SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
Commission File Number 0-19799
PILGRIM AMERICA CAPITAL CORPORATION
-----------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 86-0670679
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 417-8100
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
5,322,477 Shares of Common Stock outstanding on January 31, 1999
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
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 .............................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...............................15
Signatures .............................................................16
2
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ITEM 1. FINANCIAL STATEMENTS
PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, September 30,
1998 1998
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1,104 $ 763
Investments 22,979 18,808
Accounts receivable 441 438
Notes receivable 4,136 4,136
Costs assigned to management contracts
acquired, less accumulated amortization
of $4,846 and $4,523 27,417 27,740
Furniture, fixtures and equipment, less
accumulated depreciation of $608 and $536 978 879
Deferred acquisition costs, less accumulated
amortization of $71 and $3,442 1,534 26,562
Other assets 3,821 4,169
-------- --------
TOTAL ASSETS $ 62,410 $ 83,495
======== ========
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current income taxes payable $ 1,554 $ --
Notes payable 8,175 30,375
Accrued compensation 3,558 2,763
Accounts payable and accrued expenses 3,778 3,793
-------- --------
Total liabilities 17,065 36,931
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares
authorized, 8,085,722 and 8,081,722 shares issued,
with 5,337,477 and 5,588,477 shares outstanding
at December 31, 1998 and September 30, 1998 81 81
Less: Treasury stock of 2,748,245 and 2,493,245 at
December 31, 1998 and September 30, 1998 (16,958) 12,530)
Additional paid-in capital 48,805 48,790
Retained earnings 13,427 10,296
Accumulated other comprehensive earnings
Unrealized loss on investments, net of tax (10) (73)
-------- --------
Total stockholders' equity 45,345 46,564
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,410 $ 83,495
======== ========
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended
December 31,
1998 1997
- --------------------------------------------------------------------------------
REVENUES:
Management and administrative fees $ 6,750 $ 5,036
Private account management fees 3,213 688
Distribution fees 1,223 1,135
Commissions 221 260
Investment and other income 1,250 438
---------- ----------
Total revenues 12,657 7,557
---------- ----------
EXPENSES:
General and administrative 4,115 2,158
Selling 2,602 1,600
Interest expense 166 154
Amortization and depreciation 431 799
---------- ----------
Total expense 7,314 4,711
---------- ----------
Earnings before income taxes 5,343 2,846
Income taxes 2,212 1,178
---------- ----------
NET EARNINGS $ 3,131 $ 1,668
========== ==========
Earnings per common and
common equivalent share
Basic:
Net earnings $ 0.59 $ 0.29
========== ==========
Shares used in per share calculation 5,344,890 5,799,495
========== ==========
Diluted:
Net earnings $ 0.51 $ 0.25
========== ==========
Shares used in per share calculation 6,122,891 6,585,558
========== ==========
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Three months ended
December 31,
1998 1997
- --------------------------------------------------------------------------------
Net earnings $ 3,131 $ 1,668
Other comprehensive earnings, net of tax
Unrealized holding gains (losses) arising
during the period 63 (38)
Less: Reclassification adjustment for gains
included in net earnings -- (129)
------- -------
Comprehensive earnings $ 3,194 $ 1,501
======= =======
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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PILGRIM AMERICA CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months
Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,131 $ 1,668
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization and depreciation 409 799
Gain on sale of investments -- (219)
Gain on sale of deferred acquisition costs (153) --
(Increase) decrease in accounts receivable (3) 16
Increase in deferred acquisition costs due to subscriptions (4,108) (3,895)
Decrease in deferred acquisition costs due to redemptions -- 75
Net change in deferred tax asset/ current tax liability 2,290 1,178
Increase in operating liabilities 780 782
Increase in other operating assets (429) (674)
-------- --------
Net cash provided by (used in) operating activities 1,917 (270)
-------- --------
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CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Pilgrim Funds -- (9)
Sale of Pilgrim Funds -- 1,180
Investments in Private Accounts (4,045) (4,750)
Sales of furniture, fixtures and equipment -- 4
Purchases of furniture, fixtures and equipment (171) (205)
-------- --------
Net cash used in investing activities (4,216) (3,780)
-------- --------
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CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (4,428) --
Proceeds from exercise of stock options 15 --
Proceeds from sale of deferred acquisition costs 29,253 --
Term debt borrowing (repayment) (22,200) 4,350
-------- --------
Net cash provided by financing activities 2,640 4,350
-------- --------
Net increase in cash and cash equivalents 341 300
Cash and cash equivalents, beginning of period 763 219
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,104 $ 519
======== ========
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 465 $ 51
Income taxes paid 68 --
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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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 and its subsidiaries (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, 1998 are not
necessarily indicative of the results which may be expected for the fiscal year
ending September 30, 1999. For additional information, refer to the consolidated
financial statements for the fiscal year ended September 30, 1998 which are
included in the Company's Form 10-K-A.
The condensed consolidated financial statements include the Company's wholly
owned subsidiary, Pilgrim Group, Inc. ("PGI") and PGI's wholly owned
subsidiaries, Pilgrim Investments, Inc. ("PII"), a registered investment
advisor, and Pilgrim Securities, Inc., ("PSI"), a registered broker/dealer
(collectively "Pilgrim"). 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 (each a "Fund" and collectively the "Pilgrim Funds" or the "Funds")
and Private Accounts operating under the Pilgrim name. The results of operations
reported in the condensed consolidated financial statements reflect these
investment management activities.
COSTS ASSIGNED TO MANAGEMENT CONTRACTS ACQUIRED. Costs assigned to management
contracts acquired represent the fair value of the investment management rights
acquired through the acquisition in April 1995 of such management contracts (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 from the Acquisition. These amounts are being amortized on a straight-line
basis over 25 years.
The Company periodically analyzes costs assigned to management contracts
acquired to determine whether any impairment in value has occurred. Based upon
anticipated future cash flows from operations, in the opinion of management
there has been no impairment.
DEFERRED ACQUISITION COSTS. The Company pays commissions of up to 4.00% to
authorized broker-dealers at the time that certain Fund shares are sold. The
commissions are recovered via distribution fees received from the related shares
and contingent deferred sales charges ("CDSC"s) received should the shareholders
redeem shares during a specified period (up to six years). Such commission costs
are capitalized as Deferred Acquisition Costs ("DAC") and amortized over the
period that the CDSC is in effect. On December 11, 1998, the Company sold
without recourse its existing DAC asset related to certain of the Funds' shares
(the "B Shares") and has agreed to sell DAC assets generated on future B Share
sales through November 1999. The Company funds the DAC daily and sells the asset
monthly. The purchaser of the DAC asset is entitled to 0.75%, annualized, in
distribution fees paid from B Share assets and all CDSCs received from any
redemptions of the related B Shares. Prior to the sale of the DAC asset, the
Company amortized the B Share DAC over a six-year period, which is the period
during which the CDSC is in effect for such Shares.
7
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PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAX. Deferred tax assets and liabilities are initially recognized for
temporary differences between the consolidated financial statement carrying
amount and the tax bases of assets and liabilities which will result in future
deductible amounts and operating loss and tax credit carryforwards. A valuation
allowance is then established to reduce the deferred tax asset to the level at
which it is "more likely than not" that the tax benefits will be realized. Based
on management's analysis, it is anticipated that all the deferred tax assets
will be utilized, therefore, no valuation allowance has been established as of
December 31, 1998.
NET EARNINGS PER SHARE. 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
shareholders by the weighted average number of common shares outstanding
adjusted for the effect of dilutive common stock equivalents, including stock
options, during the period.
Shares outstanding and the net EPS per share data reported for the quarter ended
December 31, 1997, 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.
The following is a reconciliation of the basic and diluted EPS computations for
the three months ended (amounts in thousands, except per share amounts):
December 31, December 31,
1998 1997
------------ ------------
Net earnings for basic and diluted EPS $ 3,131 $ 1,668
============ ============
Shares of common stock and common
stock equivalents:
Average number of common shares used in
basic computation 5,345 5,799
Effect of dilutive securities - options 778 787
------------ ------------
Average shares used in diluted 6,123 6,586
============ ============
Net earnings per share:
Basic $ 0.59 $ 0.29
============ ============
Diluted $ 0.51 $ 0.25
============ ============
COMPREHENSIVE INCOME. Effective December 31, 1998 the Company has adopted 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
to equity during a period except those resulting from investments by owners and
distribution 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
the 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 and reclassification of
financial statements for earlier periods provided for a comparative purpose is
required.
8
<PAGE>
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 Funds,
one closed-end Fund and five Private Accounts.
RESULTS OF OPERATIONS
The following table presents comparative quarterly data regarding assets under
management, Fund share sales, and increases in Private Account assets for the
four quarters ended December 31, 1998
PILGRIM FUNDS
SELECTED FUND DATA (UNAUDITED)
FOR THE QUARTERS ENDED,
($000,000)
--------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
--------- --------- --------- ---------
OPEN-END FUNDS:
Beginning Assets $ 1,614.3 $ 1,786.3 $ 1,508.1 $ 1,153.3
Direct Sales 178.7 210.0 359.3 307.8
Direct Redemptions (85.1) (91.7) (51.9) (48.9)
Exchanges In (Out)(1) 2.1 (8.5) 4.1 (4.1)
Investment Activities (2) 189.9 (281.8) (33.3) 100.0
--------- --------- --------- ---------
Ending Assets 1,899.9 1,614.3 1,786.3 1,508.1
CLOSED-END FUNDS:
Beginning Assets 1,663.4 1,574.6 1,473.2 1,453.8
Direct Sales (4) 28.0 71.6 71.5 --
Investment Activities (2) 59.9 17.2 29.9 19.4
--------- --------- --------- ---------
Ending Assets 1,751.3 1,663.4 1,574.6 1,473.2
PRIVATE ACCOUNTS:
Beginning Assets 1,896.0 1,378.5 870.0 587.3
Increases (3) 172.3 517.5 508.5 282.7
--------- --------- --------- ---------
Ending Assets 2,068.3 1,896.0 1,378.5 870.0
--------- --------- --------- ---------
Ending Assets Under
Management $ 5,719.5 $ 5,173.7 $ 4,739.4 $ 3,851.3
========= ========= ========= =========
(1) Net exchanges from (to) the company's sponsored money market fund.
(2) 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.
(3) Includes assets accumulated in private account transactions which had not
closed as of the related quarter end date. Such transactions were in the
ramp up stages at those dates.
(4) Registration statements covering securities to be issued pursuant to a cash
Purchase Plan and a Shelf Offering for Prime Rate Trust (the "Programs")
were filed with the Securities and Exchange Commission and are now
effective.
9
<PAGE>
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO THE QUARTER ENDED DECEMBER 31, 1997
Net earnings for the December 31, 1998 quarter amounted to $3.1 million or $.51
per diluted share compared to net earnings of $1.7 million or $.25 per diluted
share for the quarter ended December 31, 1997.
REVENUES. Revenues for the December 31, 1998 quarter were $12.6 million an
increase of $5.1 million or 67% over revenues for the December 31, 1997 quarter.
Management and administrative fees, the Company's largest revenue source, were
$6.7 million in the current quarter, an increase of $1.7 million or 34% compared
to the December 31, 1997 quarter. These revenues are derived from the Company's
open-end and closed-end Funds, which averaged $3.5 billion in assets under
management during the current quarter, an increase of $1.1 billion or 43.3% over
Fund assets under management in the quarter ended December 31, 1997. Private
Account management fees increased $2.5 million or 367% over the comparable
quarter as a result of the increase of Private Account average assets under
management of $1.5 billion or 296%
Distribution fees of $1.2 million, for the quarter ended December 31, 1998
increased $88,000 or 8% compared to the quarter ended December 31, 1997, even
though fund assets which generate distribution fee income increased $746 million
or 65% during the comparable quarters. The nominal increase in distribution fee
income is attributable to the fact that the Company sold its DAC asset and the
related rights to receive .75% of the 1.00% annualized distribution fees paid by
the Funds' B Share assets effective September 30, 1998. Accordingly, no related
distribution fees were recorded during the current quarter.
Investment and other income for the December 31, 1998 quarter was $1.2 million,
an increase of $812,000 or 185% over the December 31, 1997 quarter. This
increase was primarily due to the increase in the Company's investments in the
Private Accounts that it manages, which was partially reduced by a $219,000 gain
the Company recognized in the December 1997 quarter due to the sale of cash
investments made initially in the Pilgrim Funds at the time the Funds were
established. Private Account investments totaled $22.4 million at December 31,
1998 compared to $4.8 million at December 31, 1997.
EXPENSES. Total expenses, excluding amortization, depreciation and interest
expense, for the current quarter were $6.7 million an increase of $3.0 million
or 81% compared to the December 31, 1997 quarter. This increase in expenses was
primarily a result of a $2.0 million increase in general and administrative
expenses due to an increase in personnel and compensation and a $1.0 million
increase in selling expenses primarily related to an increase in the Company's
personnel costs for sales and marketing.
Interest expense increased to $166,000 in the quarter ended December 31, 1998 an
increase of $12,000 or 8% compared to the quarter ended December 31, 1997. The
relatively flat interest expense between quarters is primarily attributable to
the sale of the DAC asset in December 1998. The Company was reimbursed by the
purchaser of the DAC asset for the interest expense that the Company incurred on
related borrowings between the effective date of sale, September 30, 1998 and
the date the funds were received, at the closing of transaction in December
1998. The funds received in December from the sale of the DAC asset were used to
pay down debt outstanding under the Company's Credit Agreement (see
"Liquidity").
Amortization and depreciation expenses decreased $368,000 primarily as a result
of the sale of the DAC asset. The DAC assets consisted of commissions paid on
the sale of certain Fund shares. Prior to the sale of the DAC asset, these
commissions were capitalized and amortized over a six-year period.
SUBSEQUENT EVENT
The Company entered into an agreement with the investment management firm of
Nicholas-Applegate Capital Management of San Diego, California to acquire the
rights to manage and distribute eleven open-end retail Nicholas-Applegate Mutual
Funds with net assets totaling $1.4 billion. The agreement is subject to the
approval of the Funds' trustees and shareholders and review by regulatory
agencies. The transaction is expected to close in May or June of 1999. The
purchase price to be paid at closing is approximately $22.5 million, adjusted
for sales, redemptions and changes in market value of the funds prior to close.
As of February 1, 1999, the Company became the distributor of the
Nicholas-Applegate open-end retail mutual funds.
10
<PAGE>
LIQUIDITY
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 investments made by the
Company in connection with the management of Private Accounts. The Company's
principal sources of liquidity and capital resources include cash flow from
operations and borrowings available under a $43.3 million credit agreement ("the
Credit Agreement"). During the first three months of fiscal 1999, the Company's
operations provided cash of $1.9 million and the Company used $4.2 million in
its investing activities of which $4.0 million was used to purchase an
investment in a new Private Account asset. The Company had a net increase in
cash from financing activity due to the $29.3 million received from the sale of
the DAC asset offset by $4.4 million in purchases of the Company's stock and a
decrease in borrowings of $22.2 million.
One of the Company's principal uses of cash is the payment of commissions in
connection with the sale of B Shares. Such costs are capitalized as DAC assets
and are recovered through distribution fees and CDSC fees received from the B
Share assets. On December 11, 1998, the Company sold its September 30, 1998 DAC
asset for $26.5 million and agreed to sell any DAC assets generated through B
Share sales through November, 1999, with a right of first refusal on a two-year
extension thereafter. The purchaser of the DAC asset is entitled to 0.75%,
annualized, in distribution fees paid from B Share assets and all CDSCs received
from any redemptions of the related B Shares. The Company's inability to sell
its future DAC assets or to borrow to fund commissions could have an adverse
affect on the Company's ability to finance the continued sale of open-end Fund B
Shares.
The Company uses a significant portion of its cash to invest in Private Accounts
that it manages. The Company may be required to invest an agreed upon percentage
in each new Private Account on the date the transaction closes. The Company's
inability to generate funds from operations or to borrow funds needed to invest
in new Private Accounts could have an adverse effect on the Company's ability to
continue to close and manage additional Private Account assets. As of December
31, 1998 the Company had $22.4 million in investments in Private Accounts, which
are accounted for under the equity method.
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 December
22, 1998, and allows the Company or the Company's wholly owned subsidiary
Pilgrim Group, Inc ("PGI") to borrow up to $43.3 million. The borrowings can 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 investments and
(v) repurchasing Company stock. The agreement contains restrictive covenants
which require PGI and the Company to maintain certain financial ratios and
prohibits certain "restricted payments" 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 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, Pilgrim Investments, Inc.
("PII") and Pilgrim Securities, Inc., and by a guarantee by PGI's wholly owned
subsidiary, PII.
At December 31, 1998 the Company had borrowings of approximately $8.2 million
outstanding under the Credit Agreement and had approximately $35.1 million
additional borrowings available.
On August 5, 1997, the Company's Board of Directors approved purchasing up to
750,000 shares of its common stock from time to time in open market
transactions. The Company will use cash generated from operations or borrowings
obtained under the Credit Agreement to purchase the shares. As of January 31,
1999 the Company had purchased 486,650 shares pursuant to this authorization. In
August 1998, the Company's Board of Directors approved the purchase from time to
time of additional 500,000 shares of common stock.
YEAR 2000
Many existing computer programs only use two digits to identify a year in the
date field. The change from 1999 to 2000 may cause many computer applications to
fail or create erroneous results. The endeavor to correct this year 2000 problem
has commonly become known as Y2K and affects virtually all companies.
11
<PAGE>
The Company is working to ensure that its information technology systems
("systems") will, along with those of its third party service providers ("third
parties" or "third party"), continue to function properly upon the arrival of
the year 2000. The Company has developed and is implementing a comprehensive Y2K
plan (the "plan") to complete all internal system upgrades or conversions by the
fourth quarter of fiscal 1999. A significant part of the plan involves upgrading
hardware and software to newer versions that have been certified to be Y2K
compliant. To date, most of the Company's current hardware and software systems
have been certified, by the manufacturers, as Y2K compliant. Based on the
Company's plan, it is estimated that incremental expenses for the Y2K project
will not have a material impact on the Company's operations or financial
results. To date, the Company has spent approximately $751,000 on upgrading its
hardware and software systems to those that are Y2K compliant and to accommodate
the Company's growth. The Company estimates that the remaining cost to complete
the implementation of the plan will be between $200,000 and $500,000. The
Company will use its own cash or to the extent available borrow from its line of
credit for any Y2K expenditure. It is the Company's policy to capitalize all
costs for hardware and software that have a useful life of over one-year. The
cost of these assets will be depreciated based on the estimated useful life.
Costs for remediation and testing are expensed as incurred.
The Company is measuring its progress by following the three action phases
outlined in its plan: Assessment, Remediation/Implementation and Testing. The
Assessment phase included completing an inventory of all-internal and external
systems, office equipment, third party dependencies, physical facilities,
business issues and creating a budget and strategy to address the Y2K issue. The
Remediation/Implementation phase includes upgrading or replacing hardware and
software systems, issuance of Company statements of Y2K readiness, compliance
with regulatory disclosure requirements, development of a Y2K contingency plan
and contacting and monitoring third parties. The Testing phase includes several
levels of testing some of which rely upon the third parties. The Company must
test internal systems on a stand-alone basis and also complete point-to-point
testing with some of its third parties. Additionally, the Company will obtain
the results of certain third party testing that will be conducted on behalf of
the Company and its affiliates on an industry wide basis. Below is a table that
summarizes the status of the Company's Y2K readiness.
Status of Y2K Readiness
- --------------------------------------------------------------------------------
Y2k Plan Phase % Completed Completion Target Date
As of February 1, 1999
- --------------------------------------------------------------------------------
Assessment 100% 01/31/99
Remediation/Implementation 85% 09/30/99
Testing 75% 10/31/99
- --------------------------------------------------------------------------------
The Company's core business activities are highly dependent upon certain third
parties that are classified as Y2K "mission critical". A failure of any single
mission critical third party or combination of parties could likely have a
material negative impact to the Company' ability to conduct its business. As
part of its plan, the Company has been monitoring the Y2K progress of such
mission critical third parties. To date based upon written disclosures provided
by such third parties, the Company has not received any significant indication
that a mission critical third party will likely experience a Y2K failure.
12
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Below is a summary table that sets forth the most current Y2K status as
disclosed by certain of the Company's mission critical third parties:
Mission Critical Third Party - Y2K Status
- --------------------------------------------------------------------------------
Third Party Current Status Last Update
- --------------------------------------------------------------------------------
Funds Transfer Agent The five major systems of the TA system are
generally Y2K ready. Testing will continue through
the second quarter of 1999. 1/99
- --------------------------------------------------------------------------------
Funds Custodian The information technology (IT) applications: 11/98
Correction 97% complete
Testing & Implementation 91% complete
Level 2 Testing 75% Complete
Level 3 Testing 51% Complete
72% of the sub-custodians indicate Y2K readiness by 12/98.
- --------------------------------------------------------------------------------
Funds Accounting On target to achieve goal of Y2K compliant
Agent production environment by 12/98. 10/98
- --------------------------------------------------------------------------------
Communication Both vendors have remediation and renovation
Vendors well under way. 11/98
- --------------------------------------------------------------------------------
Electrical Vendor All It and non It systems have been inventoried.
All renovations are scheduled for completion by
mid 1999. 1/99
- --------------------------------------------------------------------------------
Corporate Banker Systems are compliant. Testing continues
through mid-1999 1/99
- --------------------------------------------------------------------------------
The Company is developing a contingency plan with the objective of providing
reasonable alternatives to systems, third party vendors, facilities and
procedures enabling the Company to conduct its core business operations if
confronted with a Y2K failure. The scope of the contingency plan includes
mission critical systems, physical facilities and the Company's communication
systems. The contingency plan will provide the Company guidance should it or any
of the Company's primary third party providers fail to meet its goals and be
Year 2000 compliant and includes an alternate vendor list for its third party
mission critical providers. The Company has determined that even though it has a
list of alternative vendors selected, it cannot ensure that these alternates
will be Y2K ready or have the wherewithal to accept the Company business. The
Company has also determined that there are some third party mission critical
vendors do not have an alternate source. The Company relies heavily on its third
party mission critical systems to conduct its day to day business operations and
to the extent that its contingency plan fails, the Company's financial condition
may be adversely effected.
The Company's ability to manage the Y2K issue is subject to uncertainties beyond
its control and actual results could differ materially from what has been
discussed above. There are several factors that could effect the Y2K issue for
the Company, including; the success of the Company in identifying systems and
programs that are affected by Y2K; the amount and nature of testing on internal
and external systems that is required; the installation, programming, and
systems work related to upgrading or replacing each of the affected programs;
the cost, magnitude and availability of labor and consulting to complete the
required Y2K projects and the success of the Company's external third party
providers and other industry or governmental entities in addressing their Y2K
issues and assessing their risks.
The failure of the Company, the Company's mission critical third party providers
or other industry or governmental entities to resolve Y2K issues could have a
material adverse affect on the Company's business, financial condition, and
results of operations. The Company could become the subject of legal claims
regarding its inability to operate its business due to Y2K failures by it or any
of its mission critical third party vendors. The Company is also regulated by
several governmental agencies that may decide to impose fines or sanctions that
could adversely effect the Company's ability to do business or in some cases
require the Company to cease operations. The Company could also experience a
decline in assets under management of investors if its Funds become concerned
about the Y2K problem and withdraw their investments. A decline in assets under
management would have an adverse effect upon the Company's business, financial
condition and results of operations.
13
<PAGE>
FORWARD LOOKING STATEMENT
When used in this Form 10-Q and in future filings by the Company with the
Securities and Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases, "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward looking" statements, within the meaning of the Private
Securities Litigation Reform Act of 1995. All assumptions, anticipations,
expectations and forecasts contained herein are forward looking statements that
involve risks and uncertainties. Discussions in Management's Discussion and
Analysis about the Company's estimated completion dates for phases of the
Company's Year 2000 plan, related cost estimates, statements about possible
effects of the year 2000 problem and related contingency plans are also "forward
looking" statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and should be
read in conjunction with the risk disclosures. The Company wishes to advise
readers that the factors in the Year 2000 discussed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company will not undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
14
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1. THROUGH 5. ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Credit Agreement Date December 22, 1998
27.0 Financial Data Schedules
(b) Reports on Form 8-K.
None
15
<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 9, 1999
/s/ James R. Reis
-----------------------------------------
James R. Reis
Vice-Chairman and Chief Financial Officer
(Principal Accounting Officer)
16
Execution copy
FIRST AMENDMENT TO THIRD
AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT
AGREEMENT (this "Amendment"), made and entered into as of December 22, 1998, is
by and among PILGRIM GROUP, INC., a Delaware corporation f/k/a PILGRIM AMERICA
GROUP, INC. ("PAG"), PILGRIM AMERICA CAPITAL CORPORATION, a Delaware corporation
("PACC") (together the "Borrowers" and each a "Borrower"), the banks which are
signatories hereto pursuant to Section 9.6, the "Banks" and U.S. Bank National
Association, a national banking association, one of the Banks as agent for the
Banks (in such capacity, the "Agent").
RECITALS
1. The Agent, the Banks and the Borrowers entered into a Third
Amended and Restated Credit Agreement dated as of July 31, 1998 (the "Credit
Agreement"); and
2. The Borrowers desire to amend certain provisions of the
Credit Agreement, and the Banks have agreed to make such amendments, subject to
the terms and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
covenant and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used herein
and not otherwise defined herein shall have the meanings assigned to them in the
Credit Agreement, unless the context shall otherwise require.
Section 2. Amendments. The Credit Agreement is hereby amended
as follows:
2.1 Section 1.1 of the Credit Agreement is hereby amended by
adding the following definition thereto in alphabetical order:
"12b-1 Sale": The sale by PASI of certain 12b-1 Fees
and related Contingent Deferred Sales Charges pursuant to a
Pilgrim Program Master Agreement by and among PAG, PAII, PASI,
PLT Finance, L.P., Putnam, Lovell, de Guardiola & Thornton
<PAGE>
Inc. and Bankers Trust Company, as Funding and Collection
Agent, dated December 11, 1998, and the other agreements,
documents and instruments contemplated thereby, as originally
in effect and as amended, supplemented or otherwise modified
with the consent of the Agent.
2.2 Section 2.7(a) of the Credit Agreement is amended to read
in its entirety as follows:
2.7(a) Proceeds of Asset Sales. Within one Business Day
following the receipt of the initial proceeds of the 12b-1
Sale, the Borrowers shall prepay the Loans, and the Aggregate
Commitment Amounts shall be reduced, by an amount equal to
Eleven Million Seven Hundred Fifty Thousand Dollars
($11,750,000). Within one Business Day following the sale of
any CLO Investments, Advisory Contracts, other 12b-1 Fees and
the related Contingent Deferred Sales Charges, or interests
therein (including but not limited to stock in Advisory
Subsidiaries or other Subsidiaries) by either Borrower or any
Subsidiary occurring after the Closing Date, other than
further sales of 12b-1 Fees and Contingent Deferred Sales
Charges as part of the 12b-1 Sale made on or before December
11, 1999, to the extent the sum of the proceeds of all such
sales received after the Closing Date, net of the actual cash
expenses and taxes paid or incurred by any Borrower or any
Subsidiary thereof in connection with such sales, exceeds
Three Million Dollars ($3,000,000), the Borrowers shall prepay
the Loans and the Aggregate Commitment Amounts shall be
reduced by an amount equal to fifty percent (50%) of such
excess; provided, however that this Section 2.7(a) shall not
be deemed to authorize any sale or other transfer that would
otherwise be prohibited by Section 6.2.
Section 3. Effectiveness of Amendments. The amendments
contained in this Amendment shall become effective upon delivery by the
Borrowers of, and compliance by the Borrowers with, the following:
3.1 This Amendment duly executed by each of the Borrowers.
3.2 A Certificate by the Secretary or Assistant Secretary of
each of PAG, Pilgrim Securities, Inc., f/k/a Pilgrim America
Securities, Inc. ("PASI"), Pilgrim Investments, Inc., f/k/a Pilgrim
America Investments, Inc. ("PAII"), and PACC (i) certifying that there
has been no amendment to the Certificate of Incorporation or Bylaws of
PAG, PASI, PAII, and PACC, other than amendments to change the
corporate name of PAG, PAII and PASI (in each case deleting the word
"America" from such names) since true and accurate copies of the same
were delivered to the Agent with a certificate of the Secretary of the
respective entity dated July 31, 1998, and (ii) identifying the
-2-
<PAGE>
officers of PAG, PAII, PASI and PACC authorized to execute this
Amendment and any other instrument or agreement to be executed in
connection with this Amendment (collectively, the "Amendment
Documents").
3.3 Certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment.
3.4 A consent by PASI in the form of Exhibit A attached to
this Amendment, duly executed by PASI.
3.5 Confirmation of Security Agreements in the form of
Exhibits B-1 and B-2 attached to this Amendment, duly executed by each
of PASI and PAII.
3.6 The Borrowers shall have performed and complied with such
other conditions as specified by the Banks, including payment of all
unpaid legal fees and expenses incurred by the Agent through the date
of this Amendment in connection with the Credit Agreement and the
Amendment Documents.
Section 4. Representations, Warranties, Authority, No Adverse
Claim.
4.1 Reassertion of Representations and Warranties, No Default.
The Borrowers hereby represent that on and as of the date hereof and after
giving effect to this Amendment (a) all of the representations and warranties
contained in Article IV of the Credit Agreement are true, correct and complete
in all respects as of the date hereof as though made on and as of such date,
except for changes permitted by the terms of the Credit Agreement, and (b) there
will exist no Default or Event of Default under the Credit Agreement as amended
by this Amendment on such date which has not been waived.
4.2 Authority, No Conflict, No Consent Required. The Borrowers
each represent and warrant that each Borrower has the power and legal right and
authority to enter into the Amendment Documents and has duly authorized as
appropriate the execution and delivery of the Amendment Documents and other
agreements and documents executed and delivered by such Borrower in connection
herewith or therewith by proper corporate action, and none of the Amendment
Documents nor the agreements contained herein or therein contravene or
constitute a default under any agreement, instrument or indenture to which such
Borrower is a party or a signatory or a provision of such Borrower"s Certificate
of Incorporation, Bylaws or any other agreement or requirement of law, or result
in the imposition of any Lien on any of its property under any agreement binding
on or applicable to the Borrower or any of its property except, if any, in favor
of the Agent. Each Borrower represents and warrants that no consent, approval or
authorization of or registration or declaration with any Person, including but
not limited to any governmental authority, is required in connection with the
-3-
<PAGE>
execution and delivery by such Borrower of the Amendment Documents or other
agreements and documents executed and delivered by the Borrower in connection
therewith or the performance of obligations of the Borrower therein described,
except for those which the Borrower has obtained or provided and as to which the
Borrower has delivered certified copies of documents evidencing each such action
to the Agent.
4.3 No Adverse Claim. The Borrowers hereby warrant,
acknowledge and agree that no events have been taken place and no circumstances
exist at the date hereof which would give the Borrowers a basis to assert a
defense, offset or counterclaim to any claim of the Agent or the Banks with
respect to the Borrowers" obligations under the Credit Agreement, as amended by
this Amendment.
Section 5. Affirmation of Credit Agreement, Further
References, Affirmation of Security Interest and Guaranty. The Banks and the
Borrowers each acknowledge and affirm that the Credit Agreement, as hereby
amended, is hereby ratified and confirmed in all respects and all terms,
conditions and provisions of the Credit Agreement, except as amended by this
Amendment, shall remain unmodified and in full force and effect. All references
in any document or instrument to the Credit Agreement are hereby amended and
shall refer to the Credit Agreement as amended by this Amendment. The Borrowers
confirm to the Agent that the Borrowers" respective obligations under the Credit
Agreement, as amended by this Amendment are and continue to be secured by the
security interest granted by the Borrowers in favor of the Agent for the benefit
of the Banks under the Security Agreement dated as of July 31, 1998 executed by
PAG, the Collateral Assignment (Trademarks) dated as of July 31, 1998 executed
by PAG, and the Pledge Agreements each dated as of July 31, 1998, and made by
each Borrower in favor of the Banks, and all of the terms, conditions,
provisions, agreements, requirements, promises, obligations, duties, covenants
and representations of the Borrowers under such documents and any and all other
documents and agreements entered into with respect to the obligations under the
Credit Agreement are incorporated herein by reference and are hereby ratified
and affirmed in all respects by the Borrowers.
Section 6. Merger and Integration, Superseding Effect. This
Amendment, from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto and supersedes and has merged into this
Amendment all prior oral and written agreements on the same subjects by and
between the parties hereto with the effect that this Amendment, shall control
with respect to the specific subjects hereof and thereof.
Section 7. Severability. Whenever possible, each provision of
this Amendment and the other Amendment Documents and any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto shall be interpreted in such manner as to be effective, valid and
enforceable under the applicable law of any jurisdiction, but, if any provision
of this Amendment, the other Amendment Documents or any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
-4-
<PAGE>
thereto shall be held to be prohibited, invalid or unenforceable under the
applicable law, such provision shall be ineffective in such jurisdiction only to
the extent of such prohibition, invalidity or unenforceability, without
invalidating or rendering unenforceable the remainder of such provision or the
remaining provisions of this Amendment, the other Amendment Documents or any
other statement, instrument or transaction contemplated hereby or thereby or
relating hereto or thereto in such jurisdiction, or affecting the effectiveness,
validity or enforceability of such provision in any other jurisdiction.
Section 8. Successors. The Amendment Documents shall be
binding upon the Borrowers and the Banks and their respective successors and
assigns, and shall inure to the benefit of the Borrowers and the Banks and their
respective successors and assigns.
Section 9. Legal Expenses. As provided in Section 8.2 of the
Credit Agreement, the Borrowers agrees to reimburse the Agent, upon execution of
this Amendment, for all reasonable out-of-pocket expenses (including attorneys"
fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred
in connection with the Credit Agreement, including in connection with the
negotiation, preparation and execution of the Amendment Documents and all other
documents negotiated, prepared and executed in connection with the Amendment
Documents, and in enforcing the obligations of the Borrowers under the Amendment
Documents, and to pay and save the Agent harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of the Amendment Documents, which obligations of the Borrowers shall
survive any termination of the Credit Agreement.
Section 10. Headings. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.
Section 11. Counterparts. The Amendment Documents may be
executed in several counterparts as deemed necessary or convenient, each of
which, when so executed, shall be deemed an original, provided that all such
counterparts shall be regarded as one and the same document, and either party to
the Amendment Documents may execute any such agreement by executing a
counterpart of such agreement.
Section 12. Governing Law. THE AMENDMENT DOCUMENTS SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT
TO CONFLICT OF LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS, THEIR HOLDING COMPANIES AND THEIR AFFILIATES.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first above written.
PILGRIM AMERICA CAPITAL
CORPORATION
By __________________________
Title _______________________
Address for Borrower:
Two Renaissance Square, Ste. 1200
40 North Central Avenue
Phoenix, AZ 85004-4424
Attention: James R. Reis
Telecopier: (602) 417-8301
PILGRIM GROUP, INC.
By __________________________
Title _______________________
Address for Borrower:
Two Renaissance Square, Ste. 1200
40 North Central Avenue
Phoenix, AZ 85004-4424
Attention: James M. Hennessy
Telecopier: (602) 417-8301
U.S. BANK NATIONAL ASSOCIATION
By __________________________
Title _______________________
Address:
U.S. Bank Place - MPFP0702
601 Second Avenue South
Minneapolis, MN 55402-4302
Attention: Mark A. Bagley
Telecopier: (612) 973-0832
-6-
<PAGE>
BANK ONE ARIZONA, NA
By __________________________
Title _______________________
Address:
201 North Central Avenue
21st Floor AZ1-1178
Phoenix, AZ 85004
Attention: Michelle Schechner
STATE STREET BANK AND
TRUST COMPANY
By___________________________
Its__________________________
Address:
1776 Heritage Drive
JAB4SW
North Quincy, MA 02171
Attention: Edward A. Siegel
-7-
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<PERIOD-START> OCT-01-1998
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