
other operating assets. The Funds included two closed-end funds with shares
traded on the New York Stock Exchange: Pilgrim America Prime Rate Trust
(NYSE:PPR) and Pilgrim America Bank and Thrift Fund, Inc. (NYSE:PBS); and three
open-end funds: Pilgrim America MagnaCap Fund, Pilgrim America High Yield Fund
and Pilgrim Government Securities Income Fund.
Pilgrim America's results of operations from April 7, 1995, have been
included in the Company's consolidated statements of operations.
(3) Note Receivable
On September 30, 1994, the Company sold its mortgage loan servicing
operations, including the rights to service $6.3 billion in mortgage loans, to
NationsBanc Mortgage Corporation. The Company received $88.2 million at closing,
comprised of $84.0 million in cash and a promissory note in the amount of $4.2
million. The principal on this note is due on September 30, 1999. The note is
subject to the right of offset with respect to certain indemnifications made by
the Company in connection with the sale. The Company had an allowance of
$230,000 and $618,000 at September 30, 1997 and September 30, 1996,
respectively, to cover potential claims made in connection with the
indemnification provisions.
(4) Investments
Investments in marketable securities are carried at market value and
consist of investments in certain Funds managed by the Company. The cost basis
of the Company's investments was $2.2 million and $2.1 million as of September
30, 1997 and 1996, respectively. Gross unrealized gains and (losses) thereon
were $901,000 and ($3,000) at September 30, 1997 and $333,000 and $0 at
September 30, 1996. During the year ended September 30, 1997 the Company sold
$540,000 in marketable securities which resulted in gross realized gains of
$38,000.
(5) Term Loan Commitment
On July 31, 1997, the Company and its lender amended and restated an existing
credit agreement dated April 28, 1995, used to finance the Company's operations
(the "Pilgrim America Credit Agreement" or "Agreement"). The restated Agreement
was subsequently amended on September 18, 1997 and allows the Company and PAG to
borrow up to $25 million to be used for various purposes including (i) general
corporate working capital, (ii) acquisition of investment management rights,
(iii) financing of commissions paid by the Company on certain mutual fund shares
and (iv) repurchasing the Company's stock. Borrowings are collateralized by
assets of Pilgrim America Group, Pilgrim America Securities and Pilgrim America
Investment and guaranteed by the Company. Borrowings may be drawn down until
July 30, 1998 and are repayable beginning on September 30, 1998 and ending on
June 30, 2000.
32
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Agreement contains restrictive convenants which require PAG and the
Company to maintain certain financial ratios and prohibits "restricted payments"
(including dividends and other payments) from PAG to the Company.
As of September 30, 1997 and September 30, 1996 the Company had
borrowed $5.5 million and $3.6 million, respectively, under the Agreement. The
weighted average interest rate on borrowings outstanding during Fiscal 1997 and
Fiscal 1996 were 7.07% and 7.14%, respectively. Additionally, the Company is
obligated to pay a commitment fee of 0.18% of any unused borrowing availability.
The repayment schedule based on the September 30, 1997 loan balance is as
follows (in thousands):
September 30, Repayment Amount
------------- ----------------
1998 $ 684
1999 2,737
2000 2,054
-------
$ 5,475
=======
(6) Redeemable Preferred Stock
During Fiscal 1996 and 1995 the Company redeemed 3,384 and 6,768
shares, respectively, of its Series A Preferred Stock at the liquidation value
of $100 per share, for an aggregate redemption price of $338,000 and $677,000,
respectively. As of September 30, 1997 and 1996 all issued and outstanding
shares of its Series A Preferred Stock had been redeemed.
(7) Income Taxes
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 carry forwards. A valuation allowance is then
established to reduce that deferred tax asset to the level at which it is "more
likely than not" that the tax benefits will be realized. Realization of tax
benefits of deductible temporary differences and operating loss or credit carry
forwards depends on having sufficient taxable income of an appropriate character
within the carry back and carry forward periods. Sources of taxable income that
may allow for the realization of tax benefits include (i) taxable income in the
current year or prior years that is available through carryback, (ii) future
taxable income that will result from the reversal of existing taxable temporary
differences, and (iii) future taxable income generated by future operations.
Based on an evaluation of the realizability of the deferred tax asset, as of
September 30, 1997 management has determined that it is more likely than not
that the Company will generate sufficient taxable income in future periods to
allow for the realization of its deferred tax asset of $8.0 million. Therefore,
no valuation allowance has been established as of September 30, 1997. The net
change in the valuation allowance for deferred tax assets in 1997 was $7.8
million.
33
<PAGE>
As of September 30, 1997 and September 30, 1996, the Company had a
deferred tax asset before valuation allowance of $8.0 million and $10.7 million
(as adjusted for filed tax returns), respectively. The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities at September 30, 1997 and 1996 are presented below
(in thousands):
September 30,
--------------------
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforward $ 6,840 $ 7,802
Allowance for contingency 163 1,022
Repurchase allowance 290 772
Deferred compensation 500 355
Allowance for discontinued operations 82 290
Allowance for receivables 92 247
Allowance for foreclosure losses -- 95
Other 66 83
-------- --------
Total gross deferred tax assets 8,033 10,666
Less valuation allowance -- (7,765)
-------- --------
Total deferred tax assets 8,033 2,901
-------- --------
Deferred tax liabilities:
Costs assigned to management contracts acquired (1,199) (878)
Depreciation (54) (145)
Unrealized gain on investments (360) (128)
-------- --------
Total deferred tax liabilities (1,613) (1,151)
-------- --------
Net deferred tax assets $ 6,420 $ 1,750
======== ========
At September 30, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of $17.1 million which are available to offset
future federal taxable income through the fiscal year ending September 30, 2010.
34
<PAGE>
Income tax (benefit) attributable to income from continuing operations consists
of (in thousands):
----------------------------------
Current Deferred Total
----------------------------------
Year Ended September 30, 1997
- -----------------------------
Federal $ 223 $(4,167) $(3,944)
State -- (735) (735)
------- ------- -------
Total income tax (benefit) 223 (4,902) (4,679)
------- ------- -------
Less discontinued operations (72) (208) (280)
------- ------- -------
Income tax (benefit)
attributable to continuing operations $ 151 $(5,110) $(4,959)
======= ======= =======
Year Ended September 30, 1996
- -----------------------------
Federal $ -- $(1,488) $(1,488)
State -- (262) (262)
------- ------- -------
Total income tax (benefit) $ -- $(1,750) $(1,750)
======= ======= =======
The total income tax provision (benefit) differs from the amount computed by
applying the statutory federal income tax rate of 34% to earnings (loss) from
continuing operations for the following reasons (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
Description 1997 1996 1995
- --------------------------- ---------------------------------------
<S> <C> <C> <C>
Expected tax (benefit) on earnings
(loss) from continuing operations $ 2,160 $ (477) $ (187)
Increase in income taxes resulting from
deductable meals and entertainment
expense 54 45 20
State income tax, net of federal benefit 381 (76) -
Other 211 - -
Change in valuation allowance (7,765) (1,242) 167
---------- ---------- -----------
Total $ (4,959) $ (1,750) -
========== ========== ===========
</TABLE>
35
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(8) Stockholders' Equity
On September 27, 1996, the Company repurchased 1,017,730 shares of its
common stock from two institutional stockholders at a price of $6.50 per share
for a total of $6.6 million. The Company used funds borrowed under the Pilgrim
America Credit Agreement to finance the repurchase (see Note 5).
Between November 1994 and January 1995, the Company repurchased 500,000
shares of its common stock at a total purchase price of $2.0 million. These
purchases were made in open market transactions pursuant to a previously
announced authorization by the Company's board of directors to repurchase up to
500,000 shares of common stock based upon market conditions.
On August 5, 1997 the Company's Board of Directors approved
repurchasing up to 500,000 shares of its common stock from time to time in open
market transactions. As of September 30, 1997 the Company has not repurchased
any of these shares.
During fiscal 1997 the Company issued 6,200 shares of Company stock
from the result of stock options being exercised. No stock options were
exercised in Fiscal 1996.
(9) Stock Option Plan
Pursuant to the Company's Stock Option Plan ( "Plan 1"), the Company's
Board of Directors has granted to certain officers and employees incentive stock
options to purchase 516,000 shares of the Company's common stock as of September
30, 1997. Under Plan 1, total options of up to 537,786 shares are available to
be granted. Additionally, as of September 30, 1997 the Company had issued to
non-employee directors non-statutory stock options to purchase 50,000 shares of
common stock. All options are fully vested after 3 years and have an 8 year
term. All stock options are granted with an exercise price equal to or exceeding
the stock's fair market value at the date of grant.
On August 30, 1996, the Company adopted the 1996 Performance Share Plan
("Plan 2"), approved and administered by the Company's board of directors, in
which certain officers and employees were granted interests that entitled them
to compensation amounts directly related to the market price of the Company's
common stock ("Performance Shares"). On February 11, 1997 the Company amended
Plan 2 to provide that awards under Plan 2 will be paid by the Company solely in
shares of common stock and to limit participation in Plan 2 to persons who are
not Executive Officers of the Company. As of September 30, 1997 Plan 2 had
197,500 options granted and outstanding. Under Plan 2, total options of up to
243,800 are available to be granted. The options are fully vested after five
years and the life of the stock options is established by the Plan Committee but
shall not exceed 10 years from the initial date of grant.
The weighted average fair value at the date of grant was $8.32 and
$2.97 for stock options granted under Plan 1 and Plan 2 during the years ended
September 30, 1997 and September 30, 1996, respectively. The Company used the
Black Scholes options-pricing model with the following assumptions to calculate
the weighted average fair value at the date of grant: no expected dividend yield
for Fiscal 1997 and Fiscal 1996; risk free interest rate of 6.22% for Fiscal
1997 and Fiscal 1996; an expected life of eight years, and a volatility rate
calculated using the monthly stock price for the three years preceding the date
of grant.
36
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company applies APB Opinion 25 in accounting for the Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options for Plan 1
and amended Plan 2 under SFAS No.123, the Company's net earnings for the years
ending September 30, 1997 and 1996, would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):
1997 1996
---- ----
Net earnings (loss): As reported $11,724 $ 348
Pro forma 11,182 (233)
Per share net earnings (loss)
from continuing operations:
Primary: As reported $ 2.71 $ .07
Pro forma $ 2.58 $ (.05)
Fully Diluted: As reported $ 2.63 $ .07
Pro forma $ 2.50 $ (.05)
Per share net earnings (loss):
Primary: As reported $ 2.81 $ .07
Pro forma $ 2.68 $ (.05)
Fully Diluted: As reported $ 2.72 $ .07
Pro forma $ 2.59 $ (.05)
Pro forma net earnings (loss) reflects only options granted under the
Plans in Fiscal 1997 and only Plan 1 for Fiscal 1996. Therefore the full impact
of calculated compensation costs for stock options under SFAS No. 123 is not
reflected in the pro forma net earnings amounts presented above because
compensation costs for options issued in periods prior to Fiscal 1996 are not
considered.
37
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock option activity during the periods indicated is as follows (shares in
thousands):
-------------------------------
Number of Range of
Shares Exercise Prices
-------------------------------
Options outstanding at September 30, 1995
581 $5.75 - $12.75
Options granted
574 $5.75
Options cancelled
(386) $5.75 - $12.75
-------------
Options outstanding at September 30, 1996
769 $5.75
Options granted
109 $9.50 - $15.50
Options exercised
(6) $5.75
Options cancelled (1)
(108) $5.75
-------------
Options outstanding at September 30, 1997
764 $5.75 - $15.50
=============
(1) On February 11, 1997, a Senior Vice President of the Company, agreed to
have 30,000 options, previously granted under Plan 2, cancelled in
exchange for the issuance of options under Plan 1 which entitled him to
acquire 30,000 shares. The exercise price of the cancelled options was
$5.75 with a five year vesting period, 20% each year beginning April 7,
1996. The exercise price of the new options was $9.50 with three years
vesting, 40% vested as of the grant date with 20% additional vesting on
each annual anniversary date.
The Company also agreed to pay an amount in cash which represented the
difference between the new options granted at an exercise price of
$9.50 and the options cancelled which had an exercise price of $5.75,
based upon the vesting schedule of the cancelled Plan 2 options. The
Company charged these payments to compensation expense in fiscal 1997.
As of September 30, 1997, there were 299,042 shares exercisable under
Plan 1 and Plan 2 with a weighted average exercise price of $5.75. As of
September 30, 1996, there were 86,000 shares exercisable under Plan 1, all with
an exercise price of $5.75.
38
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) Employee Benefits
In July 1991, Pilgrim America Capital Corporation established a tax
deferred savings plan under Section 401(k) of the Internal Revenue Code. The
plan, which was amended May 1, 1995, covers all full time employees and allows
for a maximum contribution of $9,500 (the "Maximum") by each employee. Prior to
May 1, 1995, employees were allowed to contribute up to 20 percent of their
salary, subject to the Maximum. Employees were immediately vested in their
contributions. Matching contributions made by the Company were voluntary and any
matching contributions made through May 1, 1995 are fully vested.
Subsequent to May 1, 1995, pursuant to the amended plan, employees may
contribute up to 10% of their salary, subject to the Maximum, and the Company
automatically matches the employee's contributions, up to 7% of the employee's
salary. Employees become vested in the Company's contributions over a three-year
period.
During the year ended September 30, 1997 and September 30, 1996, the
Company contributed $265,000 and $273,000, respectively, to the plan.
(11) Commitments and Contingencies
The Company is involved in various legal proceedings which arose in the
course of its discontinued mortgage operations. Management is of the opinion
that such proceedings are not material in nature and will not have a material
adverse effect on the Company.
The Company is obligated under certain non-cancelable operating leases
for equipment and office facilities. In addition, during the years ended
September 30, 1997 and September 30, 1996 the Company has provided $96,000 and
$196,000, respectively, for net discounted future minimum lease payments
relating to lease obligations acquired from Pilgrim Group, Inc. The Company's
operations have been relocated and the facilities subleased.
39
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future minimum lease payments under the Company's operating leases for
its offices in Phoenix, Arizona and for the offices in Los Angeles, California
(which lease was acquired from Pilgrim Group, Inc. pursuant to the Acquisition),
as well as the sublease income related to the Los Angeles office, are as
follows:
September Lease Sublease Net
30, Payments Income Payments
----------- ---------- ----------- ---------
1998 $ 889 $ 525 $ 364
1999 899 525 374
2000 719 350 369
2001 353 -- 353
2002 276 -- 276
---------- ----------- ---------
$ 3,136 $ 1,400 $ 1,736
========== =========== =========
Rent expense included in continuing operations for the years ended
September 30, 1997, 1996 and 1995, were $341,000, $333,000 and $292,000,
respectively.
(12) Related Party Transactions
Investment Advisory Agreements. Pursuant to investment management
agreements (the "Agreements"), the Company provides investment management
services to the Funds. Following an initial two-year term, the Agreements are
renewable annually based upon approval by a majority of the respective Fund's
disinterested directors.
Additionally, each Agreement may be terminated prior to its expiration
upon 60 days notice by either the Company or the Fund.
As provided in the Agreements, the Company receives management fees
ranging from .50% to 1.25% on an annual basis of the respective Fund's average
daily net assets. Management fees received from the Funds, net of sub-advisory
fees, amounted to $15.7 million during Fiscal 1997, $11.2 million during Fiscal
1996 and $5.1 million for the period from April 7, 1995 to September 30, 1995.
The Agreements also contain expense limitation provisions whereby the Company
has agreed to reimburse each Fund annually, under certain conditions, an amount
equal to all or a portion of its investment advisory fees. Fund expense
reimbursements under these provisions were $742,000 during Fiscal 1997, $606,000
during Fiscal 1996, and $94,000 for the period from April 7, 1995 to September
30, 1995. Amounts payable to the Funds under such provisions as of September 30,
1997 and September 30, 1996 were $95,000 and $56,000, respectively.
In addition the Company acts as administrator for Pilgrim America Prime
Rate Trust (the "Trust"). Under the terms of the related Agreement, the Company
receives annual administrative fees ranging from .10% to .15% of the average
daily net assets plus any borrowings of the Trust. The fees are computed daily
and payable monthly.
Administrative fees received from the Trust amounted to $1.7 million
during Fiscal 1997, $1.3 million during Fiscal 1996, and $608,000 for the period
from April 7, 1995 to September 30, 1995.
40
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company also serves as the principal distributor for Pilgrim America
MagnaCap Fund, Pilgrim America High Yield Fund, Pilgrim Government Securities
Income Fund, Pilgrim America Masters Asia-Pacific Equity Fund, Pilgrim America
Masters MidCap Value Fund, Pilgrim America Masters LargeCap Value Fund and
Pilgrim America Bank and Thrift Fund, open-end management investment companies
(collectively, the "Open-end Funds") managed by the Company (see Notes 13 and
16). Distribution fees earned from the Open-end Funds amounted to $2.5 million
in Fiscal 1997, $1.1 million for Fiscal 1996 and $377,000 for the period from
April 7, 1995 to September 30, 1995.
(13) Distribution Plans
Pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
principal distributor for the Open-end Funds, the Company receives distribution
fees ranging from .25% to 1.00% on an annual basis of the respective Open-end
Fund's average daily net assets. Also under Rule 12b-1, the Company makes
ongoing payments on a quarterly basis to authorized dealers for distribution and
shareholder servicing at annual rates ranging from .25% to .65% of the Fund's
average daily net assets.
The Company is entitled to contingent deferred sales charges which are
imposed upon the redemption of certain classes of shares of the Open-end Funds.
Such charges are paid by the redeeming shareholder and are imposed at the rate
of 5% for redemptions in the first year after purchase, declining to 4%, 3%, 3%,
2% and 1% in the second, third, fourth, fifth and sixth years, respectively.
(14) Discontinued Operations
Historically, the Company had been engaged in the mortgage banking
business. On June 9, 1994, the Company sold its rights to service $305.5 million
of Government National Mortgage Association ("GNMA") loans. On September 30,
1994, the Company's mortgage servicing portfolio and operations were sold (see
Note 3). On February 28, 1995, the Company discontinued the remainder of its
mortgage banking operations and recorded a provision for loss on discontinuance
of mortgage banking operations of $986,000. This provision included the
anticipated mortgage banking related revenues and expenses, including severance
expense and all other costs that will be incurred to phase out these operations.
Subsequent to February 28, 1995, during Fiscal 1995 the Company increased the
loss provision to $5.3 million, based on reevaluation of its allowances for
discontinued operations, including legal fees and other costs relating to legal
proceedings (see Note 15). During Fiscal 1997, no additional provisions were
made for discontinued operations and the Company adjusted the allowance for
discontinued operations by including $413,000 (net of tax) of income from the
reversal of certain allowances for discontinued operations. As of September 30,
1997 the Company believes that the remaining allowances are adequate to complete
the discontinuance of the remaining mortgage banking operations. The Company
believes that it has substantially wound down its mortgage banking operations,
but anticipates that mortgage loan related issues will continue to arise through
at least Fiscal 1998.
Balance Sheet. The balance sheet presentation included in the
accompanying consolidated financial statements as of September 30, 1997 and 1996
has been adjusted to reflect the assets and liabilities relating to the
Company's mortgage banking operations as net liabilities of discontinued
operations.
41
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth certain balance sheet information related
to these operations as of September 30, 1997 and 1996:
Net Liabilities of Discontinued Operations
(in thousands)
1997 1996
------- -------
Assets
Other receivables $ -- $ 157
Mortgage loans held for sale 1,128 3,516
------- -------
Total assets 1,128 3,673
------- -------
Liabilities
Accounts payable and accrued expenses 1,358 3,191
Allowances for contingencies (see Notes 11 and 15) -- 2,554
Notes payable -- 1,320
------- -------
Total liabilities 1,358 7,065
------- -------
Net liabilities of discontinued operations $ (230) $(3,392)
======= =======
Operations. The statements of operations presentation included in the
accompanying consolidated financial statements for the fiscal years ended
September 30, 1997, 1996, and 1995 have been adjusted to reflect the results of
the mortgage banking operations as discontinued operations. Primary earnings
(loss) per share attributable to discontinued operations were $0.10, $0.00 and
($1.08) in 1997, 1996 and 1995, respectively.
Restructuring Charges. As of September 30, 1997, the Company had no
outstanding leases on office or equipment related to the discontinued mortgage
business. Usage of the allowance for losses on office and equipment leases was
$127,000 during Fiscal 1997 and the remaining balance at September 30, 1996 was
$201,000.
The Company has loss allowances, included in accrued expenses (of
discontinued operations), in the amount of $0 and $237,000 at September 30, 1997
and 1996, respectively, to provide for estimated losses to be incurred upon
foreclosure of loans in the servicing portfolio and for VA no-bids. As of June
30, 1997 the Company's obligation to indemnify VA no-bids expired. Additionally,
as of September 30, 1997 and 1996, the Company had established repurchase
allowances of $725,000 and $1.9 million, respectively, also in accrued expenses,
to provide for estimated losses to be incurred upon repurchase and resale of
loans originated by the Company.
(15) Legal Proceedings
On May 23, 1997 the Company entered into an agreement with the
Federal Deposit Insurance Corporation ("FDIC") to settle all claims in a civil
action filed in December 1995 by the FDIC in the United States District Court,
District of Arizona. The FDIC action against the Company and other defendants
sought at least $20 million in actual damages and $80 million in punitive
damages. This settlement covers all FDIC claims asserted against the Company and
certain of its officers and directors. The Company settled with its Director and
Officer liability insurance carrier under the policy providing coverage for this
matter and had no charge to earnings.
42
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(16) Subsequent Event
On October 20, 1997, the shareholders of Pilgrim America Bank and Thrift
Fund voted to change the Fund from a Closed-end Fund to an Open-end Fund. As a
result of this change, the Fund has entered into a distribution agreement with
PAS to distribute the Funds' shares. The Fund will pay PAS a .25% and 1.00%
12B-1 fee based on average annual assets of Class A and Class B shares,
respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information respecting (a) continuing directors and nominees of the
Company is set forth under the caption "Information Concerning Directors and
Nominees" and (b) disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is set forth under the caption "Compliance with Section 16(a)
under The Exchange Act," in the Company's Proxy Statement relating to its 1998
Annual Meeting of Stockholders incorporated by reference into this Form 10-K
Report, which will be filed with the Securities and Exchange Commission in
accordance with Rule 14a-6(c) promulgated under the Securities Exchange Act of
1934 (the "1998 Proxy Statement"). With the exception of the foregoing
information and other information specifically incorporated by reference into
this Form 10-K Report, the Company's 1998 Proxy Statement is not being filed as
a part hereof. Information respecting executive officers of the Company who are
not continuing directors or nominees is set forth at the end of Part I of this
Report.
Item 11. Executive Compensation
Information respecting executive compensation is set forth under the
caption "Executive Compensation" in the 1998 Proxy Statement, which information
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information respecting security ownership of certain beneficial owners
and management is included under the caption "Principal Stockholders and
Stockholdings of Management" in the 1998 Proxy Statement, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information respecting certain relationships and transactions of
management is set forth under the caption "Certain Transactions" in the 1998
Proxy Statement, which information is incorporated herein by reference.
43
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
<TABLE>
<CAPTION>
Page or
(a) Financial Statements. Method of Filing
------------------------------
<S> <C> <C>
(1) Report of KPMG Peat Marwick LLP Page 24
(2) Consolidated Financial Statements and Notes thereto of Page 25
the Company, including Consolidated Balance Sheets as of
September 30, 1997 and 1996 and related Consolidated
Statements of Operations, Cash Flows and Stockholders'
Equity for the years ended September 30, 1997, 1996 and
1995.
(b) Financial Statement Schedules.
(1) Report of KPMG Peat Marwick LLP Page 50
(2) Schedule I-- Condensed Financial Information Page 51
(3) Schedule II-- Valuation and Qualifying Accounts Page 52
(c) Exhibits. The following exhibits are filed as part of this Report.
3.1 Restated Certificate of Incorporation of Registrant Incorporated by reference
to Exhibit 3.1 of the
Registrant's Annual Report
on Form 10-K for the Fiscal
Year Ended September 30,
1993 (the "1993 Form 10-K")
3.2 Amended and Restated Bylaws of Registrant Incorporated by reference to
Exhibit 3.2 of the 1993 Form
10-K
4.1 Form of Certificate for Common Stock Incorporated by reference to
Exhibit 4.1 of the 1993 Form
10-K
4.2.1 Stock Option Plan of the Registrant (as amended through Incorporated by reference to
November 1993) Exhibit 4.2.1 of the 1993
Form 10-K
4.2.2 Form of Incentive Stock Option Agreement for the Stock Incorporated by reference to
Option Plan Exhibit 4.2 of Form S-8
Registration Statement No.
33-61274 ("S-8 No. 33-61274")
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C>
4.2.3 Form of Nonstatutory Stock Option Agreement for the Incorporated by reference to
Stock Option Plan Exhibit 4.3 of S-8 No.
33-61274
4.3 Form of Stock Option Agreement for Non-Employee Incorporated by reference to
Directors Exhibit 4 of Form S-8 No.
33-64738
4.5.1 Performance Share Plan Incorporated by reference to
Exhibit 4.5.1 of the 1996
Form 10K.
4.5.2 Form of Performance Share Agreement Incorporated by reference to
Exhibit 4.5.2 of the 1996
Form 10K.
10.1.1 Employment Agreement between Registrant and Robert Incorporated by Reference to
W. Stallings dated August 16, 1995 Exhibit 10.1.1 of the Report
on Form 10-K for the Fiscal
Year Ended September 30,
1995 (the "1995 Form 10-K")
10.1.2 Employment Agreement between Registrant and James R. Incorporated by Reference to
Reis dated August 16, 1995 Exhibit 10.1.2 of the 1995
Form 10-K
10.2.3 Form of Indemnity Agreement between the Registrant Incorporated by reference to
and each member of its Board of Directors Exhibit 10.9.3 of the 1992
Form 10-K
10.3 Asset Purchase Agreement dated August 27, 1994 Incorporated by reference to
between Registrant and NationsBanc Mortgage Exhibit 2 to Form 8-K
Corporation relating to an event of
August 27, 1994
Acquisition Agreement among the Registrant, Pilgrim Incorporated by reference to
10.4 Group, Inc., Pilgrim Management Corporation, Pilgrim Exhibit 2 to Form 8-K
Distributors Corporation and Palomba Weingarten relating to an event of
December 7,
1994
10.5.1 Second Amended an Restated Credit Agreement dated as Incorporated by reference to
of July 31, 1997 by and between Pilgrim America Group, exhibit 10.1 to the June 30,
Inc and First Bank National Association 1997 Form 10Q.
10.16 Reaffirmation of Security Agreement dated July 31, 1996, Incorporated by reference to
PAI to First Bank Exhibit 10.16 of the 1996
Form 10K.
10.17 Reaffirmation of Security Agreement dated July 31, 1996, Incorporated by reference to
by PAS to First Bank Exhibit 10.17 of the 1996
Form 10K.
10.18 Reaffirmation of Guaranty and Pledge Agreement dated Incorporated by reference to
July 31, 1996, by the Registrant in favor of First Bank Exhibit 10.18 of the 1996
Form 10K.
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C>
10.19 Reaffirmation of Guaranty dated July 31, 1996, by PAI in Incorporated by reference to
favor of First Bank Exhibit 10.19 of the 1996
Form 10K.
10.20 Reaffirmation of Pledge Agreement dated as of July 31, Incorporated by reference to
1996, by PAG to First Bank Exhibit 10.20 of the 1996
Form 10K.
10.21 Portfolio Management Agreement among PAI, HSBC Incorporated by reference to
Asset Management Americas Inc. and HSBC Asset Exhibit 10.22 of the 1995
Management Hong Kong Limited, dated April 27, 1995 Form 10-K
10.22 Portfolio Management Agreement dated May 1, 1995, Incorporated by reference to
between PAI and CRM Advisors, LLC Exhibit 10.23 of the 1995
Form 10-K
10.24 Investment Management Agreement dated June 6, 1995, Incorporated by reference to
between PAI and Pilgrim America Masters Series, Inc. Exhibit 10.25 of the 1995
Form 10-K
10.25 Investment Management Agreement dated April 7, 1995, Incorporated by reference to
between PAI and Pilgrim America Investment Funds, Inc. Exhibit 99.5 of Form 8-K/A
on behalf of its Pilgrim America High Yield Fund series Amendment No. 2, Event dated
December 7, 1994
10.26 Investment Management Agreement dated April 7, 1995, Incorporated by reference to
between PAI and Pilgrim Government Securities Income Exhibit 99.4 of Form 8-K/A
Fund Amendment No. 2, Event dated
December 7, 1994
10.27 Investment Management Agreement dated April 7, 1995, Incorporated by reference to
between PAI and Pilgrim Prime Rate Trust Exhibit 99.1 of Form 8-K/A,
Amendment No. 2, Event dated
December 7, 1994
10.28 Investment Management Agreement dated April 7, 1995, Incorporated by reference to
between PAI and Pilgrim Regional BankShares Inc. Exhibit 99.3 of Form 8-K/A,
Amendment No. 2, Event dated
December 7, 1994
10.29 Investment Management Agreement dated April 7, 1995, Incorporated by reference to
between PAI and Pilgrim America Investment Funds, Inc. Exhibit 99.2 of Form 8-K/A,
on behalf of Pilgrim America MagnaCap Fund series Amendment No. 2, Event dated
December 7, 1994
10.30 Administration Agreement amended and restated as of Incorporated by reference to
April 7, 1995, between PAG and Pilgrim Prime Rate Trust Exhibit 99.6 of Form 8-K/A,
Amendment No. 2, Event dated
December 7, 1994
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C>
10.31 Distribution Plan dated April 7, 1995, between PAI and Incorporated by reference to
Pilgrim America Investment Funds, Inc. on behalf of its Exhibit 99.7 of Form 8-K/A
Pilgrim America MagnaCap Fund series and PAS Amendment No. 2, Event dated
December 7, 1994
10.32 Distribution Plan dated April 7, 1995, between PAI and Incorporated by reference to
Pilgrim America Investment Funds, Inc. on behalf of its Exhibit 99.8 of Form 8-K/A,
Pilgrim America High Yield Fund series and PAS Amendment No. 2, Event dated
December 7, 1994
10.33 Distribution Plan dated April 7, 1995, between Pilgrim Incorporated by reference to
Government Securities Income Fund, Inc. and PAS Exhibit 99.9 of Form 8-K/A,
Amendment No. 2, Event dated
December 7, 1994
10.34 Agreement dated July 23, 1997 between Merrill Lynch Pierce, Page 53
Fenner and Smith, Inc. and Pilgrim America Investments, Inc.
10.35 Collateral Management Agreement dated November 13, 1997 Page 61
between ML CLO XII Pilgrim America Ltd. and Pilgrim America
Investments, Inc.
11.1 Computation of Earnings per Share. Page 80
21 Subsidiaries of Registrant Incorporated by reference to
Exhibit 21 of the 1995 Form
10k.
23 Consent of KPMG Peat Marwick LLP Included in Report at
Financial Statement Schedules
24 Powers of Attorney See Signature Page
</TABLE>
(d) Reports on Form 8-K.
None
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report of Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 19
day of December, 1997.
PILGRIM AMERICA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ Robert W. Stallings
---------------------------------------
Robert W. Stallings
Chairman of the Board, Chief Executive Officer and President
48
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert W. Stallings and James R. Reis, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K Annual
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert W. Stallings Chairman of the Board, Chief December 19, 1997
- ---------------------------------------- Executive Officer and President (Principal
Robert W. Stallings Executive Officer)
/s/ James R. Reis Vice Chairman and Chief Financial December 19, 1997
- ---------------------------------------- Officer (Principal Accounting
James R. Reis Officer
/s/ John C. Cotton Director December 19, 1997
- ----------------------------------------
John C. Cotton
/a/ Roy A. Herberger, Jr. Director December 19, 1997
- ----------------------------------------
Roy A. Herberger, Jr.
/s/ John M. Holliman, III Director December 19, 1997
- ----------------------------------------
John M. Holliman, III
/s/ Stephen A McConnell Director December 19, 1997
- ----------------------------------------
Stephen A McConnell
/s/ Paul J. Renze Director December 19, 1997
- ----------------------------------------
Paul J. Renze
</TABLE>
49
<PAGE>
Independent Auditors' Consent and Report on Schedules
-----------------------------------------------------
The Board of Directors
Pilgrim America Capital Corporation:
The audits referred to in our report dated October 17, 1997, included the
related financial statement schedules as of September 30, 1997 and 1996, and for
each of the years in the three-year period ended September 30, 1997. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference in the registration statements No.
333-23051, No. 333-06597, No. 33-61274 and No. 33-64738 on Form S-8 of Pilgrim
America Capital Corporation of our report dated October 17, 1997 relating to the
consolidated balance sheets of Pilgrim America Capital Corporation and
subsidiaries as of September 30, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended September 30, 1997 and our report dated
December 22, 1997 relating to the schedules set forth in the preceding
paragraph, which reports appear in the September 30, 1997, annual report of Form
10-K of Pilgrim America Capital Corporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
December 22, 1997
Los Angeles, California
50
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PILGRIM AMERICA CAPITAL CORPORATION
in thousands
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Balance Sheets
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Assets: Liabilities and Stockholders' Equity:
Cash and cash equivalents ..... $ - $ 3 Notes payable ............................. $ 5,475 $ -
Investments ................... 2,990 2,346 Due from subsidiaries ..................... 252 -
Investments in subsidiaries ... 39,352 32,552 Other liabilities ......................... 1,668 6,592
Note receivable ............... 3,976 - -------- --------
Receivables ................... 225 - Total liabilities ......................... 7,395 6,592
Due from subsidiaries ......... - 942 -------- --------
Deferred tax asset ............ 1,990 - Common stock .............................. 54 54
Other assets .................. 615 537 Less: Treasury stock ................... (8,623) (8,623)
Additional paid in capital ................ 48,795 48,759
Unrealized gain on investments ............ 538 333
Retained earnings (accumulated deficit).... 989 (10,735)
-------- --------
Total stockholders' equity .......... 41,753 29,788
-------- -------- -------- --------
Total liabilities and stockholders'
Total assets .................. $ 49,148 $ 36,380 equity .............................. $ 49,148 $ 36,380
======== ======== ======== ========
Condensed Statement of Operations
For the Years Ended September 30,
1997 1996 1995
---------- ---------- ----------
Equity in earnings (loss) of subsidiaries ................................................... $ 8,289 $ 588 $ (5,811)
Other gain (loss) ............................................................................ 1,091 (240) (60)
Income tax benefit ........................................................................... 2,344 - -
---------- ---------- ----------
Net earnings (loss) .......................................................................... $ 11,724 $ 348 $ (5,871)
========== ========== ==========
Condensed Statements of Cash Flows
For the Years Ended September 30,
1997 1996 1995
---------- ---------- ----------
Net cash provided by operating activities .................................................. $ 400 $ 6,940 $ 4,714
---------- ---------- ----------
Net cash used in investing activities ...................................................... (439) (13) (2,000)
---------- ---------- ----------
Redemption of preferred stock .............................................................. - (338) (677)
Purchase of treasury stock ................................................................. - (6,615) (2,008)
Purchase of stock options .................................................................. 36 - -
---------- ---------- ----------
Net cash provided by (used in) financing activities ........................................ 36 (6,953) (2,685)
---------- ---------- ----------
Increase(decrease) in cash and cash equivalents ............................................ (3) (26) 29
Cash and cash equivalents, beginning of period ............................................. 3 29 -
---------- ---------- ----------
Cash and cash equivalents, end of period ................................................... $ - $ 3 $ 29
========== ========== ==========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE I I - VALUATION AND QUALIFYING ACCOUNTS
PILGRIM AMERICA CAPITAL CORPORATION
in thousands
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------- ------------- --------------------------------- ----------------- ---------------
Additions
---------------------------------
Balance at Charged to Charged from Balance
beginning costs and (to) other at end
Description of period expenses accounts Deductions (1) of period
- -------------------------------------- ------------- ------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997
Allowance for restructuring $ 201 $ - $ (103) $ (98) $ -
Allowance for repurchases 1,930 - (709) (496) 725
Allowance for losses 893 (696) (3) 1,086 (670) 613
Allowance for contingencies (2) 2,554 - (407) (2,147) -
Year ended September 30, 1996
Allowance for restructuring 328 - - (127) 201
Allowance for repurchases 3,171 - - (1,241) 1,930
Allowance for losses 1,003 - 58 (168) 893
Allowance for contingencies (2) 3,000 - 528 (974) 2,554
Year ended September 30, 1995
Allowance for restructuring 4,661 - (469) (3,864) 328
Allowance for repurchases 1,747 2,826 271 (1,673) 3,171
Allowance for losses 1,738 334 (271) (798) 1,003
Allowance for contingencies (2) - 3,000 - 3,000
</TABLE>
(1) Actual losses charged against allowance, net of recoveries and
reclassifications
(2) For estimated costs related to RTC action (see "Item 3. Legal Proceedings"
and "Item 8. Financial Statements and Supplementary Data - Notes 11, 15").
(3) The Company determined that the allowance for discontinued operations was
overstated and recorded income from discontinued operations (see the
Statement of Operations "Earnings (loss) from discontinued mortgage
business, net of tax").
52
July 23, 1997
Confidential
- ------------
Mr. James Reis
Pilgrim America Investments, Inc.
40 North Central Avenue
Suite 1200
Phoenix, Arizona 85004-4424
Dear Mr. Reis:
This letter agreement will confirm the understanding between
Pilgrim America Investments, Inc. (the "Manager") and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPFSI") pursuant to which (a) MLPFSI or one or
more of its affiliates (collectively, "Merrill Lynch") agrees to act on an
exclusive basis as sole placement agent, on the terms and conditions set forth
herein, in connection with the structuring and placement of a private offering
(the "Offering") of senior secured notes or revolving loans ("Senior Notes" and
together with the Subordinated Notes (as defined below) issued in connection
with ML CLO Series 1997 - Pilgrim America-1, the "Notes") and (b) the Manager
agrees to serve as collateral manager for the Issuer (as defined below) pursuant
to a collateral management agreement in substantially the form of Exhibit B
hereto (the "Collateral Management Agreement"). The Notes will be issued by one
or more special purpose vehicles (individually and collectively, the "Issuer")
pursuant to an Indenture substantially in the form of Exhibit C hereto as
revised to reflect the requirements of the trustee, any rating agency rating any
of the Senior Notes and as otherwise revised by mutual agreement among the
Manager and Merrill Lynch prior to the closing date of the Offering (the
"Indenture") in as many as four classes consisting of up to three classes of
Senior Notes and one class of subordinated notes ("Subordinated Notes") and will
be collateralized primarily by a portfolio of bank loans and high yield bonds to
be acquired by the Manager or an affiliate of the Manager (the "Collateral") on
behalf of the Issuer.
1. Roles of Merrill Lynch and Manager. Merrill Lynch hereby
agrees (i) to act as sole advisor to the Manager and the Issuer in connection
with structuring the Offering of the Notes, (ii) to act as placement agent for
the Notes and to use all reasonable efforts to consummate the Offering and (iii)
to purchase (for retention or resale at Merrill Lynch's sole discretion) any
Subordinated Notes not placed pursuant to clause (ii) hereof. The Manager hereby
agrees to act as collateral manager for the Issuer with respect to the
Collateral. The Manager agrees that it has not retained and will not retain any
other person, firm, corporation or other entity (any and all of which shall be
referred to herein as a "person") to assist the Manager or the Issuer with
respect to the underwriting, placement or sale of the Notes and will not,
directly or indirectly, offer any of the Notes for sale to, or solicit any
offers to buy from, or otherwise contact, approach or negotiate with respect
thereto with any person other than Merrill Lynch. Notwithstanding the foregoing,
nothing herein shall prevent the Manager
53
<PAGE>
from retaining Tri-River Capital Group ("Tri-River"), at the Manager's expense,
as a financial adviser to the Manager in connection with the transactions
contemplated in this letter agreement.
Merrill Lynch's obligations under clauses (ii) and (iii) of
the first sentence of this Section 1 shall be conditioned on and subject to (i)
no material adverse changes in market conditions from those existing on the date
hereof, (ii) unless otherwise agreed between the Manager and Merrill Lynch, a
structure for the Notes consistent with the requirements of the applicable
rating agencies and prior Merrill Lynch CBO and CLO transactions, and (iii) the
timely satisfaction by the Manager of all of its obligations under this letter
agreement.
The Manager hereby agrees that for a period of 6 months from
the issue date of the Notes (such issue date, the "Closing Date") or until
Merrill Lynch has resold all of the Subordinated Notes purchased by it on the
Closing Date, whichever shall be earlier, the Manager will not commence or
participate in any CBO or CLO.
2. Manager's Commitment. In order to achieve a transaction of
approximately $400 million, it will be necessary to issue approximately $33.5
million aggregate principal amount of Subordinated Notes (such amount, the "Base
Subordinated Note Amount"). Accordingly, the Manager hereby agrees to purchase
or cause an affiliate to purchase at least $5 million aggregate principal amount
of Subordinated Notes (such amount, the "Manager Subordinated Note Amount") at a
price of par on the Closing Date, such amount to be subject to change from time
to time as mutually agreed in writing between Merrill Lynch and the Manager.
3. Compensation. In payment for services being rendered
hereunder, the Manager agrees that Merrill Lynch shall be paid the following
fees from the proceeds of the Offering of the Notes (however, such fees are
separate and distinct from, and do not preclude the receipt of, origination fees
which may be payable to investors in the Senior Notes): (i) a structuring fee
equal to 1.0% of the aggregate par amount of the Notes and (ii) placement fees
determined in the manner described in Exhibit A hereto; provided, however, that
the placement fees described in clause (ii) shall not be payable with respect to
the Subordinated Notes purchased by the Manager or an affiliate pursuant to this
letter agreement. Such fees shall be payable in same day funds at the offices of
Merrill Lynch, Merrill Lynch World Headquarters, North Tower, World Financial
Center, New York, New York 10281-1317 out of the proceeds of the Offering on the
Closing Date.
The Manager agrees that the Collateral Management Fee that
will be payable pursuant to the Collateral Management Agreement and the
Indenture will consist of (capitalized terms not defined in this paragraph shall
have the definitions ascribed to them in the Collateral Management Agreement and
the Indenture) (a) a "Base Collateral Management Fee" payable in arrears on each
Distribution Date pursuant to Section 8 of the Collateral Management Agreement
and Section 11.1 of the Indenture, in an amount (as certified by the Manager to
the Trustee) equal to 0.35% per annum of the sum of the Aggregate Principal
Amount outstanding on the first day of the Due Period preceding such
Distribution Date, (b) a "Subordinated Collateral Management Fee" payable in
arrears on each Distribution Date pursuant to Section 8 of the Collateral
Management Agreement and Section 11.1 of the Indenture, in an amount (as
certified by the Manager to the Trustee) equal to 0.15% per annum of the sum of
the Aggregate Principal Amount outstanding on the first day of the Due Period
preceding such Distribution Date, and (c) a "Contingent Collateral Management
Fee" payable in arrears on each Distribution Date pursuant to Section 8 of the
Collateral Management Agreement and Section 11.1 of the Indenture, equal to
0.25% per annum of the Aggregate Principal Amount outstanding on the first day
of the Due Period preceding such Distribution Date and as provided in the
Indenture; provided, however, that the Contingent Collateral Management Fee will
be payable on each Distribution Date only to the extent that (after taking into
account any distributions to be made to the Subordinated Notes on such
Distribution Date) the holders of the Subordinated Notes have received an
internal rate of return of 10% per annum on the amount of the initial principal
amount of the Subordinated Notes for the period from the Closing Date to such
Distribution
54
<PAGE>
Date, to the extent of funds available for such purpose in accordance with the
priorities of payment described under Section 11.1 of the Indenture.
4. No Unauthorized Use of Advice from Merrill Lynch. Subject
to Section 9, (i) no advice rendered by Merrill Lynch in connection with the
services performed by Merrill Lynch pursuant to this letter agreement will be
quoted, nor will any such advice or the name of Merrill Lynch be referred to, in
any report, document, release or other written communication (including, without
limitation, any offering document relating to the Senior Notes or the
Subordinated Notes) and (ii) no advice rendered by Merrill Lynch in connection
with the services performed by Merrill Lynch pursuant to this letter agreement
will be quoted, nor will any such advice be referred to in any oral
communication; in either case (i) or (ii) whether prepared, issued or
transmitted by the Manager, the Issuer (to the extent acting at the direction of
the Manager), or any person or corporation controlling, controlled by or under
common control with the Manager or the Issuer (to the extent acting at the
direction of the Manager), or any director, officer, employee, agent or
representative of any of the foregoing, to any unaffiliated third party, without
Merrill Lynch's prior written authorization. The Manager shall not make any
public announcement concerning the issuance of the Notes, the Manager's role
hereunder or any other aspects of the transactions contemplated by this
agreement and the Indenture except: (i) as required by federal and state
securities laws or (ii) with the consent of Merrill Lynch provided that such
announcement does not violate federal and state securities laws.
5. Termination Generally. This letter agreement shall
terminate twelve months after the date of signing by the Manager and Merrill
Lynch, unless (i) the Manager and Merrill Lynch mutually agree in writing to
extend or shorten its term, (ii) in the absence of any mutual agreement, the
Manager elects to terminate this agreement by notifying Merrill Lynch in writing
and Merrill Lynch consents to such termination, which consent shall not be
unreasonably withheld; or (iii) in the absence of any mutual agreement, the
Merrill Lynch elects to terminate this agreement by notifying the Manager in
writing and the Manager consents to such termination, which consent shall not be
unreasonably withheld; provided, however, that Sections 3, 4, 5 and 9 of this
letter agreement will survive any termination of this agreement and provided
further that any early termination pursuant to subsection (ii) above shall
constitute a breach by the Manager for purposes of the provisions under
"Termination Not Upon Closing of the Transaction" below and any early
termination pursuant to subsection (iii) above shall constitute a breach by
Merrill Lynch for purposes of the provisions under "Termination Not Upon Closing
of the Transaction" below. If the Offering is not executed during the term of
this letter agreement and the Manager or an affiliate enters into a transaction
similar to that described above (regardless of the number of classes of
securities issued) with a firm other than Merrill Lynch within six months of the
termination of this letter agreement, the structuring and placement fees
heretofore agreed (calculated based on the corresponding classes of securities
issued) shall be promptly paid by the Manager to Merrill Lynch.
Termination Upon Closing of the Transaction. If the Notes are
issued on the Closing Date, any positive Gross Carry remaining after payment of
the Origination Fee (each as defined below) shall be ratably shared between the
Manager and Merrill Lynch based upon the Share Ratio (as defined below) and any
negative Gross Carry shall be treated as an additional expense of the Offering
to be paid from the proceeds of the Offering.
"Share Ratio" shall mean the ratio obtained by dividing (x)
the Manager Subordinated Note Amount by (y) the Base Subordinated Note Amount.
The Share Ratio shall initially be 5/33.5 (thus, 14.9% with respect to the
Manager and 85.1% with respect to Merrill Lynch). Such ratio is subject to
change from time to time as mutually agreed in writing between Merrill Lynch and
the Manager and, if the Notes are issued, shall be automatically deemed changed
to equal the ratio of the aggregate principal amount of Subordinated Notes
55
<PAGE>
actually purchased by the Manager or an affiliate of the Manager to the
aggregate principal amount of Subordinated Notes actually issued.
If the Notes are issued, Merrill Lynch shall be reimbursed on
the Closing Date from the proceeds of the Offering for all reasonable
out-of-pocket expenses, including but not limited to the fees and disbursements
of Merrill Lynch's counsel, the fees of the applicable rating agencies, the fees
of the trustee, including trustee's counsel, and fees for accounting and other
professional services that may be incurred in connection with the preparation
and placement of the Offering (the "Merrill Lynch Reimbursement Amount"). If the
Notes are not issued, the Merrill Lynch Reimbursement Amount shall not exceed
$1,000,000 in the aggregate.
If the Notes are issued, the Manager shall be reimbursed on
the Closing Date from the proceeds of the Offering the Manager Reimbursement
Amount (as defined below); provided, however, that in addition to the Manager's
Note purchase obligations under Section 2, the Manager shall purchase an
aggregate principal amount of Subordinated Notes equal to or greater than the
Manager Reimbursement Amount at a price of par of the Closing Date. In addition,
if the Notes are issued Merrill Lynch agrees to pay to the Manager on the
Closing Date an amount equal to the Origination Fee (as defined below) out of,
and only up to, the positive amount of the Gross Carry, if any.
"Manager Reimbursement Amount" shall mean an amount equal to
all of the Manager's reasonable out-of-pocket expenses, including but not
limited to the fees and disbursements of its counsel, in an amount not to exceed
(a) $50,000 if the Notes are issued and (b) $15,000 if no Notes are issued.
"Gross Carry" (which may be a negative number) means (a) the
amount of interest accrued on the Collateral for the period from the acquisition
of such Collateral in anticipation of the Offering to the Closing Date or date
on which such Collateral is liquidated following a determination that the Notes
will not be issued (the "Accumulation Period"), plus (b) any gain on the sale of
any Collateral prior to the Closing Date or from the liquidation of the
Collateral, or any hedging gains or profits, following a determination that the
Closing Date will not occur (in each case net of expenses of such sale or
liquidation and any related hedging costs or losses, but not including the
Origination Fee, if any,), minus (c) any loss on the sale of any Collateral
prior to the Closing Date or from the liquidation of the Collateral following a
determination that the Closing Date will not occur (in each case net of expenses
of such sale or liquidation and any related hedging costs or losses, but not
including the Origination Fee, if any,) minus (d) an amount (the "Finance
Charge") equal to interest accrued on the average daily amount advanced to
purchase the Collateral held by the Issuer or Merrill Lynch during the
Accumulation Period at a rate of three-month LIBOR plus 100 basis points.
Merrill Lynch shall be paid or shall be entitled to retain the Finance Charge
whether or not the Closing Date occurs.
Termination Not Upon Closing of the Transaction. If no Notes
are issued, the Manager and Merrill Lynch agree to ratably share in any negative
Net Carry (as defined below), or in any positive Net Carry remaining after
payment of the Origination Fee as described below, based in each case upon the
Share Ratio, except upon a breach of this letter agreement by either Merrill
Lynch or the Manager as provided below.
"Net Carry" (which may be a negative number) means (i) Gross
Carry minus (ii) the Merrill Lynch Reimbursement Amount minus (iii) the Manager
Reimbursement Amount.
If this letter agreement terminates prior to the Closing Date,
the Collateral shall be sold or liquidated by Merrill Lynch at the respective
Market Prices (as defined below) for each item of Collateral; provided, however,
the Manager shall have a right of first refusal to purchase all or any portion
of the Collateral
56
<PAGE>
at the respective Market Prices of such Collateral. The Manager must give
Merrill Lynch notice that it wishes to exercise such right within 5 business
days of the termination of this letter agreement.
"Market Price" shall mean the firm bid price obtained by
Merrill Lynch from a buyer or buyers in the market for each item of Collateral.
Upon the occurrence of a sale or liquidation of the Collateral
pursuant to the second preceding paragraph, the Manager shall be entitled to be
paid the Origination Fee out of, and only up to, the positive amount of the Net
Carry, if any.
"Origination Fee" shall mean an amount equal to 0.385% per
annum on the average daily principal amount of the Collateral held by the Issuer
or Merrill Lynch during the Accumulation Period.
Upon a termination of this letter agreement due to a breach by
the Manager of any of its obligations or agreements hereunder, the Manager
hereby agrees that Merrill Lynch shall not be responsible for, and shall be held
harmless from any losses (including any unreimbursed Merrill Lynch Reimbursement
Amount or Manager Reimbursement Amount) relating to, such termination. Upon the
occurrence of such a breach, the Manager shall not be entitled to the
Origination Fee regardless of any gains resulting from a sale or liquidation of
the Collateral pursuant to the fourth preceding paragraph.
Upon a termination of this letter agreement due to a breach by
Merrill Lynch of any of its obligations or agreements hereunder, Merrill Lynch
hereby agrees that the Manager shall not be responsible for, and shall be held
harmless from any losses (including any unreimbursed Merrill Lynch Reimbursement
Amount or Manager Reimbursement Amount) relating to, such termination. Upon the
occurrence of such a breach, the Manager shall be entitled to the Origination
Fee regardless of gains or losses resulting from the sale or liquidation of the
Collateral pursuant to the fifth preceding paragraph.
6. Notices. Each notice or request by the Manager hereunder
will be evidenced by a writing signed by authorized representatives of the
Manager. All communications hereunder shall be in writing and shall be mailed or
delivered (i) to the Manager at the address set forth above, and (ii) to Merrill
Lynch, at its offices at Merrill Lynch World Headquarters, North Tower -7th
Floor, World Financial Center, New York, New York 10281-1307, Attention: Frank
Ronan, Managing Director.
7. Benefits of this Agreement. This letter agreement shall be
binding on and inure to the benefit of Merrill Lynch, the Manager and their
respective successors and assigns. No person other than such parties specified
in the preceding sentence shall have any rights with respect to the enforcement
of any of the rights or obligations hereunder.
No party to this letter agreement shall assign this letter
agreement to any other person or entity without the prior written consent of
each party hereto.
8. Manager Representation. The Manager represents that neither
it nor any of its affiliates is a party to or is bound by any agreement (written
or unwritten) with any person other than Merrill Lynch (i) relating in any
manner to the structuring, offer, issuance, sale, purchase or management of
collateralized loan obligations or similar instruments, (ii) the terms of which
would in any manner limit the Manager's ability to execute, deliver and perform
the Manager's obligations under this letter agreement, the Collateral Management
Agreement, the terms of any indenture relating to the Offering or any other
documents or instruments contemplated in connection with the transactions
described herein or (iii) the terms of which would in any manner limit the
Manager's ability to provide information to the Issuer or Merrill Lynch in
connection with the
57
<PAGE>
structuring and execution of such transactions, the composition or other
characteristics of the Collateral or any other aspect of the Manager's
involvement in such transactions.
9. Confidentiality. In connection with the transactions
contemplated by this letter agreement, Merrill Lynch expects to furnish the
Manager with certain oral and written confidential or proprietary material and
information, including without limitation information regarding the specific
proposed structure of the transaction, including investment criteria and hedging
arrangements. All material and information furnished by Merrill Lynch to the
Manager, whether oral or written, shall be considered confidential and
proprietary unless Merrill Lynch otherwise specifies in writing (all such
confidential or proprietary material and information is referred to herein as
the "Confidential Information"). The Manager agrees that it will keep the
Confidential Information strictly confidential. Notwithstanding the foregoing,
the Manager may disclose Confidential Information to Tri-River to the extent the
Manager deems appropriate; provided, however, that the Manager agrees to take
all reasonable steps necessary to ensure that Tri-River keeps the Confidential
Information strictly confidential. The Manager agrees that it will use the
Confidential Information solely for the purposes described in this letter
agreement. The term "Confidential Information" does not include any information
(i) that is or becomes publicly available other than as a result of a breach of
this Section 9 by the Manager or (ii) that was known by the Manager prior to its
disclosure by Merrill Lynch. This Section 9 shall not be construed to prohibit
disclosure by the Manager of the Confidential Information or any portion thereof
pursuant to any subpoena or similar legal process of any court or tribunal
provided that the Manager shall first give Merrill Lynch notice of the proposed
disclosure and seek to obtain confidential treatment of the Confidential
Information or portion thereof from such court or tribunal. Moreover, this
Section 9 shall not be construed to prohibit disclosure by the Manager of the
Confidential Information or any portion thereof as required by federal
securities laws; provided, however, that the Manager shall first give Merrill
Lynch notice of the proposed disclosure and certify to Merrill Lynch in writing
that such disclosure is required pursuant to federal securities laws. Upon
request of Merrill Lynch, the Manager shall return or cause to be returned to
Merrill Lynch the Confidential Information, without retaining any copy thereof.
It is understood and agreed that money damages would not be a sufficient remedy
for a breach of this Section 9 and that in addition to all other remedies
available at law or in equity, Merrill Lynch shall be entitled to equitable
relief, including injunction and specific performance, without proof of actual
damages.
Merrill Lynch agrees that all material and information
furnished by the Manager to Merrill Lynch, whether oral or written, with respect
to the Collateral shall be considered confidential and proprietary unless the
Manager otherwise specifies in writing, and that its review and inspection of
such material or information shall be undertaken solely for the purposes of
evaluating the transactions contemplated herein. The rights and limitations set
forth with respect to the disclosure of Confidential Information by the Manager
in the last five sentences of the preceding paragraph shall also apply mutatis
mutandis to the disclosure by Merrill Lynch of information with respect to the
Collateral. Notwithstanding the foregoing, nothing herein shall prevent the
disclosure by Merrill Lynch of information with respect to the Collateral in
order to assert, as Merrill Lynch deems necessary or appropriate, any defenses
available to them under federal or state law.
10. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO CONTRACTS EXECUTED IN AND TO BE PERFORMED IN THAT STATE.
11. Due Authorization. Each party represents that it is duly
authorized to execute this letter agreement.
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12. Counterparts. This letter agreement my be executed in one
or more counterparts each of which shall be deemed an original.
13. Headings. The section headings in this letter agreement
have been inserted as a matter of convenience of reference and are not a part of
this letter agreement.
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If the above correctly sets forth the understanding among the
Manager and Merrill Lynch, please so indicate by signing and returning to the
undersigned one of the enclosed duplicates of this letter agreement.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By:___________________________
Name:
Title:
Confirmed and agreed to as of the date first above written:
PILGRIM AMERICA INVESTMENTS, INC.
By:_______________________________
Name:
Title:
Collateral Management Agreement
-------------------------------
This Agreement, dated as of November 13, 1997, is entered into
by and between ML CLO XII Pilgrim America (Cayman) Ltd., a company incorporated
under the laws of the Cayman Islands, with its registered office located at the
offices of Messrs. Maples and Calder, P.O. Box 309, Ugland House, South Church
Street, George Town, Grand Cayman, Cayman Islands, British West Indies (together
with successors and assigns permitted hereunder, the "Issuer"), and Pilgrim
America Investments, Inc., ("Pilgrim America" or, in such capacity, the
"Collateral Manager"), a Delaware corporation, with its principal offices
located at Two Renaissance Square, 40 North Central Ave., Suite 12, Phoenix AZ
85004-4424, as collateral manager.
WITNESSETH:
-----------
WHEREAS, the Issuer intends to issue its Class A Floating Rate
Senior Secured Notes due 2009 (the "Class A Notes"), Class B Second Senior
Secured Notes due 2009 (the "Class B Notes"),(the Class A Notes together with
the Class B Notes, the "Senior Notes"), and Class C Subordinated Notes due 2009
(the "Class C Notes" and, together with the Senior Notes, the "Notes") pursuant
to an indenture (the "Indenture") to be dated as of November 13, 1997, among the
Issuer, ML CLO XII Pilgrim America (Delaware) Corp., as co-issuer of the Notes
(the "Co-Issuer"), and State Street Bank & Trust Company, as trustee (together
with any successor trustee permitted under the Indenture, the "Trustee");
WHEREAS, the Issuer intends to pledge certain Collateral Debt
Securities, Eligible Investments and Cash (all as defined in the Indenture) and
certain other assets (all as set forth in the Indenture) (collectively, the
"Collateral") to the Trustee as security for the Notes;
WHEREAS, the Issuer wishes to enter into this Collateral
Management Agreement, pursuant to which the Collateral Manager agrees to
perform, on behalf of the Issuer, certain duties with respect to the Collateral
securing the Notes in the manner and on the terms set forth herein; and
WHEREAS, the Collateral Manager has the capacity to provide
the services required hereby and is prepared to perform such services upon the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements
herein set forth, the parties hereto agree as follows:
1. Definitions.
Terms used herein and not defined below shall have the
meanings set forth in the Indenture.
"Agreement" shall mean this Collateral Management Agreement,
as amended from time to time.
"Board of Directors" shall mean the directors of the Issuer
duly appointed from time to time pursuant to the Memorandum of Association and
Articles of Association in accordance with Cayman Islands law.
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"Change of Control" shall mean the persons currently owning
and controlling voting securities of Pilgrim America failing to own and control,
directly or indirectly, in the aggregate, at least 50% of the outstanding voting
securities of Pilgrim America.
"Governing Instruments" shall mean the memorandum, articles or
certificate of incorporation or association and by-laws, if applicable, in the
case of a corporation, or the partnership agreement, in the case of a
partnership.
2. General Duties of the Collateral Manager.
The Collateral Manager shall provide services to the Issuer as
follows:
(a) Subject to and in accordance with the terms of
the Indenture and this Agreement, the Collateral Manager agrees to supervise and
direct the investment and reinvestment of the Collateral, and shall perform on
behalf of the Issuer the duties that have been specifically delegated to the
Collateral Manager in this Agreement and in the Indenture (and the Collateral
Manager shall have no obligation to perform any other duties under the
Indenture) and, to the extent necessary or appropriate to perform such duties,
the Collateral Manager shall have the power to execute and deliver all necessary
and appropriate documents and instruments on behalf of the Issuer with respect
thereto. The Collateral Manager shall, subject to the terms and conditions of
the Indenture, perform its obligations hereunder and under the Indenture with
reasonable care, using a degree of skill and attention no less than that which
the Collateral Manager (i) exercises with respect to comparable assets that it
manages for itself and (ii) exercises with respect to comparable assets that it
manages for others, and in a manner consistent with practices and procedures
followed by institutional managers of national standing relating to assets of
the nature and character of the Collateral, except as expressly provided
otherwise in this Agreement and/or the Indenture. To the extent not inconsistent
with the foregoing, the Collateral Manager shall follow its customary standards,
policies and procedures in performing its duties hereunder (including those
duties of the Issuer under the Indenture which the Collateral Manager has agreed
to perform on the Issuer's behalf pursuant to this Agreement). The Collateral
Manager shall comply with all the terms and conditions of the Indenture
affecting the duties and functions that have been delegated to it thereunder and
hereunder. The Collateral Manager shall not be bound to follow any amendment to
the Indenture, however, until it has received written notice thereof and until
it has received a copy of the amendment from the Issuer or the Trustee;
provided, however, that the Collateral Manager shall not be bound by any
amendment to the Indenture that materially increases the duties or liabilities
of the Collateral Manager unless the Collateral Manager shall have consented
thereto. The Issuer agrees that it will not permit any amendment to the
Indenture that materially increases the duties or liabilities of the Collateral
Manager to become effective unless the Collateral Manager has been given prior
written notice of such amendment and consented thereto in writing;
(b) the Collateral Manager shall select any
Collateral which shall be acquired by the Issuer pursuant to the Indenture in
accordance with the investment criteria set forth therein, and shall take into
consideration the payment obligations of the Issuer under the Indenture on each
Distribution Date in so doing, such that expected distributions on the
Collateral Debt Securities permit a timely performance of the payment
obligations by the Issuer;
(c) the Collateral Manager shall monitor the
Collateral on an ongoing basis and provide to the Issuer all opinions, reports,
schedules and other data which the Issuer is required to prepare, deliver or
furnish under the Indenture, in the form and containing all information required
thereby and in sufficient time for the Issuer to review such required reports,
schedules and data and to deliver them to the parties entitled thereto under the
Indenture; the Collateral Manager shall be responsible for obtaining to the
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extent practicable any information concerning whether a Collateral Debt Security
has become a Defaulted Security;
(d) the Collateral Manager, subject to and in
accordance with the provisions of the Indenture may, at any time, direct the
Trustee (i) to dispose of a Collateral Debt Security or an Eligible Investment
or other securities received in respect thereof in the open market or otherwise,
or (ii) to acquire, as security for the Notes in substitution for or in addition
to any one or more Collateral Debt Securities or Eligible Investments included
in the Collateral, one or more Substitute Collateral Debt Securities or Eligible
Investments, and may, in each case subject to and in accordance with the
provisions of the Indenture, as agent of the Issuer, require the Trustee to take
the following actions with respect to a Collateral Debt Security or Eligible
Investment:
(i) retain such Collateral Debt Security
or Eligible Investment; or
(ii) dispose of such Collateral Debt
Security or Eligible Investment in the open market or otherwise; or
(iii) if applicable, tender such
Collateral Debt Security or Eligible Investment pursuant to an Offer;
or
(iv) if applicable, consent to any
proposed amendment, modification or waiver pursuant to an Offer; or
(v) retain or dispose of any securities
or other property (if other than cash) received pursuant to an Offer;
or
(vi) waive any default with respect to
any Defaulted Security; or
(vii) vote to accelerate the maturity of
any Defaulted Security; or
(viii) exercise any other rights or
remedies with respect to such Collateral Debt Security or Eligible
Investment as provided in the related Underlying Instruments or take
any other action consistent with the terms of the Indenture which is in
the best interests of the Noteholders.
(e) The Collateral Manager covenants and agrees, in
performing its duties hereunder, that it will seek to manage the Collateral in
such a way that there will be sufficient funds available on each Distribution
Date in accordance with the priorities set forth in the Indenture (i) to pay
interest on the Senior Notes in a timely manner, (ii) to repay the principal of
each Class of Notes in full on or prior to their respective stated maturity
dates and (iii) subject to (i) and (ii) above, to maximize the returns to the
Holders of the Class C Notes.
(f) The Collateral Manager hereby agrees to the
following:
(i) The Collateral Manager agrees not to
institute against, or join any other Person in instituting against, the
Issuer or the Co-Issuer any bankruptcy, reorganization, arrangement,
insolvency, moratorium or liquidation proceedings or other proceedings
under federal or state bankruptcy or similar laws until at least one
year and one day (or, if longer, the applicable preference period then
in effect) after the payment in full of all Notes issued under the
Indenture.
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(ii) The Collateral Manager shall cause
any sale of any Collateral Debt Security to be conducted on an arm's
length basis.
(g) In providing services hereunder, the Collateral
Manager may employ third parties, including its Affiliates, to render advice
(including investment advice) and assistance; provided, however, that the
Collateral Manager shall not be relieved of any of its duties hereunder
regardless of the performance of any services by third parties.
3. Brokerage.
The Collateral Manager shall seek to obtain the best prices
and execution for all orders placed with respect to the Collateral, considering
all circumstances. Subject to the objective of obtaining best prices and
execution, the Collateral Manager may take into consideration research and other
brokerage services furnished to the Collateral Manager or its Affiliates by
brokers and dealers which are not Affiliates of the Collateral Manager. Such
services may be used by the Collateral Manager or its Affiliates in connection
with its other advisory activities or investment operations. The Collateral
Manager may aggregate sales and purchase orders of securities placed with
respect to the Collateral with similar orders being made simultaneously for
other accounts managed by Collateral Manager or with accounts of the Affiliates
of the Collateral Manager, if in the Collateral Manager's reasonable judgment
such aggregation shall result in an overall economic benefit to the Collateral,
taking into consideration the advantageous selling or purchase price, brokerage
commission and other expenses. When any aggregate sales or purchase orders
occur, the objective of the Collateral Manager (and any of its Affiliates
involved in such transactions) shall be to allocate the executions among the
accounts in an equitable manner.
In addition to the foregoing and subject to the objective of
obtaining best prices and execution and to the extent permitted by applicable
law, the Collateral Manager may, on behalf of the Issuer, direct the Trustee to
acquire any and all of the Eligible Investments or other Collateral from, or
sell Collateral Debt Securities or other Collateral to, Merrill Lynch, Pierce,
Fenner & Smith Incorporated or its Affiliates or any other firm.
4. Additional Activities of the Collateral Manager.
Nothing herein shall prevent the Collateral Manager or any of
its Affiliates from engaging in other businesses, or from rendering services of
any kind to the Issuer and its Affiliates, the Trustee, the Noteholders or any
other Person or entity to the extent permitted by applicable law. Without
prejudice to the generality of the foregoing, the Collateral Manager and
directors, officers, employees and agents of the Collateral Manager or its
Affiliates may, among other things, and subject to any limits specified in the
Indenture:
(a) serve as directors (whether supervisory or
managing), officers, partners, employees, agents, nominees or signatories for
the Issuer, its Affiliates or any issuer of any obligations included in the
Collateral or their respective Affiliates, to the extent permitted by their
Governing Instruments, as from time to time amended, or by any resolutions duly
adopted by the Issuer, its Affiliates or any issuer of any obligations included
in the Collateral or their respective Affiliates, pursuant to their respective
Governing Instruments; provided, that in the reasonable judgment of the
Collateral Manager, such activity will not have a material adverse effect on any
item of the Collateral;
(b) receive fees for services of any nature rendered
to the issuer of any obligations included in the Collateral or their respective
Affiliates; provided, that in the reasonable judgment of the Collateral Manager,
such activity will not have a material adverse effect on any item of the
Collateral; and provided,
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further, that if any portion of such services are related to any obligations
included in the Collateral, the portion of such fees relating to such
obligations shall be deposited into the Collection Account; and
(c) be a secured or unsecured creditor of, or hold an
equity interest in, the Issuer, its Affiliates or any issuer of any obligation
included in the Collateral.
It is understood that the Collateral Manager and any of its
Affiliates may engage in any other business and furnish investment management
and advisory services to others, including Persons which may have investment
policies similar to those followed by the Collateral Manager with respect to the
Collateral and which may own securities of the same class, or which are the same
type, as the Collateral Debt Securities or other securities of the issuers of
Collateral Debt Securities. The Collateral Manager will be free, in its sole
discretion, to make recommendations to others, or effect transactions on behalf
of itself or for others, which may be the same as or different from those
effected with respect to the Collateral.
Unless the Collateral Manager determines in its reasonable
judgment that such purchase or sale is appropriate, the Collateral Manager may
refrain from directing the purchase or sale hereunder of securities issued by
(i) Persons of which the Collateral Manager, its Affiliates or any of its or
their officers, directors or employees are directors or officers, (ii) Persons
for which the Collateral Manager or its Affiliate act as financial adviser or
underwriter or (iii) Persons about which the Collateral Manager or any of its
Affiliates have information which the Collateral Manager deems confidential or
non-public or otherwise might prohibit it from trading such securities in
accordance with applicable law. The Collateral Manager shall not be obligated to
pursue any particular investment strategy or opportunity with respect to the
Collateral.
5. Conflicts of Interest.
The Collateral Manager shall not direct the Trustee to acquire
an obligation to be included in the Collateral from the Collateral Manager or
any of its Affiliates as principal or to sell an obligation to the Collateral
Manager or any of its Affiliates as principal unless the Issuer shall have
received from the Collateral Manager such information relating to such
acquisition as it may reasonably require and shall have approved such
acquisition. The Collateral Manager shall not direct the Trustee to purchase any
Collateral Debt Security for inclusion in the Collateral directly from any
account or portfolio for which the Collateral Manager serves as investment
advisor, or direct the Trustee to sell directly any Collateral Debt Security to
any account or portfolio for which the Collateral Manager serves as investment
advisor except in compliance with the 1940 Act, the Investment Advisers Act of
1940 and the procedures set forth in Exhibit A.
6. Records; Confidentiality.
The Collateral Manager shall maintain appropriate books of
account and records relating to services performed hereunder, and such books of
account and records shall be accessible for inspection by a representative of
the Issuer, the Trustee, the Noteholders, and the Independent accountants
appointed by the Issuer pursuant to the Indenture at a mutually agreed time
during normal business hours and upon not less than three Business Days' prior
notice. At no time will the Collateral Manager make a public announcement
concerning the issuance of the Notes, the Collateral Manager's role hereunder or
any other aspect of the transactions contemplated by this Agreement and the
Indenture. The Collateral Manager shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
shall not disclose any such information to non-affiliated third parties except
(i) with the prior written consent of the Issuer, (ii) such information as any
Rating Agency shall reasonably request in connection with its rating of any
Class of the Senior Notes, (iii) as required by law, regulation, court order or
the rules or regulations of any self-regulating
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organization, body or official having jurisdiction over the Collateral Manager,
(iv) to its professional advisers, (v) such information as shall have been
publicly disclosed other than in violation of this Agreement, or (vi) such
information that was or is obtained by the Collateral Manager on a
non-confidential basis, provided that the Collateral Manager does not know or
have reason to know of any breach by such source of any confidentiality
obligations with respect thereto. For purposes of this Section 6, the
Noteholders shall in no event be considered "non-affiliated third parties."
7. Obligations of Collateral Manager.
Unless otherwise specifically required by any provision of the
Indenture or this Agreement or by applicable law, the Collateral Manager shall
use all reasonable efforts to ensure that no action is taken by it, and shall
not intentionally or with reckless disregard take any action, which would (a)
materially adversely affect the Issuer or the Co-Issuer for purposes of Cayman
Islands law (to the extent the Collateral Manager has knowledge thereof), United
States federal or state law or any other law known to the Collateral Manager to
be applicable to the Issuer, (b) not be permitted under the Issuer's Memorandum
of Association or Articles of Association, (c) violate any law, rule or
regulation of any governmental body or agency having jurisdiction over the
Issuer or the Co-Issuer including, without limitation, any Cayman Islands law
(to the extent the Collateral Manager has knowledge thereof), or United States
federal, state or other applicable securities law the violation of which has or
could reasonably be expected to have an adverse effect on any Noteholder, on the
business, operations, assets or financial condition of the Issuer or the
Co-Issuer, or on the ability of the Collateral Manager to perform its
obligations hereunder, (d) require registration of the Issuer or the Co-Issuer
or the pool of Collateral as an "investment company" under the Investment
Company Act, (e) cause the Issuer or the Co-Issuer to violate the terms of the
Indenture, (f) adversely affect the interests of the Noteholders in any material
respect, or (g) subject the Issuer to U.S. federal or state income taxation. For
purposes of this Section 7, the Collateral Manager will be entitled to assume
that as of the Closing Date, none of the actions referred to in the preceding
sentence have been taken. The Collateral Manager covenants that it shall comply
in all material respects with all laws and regulations applicable to it in
connection with the performance of its duties under this Agreement and the
Indenture. Notwithstanding anything in this Agreement, the Collateral Manager
shall not take any discretionary action that would reasonably be expected to
cause an Event of Default under the Indenture.
8. Compensation.
(a) The Issuer shall pay to the Collateral Manager,
for services rendered and performance of its obligations under this Agreement,
the Collateral Management Fee, which shall be payable in such amounts and at
such times as set forth in the Indenture. If on any Distribution Date there are
insufficient funds to pay such fee (and/or any other amounts due and payable to
the Collateral Manager) in full, the amount not so paid shall be deferred and
shall be payable on such later Distribution Date on which funds are available
therefor as provided in the Indenture.
(b) The Collateral Manager shall be responsible for
the ordinary expenses incurred in the performance of its obligations under this
Agreement; provided, however, that any extraordinary expenses incurred by the
Collateral Manager in the performance of such obligations (including, but not
limited to, any reasonable expenses incurred by it to employ outside lawyers or
consultants reasonably necessary in connection with the default or restructuring
of any Collateral Debt Security or other unusual matters arising in the
performance of its duties under this Agreement and the Indenture) shall be
reimbursed by the Issuer to the extent funds are available therefor in
accordance with and subject to the limitations contained in the Indenture. It is
understood that ordinary direct expenses of the purchase and sale of Collateral
Debt Securities (including, but
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not limited to, reasonable and customary brokerage fees and commissions,
transfer fees, Rating Agency fees and legal expenses) will be expenses of the
Issuer and not of the Collateral Manager.
(c) If this Agreement is terminated pursuant to
Section 12, Section 14 or otherwise, the fees payable to the Collateral Manager
shall be prorated for any partial periods between Distribution Dates during
which this Agreement was in effect and shall be due and payable on the first
Distribution Date following the date of such termination, subject to the
provisions of the Indenture.
9. Benefit of the Agreement.
The Collateral Manager agrees that its obligations under this
Agreement shall be enforceable at the instance of the Issuer, the Trustee, on
behalf of the Noteholders, or the requisite percentage of Noteholders as
provided in the Indenture.
10. Limits of Collateral Manager Responsibility
(a) The Collateral Manager assumes no responsibility
under this Agreement other than to render the services called for hereunder and
under the terms of the Indenture made applicable to it pursuant to the terms of
this Agreement in good faith and, subject to the standard of conduct described
in the next sentence, shall not be responsible for any action of the Issuer or
the Trustee in following or declining to follow any advice, recommendation or
direction of the Collateral Manager. The Collateral Manager, its directors,
officers, stockholders, partners, agents and employees, and its Affiliates and
their directors, officers, stockholders, partners, agents and employees, shall
not be liable to the Issuer, the Trustee, the Noteholders or any other person
for any losses (including, but not limited to, losses in value of the
Collateral), claims, damages, judgments, assessments, costs or other liabilities
(collectively, "Liabilities") incurred by the Issuer, the Trustee, or the
Noteholders that arise out of or in connection with the performance by the
Collateral Manager of its duties under this Agreement and the Indenture, except
(i) by reason of acts or omissions constituting bad faith, willful misconduct,
negligence or breach of fiduciary duty in the performance, or reckless
disregard, of the obligations of the Collateral Manager hereunder and under the
terms of the Indenture applicable to it or (ii) with respect to the information
concerning the Collateral Manager provided in writing by the Collateral Manager
for inclusion in the Offering Memorandum dated November 11, 1997 relating to
Collateralized Loan Obligations issuable in series (the "Base Memorandum"), and
the Supplements dated November 11, 1997 to the Base Memorandum relating to the
Senior Notes and the Subordinated Notes (the "Note Supplements" and together
with the Base Memorandum, the "Offering Memorandum"), such information
containing any untrue statement of material fact or omitting to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The matters described
in (i) and (ii) in the preceding sentence are collectively referred to for
purposes of this paragraph 10 as "Collateral Manager Breaches".
(b) The Issuer shall indemnify and hold harmless (the
Issuer in such case, the "Indemnifying Party") the Collateral Manager, its
directors, officers, stockholders, partners, agents and employees (such parties
collectively in such case, the "Indemnified Parties") from and against any and
all Liabilities, and will reimburse each Indemnified Party for all reasonable
fees and expenses (including reasonable fees and expenses of counsel)
(collectively, the "Expenses") as such Expenses are incurred in investigating,
preparing, pursuing or defending any claim, action, proceeding or investigation
with respect to any pending or threatened litigation (collectively, the
"Actions"), caused by, or arising out of or in connection with the issuance of
the Notes, the transactions contemplated by the Offering Memorandum, the
Indenture, the loan purchase agreement among the Collateral Manager, the Issuer
and Merrill Lynch, Pierce, Fenner & Smith Incorporated dated July 23, 1997, the
bond purchase agreement between the Collateral Manager and Merrill Lynch
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International dated July 23, 1997, or this Agreement, and/or any action taken
by, or any failure to act by, such Indemnified Party; provided, however, that no
Indemnified Party shall be indemnified for any Liabilities or Expenses it incurs
as a result of any acts or omissions by any Indemnified Party constituting
Collateral Manager Breaches. Notwithstanding anything contained herein to the
contrary, the obligations of the Issuer under this Section 10 shall be payable
solely out of the Collateral in accordance with the priorities set forth in the
Indenture.
(c) With respect to any claim made or threatened
against an Indemnified Party, or compulsory process or request or other notice
of any loss, claim, damage or liability served upon an Indemnified Party, for
which such Indemnified Party is or may be entitled to indemnification under this
Section 10, such Indemnified Party shall (or with respect to Indemnified Parties
that are directors, officers, stockholders, agents or employees of the
Collateral Manager, the Collateral Manager shall cause such Indemnified Party
to):
(i) give written notice to the
Indemnifying Party of such claim within ten (10) days after such claim
is made or threatened, which notice shall specify in reasonable detail
the nature of the claim and the amount (or an estimate of the amount)
of the claim; provided, however, that the failure of any Indemnified
Party to provide such notice to the Indemnifying Party shall not
relieve the Indemnifying Party of its obligations under this Section 10
unless the Indemnifying Party is materially prejudiced or otherwise
forfeits rights or defenses by reason of such failure;
(ii) provide the Indemnifying Party such
information and cooperation with respect to such claim as the
Indemnifying Party may reasonably require, including, but not limited
to, making appropriate personnel available to the Indemnifying Party at
such reasonable times as the Indemnifying Party may request;
(iii) cooperate and take all such steps
as the Indemnifying Party may reasonably request to preserve and
protect any defense to such claim;
(iv) in the event suit is brought with
respect to such claim, upon reasonable prior notice, afford to the
Indemnifying Party the right, which the Indemnifying Party may exercise
in its sole discretion and at its expense, to participate in the
investigation, defense and settlement of such claim;
(v) neither incur any material expense
to defend against nor release or settle any such claim or make any
admission with respect thereto (other than routine or incontestable
admissions or factual admissions the failure to make which would expose
such Indemnified Party to unindemnified liability) nor permit a default
or consent to the entry of any judgment in respect thereof, in each
case without the prior written consent of the Indemnifying Party; and
(vi) upon reasonable prior notice,
afford to the Indemnifying Party the right, in its sole discretion and
at its sole expense, to assume the defense of such claim, including,
but not limited to, the right to designate counsel and to control all
negotiations, litigation, arbitration, settlements, compromises and
appeals of such claim; provided, that if the Indemnifying Party assumes
the defense of such claim, it shall not be liable for any fees and
expenses of counsel for any Indemnified Party incurred thereafter in
connection with such claim except that if such Indemnified Party
reasonably determines that counsel designated by the Indemnifying Party
has a conflict of interest due to the conflicting interests of the
Indemnifying Party and the Indemnified Party, such Indemnifying Party
shall pay the reasonable fees and disbursements of one counsel (in
addition to any local counsel) separate from its own counsel for all
Indemnified Parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances; and provided further, that
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prior to entering into any final settlement or compromise, such
Indemnifying Party shall use its best efforts in the light of the then
prevailing circumstances.
(d) In the event that any Indemnified Party waives
its right to indemnification hereunder, the Indemnifying Party shall not be
entitled to appoint counsel to represent such Indemnified Party nor shall the
Indemnifying Party reimburse such Indemnified Party for any costs of counsel to
such Indemnified Party.
(e) Nothing herein shall in any way constitute a
waiver or limitation of any rights which the Issuer may have under any U.S.
federal securities laws.
11. No Partnership or Joint Venture.
The Issuer and the Collateral Manager are not partners or
joint venturers with each other and nothing herein shall be construed to make
them such partners or joint venturers or impose any liability as such on either
of them. The Collateral Manager's relation to the Issuer shall be deemed to be
that of an independent contractor.
12. Term; Termination.
(a) This Agreement shall commence as of the date
first set forth above and shall continue in force and effect until the first of
the following occurs: (i) the payment in full of the Notes and the termination
of the Indenture in accordance with its terms; (ii) the liquidation of the
Collateral and the final distribution of the proceeds of such liquidation to the
Noteholders; or (iii) the termination of this Agreement in accordance with
subsection (b), (c) or (d) of this Section 12 or Section 14 of this Agreement.
(b) Notwithstanding any other provision hereof to the
contrary, this Agreement may be terminated without cause by the Collateral
Manager, and the Collateral Manager may resign, upon 90 days' (or such shorter
notice as is acceptable to the Issuer) written notice to the Issuer; provided,
however, that no such termination or resignation shall be effective until the
date as of which a successor Collateral Manager shall have agreed in writing to
assume all of the Collateral Manager's duties and obligations pursuant to this
Agreement, and the Issuer shall use its best efforts to appoint a successor
Collateral Manager to assume such duties and obligations. Any replacement
Collateral Manager must be appointed by the Issuer and approved by the Holders
of a Majority of the Aggregate Outstanding Amount of the Controlling Class of
Notes.
(c) This Agreement may be terminated at any time by
the Issuer, and the Issuer may remove the Collateral Manager, upon 90 days'
prior written notice to the Collateral Manager (or such shorter notice as is
acceptable to the Collateral Manager). The Issuer agrees that prior to the
delivery by it of a notice of termination pursuant to this subsection (c), it
shall obtain the consent to such termination from the holders of a Majority of
the Aggregate Outstanding Amount of the Controlling Class of Notes.
Notwithstanding the foregoing, no termination pursuant to this subsection (c)
shall be effective until the date as of which a successor Collateral Manager
shall have agreed in writing to assume all of the Collateral Manager's duties
and obligations pursuant to this Agreement.
(d) This Agreement shall be automatically terminated
in the event that the Issuer determines in good faith that the Issuer or the
Co-Issuer or the pool of Collateral has become required to be registered under
the provisions of the Investment Company Act, and the Issuer notifies the
Collateral Manager thereof.
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<PAGE>
(e) Upon termination of this Agreement, neither party
shall have any further liability or obligation to the other, except as provided
in Sections 2(f)(i), 10 and 15 of this Agreement.
(f) Any removal or resignation of the Collateral
Manager while any Notes are Outstanding will be effective upon the appointment
by the Issuer (and the acceptance in writing by such successor Collateral
Manager) of a successor Collateral Manager that is an established institution
which (i) has demonstrated an ability to professionally and competently perform
duties similar to those imposed upon the Collateral Manager hereunder, (ii) is
legally qualified and has the capacity to act as Collateral Manager hereunder,
as successor to the Collateral Manager under this Agreement in the assumption of
all of the responsibilities, duties and obligations of the Collateral Manager
hereunder and under the applicable terms of the Indenture and (iii) shall not
cause the Issuer or the Co-Issuer or the pool of Collateral to become required
to register under the provisions of the Investment Company Act. The Issuer, the
Trustee and the successor Collateral Manager shall take such action (or cause
the outgoing Collateral Manager to take such action) consistent with this
Agreement and the terms of the Indenture applicable to the Collateral Manager,
as shall be necessary to effectuate any such succession.
(g) In the event of removal of the Collateral Manager
pursuant to this Agreement by the Issuer or, to the extent so provided in the
Indenture, by the Trustee, the Issuer shall have all of the rights and remedies
available with respect thereto at law or equity, and, without limiting the
foregoing, the Issuer or, to the extent so provided in the Indenture, the
Trustee may by notice in writing to the Collateral Manager as provided under
this Agreement terminate all the rights and obligations of the Collateral
Manager under this Agreement (except those that survive termination pursuant to
Section 12(e) above). Upon expiration of the applicable notice period with
respect to termination specified in this Section 12 or Section 14 of this
Agreement, as applicable, all authority and power of the Collateral Manager
under this Agreement, whether with respect to the Collateral or otherwise, shall
automatically and without further action by any person or entity pass to and be
vested in the successor Collateral Manager upon the appointment thereof.
13. Delegation; Assignments.
This Agreement shall not be delegated by the Collateral
Manager, in whole or in part, without the prior written consent of the Issuer
and the holders of a Majority of the Aggregate Outstanding Amount of the
Controlling Class of Notes and, notwithstanding any such consent, no delegation
of duties by the Collateral Manager shall relieve it from any liability
hereunder. Any assignment of this Agreement to any Person, in whole or in part,
by the Collateral Manager shall be deemed null and void unless such assignment
is consented to in writing by the Issuer and the holders of a Majority of the
Aggregate Outstanding Amount of the Controlling Class of Notes. Any assignment
consented to by the Issuer and such Noteholders shall bind the assignee
hereunder in the same manner as the Collateral Manager is bound. In addition,
the assignee shall execute and deliver to the Issuer and the Trustee a
counterpart of this Agreement naming such assignee as Collateral Manager. Upon
the execution and delivery of such a counterpart by the assignee, the Collateral
Manager shall be released from further obligations pursuant to this Agreement,
except with respect to its obligations arising under Section 10 of this
Agreement prior to such assignment and except with respect to its obligations
under Section 2(f)(i) and Section 15 hereof. This Agreement shall not be
assigned by the Issuer without the prior written consent of the Collateral
Manager and the Trustee, except in the case of assignment by the Issuer to (i)
an entity which is a successor to the Issuer permitted under the Indenture, in
which case such successor organization shall be bound hereunder and by the terms
of said assignment in the same manner as the Issuer is bound thereunder or (ii)
the Trustee as contemplated by the Indenture. In the event of any assignment by
the Issuer, the Issuer shall use its best efforts to cause its successor to
execute and deliver to the Collateral Manager such documents as the
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<PAGE>
Collateral Manager shall consider reasonably necessary to effect fully such
assignment. The Collateral Manager hereby consents to the matters set forth in
Section 15.1 of the Indenture.
14. Termination by the Issuer for Cause.
This Agreement may be terminated, and the Collateral Manager
may be removed, by the Issuer, the Trustee or the holders of a Majority of the
Aggregate Outstanding Amount of the Controlling Class of Notes, in each case for
cause upon 10 days' prior written notice to the Collateral Manager and upon
written notice to the Noteholders as set forth below. No such termination or
removal shall be effective (i) until the date as of which a successor Collateral
Manager shall have agreed in writing to assume all of the Collateral Manager's
duties pursuant to this Agreement and (ii) in the case of a termination by the
Issuer or the Trustee, unless written notice thereof shall have been given to
the Noteholders stating that such termination shall be effective unless rejected
in writing within 30 days after the date of such notice by the holders of a
Majority of the Aggregate Outstanding Amount of the Controlling Class of Notes,
which rejection shall not be unreasonable (except pursuant to paragraph (c)
below where such notice to Noteholders shall not be required). For purposes of
determining "cause" with respect to any such termination of this Agreement, such
term shall mean any one of the following events:
(a) the Collateral Manager willfully violates, or
takes any action that it knows breaches, any provision of this Agreement or the
Indenture applicable to it;
(b) the Collateral Manager breaches in any respect
any provision of this Agreement or any terms of the Indenture applicable to it
and fails to cure such breach within 30 days of its becoming aware of, or its
receiving notice from, the Trustee of, such breach;
(c) the Collateral Manager is wound up or dissolved
or there is appointed over it or a substantial portion of its assets a receiver,
administrator, administrative receiver, trustee or similar officer; or the
Collateral Manager (i) ceases to be able to, or admits in writing its inability
to, pay its debts as they become due and payable, or makes a general assignment
for the benefit of, or enters into any composition or arrangement with, its
creditors generally; (ii) applies for or consents (by admission of material
allegations of a petition or otherwise) to the appointment of a receiver,
trustee, assignee, custodian, liquidator or sequestrator (or other similar
official) of the Collateral Manager or of any substantial part of its properties
or assets, or authorizes such an application or consent, or proceedings seeking
such appointment are commenced without such authorization, consent or
application against the Collateral Manager and continue undismissed for 60 days;
(iii) authorizes or files a voluntary petition in bankruptcy, or applies for or
consents (by admission of material allegations of a petition or otherwise) to
the application of any bankruptcy, reorganization, arrangement, readjustment of
debt, insolvency or dissolution, or authorizes such application or consent, or
proceedings to such end are instituted against the Collateral Manager without
such authorization, application or consent and are approved as properly
instituted and remain undismissed for 60 days or result in adjudication of
bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part
of its properties or assets to be sequestered or attached by court order and the
order remains undismissed for 60 days;
(d) the occurrence of any Event of Default under
Section 5.1(a) or Section 5.1(b) of the Indenture or an Event of Default that
results from any breach by the Collateral Manager of its duties under the
Indenture or hereunder;
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<PAGE>
(e) the occurrence of an act by the Collateral
Manager that constitutes fraud or criminal activity in the performance of its
obligations under this Agreement, or the Collateral Manager being indicted for a
criminal offense materially related to its primary businesses; or
(f) a Change of Control shall occur with respect to
the Collateral Manager.
If any of the events specified in this Section 14 shall occur,
the Collateral Manager shall give prompt written notice thereof to the Issuer,
the Trustee and the holders of all outstanding Notes upon the Collateral
Manager's becoming aware of the occurrence of such event. A Majority of the
Aggregate Outstanding Amount of the Controlling Class of Notes may waive any
event described in (a), (b), (d), (e) or (f) above as a basis for termination of
this Agreement and removal of the Collateral Manager under this Section 14.
15. Action Upon Termination.
(a) Upon the effective date of termination of this
Agreement, the Collateral Manager shall as soon as practicable:
(i) deliver to the Issuer all property
and documents of the Trustee or the Issuer or otherwise relating to the
Collateral then in the custody of the Collateral Manager; and
(ii) deliver to the Trustee an
accounting with respect to the books and records delivered to the
Trustee or the successor Collateral Manager appointed pursuant to
Section 12(f) hereof.
Notwithstanding such termination, the Collateral Manager shall
remain liable to the extent set forth herein (but subject to Section 10 hereof)
for its acts or omissions hereunder arising prior to termination and for any
expenses, losses, damages, liabilities, demands, charges and claims (including
reasonable attorneys' fees) in respect of or arising out of a breach of the
representations and warranties made by the Collateral Manager in Section 16(b)
hereof or from any failure of the Collateral Manager to comply with the
provisions of this Section 15.
(b) The Collateral Manager agrees that,
notwithstanding any termination, it shall reasonably cooperate in any Proceeding
arising in connection with this Agreement, the Indenture or any of the
Collateral (excluding any such Proceeding in which claims are asserted against
the Collateral Manager or any Affiliate of the Collateral Manager) upon receipt
of appropriate indemnification and expense reimbursement.
16. Representations and Warranties.
(a) The Issuer hereby represents and warrants to the
Collateral Manager as follows:
(i) The Issuer has been duly
incorporated and is validly existing under the laws of the Cayman
Islands, has the full corporate power and authority to own its assets
and the securities proposed to be owned by it and included in the
Collateral and to transact the business in which it is presently
engaged and is duly qualified under the laws of each jurisdiction where
its ownership or lease of property or the conduct of its business
requires, or the performance of its obligations under this Agreement,
the Indenture or the Notes would require, such qualification, except
for failures to be so qualified, authorized or licensed that would not
in the aggregate have a material adverse effect on the business,
operations, assets or financial condition of the Issuer.
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<PAGE>
(ii) The Issuer has full corporate power
and authority to execute, deliver and perform this Agreement, the
Indenture and the Notes and all obligations required hereunder, under
the Indenture and the Notes and has taken all necessary action to
authorize this Agreement, the Indenture and the Notes on the terms and
conditions hereof and thereof and the execution, delivery and
performance of this Agreement, the Indenture and the Notes and the
performance of all obligations imposed upon it hereunder and
thereunder. No consent of any other person including, without
limitation, stockholders and creditors of the Issuer, and no license,
permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental
authority, other than those that may be required under state securities
or "blue sky" laws and those that have been or shall be obtained in
connection with the Indenture and the issuance of the Notes, is
required by the Issuer in connection with this Agreement, the Indenture
or the Notes or the execution, delivery, performance, validity or
enforceability of this Agreement, the Indenture or the Notes or the
obligations imposed upon it hereunder or thereunder. This Agreement
constitutes, and each instrument or document required hereunder, when
executed and delivered hereunder, shall constitute, the legally valid
and binding obligation of the Issuer enforceable against the Issuer in
accordance with its terms, subject to (a) the effect of bankruptcy,
insolvency or similar laws affecting generally the enforcement of
creditors' rights and (b) general equitable principles.
(iii) The execution, delivery and
performance of this Agreement and the documents and instruments
required hereunder shall not violate any provision of any existing law
or regulation binding on the Issuer, or any order, judgment, award or
decree of any court, arbitrator or governmental authority binding on
the Issuer, or the Governing Instruments of, or any securities issued
by, the Issuer or of any mortgage, indenture, lease, contract or other
agreement, instrument or undertaking to which the Issuer is a party or
by which the Issuer or any of its assets may be bound, the violation of
which would have a material adverse effect on the business, operations,
assets or financial condition of the Issuer, and shall not result in or
require the creation or imposition of any lien on any of its property,
assets or revenues pursuant to the provisions of any such mortgage,
indenture, lease, contract or other agreement, instrument or
undertaking (other than the lien of the Indenture).
(iv) The Issuer is not in violation of
its Governing Instruments or in breach or violation of or in default
under the Indenture or any contract or agreement to which it is a party
or by which it or any of its assets may be bound, or any applicable
statute or any rule, regulation or order of any court, government
agency or body having jurisdiction over the Issuer or its properties,
the breach or violation of which or default under which would have a
material adverse effect on the validity or enforceability of this
Agreement or the performance by the Issuer of its duties hereunder.
(v) True and complete copies of the
Indenture and the Issuer's Governing Instruments have been delivered to
the Collateral Manager.
The Issuer agrees to deliver a true and complete copy of each
amendment to the documents referred to in Section 16(a)(v) above to the
Collateral Manager as promptly as practicable after its adoption or execution.
(b) The Collateral Manager hereby represents and
warrants to the Issuer as follows:
(i) The Collateral Manager is a
corporation duly organized and validly existing and in good standing
under the laws of the State of Delaware and has full power and
authority to own its assets and to transact the business in which it is
currently engaged and is duly qualified and in
73
<PAGE>
good standing under the laws of each jurisdiction where its ownership
or lease of property or the conduct of its business requires, or the
performance of this Agreement would require such qualification, except
for those jurisdictions in which the failure to be so qualified,
authorized or licensed would not have a material adverse effect on the
business, operations, assets or financial condition of the Collateral
Manager or on the ability of the Collateral Manager to perform its
obligations under, or on the validity or enforceability of, this
Agreement and the provisions of the Indenture applicable to the
Collateral Manager.
(ii) The Collateral Manager has full
power and authority to execute, deliver and perform this Agreement and
all obligations required hereunder and under the provisions of the
Indenture applicable to the Collateral Manager, and has taken all
necessary action to authorize this Agreement on the terms and
conditions hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder and under the terms of
the Indenture applicable to the Collateral Manager. No consent of any
other person, including, without limitation, creditors of the
Collateral Manager, and no license, permit, approval or authorization
of, exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the
Collateral Manager in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement or
the obligations required hereunder or under the terms of the Indenture
applicable to the Collateral Manager. This Agreement has been, and each
instrument and document required hereunder or under the terms of the
Indenture shall be, executed and delivered by a duly authorized officer
of the Collateral Manager, and this Agreement constitutes, and each
instrument and document required hereunder or under the terms of the
Indenture when executed and delivered by the Collateral Manager
hereunder or under the terms of the Indenture shall constitute, the
valid and legally binding obligations of the Collateral Manager
enforceable against the Collateral Manager in accordance with their
terms, subject to (a) the effect of bankruptcy, insolvency or similar
laws affecting generally the enforcement of creditors' rights and (b)
general equitable principles.
(iii) The execution, delivery and
performance of this Agreement and the terms of the Indenture applicable
to the Collateral Manager and the documents and instruments required
hereunder or under the terms of the Indenture shall not violate or
conflict with any provision of any existing law or regulation binding
on the Collateral Manager, or any order, judgment, award or decree of
any court, arbitrator or governmental authority binding on the
Collateral Manager, or the organizational documents of, or any
securities issued by the Collateral Manager or of any mortgage,
indenture, lease, contract or other agreement, instrument or
undertaking to which the Collateral Manager is a party or by which the
Collateral Manager or any of its assets may be bound, the violation of
which would have a material adverse effect on the business, operations,
assets or financial condition of the Collateral Manager or its ability
to perform its obligations under this Agreement, and shall not result
in or require the creation or imposition of any lien on any of its
property, assets or revenues pursuant to the provisions of any such
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking.
(iv) There is no charge, investigation,
action, suit or proceeding before or by any court pending or, to the
best knowledge of the Collateral Manager, threatened that, if
determined adversely to the Collateral Manager, would have a material
adverse effect upon the performance by the Collateral Manager of its
duties under, or on the validity or enforceability of, this Agreement
and the provisions of the Indenture applicable to the Collateral
Manager hereunder.
(v) The Collateral Manager is registered
as an investment advisor under the United States Investment Advisers
Act of 1940, as amended.
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(vi) The Collateral Manager is
authorized to carry on its business in the United States.
(vii) The Collateral Manager is not in
violation of its Governing Instruments or in breach or violation of or
in default under any contract or agreement to which it is a party or by
which it or any of its property may be bound, or any applicable statute
or any rule, regulation or order of any court, government agency or
body having jurisdiction over the Collateral Manager or its properties,
the breach or violation of which or default under which would have a
material adverse effect on the validity or enforceability of this
Agreement or the provisions of the Indenture applicable to the
Collateral Manager, or the performance by the Collateral Manager of its
duties hereunder or thereunder.
(viii) The Section entitled "The
Collateral Manager" and any other information concerning the Collateral
Manager contained in the Offering Memorandum is true in all material
respects and does not omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
17. Notices.
Unless expressly provided otherwise herein, all notices,
requests, demands and other communications required or permitted under this
Agreement shall be in writing (including by telecopy) and shall be deemed to
have been duly given, made and received when delivered against receipt or upon
actual receipt of registered or certified mail, postage prepaid, return receipt
requested, or, in the case of telecopy notice, when received in legible form,
addressed as set forth below:
(a) If to the Issuer:
ML CLO XII Pilgrim America (Cayman) Ltd.
c/o Queensgate SPV Services Limited
P.O. Box 1093 GT, Ugland House
South Church Street
George Town
Grand Cayman
Cayman Islands
British West Indies
Telephone: (345) 945-7009
Telecopy: (345) 945-7100
Attention: The Directors
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Telephone: (212) 225-2000
Telecopy: (212) 225-3999
Attention: Raymond B. Check, Esq.
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(b) If to the Collateral Manager:
Pilgrim America Investments, Inc.,
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424
Telephone: (602) 417-8111
Telecopy: (602) 417-8301
Attention: James R. Reis, Vice Chairman
with a copy to:
Mayer Brown & Platt
190 South LaSalle Street
Chicago, IL 60603-3441
Telephone: (312) 782-0600
Telecopy: (312) 701-7711
Attention: J. Paul Forrester
(c) If to the Trustee:
State Street Bank & Trust Co.
2 International Place
Boston, MA 02110-2804
Telephone: (617) 664-5482
Telecopy: (617) 664-5367
Attention: Raymond Wellaby
(d) If to the Noteholders:
At their respective addresses set forth on
the Note Register.
Any party may alter the address or telecopy number to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this Section 17 for the giving of
notice.
18. Binding Nature of Agreement; Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, personal representatives,
successors and permitted assigns as provided herein.
19. Entire Agreement.
This Agreement contains the entire agreement and understanding
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements, understandings, inducements
and conditions, express or implied, oral or written, of any nature whatsoever
with respect to the subject matter hereof. The express terms hereof control and
supersede any course of performance and/or usage
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<PAGE>
of the trade inconsistent with any of the terms hereof. This Agreement may not
be modified or amended other than by an agreement in writing executed by the
parties hereto.
20. Conflict with the Indenture.
Subject to the last two sentences of Section 2(a), if this
Agreement requires any action to be taken with respect to any matter and the
Indenture requires that a different action be taken with respect to such matter,
and such actions are mutually exclusive, the provisions of the Indenture in
respect thereof shall control.
21. Priority of Payments.
The Collateral Manager agrees that the payment of all amounts
to which it is entitled pursuant to this Agreement and the Indenture shall be
due and payable only in accordance with the priorities set forth in the
Indenture and only to the extent funds are available for such payments in
accordance with such priorities. The Collateral Manager hereby consents to the
collateral assignment of this Agreement as provided in the Indenture.
22. Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF).
23. Indulgences Not Waivers.
Neither the failure nor any delay on the part of any party
hereto to exercise any right, remedy, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege preclude any other or further exercise of
the same or of any other right, remedy, power or privilege, nor shall any waiver
of any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
24. Costs and Expenses.
The costs and expenses (including the fees and disbursements
of counsel and accountants) incurred by the Collateral Manager in connection
with the negotiation and preparation of and the execution of this Agreement, and
all matters incident thereto, shall be borne by the Collateral Manager.
25. Titles Not to Affect Interpretation.
The titles of paragraphs and subparagraphs contained in this
Agreement are for convenience only, and they neither form a part of this
Agreement nor are they to be used in the construction or interpretation hereof.
26. Execution in Counterparts.
This Agreement may be executed in any number of counterparts
by facsimile or other written form of communication, each of which shall be
deemed to be an original as against any party whose signature appears thereon,
and all of which shall together constitute one and the same instrument. This
Agreement shall
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become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
27. Provisions Separable.
In case any provision in this Agreement shall be invalid,
illegal or unenforceable as written, such provision shall be construed in the
manner most closely resembling the apparent intent of the parties with respect
to such provision so as to be valid, legal and enforceable; provided, however,
that if there is no basis for such a construction, such provision shall be
ineffective only to the extent of such invalidity, illegality or
unenforceability and, unless the ineffectiveness of such provision destroys the
basis of the bargain for one of the parties to this Agreement, the validity,
legality and enforceability of the remaining provisions hereof or thereof shall
not in any way be affected or impaired thereby.
28. Number and Gender.
Words used herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
29. Third Party Beneficiaries.
The Issuer and the Collateral Manager agree that Merrill Lynch
International and Merrill Lynch, Pierce, Fenner & Smith Incorporated are
intended third party beneficiaries of Section 16(b)(viii) of this Agreement.
30. Miscellaneous.
In the event that any vote is solicited with respect to any
Collateral Debt Security or Equity Security, the Collateral Manager, on behalf
of the Issuer, shall vote or refrain from voting any such security in any manner
permitted by the Indenture that the Collateral Manager has determined in its
reasonable judgment will be in the best interests of the Noteholders. In
addition, with respect to any Defaulted Security, the Collateral Manager, on
behalf of the Issuer, may instruct the trustee for such Defaulted Security to
enforce the Issuer's rights under the Underlying Documents governing such
Defaulted Security and any applicable law, rule or regulation in any manner
permitted under the Indenture that the Collateral Manager has determined in its
reasonable judgment will be in the best interests of the Noteholders. In the
event any Offer is made with respect to any Collateral Debt Security or Equity
Security, the Collateral Manager, on behalf of the Issuer, may take such action
as is permitted by the Indenture and that Collateral Manager has determined in
its reasonable judgment will be in the best interests of the Noteholders.
In connection with taking or omitting any action under the
Indenture or this Agreement, the Collateral Manager may consult with counsel and
may rely in good faith on the advice of such counsel or any opinion of counsel.
Without prejudice to Section 14(f) hereof, any corporation,
partnership or limited liability company into which the Collateral Manager may
be merged or converted or with which it may be consolidated, or any corporation,
partnership or limited liability company resulting from any merger, conversion
or consolidation to which the Collateral Manager shall be a party, or any
corporation, partnership or limited liability company succeeding to all or
substantially all of the collateral management business of the Collateral
Manager, shall be the successor to the Collateral Manager without any further
action by the Collateral Manager, the Issuer, the Co-Issuer, the Trustee, the
Noteholders or any other person or entity.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
PILGRIM AMERICA INVESTMENTS, INC.
By:___________________________________
Name:
Title:
ML CLO XII PILGRIM AMERICA
(CAYMAN) LTD.
By:____________________________________
Name:
Title:
Acknowledged by
STATE STREET BANK & TRUST COMPANY
By:_________________________________
Name:
Title:
79
Exhibit 11.1
Pilgrim America Capital Corporation
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the year ended
--------------------------------------------------
September 30, 1997 September 30, 1996
---------------------- ----------------------
<S> <C> <C>
Primary Earnings Per Share:
A Average Common Shares Outstanding 3,862,594 4,866,737
---------------------- ----------------------
Common Share Equivalents:
B. Average Stock Options Outstanding 662,413 - (a)
C Average Options Exercise Price $ 5.958 $ -
---------------------- ----------------------
D Exercise Proceeds [B x C) $ 3,946,829 $ -
---------------------- ----------------------
E Average Market Price for the Year $ 11.240 $ -
F Shares Repurchased at Market Price [D/E] 351,141 -
---------------------- ----------------------
G Calculated Increase in Shares [B-F] 311,272 -
---------------------- ----------------------
H Weighted Average Common Shares and
Common Share Equivalents Outstanding 4,173,866 4,866,737
====================== ======================
I Net Earnings for the Year Ended $ 11,724,000 $ 348,000
====================== ======================
Primary Earning Per Share [I/H] $ 2.81 $ 0.07
====================== ======================
Fully Diluted Earnings Per Share:
A Average Common Shares Outstanding 3,862,594 4,866,737
---------------------- ----------------------
Common Share Equivalents:
B. Average Stock Options Outstanding 662,413 - (a)
C Average Options Exercise Price $ 5.958 $ -
---------------------- ----------------------
D Exercise Proceeds [B x C) $ 3,946,829 $ -
---------------------- ----------------------
E Ending Market Price for Year $ 17.750 $ -
F Shares Repurchased at Market Price [D/E] 222,357 -
---------------------- ----------------------
G Calculated Increase in Shares [B-F] 440,056 -
---------------------- ----------------------
H Weighted Average Common Shares and
Common Share Equivalents Outstanding 4,302,650 4,866,737
====================== ======================
I Net Earnings for the Year Ended $ 11,724,000 $ 348,000
====================== ======================
Fully Diluted Earning Per Share [I/H] $ 2.72 $ 0.07
====================== ======================
</TABLE>
Notes (a)
The stock options outstanding were not in the money on September 30, 1996,
therefore no dilution was calculated.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 882860
<NAME> Pilgrim America Capital Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
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