SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending December 31, 1997
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Commission File Number 0-19799
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PILGRIM AMERICA CAPITAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 86-0670679
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004
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(Address of principal executive offices) (Zip Code)
Registrant telephone number, including area code (602) 417-8100
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for) such shorter period s the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the last practicable date.
3,861,330 Shares of Common Stock outstanding on January 31, 1998
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
(a) Condensed Consolidated Financial Statements.............3
(b) Notes to Condensed Consolidated Financial Statements....6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................11
Signatures..............................................................12
2
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ITEM 1. FINANCIAL STATEMENTS
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 519 $ 219
Investments 6,648 3,127
Accounts receivable 424 458
Notes receivable 3,990 3,976
Costs assigned to management contracts acquired, less
accumulated amortization of $3,555 and $3,233 28,707 29,030
Furniture, fixtures and equipment, less accumulated
depreciation of $412 and $370 691 532
Deferred taxes 5,355 6,420
Deferred acquisition costs, less accumulated amortization
of $1,190 and $772 9,277 5,891
Other assets 1,668 994
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Total assets $ 57,279 $ 50,647
=========== ============
- ------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Liabilities:
Net liabilities of discontinued operations $ 448 $ 230
Notes payable 9,825 5,475
Accrued compensation 1,417 1,285
Accounts payable and accrued expenses 2,336 1,904
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Total liabilities 14,026 8,894
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Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized, 5,384,060
shares issued, with 3,866,330 shares outstanding 54 54
Less: Treasury stock, 1,517,730 shares (8,623) (8,623)
Additional paid-in capital 48,795 48,795
Unrealized gain on investments, net of tax 371 538
Retained earnings 2,656 989
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Total stockholders' equity 43,253 41,753
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Total liabilities and stockholders' equity $ 57,279 $ 50,647
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Three Months Ended
December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Revenues
Management and administrative fees $ 5,724 $ 3,930
Distribution fees 1,135 466
Investment and other income 698 264
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Total revenues 7,557 4,660
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- --------------------------------------------------------------------------------
Expenses
General and administrative 2,312 1,923
Selling 1,600 1,245
Amortization and depreciation 799 527
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Total expenses 4,711 3,695
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Earnings before income taxes 2,846 965
Income taxes 1,178 --
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Net earnings $ 1,668 $ 965
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- --------------------------------------------------------------------------------
Earnings per Common and
Common Equivalent Share
Basic:
Net earnings $ 0.43 $ 0.25
========== ==========
Shares used in per share calculation 3,866,330 3,860,130
========== ==========
Diluted:
Net earnings $ 0.38 $ 0.25
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Shares used in per share calculation 4,390,372 3,907,871
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See accompanying notes to condensed consolidated financial statements.
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PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
- -------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 1,668 $ 965
Adjustments to reconcile net earnings to net cash
used in operating activities:
Amortization and depreciation 799 527
(Increase) decrease in accounts receivable 16 (33)
Increase in deferred acquisition costs due to subscriptions (3,895) (906)
Decrease in deferred acquisition costs due to redemptions 75 33
Decrease in deferred tax asset 1,178 --
Increase (decrease) in operating liabilities 564 (3,240)
Increase in other operating assets (674) (175)
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Net cash used in operating activities (269) (2,829)
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Cash flows from investing activities
Investment in Pilgrim America Funds (9) (34)
Sale of Pilgrim America Funds 961 --
Other investments purchased (4,750) --
Sales of furniture, fixtures and equipment 4 8
Purchases of furniture, fixtures and equipment (205) (12)
Cash provided by discontinued operations 218 273
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Net cash provided by (used in) investing activities (3,781) 235
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Cash flows from financing activities
Term debt borrowing 4,350 2,550
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Net cash provided by financing activities 4,350 2,550
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Net increase (decrease) in cash and cash equivalents 300 (44)
Cash and cash equivalents, beginning of period 219 238
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Cash and cash equivalents, end of period $ 519 $ 194
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Supplemental disclosures
Interest paid $ 78 $ 51
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
Principles of Consolidation. The accompanying condensed consolidated
financial statements of Pilgrim America Capital Corporation (the "Company") were
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for fair presentation have been included. Operating results for the
three months ended December 31, 1997 are not necessarily indicative of the
results which may be expected for the fiscal year ending September 30, 1998. For
additional information, refer to the consolidated financial statements for the
fiscal year ended September 30, 1997 which are included in the Company's Form
10-K.
The condensed consolidated financial statements include the Company's
wholly owned subsidiary, Pilgrim America Group, Inc. ("PAG") and PAG's
subsidiaries, Pilgrim America Investments, Inc. ("PAI"), a registered investment
advisor, and Pilgrim America Securities, Inc. ("PAS"), a registered
broker/dealer (collectively "Pilgrim America"). The condensed consolidated
financial statements also include the Company's wholly-owned mortgage banking
subsidiaries, Express America TC, Inc., EAMC Liquidation Corp., ("EAMC"), and
EAMC's wholly-owned subsidiaries, Wesav Investment Corporation and Wesav
Investment Inc.-2.
The activities of the Company consist primarily of providing investment
management and related services to various open-end and closed-end investment
companies operating under the Pilgrim and Pilgrim America names (the "Funds").
The results of operations reported in the condensed consolidated financial
statements reflect these investment management activities.
Reclassifications. Certain reclassifications have been made to prior
period financial statements to conform with current period presentation.
Costs Assigned to Management Contracts Acquired. Costs assigned to
management contracts acquired represents the fair value of the investment
management rights acquired through the Acquisition and also represents the
excess of the purchase price (including liabilities assumed) over the fair value
of net assets acquired and resulting costs from the Acquisition. These amounts
are being amortized on a straight-line basis over 25 years.
The Company analyzes costs assigned to management contracts acquired
periodically to determine whether any impairment in value has occurred. Based
upon anticipated future income from operations, in the opinion of management
there has been no impairment.
6
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Acquisition Costs. The Company pays commissions of up to
4.0% to authorized broker-dealers at the time that Fund shares with contingent
deferred sales charges 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 comparison of the carrying amount of 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.
Net Earnings Per Common Share. The Company implemented Financial
Accounting Standard ("FAS") No. 128 "Earnings per Share" for the quarter ending
December 31, 1997. This statement provides accounting and reporting standards
for earnings per share (EPS), simplifies the requirement for calculating EPS,
and is compatible with international accounting standards. This statement
replaces the presentation of primary EPS with a presentation of basic EPS. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of any entity, similar
to fully diluted EPS.
Prior periods EPS have been restated to conform with the requirements of FAS No.
128.
The following table is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted EPS computations of the Company for
the quarters ended December 31, 1997 and 1996:
Income Shares Per Share
December 31, 1997 (Numerator) (Denominator) Amount
- --------------------------------- ----------- ------------- ---------
Net earnings $1,668,000
Basic EPS
Earnings available to
common stockholders 1,668,000 3,866,330 $ 0.43
=========
Effect of Dilutive Securities
Stock Options -- 524,042
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Diluted EPS
Earnings available to
common stockholders $1,668,000 4,390,372 $ 0.38
=========== ============= =========
7
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PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
- ---------------------------------
Net earnings $ 965,000
Basic EPS
Earnings available to
common stockholders 965,000 3,860,130 $ 0.25
=========
Effect of Dilutive Securities
Stock Options --
47,741
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Diluted EPS
Earnings available to
common stockholders $ 965,000 3,907,871 $ 0.25
=========== ============= =========
Private Account Management Fee On November 15, 1997, the Company
entered into a transaction with a non-issuer to manage approximately $509
million of assets ("Private Account"). The Company earns 0.50% management fee on
these assets, and the Company may be entitled to an additional performance fee.
The Company has recorded the fees earned from this Private Account in management
and administrative fees. As part of the transaction, the Company has acquired a
$5 million equity investment in the Private Account.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The Company is a holding company that, through its wholly-owned
subsidiaries, provides investment management and related services for seven
open-end and one closed-end funds (each a "Fund" and collectively the "Pilgrim
America Funds" or the "Funds").
Results of Operations
The following table presents comparative quarterly data regarding Fund
assets under management and Fund sales for the four quarters ended December 31,
1997:
8
<PAGE>
<TABLE>
<CAPTION>
Pilgrim America Funds
Selected Fund Data
($000,000)
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December 31, September 30, June 30, March 31,
1997(1) 1997 1997 1997
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<S> <C> <C> <C> <C>
Open-End Funds:
Beginning Assets $ 676.0 $ 600.0 $ 515.5 $ 462.6
Direct Sales 175.1 66.3 60.4 74.0
Direct Redemptions (62.9) (22.0) (30.8) (16.6)
Exchanges In (Out)(2) (1.0) 5.9 (1.1) 0.4
Investment Activities (3) 366.1 25.8 56.0 (4.9)
------------- ------------- ------------- -------------
Ending Assets 1,153.3 676.0 600.0 515.5
Closed-End Funds:
Beginning Assets 1,702.0 1,688.9 1,622.5 1,274.0
Investment Activities (3) (248.2) 13.1 66.4 348.5
------------- ------------- ------------- -------------
Ending Assets 1,453.8 1,702.0 1,688.9 1,622.5
Private Accounts:
Beginning Assets 230.5 -- -- --
Sales 356.8 230.5 -- --
Investment Activities (3) -- -- -- --
------------- ------------- ------------- -------------
Ending Assets 587.3 230.5 -- --
Ending Assets Under
Management $ 3,194.4 $ 2,608.5 $ 2,288.9 $ 2,138.0
============= ============= ============= =============
</TABLE>
(1) The Board of Directors of Pilgrim America Bank and Thrift Fund approved
converting the Fund from a closed-end fund to an open-end fund at a meeting
on October 16, 1997.
(2) Net Exchanges from (to) the Company's sponsored money market fund.
(3) Investment Activities include net investment income, realized gain/(loss),
change in appreciation/depreciation and net cash distributions to
shareholders. Investment Activities for closed-end funds include assets
acquired using borrowed funds.
Quarter Ended December 31, 1997 compared to the Quarter Ended December 31, 1996
Net earnings for the December 31, 1997 quarter amounted to $1.7
million, or $0.38 per share compared to a net earnings of $965,000, or $0.25 per
share for the quarter ended December 31, 1996.
Revenues. Revenues for the December 31, 1997 quarter increased by $2.9
million over revenues for the December 31, 1996 quarter. This increase primarily
resulted from an increase in management and administrative fees of $1.8 million.
Management and administrative fees are based on assets under management which
averaged $2.94 billion during the current quarter and $1.85 billion during the
December 31, 1996 quarter.
In addition, the conversion of the Bank and Thrift Fund to an open-end
Fund in October 1997, along with higher sales of open-end funds during the
current quarter as compared to the December 31, 1996 quarter resulted in an
increase in distribution fees of $669,000. Distribution fees are realized from
the sale of certain fund shares.
9
<PAGE>
Expenses. Total general and administrative and selling expenses for the
current quarter increased by $744,000 compared to the December 31, 1997 quarter.
This increase in expense was primarily the result of an increase in personnel
costs primarily resulting from an increase in staff.
Amortization and depreciation expenses increased by $272,000 between
the two quarters primarily as a result of an increase in the amortization of
deferred acquisition costs. Deferred acquisition costs are commissions paid on
the sale of certain fund shares. These commissions are capitalized and amortized
over a six-year period.
Liquidity
The Company's principal liquidity needs arise in connection with
general and administrative expense and selling expenses, including commissions
paid by the Company in connection with shares of its funds. The Company's
principal liquidity and capital resources include cash flow from the operations
and borrowings available under a credit agreement. In the first quarter of
Fiscal 1998, the Company had net cash flows used in operating activity of
$269,000, net cash flows used in investing activities of $3.7 million, of which
the Company's discontinued operations provided $218,000, and had cash provided
by financing activities of $4.4 million.
The Company, through its wholly owned discontinued mortgage
subsidiaries, owns mortgage loans and foreclosed real estate. The Company's
investments in these loans and foreclosed real estate are funded with the
Company's working capital and borrowings. 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.
The Company intends to continue funding its investment management
operations with cash provided by operations and with borrowings under its Credit
Agreement. The Company's credit agreement allows the Company or PAG to borrow up
to $25 million to be used for various purposes including: (i) general corporate
working capital; (ii) acquisition of investment management contracts; (iii)
financing of commissions paid by the Company in connection with sales of Fund
shares subject to a contingent deferred sales charge and (iv) repurchasing
Company stock. The agreement contains restrictive convenants which require PAG
and the Company to maintain certain financial ratios and prohibits "restrictive
payments" (including dividends and other payments) from PAG to the Company.
Borrowings under the credit agreement are collateralized by assets of PAG, PAS
and PAI and guaranteed by the Company. At December 31, 1997, the Company had
borrowings of approximately $ 9.8 million outstanding under the Credit
Agreement, and approximately $15.2 million additional borrowings were available.
On August 5, 1997, the Company's Board of Directors approved
repurchasing up to an additional 500,000 shares of its common stock from time to
time in open market transactions. As of January 30, 1998 the Company has
repurchased 5,000 shares, under such authorization.
10
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.0 Financial Data Schedules
(b) Reports on Form 8-K.
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PILGRIM AMERICA CAPITAL CORPORATION
Date: February 10, 1998 /s/ James R. Reis
---------------------------------------------
James R. Reis
Vice-Chairman and Chief Financial Officer
(Principle Accounting Officer)
12
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<NAME> Pilgrim America Capital Corporation
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