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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, 1998
PILGRIM AMERICA CAPITAL
CORPORATION
Delaware 86-0670679
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
Two Renaissance Square
40 North Central Avenue, 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 7, 1998, the Registrant had 5,333,477 shares of common
stock outstanding. On such date, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $77,775,441.
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 1999 Annual Meeting of Stockholders have been incorporated by reference into
Part III, Items 10, 11,12, and 13.
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TABLE OF CONTENTS PAGE
PART I
Item 1 Business.................................................. 3
Item 2 Properties................................................ 13
Item 3 Legal Proceedings......................................... 13
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 Shareholder Matters................... 14
Item 6 Selected Consolidated Financial Data...................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 19
Item 8 Financial Statements and Supplementary Data............... 24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 45
PART III
Item 10 Directors and Executive Officers of the Registrant........ 45
Item 11 Executive Compensation.................................... 45
Item 12 Security Ownership of Certain Beneficial Owners
and Management.......................................... 45
Item 13 Certain Relationships and Related Transactions............ 45
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 46
SIGNATURES............................................................ 50
2
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PART I
ITEM 1. BUSINESS
GENERAL
Pilgrim America Capital Corporation ("Pilgrim") 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"), one closed-end
fund (the "Closed-end Fund") (each a "Fund" and collectively the "Funds") and
five issuers of collateralized debt obligations (the "Private Accounts") as of
September 30, 1998. Pilgrim's common stock is traded on the NASDAQ Stock Market
National Market System (the "NASDAQ NMS") under the symbol PACC. Pilgrim
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. (subsequently renamed Atlas Financial Group, Inc.) and its
subsidiaries ("Atlas").
Pilgrim 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 term "Company" as
used herein refers to Pilgrim 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 mortgage loan
servicing assets to NationsBank 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.)
As a part of the Acquisition, 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.
As a result of the Acquisition, the Company became the manger of five
funds: Pilgrim MagnaCap Fund, formerly known as Pilgrim America MagnaCap Fund;
Pilgrim High Yield Fund, formerly known as Pilgrim America High Yield Fund;
Pilgrim Government Securities Income Fund; Pilgrim Prime Rate Trust, formerly
known as Pilgrim America Prime Rate Trust; and Pilgrim Bank and Thrift Fund,
Inc., formerly known as 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 Investments, Inc. ("PII"), a registered investment
advisor, which serves as the investment manager for Pilgrim Funds; Pilgrim
Securities, Inc. ("PSI"), a broker-dealer registered with the National
Association of Securities Dealers, Inc. (the "NASD"), which serves as the
distributor of the Funds; and Pilgrim Group, Inc. ("PGI"), the parent of PII and
PSI, which subsidiaries were respectively known as Pilgrim America Investments,
Inc., Pilgrim America Securities, Inc. and Pilgrim America Group, Inc. until
October 30, 1998.
On September 1, 1995, the Company introduced three additional Funds:
Pilgrim Asia-Pacific Equity Fund, Pilgrim MidCap Value Fund and Pilgrim LargeCap
Leaders Fund (these Funds were formerly known as Pilgrim America Masters
Asia-Pacific Equity Fund, Pilgrim America MidCap Value Fund and Pilgrim America
Masters LargeCap Value Fund, respectively). Each of these Funds has its own
investment objectives and policies and originally each Fund was sub-advised by a
money manager ("Sub-Advisor") elected by the Company and approved by the
applicable Fund Board based on the Sub-Advisor's extensive knowledge and proven
experience in its specialized asset class. On October 31, 1997, PII became
fully responsible for advising the Pilgrim LargeCap Leaders Fund. Pursuant to
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investment management agreements between the Company and each Sub-Advisor, the
Company pays sub-advisory fees to the Sub-Advisors based on the average annual
net assets of the fund managed by each particular Sub-Advisor.
During 1997, the Company began managing assets for Private Accounts.
The Private Accounts are collateralized debt obligations ("CDOs") funded through
multiple classes of secured notes issued by a special purpose company. The
Company closed its first CDO on November 13, 1997 and closed three additional
CDO's through September 30, 1998. Three of the CDOs are invested in both senior
floating rate loans and high yield bonds. The other CDO is invested solely in
high yield bonds. The Company has also been engaged by a fifth Private Account
to manage a portfolio consisting entirely of senior floating rate loans. That
transaction is expected to close in December of 1998.
The Company receives an asset based management fee for its investment
management services to Private Accounts, ranging from 0.50% to 0.60%, and is
entitled to a maximum additional fee of 0.15% to 0.25% if certain return hurdles
are met. The Company also purchased equity investments in each CDO. As of
September 30, 1998, CDO assets under management totaled $1.90 billion and the
Company's equity investments in CDOs totaled $18.3 million.
Investment Management Services
The Company provides investment advisory, distribution and
administrative services for the Funds under investment management and
administration agreements and distribution plans with each Fund. Pursuant to the
investment management agreements, PII provides investment advisory services to
each Fund, subject to the authority of each Fund's board of directors or
trustees (the "Boards") and to each Fund's 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 PII, as defined in section 2(a)(19) of the Investment Company
Act of 1940, as amended (the "Investment Company Act")). The agreements
generally may be terminated by the Company or the Fund upon 60 days notice
without penalty.
PII provides investment management services to the Private Accounts
prior to closing pursuant to a warehouse agreement or an engagement letter, and
after closing pursuant to an investment management agreement. PII is appointed
as the investment manager at the inception of each transaction for the life of
the related CDO, subject to removal at certain times or upon the happening of
certain events and for cause. Each CDO is expected to continue for six to ten
years (subject to early termination by vote of the investors).
All invested assets are managed by portfolio managers employed by the
Company, except for the Pilgrim MidCap Value Fund and Pilgrim Asia-Pacific
Equity Fund, which are managed by Sub-Advisors. The Company's portfolio
management staff includes 7 portfolio managers, 5 assistant portfolio managers,
9 analysts, a chief investment officer and a chief credit 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 portfolio records, answering investor inquiries, providing
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. The Private Accounts also pay
their own expenses, such as trustee fees, legal fees, accounting service fees
and similar expenses.
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Revenues
Substantially all of the Company's revenues are derived from investment
management, administrative and distribution fees which are based on a percentage
of assets under management in the Funds and the CDOs. 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 affect the Company's revenues and the results of its
operations.
The Funds
The Open-end Funds
The Open-end Funds are marketed and distributed through PSI 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 plans, as underwriter to each Fund, PSI 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
Boards 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.
PSI 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). PSI
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 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
re-allowed, to the Authorized Dealers. PSI receives the balance as an
underwriting commission of up to .75% of the value of the shares sold. PSI 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. PSI 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 ("DAC Asset") and are
amortized over a six-year period. The shareholder then pays a contingent sales
charge to PSI 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.
On December 11, 1998, PSI sold its September 30, 1998 DAC Asset for
$26.5 million, which approximated book value, as well as the right to receive
.75% annually of the future distribution fees and the contingent deferred sales
charges from the related Class B shares. Under the related agreements, the
Company will also sell its DAC on future Class B share sales to the purchaser
through November 30, 1999. The Purchaser has a right of first refusal on a two
year extension thereafter. The Company is required under its existing Credit
Agreement (defined below) to use proceeds in excess of $3.0 million from the
5
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sale of its DAC Asset to pay down its borrowings under the Credit Agreement and
reduce Credit Agreement borrowings by 50% of the proceeds of the sale in excess
of $3 million. The Company's credit facility will be reduced by approximately
$11.8 million as a result of this transaction.
Class M shares are offered with a lower initial sales charge than Class
A shares. The maximum initial sales charge is 3.5% for equity Funds, and 3.25%
for fixed income Funds. As with Class A shares, the majority of this commission
is re-allowed to the Authorized Dealer. PSI receives the balance as an
underwriting commission of up to .50% of the value of the shares sold. PSI also
receives 12b-1 fees from the Funds at an annual rate of .75% of Class M shares
average daily net assets.
Under the Funds' distribution plans, ongoing payments are made by PSI
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 that have been developed as part of the Company's strategy to provide
core investments to investors.
Pilgrim 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, 1998 were $779.2 million. This Fund
converted from a closed-end format to an open-end format on October 20, 1997.
Pilgrim 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% for average annual net assets. Organized in
1969, net assets of the Fund at September 30, 1998 were $389.0 million.
Pilgrim 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 0.60% of average annual net assets. Organized in 1939, net assets of
the Fund at September 30, 1998 were $296.1 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 net assets. Organized in 1984, net
assets of the Fund at September 30, 1998 were $39.4 million.
Pilgrim 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 net assets.
Organized in July 1995, net assets of the Fund at September 30, 1998 were $21.1
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 $49.0 billion of assets worldwide and its
clients primarily include pension funds, institutional investors, and high net
worth individuals.
Pilgrim 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 net
assets. Organized in July 1995, net assets of the Fund at September 30, 1998
were $66.3 million. The Sub-Advisor of the Fund is CRM Advisors, LLC ("CRM"), an
affiliate of Cramer Rosenthal McGlynn, Inc., which manages $4.0 billion of
assets for its clients, which primarily include pension plans, high net worth
individuals, foundations, endowment funds, and others.
6
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Pilgrim LargeCap Leaders 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 net assets. Organized
in July 1995, net assets of the Fund at September 30, 1998 were $23.2 million.
As of October 31, 1997, the Fund Sub-advisor resigned and was replaced by PII,
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.
The Closed-end Fund
Pilgrim Prime Rate Trust (the "Trust") seeks as high a level of current
income as is consistent with preservation of capital by acquiring interests in
senior collateralized corporate loans. Shares of the Trust are traded on the New
York Stock Exchange (NYSE:PPR).
In May 1996, the Trust's shareholders approved permitting the Trust to
borrow for investment purposes to the extent permitted under the Investment
Company Act. The Trust entered into a credit agreement in May 1996 and entered
into an amendment in November 1996 which provided that the Trust could borrow up
to $515 million, or approximately 33 1/3% of the Trust's total assets, including
assets acquired with borrowed funds. In 1998, the Trust entered into a new
financing agreement for $450 million and amended its existing credit agreement
to reduce it to $200 million, for a total borrowing capability for the Trust of
$650 million.
Management fees for the Trust are 0.80% and administrative fees range
between .10% to .l5% of the Trust's net assets plus borrowings. Organized in
1988, net assets of the Trust at September 30, 1998 were $1.18 billion, and
borrowings were $484 million.
On November 19, 1996, the Trust raised net proceeds of $157 million by
issuing 18,122,963 shares of beneficial interest in the Trust pursuant to a one
for five non-transferable rights offering (the "Offering"). After the Offering,
the Trust 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 Trust over $1.15 billion to .60% for a period of three years
following the Offering.
In May 1998, the Trust began offering shares under two shelf
registration statements; 15,000,000 shares pursuant to its Shareholder
Investment Program and privately negotiated transactions, and 10,000,000 shares
pursuant to an exclusive distribution agreement which provides for direct
issuance to the New York Stock Exchange. All shares sold must create net
proceeds to the Trust equal to or greater than Net Asset Value. The Trust has
issued all shares under its 10,000,000 share registration statement and is now
selling shares under a recently filed registration of 25,000,000 shares. During
fiscal year 1998, the Trust raised $146 million through privately negotiated
transactions and $16 million through the shareholder investment program.
Private Accounts
The Company serves as the Investment Manager for five CDOs. Four of
these CDOs have closed as of September 30, 1998, while the fifth is currently
accumulating assets in advance of closing (the "Ramp-up Stage"). Management fees
for the closed CDOs range from .50% to .60% of average assets. There are also
contingent fees that range from .15% to .25% of average assets payable if
certain return hurdles are met. Prior to closing, the Company earns a management
fee ranging from .385% to .50% of average assets. Assets managed in CDOs at
September 30, 1998 were $1.90 billion.
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The following table summarizes each Fund as of September 30, 1998, 1997, 1996
and 1995:
ASSETS UNDER MANAGEMENT
AS OF SEPTEMBER 30,
<TABLE>
<CAPTION>
(IN MILLIONS) FEES (IN BASIS POINTS)(1)(2)
------------------------------------ ----------------------------------------
1998 1997 1996 1995 Management Administrative Distribution
---- ---- ---- ---- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPEN-END FUNDS (7)
Pilgrim MagnaCap
Fund $ 389.0 $ 380.1 $ 269.2 $ 215.2 50-100 -- 30-100
Pilgrim High Yield
Fund 296.1 114.1 30.8 15.6 60(9) -- 25-100
Pilgrim Government
Securities Income Fund 39.4 29.0 36.0 42.8 40-50 -- 25-100
Pilgrim Asia-Pacific
Equity Fund 21.1 59.8 53.1 1.6 125 -- 25-100
Pilgrim MidCap Value
Fund 66.3 63.5 11.4 0.9 100 -- 25-100
Pilgrim LargeCap Leaders
Fund (7) 23.2 29.5 12.2 1.2 100 -- 25-100
Pilgrim Bank and Thrift
Fund (3) 779.2 -- -- -- 70-100 -- 25-100
-------- -------- -------- --------
Total Open-end Funds 1,614.3 676.0 412.7 277.3
-------- -------- -------- --------
CLOSED-END FUNDS
Pilgrim Prime Rate
Trust (4) (5) 1,663.4 1,354.1 1,048.2 868.0 80 10-15 --
Pilgrim Bank and Thrift
Fund (3) -- 347.9 243.6 202.3 70-100 -- --
-------- -------- -------- --------
Total Closed-end Funds 1,663.4 1,702.0 1,291.8 1,070.3 -- -- --
-------- -------- -------- --------
PRIVATE ACCOUNTS (6)(8) 1,896.0 230.5 -- -- -- -- --
-------- -------- -------- --------
TOTAL ASSETS UNDER
MANAGEMENT INCLUDING
BORROWINGS (4) $5,173.7 $2,608.5 $1,704.5 $1,347.6
======== ======== ======== ========
</TABLE>
See explanation of footnotes following table.
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(1) Fee varies based upon levels of average net assets. Table includes the
current range of fees to which each of the Funds assets are subject.
(2) In 1995, each Open-end Fund, excluding Bank and Thrift, 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 MagnaCap Fund), 1.00% and .75%, respectively.
(3) On October 20, 1997, Pilgrim Bank and Thrift Fund became an Open-end Fund.
PSI will receive a distribution fee of .25% on Class A shares and 1.00% on
Class B shares (see "The Open-end Funds" above).
(4) During the fourth quarter of Fiscal 1996, the 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,
1998 and September 30, 1997 were $484.0 million and $319.0 million,
respectively. Additionally, effective May 1998, the Trust began issuing
shares under two separate shelf registration statements, whereby the net
proceeds received by the Trust from share sales may not be less than the
greater of (i) the NAV per share or (ii) 94% of the average daily market
price over the relevant pricing period.
(5) In connection with the Offering completed on November 16, 1996 (see "The
Closed-end Fund" above), the Company has agreed to reduce its management
fee on net assets plus borrowings of the Trust over $1.15 billion to .60%
for a period of three years following the Offering.
(6) Including $202.6 million and $230.5 million of assets under management in
Private Accounts which had not closed as of September 30, 1998 and
September 30, 1997, respectively. Such transactions were in ramp up stages
at those dates. As of December 7, 1998 the fifth transaction was still in
the ramp-up stage.
(7) Effective November 16, 1998, the name "America" has been removed from the
title of each Fund (except Pilgrim Government Securities Income Fund).
Also, the Pilgrim LargeCap Fund is now known as Pilgrim LargeCap Leaders
Fund.
(8) Each Private Account contains a tiered management fee structure payable to
the Company based on assets under management and expected performance
levels. On closed transactions, a base and a secondary management fee are
paid to the Company on a current basis and on a combined basis ranges from
.50% to .60% of assets under management. There is also a contingent
management fee of up to 0.25% payable to the Company when certain return
hurdles are met within the related Private Account. In most instances, the
hurdle is not expected to be met for several years after the inception of
the related Private Account. The Company accrues as revenue the net present
value of earned contingent management fees expected to be received on each
Private Account. Prior to closing, the Company earns a management fee
ranging from .385% to .50%.
(9) In effect on September 30, 1998.
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The following table presents comparative yearly data regarding Fund activity:
RESULTS OF OPERATIONS
For the Years ended September 30,
(In millions)
1998 1997 1996 1995
---- ---- ---- ----
OPEN-END FUNDS:
Beginning assets $ 676.0 $ 412.7 $ 277.3 $ 265.4
Direct sales 1,074.0 249.7 121.6 9.0
Direct redemptions (255.3) (85.3) (39.1) (21.4)
Exchanges in (out)(1) (9.6) 4.1 (5.0) 1.9
Bank and Thrift Fund
conversion (2) 354.2 -- -- --
Investment activities (3) (225.0) 94.8 57.9 22.4
-------- -------- -------- --------
Ending assets 1,614.3 676.0 412.7 277.3
-------- -------- -------- --------
CLOSED-END FUNDS:
Beginning assets 1,702.0 1,291.8 1,070.3 1,031.7
Direct sales (4) 158.4 157.8 -- --
Bank and Thrift Fund
conversion (2) (354.2) -- -- --
Investment activities (3) 157.2 252.4 221.5 38.6
-------- -------- -------- --------
Ending assets 1,663.4 1,702.0 1,291.8 1,070.3
-------- -------- -------- --------
PRIVATE ACCOUNTS:
Beginning assets 230.5 -- -- --
Additions (5) 1,665.5 230.5 -- --
-------- -------- -------- --------
Ending assets 1,896.0 230.5 -- --
-------- -------- -------- --------
Ending assets under management $5,173.7 $2,608.5 $1,704.5 $1,347.6
======== ======== ======== ========
- ----------
(1) Net exchanges from (to) the Company's sponsored money market fund.
(2) Pilgrim Bank and Thrift converted from a Closed-end Fund to an Open-end
Fund on October 20, 1997.
(3) Investment activities include net investment income, realized gain/(loss),
change in appreciation/(depreciation) and net cash distribution to
shareholders. Investment activities for Closed-end Funds include assets
acquired using borrowed Funds.
(4) Registration statements covering securities to be issued pursuant to a Cash
Purchase Plan and a Shelf Offering for Prime Rate Trust have been filed
with the Securities and Exchange Commission and became effective in May
1998.
(5) The Private Account activity includes assets under management during
the Ramp-up Stage.
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Regulation
Virtually all aspects of the Company's business are subject to various
federal and state laws and regulations. PII is registered as an investment
advisor 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 advisors including fiduciary, record keeping, operational and
disclosure obligations.
PSI is registered as a broker-dealer under the Securities Exchange Act
of 1934, as amended, and under all applicable state securities laws. PSI is a
member of the NASD and the Securities Investor Protection Corporation. PSI 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 PSI. PSI's
regulatory net capital currently exceeds such minimum net capital requirements.
Each of the Pilgrim 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 ("RIC's") under
Sub-chapter 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 advisor 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 are highly competitive. In the United States, there are over 10,000
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 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.
The Company also intends to continue adding assets in Private Accounts.
Typically, Private Account management services are marketed through certain
broker dealer firms primarily to institutional clients. The Company has been
successful in increasing assets in Private Accounts because of Pilgrim's
perceived high quality investment management capabilities in the senior
floating rate loan and high yield bond asset classes, as well as the Company's
business relationships with certain broker dealer firms.
The Company's continued success in marketing its Private Account
investment management services is highly dependent on the continuance of its
perceived stature as a quality manager of the related asset classes as well as
the continuance of its relationship with broker dealer firms with whom it has
conducted Private Account transactions. Additionally, continued success is
dependent on the performance of the particular asset classes which are managed
by the Company and the resulting market demand for the related management
services of such asset classes.
The Company also may increase assets 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 acquisitions.
Year 2000
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 properly in the year 2000.
The Company is working to ensure that its operating and processing
systems will, along with those of its service providers, continue to function
properly when the year 2000 arrives. The Company has developed and is
implementing a comprehensive plan to complete all internal system conversions by
the second Quarter of Fiscal 1999. A significant part of the plan involves
upgrading current software to newer versions which are fully Year 2000
compliant. To date, most of the Company's current software systems are fully
compliant. Based on this plan, it is estimated that incremental expenses to the
Company for the Year 2000 project will not have material impact on the Company's
operations or financial results. In addition, the Company is keeping apprised of
the progress of outside vendors' plans to become Year 2000 compliant. The
Company has been advised in writing by its mission critical third party vendors
as to the status of their efforts to become year 2000 compliant and the Company
will continue to contact these vendors to monitor their status of completing
their Year 2000 compliance. These mission critical third party providers include
those that provide custody, transfer agency, accounting and administrative
services for the Funds, and their written correspondence has indicated that they
are addressing this problem and do not expect that it will materially adversely
affect their operations.
The Company is developing a contingency plan ("the Plan") to address
the Company's need to be prepared if the Company or one of its primary third
party vendors fails to be Year 2000 compliant on January 1, 2000. The Company
will have this written plan in place by January 31, 1999. The scope of the Plan
includes mission critical systems, physical facilities, and the Company's
12
<PAGE>
communication systems. The Plan will provide the Company guidance should it or
any of the Company's primary third party vendors fail to meet its goals to be
Year 2000 compliant.
Employees
At September 30, 1998, the Company had 112 full time employees,
including 40 sales and marketing employees, 34 portfolio management employees,
and 38 general and administrative employees. Ninety-five 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 29,000 square feet of commercial office space in Phoenix,
Arizona under a lease expiring August 31, 2005. The Company also has committed
to lease 9,700 square feet of additional office space under this lease no later
than August 31, 1999.
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 in 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
The Company is a party from time to time to actions and proceedings
incident to its business. Management does not believe that any existing actions
or proceedings will, in the aggregate, have a material adverse effect on the
business financial conditions or results of operations of the Company.
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, positions
and offices with the Company of the executive officers of the Company at
September 30, 1998 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, 41, 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 Executive Vice
President, Chief Credit Officer and Assistant Secretary of the Trust. Mr. Reis
serves as Vice Chairman and Director of PSI, PII and PGI 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.
13
<PAGE>
James M. Hennessy, 49, has served as Executive Vice President (and
prior to May 1998 as Senior Vice President) and Secretary of the Company, PSI
and of each of the Funds, and Executive Vice President (and prior to May 1998 as
Senior Vice President) of PII and PGI, since May 1995 and Secretary of PII and
PGI since July 1995. Mr. Hennessy has served as General Counsel of the Company
since September 1995 and also as Executive Vice President (and prior to May 1998
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, 48, has served as President and Chief Executive Officer
of Pilgrim 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, 42, has served as President and Chief Executive
Officer of Pilgrim Securities, Inc. since November 1996. Previously Mr. Boulware
served as Executive Vice President and Chief Operating Officer of PSI. 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 1987-1990.
Howard Tiffen, 50, has served as Senior Vice President of Pilgrim
Group, Inc. and President and Chief Operating Officer of Pilgrim 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 of
Bank of America from April 1982 to November 1995.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER 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. The prices have been adjusted to reflect a 3 for 2 stock split that
was effective after the close of business on April 30, 1998:
Fiscal Year Ended September 30, 1997 High Low
------------------------------------ ---- ---
First Quarter $ 4.67 $ 3.75
Second Quarter 7.08 4.58
Third Quarter 10.42 6.00
Fourth Quarter 13.83 9.33
Fiscal Year Ended September 30, 1998
------------------------------------
First Quarter $16.50 $11.33
Second Quarter 23.25 11.67
Third Quarter 27.00 14.67
Fourth Quarter 28.38 16.75
14
<PAGE>
The number of stockholder accounts of record of the Common Stock as of
December 7, 1998 was approximately 322. The Company believes that there are more
than 2,000 beneficial owners of its Common Stock. The Company's stock price
closed at $21.00 per share on December 7, 1998.
The Company has not paid dividends on its Common Stock. It is the
present policy of the Company's Board of Directors to retain 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 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.
The Company announced the discontinuance of its mortgage banking operations on
February 28, 1995. 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.
15
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues ......................... $ 43,301 $ 21,288 $ 14,485 $ 6,363 $ --
Expenses ......................... 27,448 14,936 15,887 6,913 --
---------- ---------- ---------- ---------- ----------
Earnings (loss) from continuing
operations before taxes ......... 15,853 6,352 (1,402) (550) --
Income taxes (benefit) ........... 6,546 (4,959) (1,750) -- --
---------- ---------- ---------- ---------- ----------
Earnings (loss) from continuing
operations ...................... 9,307 11,311 348 (550) --
Earnings (loss) from operations of
discontinued mortgage business .. -- 413 -- (14) (8,490)
Loss on discontinuance of mortgage
operations ...................... -- -- -- (5,307) --
---------- ---------- ---------- ---------- ----------
Net earnings (loss) .............. $ 9,307 $ 11,724 $ 348 $ (5,871) $ (8,490)
========== ========== ========== ========== ==========
PER COMMON SHARE:
Basic earnings (loss) from
continuing operations(1) ........ $ 1.62 $ 1.95 $ 0.05 $ (0.07) $ --
========== ========== ========== ========== ==========
Diluted earnings (loss) from
continuing operations(1) ........ $ 1.40 $ 1.81 $ 0.05 $ (0.07) $ --
========== ========== ========== ========== ==========
Basic net earnings (loss)(1) ..... 1.62 2.02 0.05 (0.79) (1.05)
========== ========== ========== ========== ==========
Diluted net earnings (loss)(1) ... $ 1.40 $ 1.87 $ 0.05 $ (0.79) $ (1.05)
========== ========== ========== ========== ==========
Basic shares used in per share
calculations(1) ................. 5,752,584 5,793,891 7,300,106 7,425,066 8,066,790
========== ========== ========== ========== ==========
Diluted shares used in per share
calculations(1) ................. 6,637,605 6,260,799 7,300,106 7,425,066 8,066,790
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET
DATA (AT PERIOD END):
Total assets(2) .................. $ 83,495 $ 50,647 $ 42,555 $ 43,495 $ 44,721
========== ========== ========== ========== ==========
Net assets (liabilities) of
discontinued operations ......... $ (505) $ (230) $ (3,392) $ (4,138) $ 35,590
========== ========== ========== ========== ==========
Redeemable preferred stock ....... $ -- $ -- $ -- $ 338 $ 1,015
========== ========== ========== ========== ==========
Total stockholders' equity ....... $ 46,564 $ 41,753 $ 29,788 $ 35,722 $ 43,601
========== ========== ========== ========== ==========
Assets under management........... $5,173,700 $2,608,500 $1,704,500 $1,347,600 $ --
========== ========== ========== ========== ==========
</TABLE>
- ----------
See explanation of footnotes following the tables.
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<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
DISCONTINUED OPERATIONS
(dollars in thousands, except share data)
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
DISCONTINUED OPERATIONS:
Revenues:
Loan administration ......... $ -- $ -- $ -- $ 139 $ 23,442
Loan origination ............ -- -- -- (225) 3,573
Interest income ............. -- -- -- 1,983 20,598
Warehouse interest expense .. -- -- -- (1,090) (12,906)
Gain on sale of servicing
rights...................... -- -- -- 2,074 40,877
Other income ................ -- -- -- 239 871
------ -------- ------ -------- --------
Total revenues ........... -- -- -- 3,120 76,455
Expenses:
Personnel ................... -- -- -- 3,322 26,517
Amortization of purchased
servicing rights ........... -- -- -- 66 10,640
Write off of goodwill ....... -- -- -- -- 6,649
Other interest expense ...... -- -- -- 145 5,248
Other operating expenses .... -- (693) -- 2,618 26,643
Restructuring charges ....... -- -- -- -- 5,050
------ -------- ------ -------- --------
Total expenses ........... -- (693) -- 6,151 80,747
------ -------- ------ -------- --------
Earnings (loss) before
income taxes (benefit) and
extraordinary item .......... -- 693 -- (3,031) (4,292)
Income taxes (benefit) ........ -- 280 -- (3,017) 2,942
------ -------- ------ -------- --------
Earnings (loss) before
extraordinary item .......... -- 413 -- (14) (7,234)
Extraordinary loss on early
extinguishment of debt ...... -- -- -- -- (1,256)
------ -------- ------ -------- --------
EARNINGS (LOSS) FROM
OPERATIONS OF DISCONTINUED
MORTGAGE BUSINESS.............. $ -- $ 413 $ -- $ (14) $ (8,490)
====== ======== ====== ======== ========
Diluted Earnings (loss)
before extraordinary item
per share(1).................. $ -- $ 0.06 $ -- $ -- $ (0.90)
====== ======== ====== ======== ========
Diluted Earnings (loss) per
share of common stock(1)...... $ -- $ 0.06 $ -- $ -- $ (1.05)
====== ======== ====== ======== ========
17
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
DISCONTINUED OPERATIONS - (Continued)
(dollars in thousands, except share data)
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Consolidated Balance Sheet
DATA (AT PERIOD END):
Mortgage loans held for sale .. $396 $1,128 $3,516 $ 2,352 $ 95,993
Purchased servicing net ....... -- -- -- -- 763
Total assets .................. 396 1,128 3,673 5,538 111,260
Notes payable ................. -- -- 1,320 -- 49,025
Total liabilities ............. 901 1,358 7,065 9,676 75,670
SELECTED OPERATING DATA:
Volume of loans originated .... -- -- -- 199,895 3,616,990
Loan servicing portfolio
(at period end)(3) ........... -- -- -- 171,861 429,304
The following footnotes relate to the preceding tables of Selected Consolidated
Financial Data:
(1) Shares used in the calculation of earnings per share have been
retroactively adjusted to account for a 50% dividend issued in the form of
a 3 for 2 stock split that took place in Fiscal 1998 and the requirements
of statement of Accounting Financial Standards Number 128.
(2) Total assets in 1994 were assets of the discontinued mortgage operations.
(3) Includes loans held for sale and loans serviced pursuant to sub-servicing
agreements. At September 30, 1994, the Company sub-serviced loans with an
aggregate principal balance of $3.2 million. No loans were sub-serviced by
the Company after the year ended September 30, 1994.
18
<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, 1998 ("Fiscal
1998"), the Company recorded net earnings of $9.3 million or $1.40 per diluted
share or $1.62 per basic share, compared to net earnings for the fiscal year
ended September 30, 1997 ("Fiscal 1997") of $11.7 million or $1.87 per diluted
share or $2.02 per basic share (of which $11.3 million or $1.81 per diluted
share or $1.95 per basic share was from the continuing operations of its
investment management business). For the fiscal year ended September 30, 1996
("Fiscal 1996"), the Company recorded net earnings of $348,000 or $.05 per
diluted share or $0.05 per basic share, all of which was from continuing
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").
An income tax liability of $6.5 million was recorded in Fiscal 1998
compared to a tax benefit of $5.0 million in Fiscal 1997. The Company recorded
the $5.0 million benefit in Fiscal 1997 because it was believed that it was more
likely than not that it would generate sufficient taxable income to allow for
the realization of its deferred tax asset. As of September 30, 1998, the Company
had net operating loss carryforwards of $1.3 million, which are available to
offset future taxable income through fiscal years ending September 30, 2011.
Provisions of the Internal Revenue Code under Section 382 may, under
certain circumstances, restrict the ability of the Company to utilize its net
operating loss carryovers. Generally, these provisions apply upon the occurrence
of a change in control, which is deemed to occur if the cumulative percentage
ownership change of a company's common shares is greater than 50 percent during
a prescribed measurement period. As the Company had substantially utilized its
net operating loss carryforwards by September 30, 1998, it is not anticipated
that those provisions will impact the Company's ability to fully utilize the
remaining $1.3 million net-operating losses.
Due to the Acquisition and the discontinuance of its mortgage banking
operations in Fiscal 1995, the Company's results of continuing operations are
discussed herein separately from the results of the Company's discontinued
mortgage-banking operations.
Investment Management (Continuing) Operations
Year ended September 30, 1998 compared to Year ended September 30, 1997
Revenues for Fiscal 1998 totaled $43.3 million, an increase of $22.0
million over Fiscal 1997 revenues. The major components of the Company's
revenues are management and administrative fees, distribution fees and Private
Account management fees. Management and administrative fees for Fiscal 1998, net
of sub-advisory fees of $536,000 (see "Item 1. Business-General"), were $22.9
million, an increase of $5.6 million over Fiscal 1997 management and
administrative fees which were net of sub-advisory fees of $644,000. These fees
are based on the average annual net assets of the Funds (plus borrowings in the
Trust) (see "Item 1. Business-General the "Funds"). Assets of the Funds totaled
$3.28 billion at September 30, 1998 versus $2.38 billion at September 30, 1997,
an increase of $900.0 million. Distribution fees were $7.4 million for Fiscal
1998, an increase of $4.9 million over Fiscal 1997. Distribution fees are based
on the average annual net assets of the Company's Open-end Funds, which totaled
$1.61 billion as of September 30, 1998 compared to $676.0 million as of
September 30, 1997, an increase of $934.0 million, including a $354.2 increase
in assets in October 1997 when the Pilgrim Bank and Thrift Fund was converted
from a Closed-end Fund to an Open-end Fund. Private Account management fees were
$6.3 million, an increase of $6.2 million over Fiscal 1997. Private Account
management fees are based on the assets managed by the Company in CDOs which
totaled $1.90 billion as of September 30, 1998 compared to $230.5 million as of
September 30, 1997, an increase of $1.67 billion.
19
<PAGE>
The increase of $2.57 billion in assets under management at September
30, 1998 resulted primarily from a net decrease of $112.4 million in market
value of managed assets and an increase in Pilgrim Prime Rate Trust borrowings
of $165.0 million (borrowings) and an increase in the new Private Account assets
of $1.67 billion. Additionally, direct sales of Open-end Funds accounted for
$1.07 billion of the increase, and direct sales of Pilgrim Prime Rate Trust
accounted for $158.4 million, while redemptions (including net exchange into the
Company's money market fund and the Bank and Thrift conversion) totaled $264.9
million and distributions paid in cash to shareholders of both Open-end and
Closed-end Funds totaled $116.1 million.
The Company's operating expenses of $27.4 million for Fiscal 1998, an
increase of $12.5 million over Fiscal 1997, include general and administrative
expense, selling expense, interest expense and depreciation and amortization.
General and administrative expense, which totaled $12.7 million and $7.3 million
in Fiscal 1998 and 1997, respectively, includes 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 specific ratios. During Fiscal
1998 and Fiscal 1997, such reimbursement expenses totaled $877,000 and $742,000,
respectively, and are included in general and administrative expense.
Selling expenses are related to the distribution of the Open-end Funds
and the Closed-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 $9.2 million in Fiscal 1998 compared to $4.9 million in
Fiscal 1997. The $4.3 million increase in selling expense was due to an increase
in sales staff as the Company expanded its sales territories to support the
increase in the sales of the Fund shares in Fiscal 1998.
Interest expense was $1.2 million and $505,000 for Fiscal 1998 and
Fiscal 1997, respectively. The increase in interest expense was primarily due to
the Company's increase in borrowings, which were $30.4 million as of September
30, 1998 compared to $5.5 million as of September 30, 1997. The increase in the
Company's borrowings resulted from the increase in commissions paid on B shares
and the equity investments made in CDOs by the Company beginning in Fiscal 1998.
Amortization and depreciation of $4.3 million in Fiscal 1998, an
increase of $2.0 million over Fiscal 1997, 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, 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 sub-advisory 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 sub-advisory fees of $387,000. These fees are based on the net average assets
of the Funds (see "Item 1. Business - Pilgrim Funds"). Net assets of the Funds
totaled $2.38 billion at September 30, 1997 versus $1.70 billion at September
30, 1996, an increase of $680.0 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 net 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.
The increase in assets of $904.0 million at September 30, 1997 resulted
primarily from a $487.8 million increase in the market value of managed Fund
assets and an increase in Pilgrim Prime Rate Trust borrowings of $140.0 million
and the new Private Account assets of $230.5 million. Additionally, direct sales
of Open-end Funds accounted for $249.7 million of the increase, while
20
<PAGE>
redemptions (including net exchange 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, interest expense and amortization and depreciation.
General and administrative expense, which totaled $7.3 million and $7.2 million
in Fiscal 1997 and Fiscal 1996, respectively, includes 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.
Interest expense was $505,000 and $137,000 for Fiscal 1997 and Fiscal
1996, respectively. The increase in interest expense was primarily due to the
Company's increase in borrowings, which were $5.5 million as of September 30,
1997 compared to $3.6 million as of September 30, 1996.
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").
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 have been reflected as "Earnings (loss)
from operations of discontinued mortgage business, net of tax" in the Company's
consolidated statements of earnings. 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.
The Company recorded no activity from the discontinued mortgage
business in Fiscal 1998. In Fiscal 1997, the Company recorded earnings (net of
tax) from discontinued operations of $413,000 related to the reevaluation of
certain allowances. The Company recorded no activity from the discontinued
mortgage business in Fiscal 1996.
Liquidity and Capital Resources
The Company's principal liquidity needs arise in connection with
general and administrative expenses, selling expenses, including commissions
paid by the Company in connection with the sale of Fund shares, and equity
investments made by the Company in connection with the management of Private
Accounts. The Company's principal liquidity and capital resources included cash
flow from operations and borrowings available at September 30, 1998 under a
$55.0 million credit agreement (the "Credit Agreement"). During Fiscal 1998, the
Company used $4.2 million in its operations and $16.2 million in its investing
21
<PAGE>
activities and $3.9 million to repurchase the Company's stock. The Company funds
these uses of cash through its financing activities, which included $24.9
million from borrowings.
One of the Company's principal uses of cash is the payment of
commissions in connection with the sale of Open-end Fund Class B shares. The
Company's payment of these commissions is funded primarily with the Company's
borrowings made available under the Credit Agreement. The Company also can fund
Class B share sales by selling its deferred acquisition cost (" DAC Asset"),
which at September 30, 1998 had a balance of $26.6 million. The Company's
inability to borrow funds or sell its DAC Asset could have an adverse effect on
the Company's ability to finance the continued sale of Open-end Fund Class B
shares. For the year ended September 30, 1998, the Company had cash outflows of
$24.5 million for the payment Class B share commissions.
On December 11, 1998, PSI sold its September 30, 1998 DAC Asset for
$26.5 million, which approximated book value, as well as the right to receive
.75% annually of the future distribution fees and the contingent deferred sales
charges from the related Class B shares. Under the related agreements, the
Company will also sell its DAC on future Class B share sales to the purchaser
through November 30, 1999. The Purchaser has a right of first refusal on a two
year extension thereafter. The Company is required under its existing Credit
Agreement (defined below) to use proceeds in excess of $3.0 million from the
sale of its DAC Asset to pay down its borrowings under the Credit Agreement and
reduce Credit Agreement borrowings by 50% of the proceeds of the sale in excess
of $3 million. The Company's credit facility will be reduced by approximately
$11.8 million as a result of this transaction. The transaction should result in
no gain or loss since the sales price approximated book value.
The Company also uses a significant portion of its cash to invest in
the equity of Private Accounts that it manages. The Company is required to
invest an agreed upon percentage in each Private Account at the date the
transaction closes. The Company's inability to borrow the funds needed to invest
in the equity of each Private Account could have an adverse effect on the
Company's ability to continue to close and manage additional Private Account
assets. As of September 30, 1998, the Company has $18.3 million in investments
in equity of Private Accounts.
The Company intends to continue funding its investment management
operations with cash provided by operations and with borrowings obtained under
the Credit Agreement. The Company's credit agreement was amended and restated on
July 31, 1998 and allows the Company or the Company's wholly owned subsidiary,
Pilgrim Group, Inc. ("PGI") to borrow up to $55.0 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; (iv) financing Private Account equity investments and (v)
repurchasing Company stock. The agreement contains restrictive convenants which
require PGI and the Company to maintain certain financial ratios and prohibits
certain "restricted payment," including dividends by the Company to its
shareholders. Borrowings under the Credit Agreement are collateralized by a
pledge by the Company of the stock of its wholly owned subsidiary PGI, by a
pledge of PGI of the stock of its wholly owned subsidiaries, by a security
interest in the assets of the Company, PGI and PGI's wholly owned subsidiaries,
and by a guarantee of PGI's wholly owned subsidiary, PII.
At September 30, 1998, the Company had borrowings of approximately
$30.4 million outstanding under the Credit Agreement and approximately $24.6
million additional borrowings available.
As of September 30, 1998 and September 30, 1997, the Company, through
its wholly owned discontinued mortgage subsidiaries, owns mortgage loans and
foreclosed real estate with principal balances aggregating approximately
$396,000 and $1.1 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 $787,000 and $725,000
to provide at September 30, 1998 and September 30, 1997, respectively, for
estimated losses to be incurred upon the repurchase and resale of loans
originated and indemnified by the Company. Any increase in repurchase loan
activity due to the Company's discontinued operations, beyond that forecasted by
the Company, may have an adverse effect on the Company's liquidity.
22
<PAGE>
On September 27, 1996, the Company repurchased 1,526,595 shares of its
common stock from two institutional stockholders at a price of $4.33 per share,
or a total of $6.6 million. These purchases were funded with borrowings under
the Credit 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 750,000 shares of its common stock from time to time in open
market transactions. As of September 30, 1998, the Company had repurchased
216,650 of these shares at a total purchase price of $3.9 million. On October 8,
1998, the Company's Board of Directors approved repurchasing an additional
500,000 shares, once the repurchase of the 750,000 shares has taken place.
In October 1998, the Company repurchased 255,000 shares of the
Company's common stock at a total purchase price of $4.4 million.
During Fiscal 1996, the Company redeemed 3,384 shares of its Series A
Preferred Stock at the liquidation value of $100 per share, for an aggregate
redemption price of $338,000.
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 that 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
(I.E., the Class B Shares). To the extent interest rates increase substantially
or the Company is not able to secure adequate financing for commission payments,
sales of Class B shares, and related revenues therefrom, may be adversely
affected.
Newly Adopted Accounting Standards
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 statement 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 Company intends to adopt the
SFAS in Fiscal 1999 and 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 an 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 revenue 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.
23
<PAGE>
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 SAS 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,
1998 and for each of the years in the three-year period ended September 30,
1998, together with the related notes and the Report of KPMG Peat Marwick LLP,
independent auditors, are set forth on the following pages. Other required
financial information and schedules are set forth herein, as more fully
described in Item 14.
24
<PAGE>
KPMG PEAT MARWICK, LLP
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, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the years in the three-year period ended September 30, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
October 7, 1998, except as to notes 1(b),
12 and 15 to the consolidated financial
statements which are as of November 16, 1998.
Los Angeles, California
25
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 763 $ 219
Investments 18,808 3,127
Accounts receivable 438 458
Notes receivable 4,136 3,976
Costs assigned to management contracts acquired,
less accumulated amortization of $4,523 and $3,233 27,740 29,030
Furniture, fixtures and equipment, less
accumulated depreciation of $536 and $370 879 532
Deferred taxes 777 6,420
Deferred acquisition costs, less accumulated
amortization of $3,442 and $772 26,562 5,891
Other assets 3,392 994
-------- --------
TOTAL ASSETS $ 83,495 $ 50,647
======== ========
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Net liabilities of discontinued operations $ 505 $ 230
Notes payable 30,375 5,475
Accrued compensation 2,763 1,285
Accounts payable and accrued expenses 3,288 1,904
-------- --------
Total liabilities 36,931 8,894
-------- --------
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, 8,081,722 and 8,076,022
shares issued, with 5,588,477 and 5,799,427
shares issued and outstanding at September 30, 1998
and September 30, 1997 81 54
Less: Treasury stock, 2,493,245 and 2,276,595
shares at September 30, 1998 and September 30, 1997 (12,530) (8,623)
Additional paid-in capital 48,790 48,795
Unrealized gain (loss) on investments (net of tax) (73) 538
Retained earnings 10,296 989
-------- --------
Total stockholders' equity 46,564 41,753
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,495 $ 50,647
======== ========
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Years Ended September 30,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
REVENUES
Management and administrative fees $ 22,935 $ 17,341 $ 12,556
Private account management fees 6,339 72 --
Distribution fees 7,380 2,483 1,143
Commissions 3,350 535 346
Investment and other income 3,297 857 440
---------- ---------- ----------
Total revenues 43,301 21,288 14,485
---------- ---------- ----------
- --------------------------------------------------------------------------------
EXPENSES
General and administrative 12,668 7,278 7,230
Selling 9,225 4,888 6,530
Interest expense 1,216 505 137
Amortization and depreciation 4,339 2,265 1,990
---------- ---------- ----------
Total expenses 27,448 14,936 15,887
---------- ---------- ----------
Earnings (loss) from continuing
operations before taxes 15,853 6,352 (1,402)
Income taxes (benefit) 6,546 (4,959) (1,750)
---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS 9,307 11,311 348
Earnings from operations of
discontinued mortgage business,
net of tax -- 413 --
---------- ---------- ----------
NET EARNINGS $ 9,307 $ 11,724 $ 348
========== ========== ==========
- --------------------------------------------------------------------------------
Earnings per common and common
equivalent share:
Basic:
Earnings from continuing operations $ 1.62 $ 1.95 $ 0.05
========== ========== ==========
Net earnings $ 1.62 $ 2.02 $ 0.05
========== ========== ==========
Shares used in per share calculation 5,752,584 5,793,891 7,300,106
========== ========== ==========
Diluted
Earnings from continuing operations $ 1.40 $ 1.81 $ 0.05
========== ========== ==========
Net earnings $ 1.40 $ 1.87 $ 0.05
========== ========== ==========
Shares used in per share calculation 6,637,605 6,260,799 7,300,106
========== ========== ==========
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Unrealized Retained
Additional Gain (Loss) Earnings Total
Common Treasury Paid-in on Investments, (Accumulated Stockholders'
Stock Stock Capital Net of Tax Deficit) Equity
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1995 $ 54 $ (2,008) $ 48,759 $ -- $(11,083) $ 35,722
Repurchase of treasury stock -- (6,615) -- -- -- (6,615)
Change in unrealized
gain (loss), net of tax -- -- -- 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
Change in unrealized
gain (loss), net of tax -- -- -- 205 -- 205
Net earnings -- -- -- -- 11,724 11,724
- ----------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997 54 (8,623) 48,795 538 989 41,753
Stock split 27 -- (27) -- -- --
Partial shares cashed out -- -- (2) -- -- (2)
Stock option purchases -- -- 24 -- -- 24
Repurchase of treasury stock -- (3,907) -- -- -- (3,907)
Change in unrealized
gain (loss), net of tax -- -- -- (611) -- (611)
Net earnings -- -- -- -- 9,307 9,307
- ----------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998 $ 81 $(12,530) $ 48,790 $ (73) $ 10,296 $ 46,564
===== ======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended September 30,
- ----------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,307 $ 11,724 $ 348
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Amortization and depreciation 4,304 2,265 1,990
Gain on sale of investments (720) (38) --
(Increase) decrease in accounts and
notes receivable (140) (631) 954
Increase in deferred acquisition costs
due to subscriptions (24,575) (4,912) (2,023)
Decrease in deferred acquisition cost
due to redemptions 1,070 281 18
(Increase) decrease in deferred tax asset 6,050 (5,029) (1,750)
Increase (decrease) in operating liabilities 2,862 (2,586) 2,478
(Increase) decrease in other operating assets (2,398) (290) 607
-------- -------- -------
Net cash provided by (used in) operating activities (4,240) 784 2,622
-------- -------- -------
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Pilgrim Funds (709) (641) (29)
Proceeds from sale of Pilgrim Funds 3,047 578 --
Equity investment in Private Accounts (18,525) -- --
Return of capital on equity investments 243 -- --
Sales of furniture, fixtures and equipment 18 -- 130
Purchases of furniture, fixtures and equipment (580) (72) (244)
Cash provided by (used in) discontinued operations 275 (2,579) (746)
-------- -------- -------
Net cash used in investing activities (16,231) (2,714) (889)
-------- -------- -------
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Term debt borrowing 24,900 1,875 3,600
Redemption of preferred stock -- -- (338)
Proceeds from purchase of stock options 24 36 --
Purchase of partial shares (2) -- --
Purchase of treasury stock (3,907) -- (6,615)
-------- -------- -------
Net cash provided by (used in) financing activities 21,015 1,911 (3,353)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 544 (19) (1,620)
Cash and cash equivalents, beginning of the year 219 238 1,858
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 763 $ 219 $ 238
======== ======== =======
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 631 $ 549 $ 186
Income taxes paid 248 98 2
Income tax refunds received -- -- 12
</TABLE>
29
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
(1) Corporate Background and Summary of Significant Accounting Policies
(a) Corporate Background. On April 7, 1995, Pilgrim America Capital
Corporation ("Pilgrim") and certain newly formed subsidiaries acquired
investment management assets and became engaged principally in the mutual fund
management business.
(b) Consolidation. The consolidated financial statements include the
accounts of Pilgrim Capital's wholly owned subsidiary Pilgrim Group, Inc.
("PGI"), and PGI's subsidiaries Pilgrim Investments, Inc. ("PII"), a registered
investment advisor, and Pilgrim Securities, Inc. ("PSI"), a registered
broker-dealer, which subsidiaries were respectively known as Pilgrim America
Group, Inc., Pilgrim America Investments, Inc. and Pilgrim America Securities,
Inc. until October 30, 1998. PGI commenced operations upon the Company'
acquisition (the "Acquisition") of certain assets of Atlas Holdings, and its
subsidiaries on April 7, 1995. The consolidated financial statements also
include the accounts of Pilgrim Capital'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 and Wesav
Investment, Inc., -2. References herein to the "Company" refer to Pilgrim
Capital and all of its subsidiaries 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 consist principally of providing investment
management and related services to various open-end and closed-end investment
companies currently operating under the Pilgrim name (the "Funds") as well as
providing management services to issuers of collateralized debt obligations
("Private Accounts"). 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 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) Investments. The Company has investments in Private Accounts in
addition to other marketable securities. Private Account investments are
accounted for using the equity method. Under the equity method the basis in the
investment is increased for the Company's proportionate share of earnings and is
reduced upon cash receipt and disbursement of earnings of the investments.
Upon acquisition, the Company classifies its marketable 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
30
<PAGE>
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.
PSI values all of its investments at market in accordance with
broker-dealer industry practice. Purchase and sales of investments are recorded
on a trade date basis.
All realized gains and losses on security transactions are computed on
the average cost method. Unrealized gains and losses are included in income.
(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 mutual fund operations, it is the opinion of
Company management that 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) Private Account Management Fees. The Company receives fees as the
investment manager on Private Accounts. The Company may be entitled to
additional contingent fees if certain investment returns are met. Investment
returns vary with each private account managed. The Company records the
contingent management fee revenue using the present value of the future cash
flows expected on each Private Account. Current cash flows of the products are
monitored and if necessary the Company adjusts the current recognition of
revenue on the contingent fee.
(k) 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 Fund shares are
expensed as incurred.
(l) 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
31
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
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 un-reimbursed amounts.
(m) Debt Issuance Costs. Costs incurred 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.
(n) 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.
(o) Net Earnings Per Common Share. Effective December 31, 1997, the
Company implemented Financial Accounting Standard ("SFAS") No. 128 "Earnings per
Share." This statement provides guidance on the calculation and reporting the
standards for earnings per share ("EPS"). Under the SFAS, basic EPS is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by
dividing income available for common stockholders by the weighted average number
of common shares outstanding adjusted for the effect of dilutive common stock
equivalents, including stock options, during the period.
EPS information for Fiscal 1997 and Fiscal 1996 has been restated to
conform to the requirements of Statement No. 128.
Additionally, the shares outstanding, share activity, and the EPS per
share data reported in Fiscal 1997 and Fiscal 1996 have been restated to give
retroactive recognition to a 50% stock dividend accounted for as a 3 for 2 stock
split that occurred in the third quarter of Fiscal 1998.
(p) 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
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.
(q) Reclassifications. Certain prior year balances have been
reclassified to conform to current presentation.
(r) 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.
(2) 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
NationsBank 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
32
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
the Company in connection with the sale. The Company had an allowance of $69,000
and $230,000 at September 30, 1998 and September 30, 1997, respectively, to
cover potential claims made in connection with the indemnification provisions.
(3) Investments
Investments are comprised of the following for the years ended
September 30, 1998 and September 30, 1997 (in thousands):
September 30, September 30,
1998 1997
------------- -------------
Investment in Equity of Private Accounts $ 18,317 $ --
Investment in Marketable Securities 491 3,127
---------- ----------
Total $ 18,808 $ 3,127
========== ==========
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 $612,000 and $2.2 million as of September 30,
1998 and September 30, 1997, respectively. Gross unrealized gains and (losses)
thereon were $24,000 and $(145,000) at September 30, 1998 and $901,000 and
($3,000) at September 30, 1997. During the years ended September 30, 1998 and
September 30, 1997, the Company sold $2.3 million and $540,000 in marketable
securities, which resulted in gross realized gains of $720,000 and $38,000,
respectively.
(4) Term Loan Commitment
On July 31, 1998, the Company and its lender amended and restated an
existing credit agreement dated April 28, 1995, used to finance the Company's
operations (the "Credit Agreement"). The restated Credit Agreement allows the
Company and PGI to borrow up to $55 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 on
certain mutual fund shares, (iv) financing Private Account equity investments
and (v) repurchasing Company stock. Borrowings are collateralized by assets of
Pilgrim Group, Inc., Pilgrim Securities, Inc. and Pilgrim Investment, Inc. and
guaranteed by the Company. Borrowings may be drawn down until July 30, 1999 and
are repayable beginning on September 30, 1999 and ending on June 30, 2001.
The Credit Agreement contains restrictive convenants which require PGI
and the Company to maintain certain financial ratios and prohibits "restricted
payments" (including dividends and other payments) from PGI to the Company.
As of September 30, 1998 and September 30, 1997 the Company had
borrowed $30.4 million and $5.5 million, respectively, under the Credit
Agreement. The weighted average interest rates on borrowings outstanding during
Fiscal 1998 and Fiscal 1997 were 6.67% and 7.07%, respectively. Additionally,
the Company is obligated to pay a commitment fee of 0.135% of any unused
borrowing availability.
33
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
The repayment schedule based on the September 30, 1998 loan balance is
as follows (in millions):
September 30, Repayment Amount
------------- ----------------
1999 $ 3.8
2000 15.2
2001 11.4
---------
$ 30.4
=========
(5) Redeemable Preferred Stock
During Fiscal 1996, the Company redeemed 3,384 shares of its Series A
Preferred Stock at the liquidation value of $100 per share, for an aggregate
redemption price of $338,000.
(6) 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 deferred tax asset, as of
September 30, 1998 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. Therefore, no valuation
allowance has been established as of September 30, 1998.
34
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
As of September 30, 1998 and September 30, 1997, the Company had a
deferred tax asset of $2.6 million and $8.0 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, 1998 and 1997 are presented below (in thousands):
September 30,
----------------------
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforward $ 526 $ 6,840
Allowance for contingency -- 163
Repurchase allowance 318 290
Deferred compensation 1,115 500
Allowance for discontinued operations 82 82
Allowance for receivables 28 92
AMT credit 366 42
Unrealized loss on investments 49 --
Other 79 24
------- -------
Total gross deferred tax assets 2,563 8,033
Less valuation allowance -- --
------- -------
Total deferred tax assets 2,563 8,033
------- -------
Deferred tax liabilities:
Costs assigned to management contracts acquired (1,534) (1,199)
Depreciation (252) (54)
Unrealized gain on investments -- (360)
------- -------
Total deferred tax liabilities (1,786) (1,613)
------- -------
Net deferred tax assets $ 777 $ 6,420
======= =======
At September 30, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of $1.3 million that are available to offset
future federal taxable income through the fiscal year ending September 30, 2011.
35
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
Income taxes (benefit) attributable to income from continuing operations
consists of (in thousands):
Current Deferred Total
------- -------- -----
YEAR ENDED SEPTEMBER 30, 1998
Federal $ 370 $ 4,836 $ 5,206
State -- 1,340 1,340
------- ------- -------
Total income taxes $ 370 $ 6,176 $ 6,546
======= ======= =======
YEAR ENDED SEPTEMBER 30, 1997
Federal $ 223 $(4,167) $(3,944)
State -- (735) (735)
------- ------- -------
Total income taxes (benefit) 223 (4,902) (4,679)
------- ------- -------
Less discontinued operations (72) (208) (280)
------- ------- -------
Income taxes (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 taxes (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 35% to earnings
(loss) in 1998 and 34% in 1997 and 1996 from continuing operations for the
following reasons (in thousands):
Year Ended September 30,
Description 1998 1997 1996
- ----------- ---- ---- ----
Expected taxes (benefit) on earnings (loss)
from continuing operations $ 5,548 $ 2,160 $ (477)
Increase in income taxes resulting from non-
deductible meals and entertainment expense 99 54 45
State income tax, net of federal benefit 871 381 (76)
Other 28 211 --
Change in valuation allowance -- (7,765) (1,242)
------- ------- -------
Total $ 6,546 $(4,959) $(1,750)
======= ======= =======
36
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
(7) Earnings Per Share.
The following is a reconciliation of the basic and diluted EPS computations for
the years ended September 30, 1998, 1997 and 1996:
Sept. 30, Sept. 30, Sept. 30,
1998 1997 1996
---------- ---------- ----------
(amounts in thousands,
except share and per share amounts)
Earnings for basic and diluted EPS
from continuing operations $ 9,307 $ 11,311 $ 348
========== ========== ==========
Net earnings for basic and diluted EPS $ 9,307 $ 11,724 $ 348
========== ========== ==========
Shares of common stock and common
stock equivalents:
Average number of common shares used
in basic computation 5,752,584 5,793,891 7,300,106
Effect of dilutive securities-options 885,021 466,908 --
---------- ---------- ----------
Average shares used in diluted 6,637,605 6,260,799 7,300,106
========== ========== ==========
Earnings per share from continuing
operations:
Basic $ 1.62 $ 1.95 $ 0.05
Diluted $ 1.40 $ 1.81 $ 0.05
Net earnings per share:
Basic $ 1.62 $ 2.02 $ 0.05
Diluted $ 1.40 $ 1.87 $ 0.05
(8) Stockholders' Equity
Between January 1998 and September 1998, the Company repurchased
216,650 shares of its common stock at a total purchase price of $3.9 million.
The 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 on market conditions.
On September 27, 1996, the Company repurchased 1,526,595 shares of its
common stock from two institutional stockholders at a price of $4.33 per share
for a total of $6.6 million. The Company used funds borrowed under the Credit
Agreement to finance the repurchase (see Note 4).
During Fiscal 1998 and Fiscal 1997, the Company issued 5,700 and 9,300
shares of Company stock, respectively, from the result of stock options being
exercised. No stock options were exercised in Fiscal 1996.
During the third quarter of Fiscal 1998, the Company had a 50% stock
dividend accounted for as a 3 for 2 stock split. In conjunction with the stock
split, 1,929,997 shares were issued. In addition, the Company paid cash in lieu
of issuing 68 partial shares in conjunction with the 3 for 2 stock split.
37
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
(9) Stock Option Plan
Pursuant to the Company's Stock Option Plan ("Plan 1"), the Company's
Board of Directors has granted certain officers and employees incentive stock
options to purchase 774,000 shares of the Company's common stock as of September
30, 1998. Under Plan 1, total options of up to 806,679 shares are available to
be granted. Additionally, as of September 30, 1998, the Company had issued to
non-employee director's non-statutory stock options to purchase 75,000 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, 1998 and September
30, 1997, Plan 2 had 307,500 and 296,250 options granted and outstanding,
respectively. Under Plan 2, total options of up to 365,700 are available to be
granted at September 30, 1997 and 357,000 at September 30, 1998. 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 $17.72, $5.55
and $1.98, for stock options granted under Plan 1 and Plan 2 during the years
ended September 30, 1998, 1997 and 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; risk free interest rate of 5.50% for Fiscal 1998 and 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.
38
<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 option 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, 1998, 1997 and 1996, would have been reduced to the pro
forma amounts indicated below (in thousands, except per share amounts):
1998 1997 1996
---- ---- ----
Net earnings As reported $ 9,307 $ 11,724 $ 348
Pro forma $ 8,982 $ 11,450 $ 332
Per share net earnings from
continuing operations:
Basic: As reported $ 1.62 $ 1.95 $ .05
Pro forma $ 1.56 $ 1.90 $ .05
Diluted: As reported $ 1.40 $ 1.81 $ .05
Pro forma $ 1.35 $ 1.76 $ .05
Per share net earnings (loss):
Basic: As reported $ 1.62 $ 2.02 $ .05
Pro forma $ 1.56 $ 1.98 $ .05
Diluted: As reported $ 1.40 $ 1.87 $ .05
Pro forma $ 1.35 $ 1.83 $ .05
Pro forma net earnings reflect only options granted under the Plans in
Fiscal 1998, 1997 and 1996. Therefore, the full impact of calculated
compensation costs for the 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.
39
<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 Shares Range of Exercise
(1) Prices (1)
---------------- -----------------
Options outstanding at September 30, 1996 1,153 $3.83
Options granted 164 $ 6.33 - $10.33
Options exercised (9) $3.83
Options cancelled (162) $3.83
------ ---------------
Options outstanding at September 30, 1997 1,146 $ 3.83 - $10.33
====== ===============
Options granted 37 $18.67 - $26.25
Options exercised (6) $ 3.83 - $5.75
Options cancelled (20) $ 3.83 - $5.75
------ ---------------
Options outstanding at September 30, 1998 1,157 $ 3.83 - $26.25
====== ===============
- ----------
(1) Number of shares and range of prices adjusted for 3 for 2 stock split that
took place in Fiscal 1998.
As of September 30, 1998 and September 30, 1997, there were 704,300 and
448,563 shares exercisable under Plan 1 and Plan 2 with a weighted average
exercise price of $4.01 and $3.83, respectively.
(10) Employee Benefits
Pilgrim America Capital Corporation has established a tax deferred
savings plan under Section 401(k) of the Internal Revenue Code. The plan covers
all full time employees and allows for employee tax deferred contributions up to
the amount specified by the IRS Regulation ($10,000 in 1998 and $9,500 in 1997
and 1996).
40
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
Pursuant to the plan, employees may contribute up to 10% of their
salary, subject to the maximum allowed, 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 years ended September 30, 1998, 1997 and 1996, the Company
contributed $345,000, $265,000 and $273,000, respectively, to the plan.
(11) Commitments and Contingencies
The Company is involved in various legal proceedings that 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.
In conjunction with discontinued mortgage operations, the Company was
obligated under certain non-cancelable operating leases for equipment and office
facilities that expired September 30, 1997.
During the years ended September 30, 1998 and September 30, 1997, the
Company has provided $52,000 and $96,000, respectively, for net discounted
future minimum lease payments relating to lease obligations acquired from Atlas
Financial Group, Inc. The Company's operations have been relocated and the
facilities subleased.
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 Atlas Financial Group, Inc. pursuant to the
Acquisition), as well as the sublease income related to the Los Angeles office,
are as follows (in thousands):
September 30, Lease Payments Sublease Income Net Payments
------------- -------------- --------------- ------------
1999 $ 1,137 $ 525 $ 612
2000 1,126 350 776
2001 766 -- 766
2002 801 -- 801
2003 890 -- 890
And thereafter 1,744 -- 1,744
-------- -------- --------
$ 6,464 $ 875 $ 5,589
======== ======== ========
Rent expense included in continuing operations for the years ended
September 30, 1998, 1997 and 1996, were $361,000, $341,000, and $333,000,
respectively.
(12) Related Party Transactions
Investment Advisory Agreements. Pursuant to investment management
agreements (the "Advisory Agreements"), the Company provides investment
management services to the Funds. Following an initial two-year term, the
Advisory Agreements are renewable annually based upon approval by a majority of
the respective Fund's disinterested directors. Additionally, each Advisory
Agreement may be terminated prior to its expiration upon 60 days notice by
either the Company or the Fund.
As provided in the Advisory Agreements, the Company receives management
fees ranging from .50% to 1.25% on an annual basis of the respective Funds
average daily net assets. Management fees received from the Funds, net of
41
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
sub-advisory fees, amounted to $21.0 million during Fiscal 1998, $15.7 million
during Fiscal 1997 and $11.2 million during Fiscal 1996. The Advisory 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 $877,000 during Fiscal 1998, $742,000 during Fiscal 1997
and $606,000 during Fiscal 1996. Amounts payable to the Funds under such
provisions as of September 30, 1998 and September 30, 1997 were $83,000 and
$95,000, respectively.
In addition, the Company acts as administrator for Pilgrim Prime Rate
Trust (the "Trust") formerly known as Pilgrim America Prime Rate Trust until
November 16, 1998. Under the terms of the related Advisory 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 $1.9 million
during Fiscal 1998, $1.7 million during Fiscal 1997 and $1.3 million during
Fiscal 1996.
The Company also serves as the principal distributor for Pilgrim
MagnaCap Fund; Pilgrim High Yield Fund; Pilgrim Government Securities Income
Fund; Pilgrim Asia-Pacific Equity Fund; Pilgrim MidCap Value Fund; Pilgrim
LargeCap Leaders Fund; and Pilgrim Bank and Thrift Fund, open-end management
investment companies (collectively, the "Open-end Funds") managed by the Company
(see Note 13). The aforementioned Funds, with the exception of Pilgrim
Government Securities Income Fund, were formerly known as Pilgrim America
MagnaCap Fund, Pilgrim America High Yield Fund, Pilgrim America Asia-Pacific
Equity Fund, Pilgrim America MidCap Value Fund, Pilgrim America LargeCap Value
Fund and Pilgrim America Bank and Thrift Fund, respectively, until November 16,
1998. Distribution fees earned from the Open-end Funds amounted to $7.4 million
in Fiscal 1998, $2.5 million in Fiscal 1997, and $1.1 million for Fiscal 1996.
In 1998, the Company became the principal distributor of the Trust. The
Company is entitled to receive up to 1.00% commission upon the sale of Trust
shares in certain privately negotiated transactions. Commissions for sales under
these transactions were $1.5 million in Fiscal 1998.
(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 form .25% to .65% of the Fund's
average daily net assets (see note 15).
The Company is entitled to contingent deferred sales charges that 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 (see
note 15).
(14) Discontinued Operations
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. 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
42
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
Notes to Consolidated Financial Statements - (Continued)
provision to $5.3 million, based on reevaluation of its allowances for
discontinued operations, including legal fees and other costs relating to legal
proceedings. 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, 1998, 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 1999.
Balance Sheet. The balance sheet presentation included in the
accompanying consolidated financial statements as of September 30, 1998 and 1997
has been adjusted to reflect the assets and liabilities relating to the
Company's mortgage banking operations as net liabilities of discontinued
operations.
The following table sets forth-certain balance sheet information
related to these operations as of September 30, 1998 and 1997:
Net Liabilities of Discontinued Operations
(in thousands) September 30,
-----------------------
1998 1997
---- ----
Assets
Mortgage loans and real estate held for sale $ 396 $ 1,128
-------- --------
Total assets 396 1,128
-------- --------
Liabilities
Accounts payable and accrued expenses 901 1,358
-------- --------
Total liabilities 901 1,358
-------- --------
Net liabilities of discontinued operations $ (505) $ (230)
======== ========
Operations. The statements of operations presentation included in the
accompanying consolidated financial statements for the fiscal years ended
September 30, 1998, 1997 and 1996 has been adjusted to reflect the results of
the mortgage banking operations as discontinued operations. Diluted earnings per
share attributable to discontinued operations were $0.00, $0.06, and $0.00 in
Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.
As of September 30, 1998 and 1997, the Company had established
repurchase allowances of $787,000 and $725,000, respectively, in accrued
expenses, to provide for estimated losses to be incurred upon repurchase and
resale of loans originated by the Company.
43
<PAGE>
(15) Subsequent Event
On December 11, 1998, PSI sold its September 30, 1998 DAC Asset for
$26.5 million, which approximated book value, as well as the right to receive
.75% annually of the future distribution fees and the contingent deferred sales
charges from the related Class B shares. Under the related agreements, the
Company will also sell its DAC on future Class B share sales to the purchaser
through November 30, 1999. The Purchaser has a right of first refusal on a two
year extension thereafter. The Company is required under its existing Credit
Agreement (defined below) to use proceeds in excess of $3.0 million from the
sale of its DAC Asset to pay down its borrowings under the Credit Agreement and
reduce Credit Agreement borrowings by 50% of the proceeds of the sale in excess
of $3 million. The Company's credit facility will be reduced by approximately
$11.8 million as a result of this transaction. The transaction should result in
no gain or loss since the sales price approximated book value.
44
<PAGE>
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 1999
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 "1999 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 1999 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 1999 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 1999 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 1999
Proxy Statement, which information is incorporated herein by reference.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements. Page or Method of Filing
------------------------
(1) Report of KPMG Peat Marwick LLP Page 25
(2) Consolidated Financial Statements Page 26
and Notes thereto of the Company,
including Consolidated Balance
Sheets as of September 30, 1998
and 1997 and related Consolidated
Statements of Earnings, Cash
Flows and Stockholders' Equity
for the years ended September 30,
1998, 1997 and 1996
(b) Financial Statement Schedules
(1) Report of KPMG Peat Marwick LLP Page 51
(2) Schedule I -- Condensed Financial
Information Page 52
(3) Schedule II -- Valuation and Qualifying
Accounts Page 53
(c) Exhibits. The following exhibits are filed as part of this Report
3.1 Restated Certificate of Incorporation by reference
Incorporation of Registrant 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 Incorporated by reference
Registrant to Exhibit 4.2.1 of the
1993 Form 10-K
4.1 Form Of Certificate for Common Incorporated by reference
Stock to Exhibit 4.1 of the 1993
Form 10-K
4.2.1 Stock Option Plan of the Incorporated by reference
Registrant (as amended through to Exhibit 4.2.1 of the
November 1993) 1993 Form 10-K
4.2.1 Form of Incentive Stock Option Incorporated by reference
Agreement for the Stock Option to Exhibit 4.2 of Form S-8
Plan Registration Statement
No.33-61274 ("S-8 No.
33-61274")
4.2.3 Form of Non-statutory Stock Incorporated by reference
Option Agreement for the Stock to Exhibit 4.3 of S-8 No.
Option Plan 33-61274
4.3 Form of Stock Option Agreement Incorporated by reference
for Non-Employee Directors to 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 10-K
4.5.2 Form of Performance Share Incorporated by reference
Agreement to Exhibit 4.5.2 of the
1996 Form 10-K
46
<PAGE>
Page or Method of Filing
------------------------
10.1.1 Employment Agreement between Incorporated by Reference
Registrant and Robert W. to Exhibit 10.1.1 of the
Stallings dated August 16, 1995 Report on Form 10-K for
the Fiscal Year Ended
September 30, 1995 (the
"1995 Form 10-K)
10.1.2 Employment Agreement between Incorporated by Reference
Registrant and James R. Reis to Exhibit 10.1.2 of the
dated August 16, 1995 1995 Form 10-K
10.2.3 Form of Indemnity Agreement Incorporated by reference
between the Registrant and each to Exhibit 10.9.3 of the
member of its Board of Directors 1992 Form 10-K
10.3 Asset Purchase Agreement dated Incorporated by reference
August 27, 1994 between to Exhibit 2 to Form 8-K
Registrant and NationsBank relating to an event of
Mortgage Corporation August 27, 1994
10.4 Acquisition Agreement among the Incorporated by reference
Registrant, Pilgrim Group, Inc., to Exhibit 2 to Form 8-K
Pilgrim Management Corporation, relating to an event of
Pilgrim Distributors Corporation December 7, 1994
and Palomba Weingarten
10.5.1 Third Amended and Restated Credit Incorporated by reference
Agreement dated as of July 31, to Exhibit 10.1 to the
1998 by and between Pilgrim Registrant's June 30, 1998
America Capital Corporation and Form 10-Q
Pilgrim America Group Inc. and US
Bank National Association and
exhibits thereto.
10.21 Portfolio Management Agreement Incorporated by reference
among PII, HSBC Asset Management to Exhibit 10.22 of the
Americas, Inc. and HSBC Asset 1995 Form 10-K
Management Hong Kong Limited,
dated April 27, 1995
10.22 Portfolio Management Agreement Incorporated by reference
dated May 1, 1995, between PII to Exhibit 10.23 of the
and CRM Advisors, LLC 1995 Form 10-K
10.24 Investment Management Agreement Incorporated by reference
dated June 6, 1995 between PII to Exhibit 10.25 of the
and Pilgrim America Masters 1995 Form 10-K
Series, Inc.
10.25 Investment Management Agreement Incorporated by reference
dated April 7, 1995, between PII to Exhibit 99.5 of Form
and Pilgrim Investment Funds, 8-K/A Amendment No. 2,
Inc. on behalf of its Pilgrim Event dated December 7,
High Yield Fund Series 1994
10.26 Investment Management Agreement Incorporated by reference
dated April 7, 1995 between PII to Exhibit 99.4 of Form
and Pilgrim Government Securities 8-K/A Amendment No. 2,
Income Fund Event dated December 7,
1994
10.27 Investment Management Agreement Incorporated by reference
dated April 7, 1995, between PII to Exhibit 99.1 of Form
and Pilgrim Prime Rate Trust 8-K/A, Amendment No. 2,
Event date December 7,
1994
47
<PAGE>
Page or Method of Filing
------------------------
10.28 Investment Management Agreement Incorporated by reference
dated April 7, 1995, between PII to Exhibit 99.3 of Form
and Pilgrim Regional BankShares, 8-K/A, Amendment No. 2,
Inc. Event dated December 7,
1994
10.29 Investment Management Agreement Incorporated by reference
dated April 7, 1995, between PII to Exhibit 99.2 of Form
and Pilgrim Investment Funds, 9-K/A, Amendment No. 2,
Inc. on behalf of Pilgrim Event dated December 7,
MagnaCap Fund Series 1994
10.30 Administration Agreement amended Incorporated by reference
and restated as of April 7, 1995, to Exhibit 99.6 of Form
between PGI and Pilgrim Prime 8-K/A, Amendment No. 2,
Rate Trust Event dated December 7,
1994
10.31 Distribution Plan dated April 7, Incorporated by reference
1995, between PII and Pilgrim to Exhibit 99.7 of Form
Investment Funds, Inc. on behalf 8-K/A, Amendment No. 2,
of its Pilgrim MagnaCap Fund Event dated December 7
series and PSI 1994
10.32 Distribution Plan dated April 7, Incorporated by reference
1995, between PII and Pilgrim to Exhibit 99.8 of Form
Investment Funds, Inc. on behalf 8-K/A, Amendment No. 2,
of its Pilgrim High Yield Fund Event dated December 7,
series and PSI 1994
10.33 Distribution Plan dated April 7, Incorporated by reference
1995, between Pilgrim Government to Exhibit 99.9 of Form
Securities Income Fund, Inc. and 8-K/A, Amendment No. 2,
PSI Event dated December 7,
1994
21 Subsidiaries of Registrant Incorporated by reference
to Exhibit 21 of the 1995
Form 10-K
23 Consent of KPMG Peat Marwick LLP Included in Report
at Financial Statement
Schedule
24 Powers of Attorney See Signature Page
27 Financial Data Schedule
(d) Reports on Form 8-K
None
48
<PAGE>
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 9th
day of December 1998.
PILGRIM AMERICA CAPITAL CORPORATION
a Delaware corporation
By: /s/ Robert W. Stallings
-------------------------------------
Robert W. Stallings
Chairman of the Board,
Chief Executive Officer and President
49
<PAGE>
POWER OF ATTORNEY
KNOWN 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 re-substitution, 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:
Signature Title Date
- --------- ----- ----
/s/ Robert W. Stallings Chairman of the Board, Chief December 9, 1998
- ------------------------- Executive Officer-and-President
Robert W. Stallings (Principal Executive Officer)
/s/ James R. Reis Vice Chairman and Chief December 9, 1998
- ------------------------- Financial Officer-(Principal
James R. Reis Accounting Officer)
/s/ John C. Cotton Director December 9, 1998
- -------------------------
John C. Cotton
/s/ Roy A. Herberger, Jr. Director December 9, 1998
- -------------------------
Roy A. Herberger, Jr.
/s/ John M. Holliman, III Director December 9, 1998
- -------------------------
John M. Holliman, III
/s/ Stephen A. McConnell Director December 9, 1998
- -------------------------
Stephen A McConnell
/s/ Paul J. Renze Director December 9, 1998
- -------------------------
Paul J. Renze
50
<PAGE>
Independent Auditors' Report Consent and Report on Schedules
The Board of Directors
Pilgrim America Capital Corporation:
The audits referred to in our report dated October 7, 1998, except as to notes
1(b), 12 and 15 to the consolidated financial statements which are as of
November 16, 1998, included the related financial statement schedules as of
September 30, 1998 and 1997 and for each of the years in the three-year period
ended September 30, 1998. 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. 333-06591, No. 333-61274 and No. 33-64738 on Form S-8 of Pilgrim
America Capital Corporation of our report dated October 7, 1998, except as to
notes 1(b), 12 and 15 to the consolidated financial statements which are as of
November 16, 1998, relating to the consolidated balance sheets of Pilgrim
America Capital Corporation and subsidiaries as of September 30, 1998 and 1997
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the years in the three-year period ended September 30,
1998 and our report dated December 11, 1998 included in the preceding paragraph,
which reports appear in the September 30, 1998 annual report on Form 10-K of
Pilgrim America Capital Corporation.
/s/KPMG Peat Marwick LLP
December 14, 1998
Los Angeles, California
51
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PILGRIM AMERICA CAPITAL CORPORATION
IN THOUSANDS
- --------------------------------------------------------------------------------
Condensed Balance Sheets
September 30, September 30,
1998 1997
------------- ------------
Assets:
Cash and cash equivalents ................ $ 267 $ --
Investments .............................. 375 2,990
Investments in subsidiaries .............. 48,729 39,352
Note receivable .......................... 4,136 3,976
Receivables .............................. -- 225
Due from subsidiaries .................... 23,685 --
Deferred tax asset ....................... 1,032 1,990
Other assets ............................. 819 615
-------- --------
Total assets ............................. $ 79,043 $ 49,148
======== ========
Liabilities and Stockholders' Equity:
Notes payable ............................ $ 30,375 $ 5,475
Due.to subsidiaries ...................... -- 252
Other liabilities ........................ 2,104 1,668
-------- --------
Total liabilities ........................ 32,479 7,395
-------- --------
Common stock ............................. 81 54
Less: Treasury stock ..................... (12,530) (8,623)
Additional paid in capital ............... 48,790 48,795
Unrealized gain on investments ........... (73) 538
Retained earnings ........................ 10,296 989
-------- --------
Total stockholders' equity ............. 46,564 41,753
-------- --------
Total liabilities and stockholders'
equity ................................. $ 79,043 $ 49,148
======== ========
Condensed Statement of Earnings
For the Years Ended September 30,
1998 1997 1996
------- ------- -------
Equity in earnings of subsidiaries ...... $ 9,396 $ 8,289 $ 588
Other gain (loss) ........................ (89) 1,091 (240)
Income tax benefit ....................... -- 2,344 --
------- ------- -------
Net earnings ............................. $ 9,307 $11,724 $ 348
======= ======= =======
Condensed Statements of Cash Flows
For the Years Ended September 30,
1998 1997 1996
---- ---- ----
Net cash provided by (used in)
operating activities ........................ $(13,698) $ 400 $ 6,940
-------- ------ -------
Net cash used in investing activities ........ (7,050) (439) (13)
-------- ------ -------
Redemption of preferred stock ................ -- -- (338)
Term debt borrowings ......................... 24,900 -- --
Purchase of partial shares for stock split ... (2) -- --
Purchase of treasury stock ................... (3,907) -- (6,615)
Purchase of stock options .................... 24 36 --
-------- ------ -------
Net cash provided by (used in)
financing activities ........................ 21,015 36 (6,953)
-------- ------ -------
Increase(decrease) in cash and
cash equivalents ............................ 267 (3) (26)
Cash and cash equivalents, beginning
of period ................................... -- 3 29
-------- ------ -------
Cash and cash equivalents, end of period ..... $ 267 $ -- $ 3
======== ====== =======
52
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PILGRIM AMERICA CAPITAL CORPORATION
IN THOUSANDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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(3) accounts Deductions(1) of period
----------- --------- ----------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
Allowance for repurchases $ 725 $ -- $ 381 $ (319) $ 787
Allowance for losses 613 -- (381) (118) 114
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
</TABLE>
(1) Actual losses charged against allowance, net of recoveries and
reclassifications
(2) The contingency allowance was established based on a lawsuit filed against
the Company by the Resolution Trust Corporation. This lawsuit was settled
in Fiscal 1997.
(3) The Company determined that the allowance for discontinued operations was
overstated and recorded income from discontinued operations (see the
Statement of Earnings "Earnings (loss) from discontinued mortgage business,
net of tax").
<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
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 763
<SECURITIES> 18,808
<RECEIVABLES> 438
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,009
<PP&E> 1,415
<DEPRECIATION> 536
<TOTAL-ASSETS> 83,307
<CURRENT-LIABILITIES> 6,368
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 46,483
<TOTAL-LIABILITY-AND-EQUITY> 83,307
<SALES> 0
<TOTAL-REVENUES> 43,301
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,216
<INCOME-PRETAX> 15,853
<INCOME-TAX> 6,546
<INCOME-CONTINUING> 9,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,307
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.40
</TABLE>
