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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2 TO
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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<PAGE>
The Registrant hereby amends its Annual Report on Form 10-K for the fiscal year
ended September 30, 1998 (the "Form 10-K") as follows:
The Amendment effects Notes 8 and 15 of Part II, Item 8 and does not effect
the Consolidated Balance Sheets, Consolidated Statements of Earnings,
Consolidated Statements of Stockholders' Equity or the Consolidated Statements
of Cash Flows.
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.
2
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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
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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.
4
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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.
5
<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.
6
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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>
7
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PILGRIM AMERICA CAPITAL CORPORATION
NOTES TO CONSOLDATED 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
8
<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
9
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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
10
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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.
11
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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.
12
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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.
13
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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)
======= ======= =======
14
<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
750,000 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.
15
<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.
16
<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.
17
<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).
18
<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
19
<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
20
<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.
21
<PAGE>
(15) Subsequent Event
On November 9, 1998, PSI signed a Letter of Intent to sell 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 Asset 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.
On October 8, 1998, the Company's Board of Directors approved
repurchasing 500,000 shares of the Company's common stock after the 750,000
shares are repurchased from the October 1997 Board approval. In October 1998,
the Company repurchased 255,000 shares of the Company's common stock at a total
purchase price of $4.4 million.
22
<PAGE>
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to report on
Form 10-K to be signed on its behalf by the undersigned; thereunto duly
authorized this 15th day of January 1999.
PILGRIM AMERICA CAPITAL CORPORATION
a Delaware corporation
By: /s/ Robert W. Stallings
----------------------------------------------
Robert W. Stallings
Chairman of the Board,
Chief Executive Officer and President
23
