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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                         Commission File Number 0-19799
   September 30, 1998

                             PILGRIM AMERICA CAPITAL
                                   CORPORATION

           Delaware                                      86-0670679
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or organization)

                             Two Renaissance Square
                       40 North Central Avenue, 12th Floor
                             Phoenix, Arizona 85004
                                 (602) 417-8100

                        Securities registered pursuant to
                            Section 12(g) of the Act:

                          Common Stock, $.01 par value

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

         At December 7, 1998,  the  Registrant  had  5,333,477  shares of common
stock outstanding. On such date, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $77,775,441.

                      DOCUMENTS INCORPORATED BY REFERENCE

         Materials have been incorporated by reference into this Report from the
following documents: Materials from the Registrant's Proxy Statement relating to
the 1999 Annual Meeting of Stockholders have been incorporated by reference into
Part III, Items 10, 11,12, and 13.

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<PAGE>
TABLE OF CONTENTS                                                           PAGE

PART I

Item 1      Business..................................................        3

Item 2      Properties................................................       13

Item 3      Legal Proceedings.........................................       13

Item 4      Submission of Matters to a Vote of
              Security Holders........................................       13

            Executive Officers of the Registrant......................       13

PART II

Item 5      Market for the Registrant's Common
              Stock and Related Shareholder Matters...................       14

Item 6      Selected Consolidated Financial Data......................       15

Item 7      Management's Discussion and Analysis of Financial
              Condition and Results of Operations.....................       19

Item 8      Financial Statements and Supplementary Data...............       24

Item 9      Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.....................       45

PART III

Item 10     Directors and Executive Officers of the Registrant........       45

Item 11     Executive Compensation....................................       45

Item 12     Security Ownership of Certain Beneficial Owners
              and Management..........................................       45

Item 13     Certain Relationships and Related Transactions............       45


PART IV

Item 14     Exhibits, Financial Statement Schedules and Reports
              on Form 8-K.............................................       46

SIGNATURES............................................................       50

                                       2
<PAGE>
                                     PART I

ITEM 1. BUSINESS 

GENERAL

         Pilgrim  America Capital  Corporation  ("Pilgrim") is a holding company
that, through its wholly owned subsidiaries,  provides investment management and
related services for seven open-end funds (the "Open-end Funds"), one closed-end
fund (the  "Closed-end  Fund") (each a "Fund" and  collectively the "Funds") and
five issuers of collateralized  debt obligations (the "Private  Accounts") as of
September 30, 1998.  Pilgrim's common stock is traded on the NASDAQ Stock Market
National  Market  System  (the  "NASDAQ  NMS")  under the symbol  PACC.  Pilgrim
commenced  its  investment  management  operations  on  April 7,  1995,  when it
consummated  the  acquisition  (the  "Acquisition")  of certain of the assets of
Pilgrim Group, Inc.  (subsequently  renamed Atlas Financial Group, Inc.) and its
subsidiaries ("Atlas").

         Pilgrim was  incorporated as First Western  Corporation and changed its
name to Express  America  Holdings  Corporation  on  September  20,  1993 and to
Pilgrim  America  Capital  Corporation  on April 28, 1997. The term "Company" as
used herein refers to Pilgrim and its  consolidated  subsidiaries.  Prior to the
Acquisition,  the Company,  primarily  through the activities of Express America
Liquidation Corporation,  formerly known as Express America Mortgage Corporation
("EAMC"),  had been engaged in the mortgage banking business,  deriving revenues
primarily  from mortgage  loan  servicing  and mortgage  loan  originations.  On
September  30, 1994,  the Company sold  substantially  all of its mortgage  loan
servicing assets to NationsBank Mortgage Corporation.  On February 28, 1995, the
Company  announced  the   discontinuance  of  all  remaining   mortgage  banking
operations.  The remaining  mortgage banking related assets are being sold. (See
Item 7 "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" for further discussion of discontinued operations.)

         As  a  part  of  the  Acquisition,  the  Company  paid  Atlas  and  its
shareholders $28.1 million and assumed certain liabilities. The Company recorded
costs  assigned  to  management   contracts  acquired  in  connection  with  the
Acquisition  of $32.3  million,  which  included the  purchase  price as well as
provisions for certain transaction costs related to the Acquisition.

         As a result of the  Acquisition,  the Company became the manger of five
funds:  Pilgrim MagnaCap Fund,  formerly known as Pilgrim America MagnaCap Fund;
Pilgrim  High Yield Fund,  formerly  known as Pilgrim  America  High Yield Fund;
Pilgrim Government  Securities Income Fund;  Pilgrim Prime Rate Trust,  formerly
known as Pilgrim  America  Prime Rate Trust;  and Pilgrim  Bank and Thrift Fund,
Inc.,  formerly known as Pilgrim  America Bank and Thrift Fund, Inc. These Funds
had  combined  net assets of $1.3  billion on the date of the  Acquisition.  The
Company also became a distributor and servicing agent for a money market fund.

         In connection with the Acquisition, the Company formed three new wholly
owned subsidiaries:  Pilgrim Investments,  Inc. ("PII"), a registered investment
advisor,  which  serves as the  investment  manager for Pilgrim  Funds;  Pilgrim
Securities,   Inc.  ("PSI"),  a  broker-dealer   registered  with  the  National
Association  of  Securities  Dealers,  Inc.  (the  "NASD"),  which serves as the
distributor of the Funds; and Pilgrim Group, Inc. ("PGI"), the parent of PII and
PSI, which subsidiaries were respectively known as Pilgrim America  Investments,
Inc.,  Pilgrim America  Securities,  Inc. and Pilgrim America Group,  Inc. until
October 30, 1998.

         On September 1, 1995, the Company  introduced three  additional  Funds:
Pilgrim Asia-Pacific Equity Fund, Pilgrim MidCap Value Fund and Pilgrim LargeCap
Leaders  Fund  (these  Funds  were  formerly  known as Pilgrim  America  Masters
Asia-Pacific  Equity Fund, Pilgrim America MidCap Value Fund and Pilgrim America
Masters  LargeCap  Value  Fund,  respectively).  Each of these Funds has its own
investment objectives and policies and originally each Fund was sub-advised by a
money  manager  ("Sub-Advisor")  elected  by the  Company  and  approved  by the
applicable Fund Board based on the Sub-Advisor's  extensive knowledge and proven
experience in its  specialized  asset  class.  On  October 31, 1997, PII  became
fully  responsible for  advising the  Pilgrim LargeCap Leaders Fund. Pursuant to

                                       3
<PAGE>
investment management  agreements between the Company and each Sub-Advisor,  the
Company pays sub-advisory  fees to the Sub-Advisors  based on the average annual
net assets of the fund managed by each particular Sub-Advisor.

         During 1997,  the Company began managing  assets for Private  Accounts.
The Private Accounts are collateralized debt obligations ("CDOs") funded through
multiple  classes of secured  notes  issued by a special  purpose  company.  The
Company  closed its first CDO on November 13, 1997 and closed  three  additional
CDO's through  September 30, 1998. Three of the CDOs are invested in both senior
floating rate loans and high yield bonds.  The other  CDO is invested  solely in
high yield bonds.  The Company has also been engaged by a fifth Private  Account
to manage a portfolio  consisting  entirely of senior floating rate loans.  That
transaction is expected to close in December of 1998.

         The Company  receives an asset based  management fee for its investment
management  services to Private  Accounts,  ranging from 0.50% to 0.60%,  and is
entitled to a maximum additional fee of 0.15% to 0.25% if certain return hurdles
are met.  The  Company  also  purchased  equity  investments  in each CDO. As of
September 30, 1998,  CDO assets under  management  totaled $1.90 billion and the
Company's equity investments in CDOs totaled $18.3 million.

         Investment Management Services

         The   Company   provides   investment   advisory,    distribution   and
administrative   services  for  the  Funds  under   investment   management  and
administration agreements and distribution plans with each Fund. Pursuant to the
investment management  agreements,  PII provides investment advisory services to
each  Fund,  subject to the  authority  of each  Fund's  board of  directors  or
trustees (the "Boards") and to each Fund's  fundamental  investment  objectives,
policies and restrictions. The investment management agreements must be approved
annually  by the Boards of the  respective  Funds,  including  a majority of the
independent  trustees or directors (I.E., those who are not "interested persons"
with respect to PII, as defined in section  2(a)(19) of the  Investment  Company
Act of  1940,  as  amended  (the  "Investment  Company  Act")).  The  agreements
generally  may be  terminated  by the  Company  or the Fund upon 60 days  notice
without penalty.

         PII provides  investment  management  services to the Private  Accounts
prior to closing pursuant to a warehouse  agreement or an engagement letter, and
after closing pursuant to an investment management  agreement.  PII is appointed
as the investment  manager at the inception of each  transaction for the life of
the related CDO,  subject to removal at certain  times or upon the  happening of
certain  events and for cause.  Each CDO is expected to continue  for six to ten
years (subject to early termination by vote of the investors).

         All invested assets are managed by portfolio  managers  employed by the
Company,  except for the  Pilgrim  MidCap  Value Fund and  Pilgrim  Asia-Pacific
Equity  Fund,  which  are  managed  by  Sub-Advisors.  The  Company's  portfolio
management staff includes 7 portfolio managers,  5 assistant portfolio managers,
9 analysts, a chief investment officer and a chief credit officer.

         Generally,  the Company  employs the personnel who serve as officers of
the  Funds  and  who  manage  the  day-to-day  business  operations,   including
maintaining  the portfolio  records,  answering  investor  inquiries,  providing
securities laws and regulations and other administrative  activities.  The Funds
generally  pay their own  expenses  such as legal and auditing  fees,  board and
shareholder meeting costs, Securities and Exchange Commission (the "Commission")
and state registration fees and similar expenses.  The Private Accounts also pay
their own expenses,  such as trustee fees, legal fees,  accounting  service fees
and similar expenses.
                                       4
<PAGE>
         Revenues

         Substantially all of the Company's revenues are derived from investment
management, administrative and distribution fees which are based on a percentage
of assets  under  management  in the Funds  and the  CDOs.  Since the  Company's
revenues  are largely  dependent  on the total value and  composition  of assets
under  management,  fluctuations in financial  markets and in the composition of
assets could significantly  affect the Company's revenues and the results of its
operations.

The Funds

         The Open-end Funds

         The  Open-end  Funds  are  marketed  and  distributed  through  PSI  in
accordance with  distribution  plans adopted by each Fund pursuant to Rule 12b-1
of the  Investment  Company  Act and the  rules  of the  NASD.  Pursuant  to the
distribution  plans,  as  underwriter  to each Fund,  PSI receives  distribution
("12b-1") fees as  compensation  or for  reimbursement  of expenses  incurred in
connection  with the  offering,  sale and  shareholder  servicing of each Fund's
shares.  The 12b-1 fees are limited based upon net assets of the particular Fund
and share class sold. The  distribution  plans must be approved  annually by the
Boards  of the  respective  Funds,  including  a  majority  of  the  independent
directors or  trustees.  These  distribution  plans are  terminable  at any time
without  notice or penalty.  The  termination  of the  distribution  plans would
result in the loss of 12b-1 fees to the Company.

         PSI  distributes  the  Open-end  Funds  on a  wholesale  basis  through
independent financial professionals,  national and regional brokerage firms, and
other financial  institutions  ("Authorized  Dealers").  Although the Authorized
Dealers have entered into selling  agreements with the Company,  such agreements
(which  generally are terminable by either party without penalty) do not legally
obligate the  Authorized  Dealers to sell any specific  amount of the  Company's
investment  products (see  "Competition  and  Marketing  Strategy"  below).  PSI
wholesalers  and their  assistants  work closely with the Authorized  Dealers to
assist in selling shares of the Open-end Funds.

         Distribution of Open-end Fund Shares

         All of the  Open-end  Funds  offer Class A, Class B and Class M shares,
except  Pilgrim  Bank and  Thrift  Fund  which  offers  only Class A and Class B
shares.  Each share of these  classes  represents  an identical  interest in the
Funds, but has varying types and amounts of sales and distribution charges.

         Class A shares are offered with a maximum initial sales charge of 5.75%
for equity Funds,  and 4.75% for fixed income Funds.  Sales charges are based on
the value of the shares  sold.  The  majority  of the sales  charge is paid,  or
re-allowed,   to  the  Authorized  Dealers.  PSI  receives  the  balance  as  an
underwriting  commission of up to .75% of the value of the shares sold. PSI also
receives  12b-1 fees from the Funds at an annual rate of .25% to .30% of Class A
share average daily net assets.

         Class B shares are offered  with no initial  sales  charge.  PSI pays a
commission  of up to 4.00% to the  Authorized  Dealer at the time of sale.  Such
payments are  capitalized  as deferred  acquisition  costs ("DAC Asset") and are
amortized over a six-year  period.  The shareholder then pays a contingent sales
charge to PSI in the event shares are redeemed within a six-year period from the
date of purchase.  The Company uses its own funds (which may be borrowed) to pay
commissions to Authorized  Dealers.  The Company recovers the broker  commission
through a higher 12b-1 fee received  from the Funds,  which is paid at an annual
rate of 1.00% of Class B share average daily net assets.

         On December 11,  1998,  PSI sold its  September  30, 1998 DAC Asset for
$26.5 million,  which  approximated  book value, as well as the right to receive
 .75% annually of the future  distribution fees and the contingent deferred sales
charges  from the  related  Class B shares.  Under the related  agreements,  the
Company  will also sell its DAC on future  Class B share sales to the  purchaser
through  November 30, 1999.  The Purchaser has a right of first refusal on a two
year extension  thereafter.  The Company is required  under its existing  Credit
Agreement  (defined  below) to use  proceeds in excess of $3.0  million from the

                                       5
<PAGE>
sale of its DAC Asset to pay down its borrowings  under the Credit Agreement and
reduce Credit Agreement  borrowings by 50% of the proceeds of the sale in excess
of $3 million.  The Company's  credit facility will be reduced by  approximately
$11.8 million as a result of this transaction.

         Class M shares are offered with a lower initial sales charge than Class
A shares.  The maximum initial sales charge is 3.5% for equity Funds,  and 3.25%
for fixed income Funds. As with Class A shares,  the majority of this commission
is  re-allowed  to  the  Authorized  Dealer.  PSI  receives  the  balance  as an
underwriting  commission of up to .50% of the value of the shares sold. PSI also
receives  12b-1 fees from the Funds at an annual  rate of .75% of Class M shares
average daily net assets.

         Under the Funds' distribution  plans,  ongoing payments are made by PSI
on a quarterly  basis to Authorized  Dealers for  distribution  and  shareholder
servicing,  based on each  Fund's  average  annual  assets  at .25% for  Class A
shares,  .25% for Class B shares, and .40% to .65% for Class M shares.  Payments
begin in the 13th month following purchase of Class A or B shares and in the 1st
month following purchase of Class M shares.

         Each of the  Open-end  Funds has  distinct  investment  objectives  and
policies that have been  developed as part of the Company's  strategy to provide
core investments to investors.

         Pilgrim Bank and Thrift Fund seeks long-term capital  appreciation with
income as a secondary  objective by investing  primarily in equity securities of
regional banks and the bank holding companies of such banks. Management fees for
the Fund range from .70% to 1.00% of average  annual net  assets.  Organized  in
1986,  assets of the Fund at September 30, 1998 were $779.2  million.  This Fund
converted from a closed-end format to an open-end format on October 20, 1997.

         Pilgrim  MagnaCap  Fund  seeks  growth  of  capital,  with  income as a
secondary consideration, through investing in equity securities determined to be
of high quality based upon its "rising dividends" criteria.  Management fees for
the Fund range from .50% to 1.00% for average  annual net assets.  Organized  in
1969, net assets of the Fund at September 30, 1998 were $389.0 million.

         Pilgrim  High Yield Fund  seeks a high  level of current  income,  with
capital  appreciation  as  a  secondary   objective,   through  investing  in  a
diversified portfolio of high-yielding debt securities.  Management fees for the
Fund are 0.60% of average  annual net assets.  Organized in 1939,  net assets of
the Fund at September 30, 1998 were $296.1 million.

         Pilgrim Government Securities Income Fund seeks a high level of current
income, consistent with liquidity and preservation of capital, through investing
in a portfolio of securities  issued or guaranteed  by the U.S.  Government,  or
certain of its  agencies  and  instrumentalities.  Management  fees for the Fund
range from .40% to .50% of average  annual net assets.  Organized  in 1984,  net
assets of the Fund at September 30, 1998 were $39.4 million.

         Pilgrim  Asia-Pacific Equity Fund seeks long-term  appreciation through
investing  in the  equity  securities  of  companies  based in the  Asia-Pacific
region.  Management  fees for the Fund are 1.25% of average  annual net  assets.
Organized in July 1995,  net assets of the Fund at September 30, 1998 were $21.1
million. The Sub-Advisor of the Fund is HSBC Asset Management Americas, Inc. and
HSBC Asset Management Hong Kong Limited (collectively  "HSBC"),  subsidiaries of
HSBC  Holdings  plc,  which was  founded as the Hong Kong and  Shanghai  Banking
Corporation in 1865. HSBC manages over $49.0 billion of assets worldwide and its
clients primarily include pension funds,  institutional  investors, and high net
worth individuals.

         Pilgrim   MidCap  Value  Fund  seeks  to  provide   long-term   capital
appreciation  through investing in equity securities of companies believed to be
undervalued and generally having market  capitalization  of between $200 million
and $5  billion.  Management  fees for the Fund are 1.00% of average  annual net
assets.  Organized in July 1995,  net assets of the Fund at  September  30, 1998
were $66.3 million. The Sub-Advisor of the Fund is CRM Advisors, LLC ("CRM"), an
affiliate  of Cramer  Rosenthal  McGlynn,  Inc.,  which  manages $4.0 billion of
assets for its clients,  which primarily  include pension plans,  high net worth
individuals, foundations, endowment funds, and others.

                                       6
<PAGE>
         Pilgrim  LargeCap  Leaders  Fund  seeks to  provide  long-term  capital
appreciation  through investing in equity securities of companies believed to be
undervalued and generally having market  capitalizations of at least $5 billion.
Management  fees for the Fund are 1.00% of average annual net assets.  Organized
in July 1995,  net assets of the Fund at September 30, 1998 were $23.2  million.
As of October 31, 1997, the Fund  Sub-advisor  resigned and was replaced by PII,
which  became  the  sole  manager  of the  fund.  The  Sub-Advisor  of the  Fund
previously  was  Ark  Asset   Management   Co.,  Inc.   ("Ark"),   formerly  the
institutional  investment  management  division  of Lehman  Brothers,  which was
established in 1929.

         The Closed-end Fund

         Pilgrim Prime Rate Trust (the "Trust") seeks as high a level of current
income as is consistent with  preservation of capital by acquiring  interests in
senior collateralized corporate loans. Shares of the Trust are traded on the New
York Stock Exchange (NYSE:PPR).

         In May 1996, the Trust's shareholders  approved permitting the Trust to
borrow for  investment  purposes to the extent  permitted  under the  Investment
Company Act. The Trust  entered into a credit  agreement in May 1996 and entered
into an amendment in November 1996 which provided that the Trust could borrow up
to $515 million, or approximately 33 1/3% of the Trust's total assets, including
assets  acquired  with  borrowed  funds.  In 1998,  the Trust entered into a new
financing  agreement for $450 million and amended its existing credit  agreement
to reduce it to $200 million,  for a total borrowing capability for the Trust of
$650 million.

         Management fees for the Trust are 0.80% and  administrative  fees range
between  .10% to .l5% of the Trust's net assets plus  borrowings.  Organized  in
1988,  net assets of the Trust at  September  30, 1998 were $1.18  billion,  and
borrowings were $484 million.

         On November 19, 1996,  the Trust raised net proceeds of $157 million by
issuing 18,122,963 shares of beneficial  interest in the Trust pursuant to a one
for five non-transferable rights offering (the "Offering").  After the Offering,
the Trust increased its borrowings  proportionately with the increase in its net
assets.  Additionally,  the Company has agreed to reduce its management  fees on
assets in the  Trust  over  $1.15  billion  to .60% for a period of three  years
following the Offering.

         In  May  1998,  the  Trust  began  offering   shares  under  two  shelf
registration   statements;   15,000,000   shares  pursuant  to  its  Shareholder
Investment Program and privately negotiated transactions,  and 10,000,000 shares
pursuant  to an  exclusive  distribution  agreement  which  provides  for direct
issuance  to the New York  Stock  Exchange.  All  shares  sold must  create  net
proceeds to the Trust equal to or greater  than Net Asset  Value.  The Trust has
issued all shares under its 10,000,000 share  registration  statement and is now
selling shares under a recently filed registration of 25,000,000 shares.  During
fiscal year 1998,  the Trust raised $146 million  through  privately  negotiated
transactions and $16 million through the shareholder investment program.

         Private Accounts

         The Company  serves as the  Investment  Manager for five CDOs.  Four of
these CDOs have closed as of September  30,  1998,  while the fifth is currently
accumulating assets in advance of closing (the "Ramp-up Stage"). Management fees
for the closed  CDOs range from .50% to .60% of average  assets.  There are also
contingent  fees that  range  from .15% to .25% of  average  assets  payable  if
certain return hurdles are met. Prior to closing, the Company earns a management
fee  ranging  from .385% to .50% of average  assets.  Assets  managed in CDOs at
September 30, 1998 were $1.90 billion.

                                       7
<PAGE>
The following table  summarizes  each Fund as of September 30, 1998,  1997, 1996
and 1995:

                             ASSETS UNDER MANAGEMENT

                               AS OF SEPTEMBER 30,

<TABLE>
<CAPTION>
                                    (IN MILLIONS)                        FEES (IN BASIS POINTS)(1)(2)
                          ------------------------------------    ----------------------------------------
                          1998       1997      1996      1995     Management  Administrative  Distribution
                          ----       ----      ----      ----     ----------  --------------  ------------
<S>                     <C>       <C>       <C>       <C>         <C>         <C>              <C>
OPEN-END FUNDS (7)

Pilgrim MagnaCap
  Fund                  $  389.0  $  380.1  $  269.2  $  215.2    50-100           --           30-100
Pilgrim High Yield
  Fund                     296.1     114.1      30.8      15.6     60(9)           --           25-100
Pilgrim Government
  Securities Income Fund    39.4      29.0      36.0      42.8    40-50            --           25-100
Pilgrim Asia-Pacific
  Equity Fund               21.1      59.8      53.1       1.6     125             --           25-100
Pilgrim MidCap Value
  Fund                      66.3      63.5      11.4       0.9     100             --           25-100
Pilgrim LargeCap Leaders
  Fund (7)                  23.2      29.5      12.2       1.2     100             --           25-100
Pilgrim Bank and Thrift
  Fund (3)                 779.2        --        --        --    70-100           --           25-100
                        --------  --------  --------  --------

Total Open-end Funds     1,614.3     676.0     412.7     277.3
                        --------  --------  --------  --------
CLOSED-END FUNDS

Pilgrim Prime Rate
  Trust (4) (5)          1,663.4   1,354.1   1,048.2     868.0     80             10-15           --
Pilgrim Bank and Thrift
  Fund (3)                    --     347.9     243.6     202.3    70-100           --             --
                        --------  --------  --------  --------

Total Closed-end Funds   1,663.4   1,702.0   1,291.8   1,070.3     --              --             --
                        --------  --------  --------  --------

PRIVATE ACCOUNTS (6)(8)  1,896.0     230.5    --        --         --              --             --
                        --------  --------  --------  --------
TOTAL ASSETS UNDER
MANAGEMENT INCLUDING
BORROWINGS (4)          $5,173.7  $2,608.5  $1,704.5  $1,347.6
                        ========  ========  ========  ========
</TABLE>

See explanation of footnotes following table.

                                       8
<PAGE>
(1)  Fee varies  based upon  levels of average net assets.  Table  includes  the
     current range of fees to which each of the Funds assets are subject.
(2)  In 1995,  each Open-end  Fund,  excluding  Bank and Thrift,  began offering
     three  classes of shares (see  "Distribution  of Fund Shares"  above).  The
     distribution fees for Class A shares, Class B shares and Class M shares are
     .25% (.30% for Pilgrim MagnaCap Fund), 1.00% and .75%, respectively.
(3)  On October 20, 1997,  Pilgrim Bank and Thrift Fund became an Open-end Fund.
     PSI will receive a distribution  fee of .25% on Class A shares and 1.00% on
     Class B shares (see "The  Open-end  Funds" above).  
(4)  During the fourth  quarter of Fiscal 1996,  the Trust began  borrowing  for
     investment purposes pursuant to its amended fundamental investment policies
     approved by its  shareholders  on May 2, 1996.  Borrowings at September 30,
     1998 and  September  30,  1997 were  $484.0  million  and  $319.0  million,
     respectively.  Additionally,  effective  May 1998,  the Trust began issuing
     shares under two separate shelf  registration  statements,  whereby the net
     proceeds  received  by the Trust from share  sales may not be less than the
     greater of (i) the NAV per share or (ii) 94% of the  average  daily  market
     price over the relevant pricing period.
(5)  In  connection  with the Offering  completed on November 16, 1996 (see "The
     Closed-end  Fund" above),  the Company has agreed to reduce its  management
     fee on net assets plus  borrowings  of the Trust over $1.15 billion to .60%
     for a period of three years following the Offering.
(6)  Including  $202.6 million and $230.5 million of assets under  management in
     Private  Accounts  which  had not  closed  as of  September  30,  1998  and
     September 30, 1997, respectively.  Such transactions were in ramp up stages
     at those dates.  As of December 7, 1998 the fifth  transaction was still in
     the ramp-up stage.
(7)  Effective  November 16, 1998,  the name "America" has been removed from the
     title of each Fund (except  Pilgrim  Government  Securities  Income  Fund).
     Also, the Pilgrim  LargeCap Fund is now known as Pilgrim  LargeCap  Leaders
     Fund.
(8)  Each Private Account contains a tiered  management fee structure payable to
     the Company  based on assets  under  management  and  expected  performance
     levels. On closed  transactions,  a base and a secondary management fee are
     paid to the Company on a current basis and on a combined  basis ranges from
     .50%  to  .60% of  assets  under  management.  There  is also a  contingent
     management  fee of up to 0.25%  payable to the Company when certain  return
     hurdles are met within the related Private Account. In most instances,  the
     hurdle is not expected to be met for several  years after the  inception of
     the related Private Account. The Company accrues as revenue the net present
     value of earned contingent  management fees expected to be received on each
     Private  Account.  Prior to closing,  the Company  earns a  management  fee
     ranging from .385% to .50%.
(9)  In effect on September 30, 1998.

                                       9
<PAGE>
The following table presents comparative yearly data regarding Fund activity:

RESULTS OF OPERATIONS

                                         For the Years ended September 30,
                                                  (In millions)
                                      1998        1997        1996        1995
                                      ----        ----        ----        ----
OPEN-END FUNDS:
   Beginning assets                $  676.0    $  412.7    $  277.3    $  265.4
   Direct sales                     1,074.0       249.7       121.6         9.0
   Direct redemptions                (255.3)      (85.3)      (39.1)      (21.4)
   Exchanges in (out)(1)               (9.6)        4.1        (5.0)        1.9
   Bank and Thrift Fund
     conversion (2)                   354.2          --          --          --
   Investment activities (3)         (225.0)       94.8        57.9        22.4
                                   --------    --------    --------    --------
   Ending assets                    1,614.3       676.0       412.7       277.3
                                   --------    --------    --------    --------

CLOSED-END FUNDS:
   Beginning assets                 1,702.0     1,291.8     1,070.3     1,031.7
   Direct sales (4)                   158.4       157.8          --          --
   Bank and Thrift Fund
     conversion (2)                  (354.2)         --          --          --
   Investment activities (3)          157.2       252.4       221.5        38.6
                                   --------    --------    --------    --------
   Ending assets                    1,663.4     1,702.0     1,291.8     1,070.3
                                   --------    --------    --------    --------

PRIVATE ACCOUNTS:
   Beginning assets                   230.5          --          --          --
   Additions (5)                    1,665.5       230.5          --          --
                                   --------    --------    --------    --------
   Ending assets                    1,896.0       230.5          --          --
                                   --------    --------    --------    --------

   Ending assets under management  $5,173.7    $2,608.5    $1,704.5    $1,347.6
                                   ========    ========    ========    ========
----------

(1)  Net exchanges from (to) the Company's  sponsored  money market fund.
(2)  Pilgrim Bank and Thrift  converted  from a  Closed-end  Fund to an Open-end
     Fund on October 20, 1997.
(3)  Investment activities include net investment income,  realized gain/(loss),
     change  in   appreciation/(depreciation)   and  net  cash  distribution  to
     shareholders.  Investment  activities for  Closed-end  Funds include assets
     acquired using borrowed Funds.
(4)  Registration statements covering securities to be issued pursuant to a Cash
     Purchase  Plan and a Shelf  Offering  for Prime  Rate Trust have been filed
     with the  Securities and Exchange  Commission  and became  effective in May
     1998.
(5)  The Private  Account  activity  includes  assets  under  management  during
     the Ramp-up Stage.

                                       10
<PAGE>
         Regulation

         Virtually all aspects of the Company's  business are subject to various
federal  and state laws and  regulations.  PII is  registered  as an  investment
advisor  with the  Commission  under the  Investment  Advisers  Act of 1940,  as
amended  (the  "Advisers   Act"),  and  is  registered  under  applicable  state
securities  laws.  The Advisers Act imposes  numerous  obligations on registered
investment  advisors  including  fiduciary,  record  keeping,   operational  and
disclosure obligations.

         PSI is registered as a broker-dealer  under the Securities Exchange Act
of 1934, as amended,  and under all applicable  state  securities laws. PSI is a
member of the NASD and the Securities  Investor Protection  Corporation.  PSI is
also subject to the  Commission's  net capital rules designed to enforce minimum
standards   regarding  the  general  financial  condition  and  liquidity  of  a
broker-dealer.  Under certain circumstances, this rule limits the ability of the
Company to make  withdrawals  of capital and receive  dividends  from PSI. PSI's
regulatory net capital currently exceeds such minimum net capital requirements.

         Each of the Pilgrim Funds is registered  under the  Investment  Company
Act.  The  shares  of each Fund are  registered  with the  Commission  under the
Securities  Act of 1933,  as amended,  and the shares of each Fund are qualified
(or are exempt) for sale under  applicable  state  securities laws in all states
and in the  District of Columbia in which  shares are sold.  The Funds have also
elected  to  be  taxed  as  regulated   investment   companies  ("RIC's")  under
Sub-chapter M of the Internal Revenue Code of 1986, as amended, in order to pass
investment  income and  capital  gains to their  shareholders  without the funds
incurring federal income taxes on such amounts distributed.  In order to qualify
as a RIC,  there are  numerous  requirements  imposed  on the  Funds,  including
diversification, distribution, and income character qualifications.

         The foregoing  federal and state laws and  regulations  generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company  from  carrying on its business in the event it
fails to comply  with such laws and  regulations.  In such event,  the  possible
sanctions  which may be imposed  include  limitations on the Company's  business
activities  for  specified  periods  of  times,   revocation  or  suspension  of
investment advisor or broker-dealer  registrations,  the suspension or expulsion
from the  securities  business of the  Company,  its  subsidiaries,  officers or
employees, and other censures, sanctions or fines.

         Competition and Marketing Strategy

         The  investment  management  business  and the mutual fund  industry in
particular are highly competitive.  In the United States,  there are over 10,000
mutual  funds,  many with  several  classes  of  shares,  of  varying  sizes and
investment  objectives and policies whose shares are being offered to the public
by investment management firms, broker-dealers, and insurance companies, many of
whom also offer investment  alternatives  other than mutual funds. Many of these
financial services firms have  substantially  greater resources and assets under
management,  and provide a broader  array of  investment  products and services,
than does the Company.

         Competition  for sales of mutual  fund  shares  is  influenced  by many
factors, including general securities market conditions, government regulations,
general  economic  conditions,  portfolio  performance,  advertising  and  sales
promotional efforts,  distribution  channels, and the type and quality of dealer
and shareholder services. Many Authorized Dealers are large broker-dealer firms.
The retail distribution  systems of these firms constitute the Company's primary
access to retail purchasers of shares of the Open-end Funds. Many of these firms
sponsor  competing  proprietary  mutual  funds.  The Company  believes  that the
Authorized  Dealers value the ability to offer their customers a broad selection
of  investment  alternatives  and  will  continue  to sell the  Open-end  Funds.
However,  to the extent that these firms limit or restrict the sale of shares of
the  Open-end  Funds  through  their  retail  brokerage   systems  in  favor  of
proprietary mutual funds, assets under management by the Company may decline and
the Company's revenues may be adversely affected.

                                       11
<PAGE>
         The Company believes that  competition  within the mutual fund industry
will  increase  as a result of  consolidation  and  acquisition  activity.  Many
industry  analysts  believe that economies of scale must be achieved in order to
compete economically.  In order to increase assets under management, and compete
with mutual fund  management  companies with greater  resources and assets under
management,  the Company  aggressively  markets  its Funds to the  broker-dealer
community  as high  quality,  core  investments  managed by seasoned  investment
managers.

         The Company's  continued success in marketing the Pilgrim Funds will be
highly dependent on penetration of the retail distribution systems of Authorized
Dealers,  which  generally  offer numerous  competing  internally and externally
managed investment products, as well as investment  performance of the Company's
Funds  relative to the  performance  of other funds  competing in the same asset
classes.  The inability to compete  effectively with other  investment  products
could have a material adverse effect on the Company's business.

         The Company also intends to continue adding assets in Private Accounts.
Typically,  Private  Account  management  services are marketed  through certain
broker dealer firms  primarily to  institutional  clients.  The Company has been
successful  in  increasing  assets in  Private  Accounts  because  of  Pilgrim's
perceived  high   quality  investment  management  capabilities  in  the  senior
floating rate loan and high yield bond asset  classes,  as well as the Company's
business relationships with certain broker dealer firms.

         The  Company's  continued  success in  marketing  its  Private  Account
investment  management  services is highly  dependent on the  continuance of its
perceived  stature as a quality  manager of the related asset classes as well as
the  continuance of its  relationship  with broker dealer firms with whom it has
conducted  Private  Account  transactions.  Additionally,  continued  success is
dependent on the  performance of the particular  asset classes which are managed
by the  Company  and the  resulting  market  demand for the  related  management
services of such asset classes.

         The Company also may increase assets through  acquisition of investment
management  firms and  investment  advisory  agreements.  From time to time, the
Company  reviews  acquisition   prospects  and  may  engage  in  discussions  or
negotiations that could lead to acquisitions.

         Year 2000

         Many  companies have a "Year 2000 Problem." This problem arises because
many computer programs only recognize  two-digit  years-00 to 99. Unless this is
modified, these programs will not be able to function properly in the year 2000.

         The  Company is working to ensure  that its  operating  and  processing
systems will,  along with those of its service  providers,  continue to function
properly  when  the  year  2000  arrives.  The  Company  has  developed  and  is
implementing a comprehensive plan to complete all internal system conversions by
the second  Quarter of Fiscal  1999.  A  significant  part of the plan  involves
upgrading  current  software  to  newer  versions  which  are  fully  Year  2000
compliant.  To date, most of the Company's  current  software  systems are fully
compliant.  Based on this plan, it is estimated that incremental expenses to the
Company for the Year 2000 project will not have material impact on the Company's
operations or financial results. In addition, the Company is keeping apprised of
the  progress  of outside  vendors'  plans to become  Year 2000  compliant.  The
Company has been advised in writing by its mission  critical third party vendors
as to the status of their efforts to become year 2000  compliant and the Company
will  continue to contact  these  vendors to monitor  their status of completing
their Year 2000 compliance. These mission critical third party providers include
those that provide  custody,  transfer  agency,  accounting  and  administrative
services for the Funds, and their written correspondence has indicated that they
are addressing this problem and do not expect that it will materially  adversely
affect their operations.

         The Company is  developing a  contingency  plan ("the Plan") to address
the  Company's  need to be prepared  if the Company or one of its primary  third
party  vendors fails to be Year 2000  compliant on January 1, 2000.  The Company
will have this written plan in place by January 31, 1999.  The scope of the Plan
includes  mission  critical  systems,  physical  facilities,  and the  Company's

                                       12
<PAGE>
communication  systems.  The Plan will provide the Company guidance should it or
any of the  Company's  primary  third party vendors fail to meet its goals to be
Year 2000 compliant.

         Employees

         At  September  30,  1998,  the  Company  had 112 full  time  employees,
including 40 sales and marketing employees,  34 portfolio management  employees,
and 38 general and administrative employees. Ninety-five employees were employed
at the Company's  headquarters in Phoenix,  Arizona. The Company's employees are
not represented by any collective bargaining agreement,  and management believes
that it maintains good relationships with its employees.

ITEM 2. PROPERTIES

         The  principal  executive  and  administrative  offices of the  Company
occupy  approximately  29,000 square feet of commercial office space in Phoenix,
Arizona under a lease  expiring  August 31, 2005. The Company also has committed
to lease 9,700 square feet of additional  office space under this lease no later
than August 31, 1999.

         The Company  also  leases  approximately  24,000  square feet of office
space  in  Los  Angeles,  California  under  a  lease  assumed  as  part  of the
Acquisition  (see  "Item  1.  Business-General").   This  space  was  sublet  in
connection with the relocation of the Company's  operations in Phoenix,  Arizona
during 1995. The lease and related sublease expire on May 31, 2000.

         The  Company  does not own any real estate  except for its  interest in
real  estate  held  in  connection  with  its   discontinued   mortgage  banking
operations.

ITEM 3. LEGAL PROCEEDINGS

         The  Company is a party from time to time to  actions  and  proceedings
incident to its business.  Management does not believe that any existing actions
or  proceedings  will, in the aggregate,  have a material  adverse effect on the
business financial conditions or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this Report.

Executive Officers of the Registrant

         Set forth below is information  respecting the names,  ages,  positions
and  offices  with the  Company  of the  executive  officers  of the  Company at
September  30, 1998 who are not  continuing  directors or nominees.  Information
respecting the executive  officers of the Company who are  continuing  directors
and nominees is set forth in Item 10 of this report.

         James R. Reis, 41, has served as an executive officer of the Company in
the position of Vice Chairman and Chief  Financial  Officer since December 1993,
Secretary from November 1994 to April 1995, and as President and Chief Financial
Officer from its formation to December  1993.  Mr. Reis serves as Executive Vice
President,  Chief Credit Officer and Assistant  Secretary of the Trust. Mr. Reis
serves as Vice  Chairman and Director of PSI, PII and PGI and as Executive  Vice
President  of each of the Funds since April 1995.  Mr. Reis has served as EAMC's
Vice Chairman  since April 1993,  its Secretary  from May 1991 to April 1995, as
Executive  Vice  President  from May 16, 1991 until  December 1993, and as Chief
Financial  Officer of EAMC from May 16, 1991 until September 1992. Mr. Reis is a
certified public accountant.

                                       13
<PAGE>
         James M.  Hennessy,  49, has served as Executive  Vice  President  (and
prior to May 1998 as Senior Vice  President)  and Secretary of the Company,  PSI
and of each of the Funds, and Executive Vice President (and prior to May 1998 as
Senior Vice  President) of PII and PGI,  since May 1995 and Secretary of PII and
PGI since July 1995. Mr.  Hennessy has served as General  Counsel of the Company
since September 1995 and also as Executive Vice President (and prior to May 1998
as Senior  Vice  President)  of EAMC (June 1992 to August  1994 and since  April
1995) and Secretary since April 1995. Mr. Hennessy also served from January 1990
to June 1992 as President of Beverly  Hills  Securities  Corp.,  a mortgage bank
acquired by the Company in June 1992.

         Stanley Vyner, 48, has served as President and Chief Executive  Officer
of Pilgrim Investments, Inc. since August 16, 1996. He served as Chief Executive
Officer of HSBC Asset  Management  Americas,  Inc.  until  December of 1995, and
prior to that was the Chief  Executive  Officer of HSBC Life  Assurance Co., the
largest provider of retirement  services in Hong Kong where Mr. Vyner worked for
nearly 11 years. An actuary by profession, Mr. Vyner earned his Honors Degree in
Economics  from  Edinburgh  University,  UK.  He is a Fellow of the  Faculty  of
Actuaries.

         Robert  Boulware,  42,  has  served as  President  and Chief  Executive
Officer of Pilgrim Securities, Inc. since November 1996. Previously Mr. Boulware
served as Executive  Vice President and Chief  Operating  Officer of PSI. He has
also served the Company in various  sales and  marketing  positions  since April
1995.  From 1992 to 1995, Mr. Boulware  served in various  management  positions
with EAMC. Prior to joining the Company,  he served as Vice President at Bank of
America from  1990-1992 and as President and CEO in his last position with Wesav
Financial Corporation from 1987-1990.

         Howard  Tiffen,  50, has  served as Senior  Vice  President  of Pilgrim
Group,  Inc. and  President  and Chief  Operating  Officer of Pilgrim Prime Rate
Trust  since July 1997.  He has been the Senior  Portfolio  Manager of the Trust
since December 1995. Previously,  Mr. Tiffen also served as a Lending Officer of
Bank of America from April 1982 to November 1995.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

         Following the Company's  initial public offering on March 17, 1992, the
Company's  Common Stock has been traded on the NASDAQ NMS, under the symbol FWCO
until  September 20, 1993,  and under the symbol EXAM until April 28, 1997,  and
PACC since such date.

         The following table sets forth,  for the fiscal periods shown, the high
and low per share sale prices of the Company's  Common Stock, as reported by the
NASDAQ NMS. The prices have been  adjusted to reflect a 3 for 2 stock split that
was effective after the close of business on April 30, 1998:

         Fiscal Year Ended September 30, 1997      High        Low
         ------------------------------------      ----        ---

         First Quarter                            $ 4.67      $ 3.75
         Second Quarter                             7.08        4.58
         Third Quarter                             10.42        6.00
         Fourth Quarter                            13.83        9.33

         Fiscal Year Ended September 30, 1998
         ------------------------------------

         First Quarter                            $16.50      $11.33
         Second Quarter                            23.25       11.67
         Third Quarter                             27.00       14.67
         Fourth Quarter                            28.38       16.75

                                       14
<PAGE>
         The number of stockholder  accounts of record of the Common Stock as of
December 7, 1998 was approximately 322. The Company believes that there are more
than 2,000  beneficial  owners of its Common Stock.  The  Company's  stock price
closed at $21.00 per share on December 7, 1998.

         The  Company  has not paid  dividends  on its Common  Stock.  It is the
present policy of the Company's Board of Directors to retain earnings to finance
the growth and development of the Company's business.  Any future dividends will
be at the  discretion of the  Company's  Board of Directors and will depend upon
the  financial  condition,  capital  requirements,  earnings,  terms  of  credit
agreements  (which prohibit  "restricted  payments" -- see Item 7.  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources),  and liquidity of the Company as well as other
factors the Company's Board of Directors may deem relevant.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The following two tables of selected consolidated financial data should
be read in conjunction with  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated  Financial  Statements
of the Company and related notes thereto included  elsewhere  herein.  The first
table  presents  selected data from the  Consolidated  Financial  Statements and
other data related to the Company's continuing  investment  management business.
Operations  of the mortgage  banking  business,  which were  discontinued  as of
February 28, 1995, are presented on a condensed  basis  therein,  as they are in
the Company's  consolidated  financial statements,  in accordance with generally
accepted accounting principles for discontinued operations.

         The  second  table is  presented  by  management  to  provide  expanded
information as to the operations of the discontinued  mortgage banking business.
The Company announced the  discontinuance of its mortgage banking  operations on
February  28,  1995.  The  selected  data  from  this  table  should  be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations"  with respect to periods prior to  discontinuance  of
the mortgage banking operations.

                                       15
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA
                    (dollars in thousands, except share data)
<TABLE>
<CAPTION>
                                                       YEAR ENDED SEPTEMBER 30,
                                      --------------------------------------------------------
                                       1998         1997         1996         1995        1994
                                       ----         ----         ----         ----        ----
<S>                                <C>          <C>         <C>          <C>         <C>
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
Revenues .........................  $   43,301   $   21,288   $   14,485   $    6,363   $       --
Expenses .........................      27,448       14,936       15,887        6,913           --
                                    ----------   ----------   ----------   ----------   ----------
Earnings (loss) from continuing
 operations before taxes .........      15,853        6,352       (1,402)        (550)          --
Income taxes (benefit) ...........       6,546       (4,959)      (1,750)          --           --
                                    ----------   ----------   ----------   ----------   ----------
Earnings (loss) from  continuing
 operations ......................       9,307       11,311          348         (550)          --
Earnings (loss) from operations of
 discontinued mortgage business ..          --          413           --          (14)      (8,490)
Loss on discontinuance of mortgage
 operations ......................          --           --           --       (5,307)          --
                                    ----------   ----------   ----------   ----------   ----------
Net earnings (loss) ..............  $    9,307   $   11,724   $      348   $   (5,871)  $   (8,490)
                                    ==========   ==========   ==========   ==========   ==========
PER COMMON SHARE:
Basic earnings (loss) from
 continuing operations(1) ........  $     1.62   $     1.95   $     0.05   $    (0.07)  $       --
                                    ==========   ==========   ==========   ==========   ==========
Diluted earnings (loss) from
 continuing operations(1) ........  $     1.40   $     1.81   $     0.05   $    (0.07)  $       --
                                    ==========   ==========   ==========   ==========   ==========
Basic net earnings (loss)(1) .....        1.62         2.02         0.05        (0.79)       (1.05)
                                    ==========   ==========   ==========   ==========   ==========
Diluted net earnings (loss)(1) ...  $     1.40   $     1.87   $     0.05   $    (0.79)  $    (1.05)
                                    ==========   ==========   ==========   ==========   ==========
Basic shares used in per share
 calculations(1) .................   5,752,584    5,793,891    7,300,106    7,425,066    8,066,790
                                    ==========   ==========   ==========   ==========   ==========
Diluted shares used in per share
 calculations(1) .................   6,637,605    6,260,799    7,300,106    7,425,066    8,066,790
                                    ==========   ==========   ==========   ==========   ==========
CONSOLIDATED BALANCE SHEET
 DATA (AT PERIOD END):
Total assets(2) ..................  $   83,495   $   50,647   $   42,555   $   43,495   $   44,721
                                    ==========   ==========   ==========   ==========   ==========
Net assets (liabilities) of
 discontinued operations .........  $     (505)  $     (230)  $   (3,392)  $   (4,138)  $   35,590
                                    ==========   ==========   ==========   ==========   ==========
Redeemable preferred stock .......  $       --   $       --   $       --   $      338   $    1,015
                                    ==========   ==========   ==========   ==========   ==========
Total stockholders' equity .......  $   46,564   $   41,753   $   29,788   $   35,722   $   43,601
                                    ==========   ==========   ==========   ==========   ==========
Assets under management...........  $5,173,700   $2,608,500   $1,704,500   $1,347,600   $       --
                                    ==========   ==========   ==========   ==========   ==========
</TABLE>
----------
See explanation of footnotes following the tables.

                                       16
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA

                             DISCONTINUED OPERATIONS
                    (dollars in thousands, except share data)


                                            YEAR ENDED SEPTEMBER 30,
                                   ------------------------------------------
                                   1998    1997      1996     1995       1994
                                   ----    ----      ----     ----       ----
DISCONTINUED OPERATIONS:
Revenues:
  Loan administration .........  $   --  $     --   $   --  $    139   $ 23,442
  Loan origination ............      --        --       --      (225)     3,573
  Interest income .............      --        --       --     1,983     20,598
  Warehouse interest expense ..      --        --       --    (1,090)   (12,906)
  Gain on sale of servicing
   rights......................      --        --       --     2,074     40,877
  Other income ................      --        --       --       239        871
                                 ------  --------   ------  --------   --------
     Total revenues ...........      --        --       --     3,120     76,455
Expenses:
  Personnel ...................      --        --       --     3,322     26,517
  Amortization of purchased
   servicing rights ...........      --        --       --        66     10,640
  Write off of goodwill .......      --        --       --        --      6,649
  Other interest expense ......      --        --       --       145      5,248
  Other operating expenses ....      --      (693)      --     2,618     26,643
  Restructuring charges .......      --        --       --        --      5,050
                                 ------  --------   ------  --------   --------
     Total expenses ...........      --      (693)      --     6,151     80,747
                                 ------  --------   ------  --------   --------
Earnings (loss) before
  income taxes (benefit) and
  extraordinary item ..........      --       693       --    (3,031)    (4,292)
Income taxes (benefit) ........      --       280       --    (3,017)     2,942
                                 ------  --------   ------  --------   --------
Earnings (loss) before
  extraordinary item ..........      --       413       --       (14)    (7,234)
Extraordinary loss on early
  extinguishment of debt ......      --        --       --        --     (1,256)
                                 ------  --------   ------  --------   --------
EARNINGS (LOSS) FROM
OPERATIONS OF DISCONTINUED
MORTGAGE BUSINESS..............  $   --  $    413   $   --  $    (14)  $ (8,490)
                                 ======  ========   ======  ========   ========
Diluted Earnings (loss)
 before extraordinary item
 per share(1)..................  $   --  $   0.06   $   --  $     --   $  (0.90)
                                 ======  ========   ======  ========   ========
Diluted Earnings (loss) per
 share of common stock(1)......  $   --  $   0.06   $   --  $     --   $  (1.05)
                                 ======  ========   ======  ========   ========

                                       17
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                      SELECTED CONSOLIDATED FINANCIAL DATA

                      DISCONTINUED OPERATIONS - (Continued)
                    (dollars in thousands, except share data)


                                            YEAR ENDED SEPTEMBER 30,
                                  -------------------------------------------
                                  1998    1997     1996      1995        1994
                                  ----    ----     ----      ----        ----
Consolidated Balance Sheet
DATA (AT PERIOD END):
Mortgage loans held for sale ..   $396   $1,128   $3,516   $  2,352   $   95,993
Purchased servicing net .......     --       --       --         --          763
Total assets ..................    396    1,128    3,673      5,538      111,260
Notes payable .................     --       --    1,320         --       49,025
Total liabilities .............    901    1,358    7,065      9,676       75,670
SELECTED OPERATING DATA:
Volume of loans originated ....     --       --       --    199,895    3,616,990
Loan servicing portfolio
 (at period end)(3) ...........     --       --       --    171,861      429,304


The following footnotes relate to the preceding tables of Selected  Consolidated
Financial Data:

(1)  Shares  used  in  the   calculation   of  earnings   per  share  have  been
     retroactively  adjusted to account for a 50% dividend issued in the form of
     a 3 for 2 stock split that took place in Fiscal  1998 and the  requirements
     of statement of Accounting Financial Standards Number 128.

(2)  Total assets in 1994 were assets of the discontinued mortgage operations.

(3)  Includes loans held for sale and loans serviced  pursuant to  sub-servicing
     agreements.  At September 30, 1994, the Company  sub-serviced loans with an
     aggregate  principal balance of $3.2 million. No loans were sub-serviced by
     the Company after the year ended September 30, 1994.

                                       18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

         Results of Operations

         General Overview. For the fiscal year ended September 30, 1998 ("Fiscal
1998"),  the Company  recorded net earnings of $9.3 million or $1.40 per diluted
share or $1.62 per basic  share,  compared to net  earnings  for the fiscal year
ended  September 30, 1997 ("Fiscal  1997") of $11.7 million or $1.87 per diluted
share or $2.02 per basic  share (of which  $11.3  million  or $1.81 per  diluted
share or $1.95  per  basic  share  was from  the  continuing  operations  of its
investment  management  business).  For the fiscal year ended September 30, 1996
("Fiscal  1996"),  the  Company  recorded  net  earnings of $348,000 or $.05 per
diluted  share or $0.05  per  basic  share,  all of  which  was from  continuing
operations.  The Company commenced its investment management operations on April
7, 1995 when it consummated  the  Acquisition of certain  investment  management
assets.  On February 28, 1995, the Company  announced the  discontinuance of its
remaining mortgage banking operations (see "Item 1. Business-General").

         An income tax  liability  of $6.5  million was  recorded in Fiscal 1998
compared to a tax benefit of $5.0 million in Fiscal 1997.  The Company  recorded
the $5.0 million benefit in Fiscal 1997 because it was believed that it was more
likely than not that it would  generate  sufficient  taxable income to allow for
the realization of its deferred tax asset. As of September 30, 1998, the Company
had net operating  loss  carryforwards  of $1.3 million,  which are available to
offset future taxable income through fiscal years ending September 30, 2011.

         Provisions of the Internal  Revenue Code under  Section 382 may,  under
certain  circumstances,  restrict  the ability of the Company to utilize its net
operating loss carryovers. Generally, these provisions apply upon the occurrence
of a change in control,  which is deemed to occur if the  cumulative  percentage
ownership  change of a company's common shares is greater than 50 percent during
a prescribed  measurement period. As the Company had substantially  utilized its
net operating loss  carryforwards  by September 30, 1998, it is not  anticipated
that those  provisions  will impact the  Company's  ability to fully utilize the
remaining $1.3 million net-operating losses.

         Due to the Acquisition and the  discontinuance  of its mortgage banking
operations in Fiscal 1995,  the Company's  results of continuing  operations are
discussed  herein  separately  from the  results of the  Company's  discontinued
mortgage-banking operations.

         Investment Management (Continuing) Operations

         Year ended September 30, 1998 compared to Year ended September 30, 1997

         Revenues for Fiscal 1998 totaled  $43.3  million,  an increase of $22.0
million  over  Fiscal  1997  revenues.  The major  components  of the  Company's
revenues are management and administrative  fees,  distribution fees and Private
Account management fees. Management and administrative fees for Fiscal 1998, net
of sub-advisory  fees of $536,000 (see "Item 1.  Business-General"),  were $22.9
million,   an  increase  of  $5.6  million  over  Fiscal  1997   management  and
administrative fees which were net of sub-advisory fees of $644,000.  These fees
are based on the average annual net assets of the Funds (plus  borrowings in the
Trust) (see "Item 1. Business-General the "Funds").  Assets of the Funds totaled
$3.28  billion at September 30, 1998 versus $2.38 billion at September 30, 1997,
an increase of $900.0  million.  Distribution  fees were $7.4 million for Fiscal
1998, an increase of $4.9 million over Fiscal 1997.  Distribution fees are based
on the average annual net assets of the Company's  Open-end Funds, which totaled
$1.61  billion  as of  September  30,  1998  compared  to $676.0  million  as of
September 30, 1997, an increase of $934.0  million,  including a $354.2 increase
in assets in October  1997 when the Pilgrim  Bank and Thrift Fund was  converted
from a Closed-end Fund to an Open-end Fund. Private Account management fees were
$6.3  million,  an increase of $6.2 million over Fiscal  1997.  Private  Account
management  fees are based on the assets  managed  by the  Company in CDOs which
totaled $1.90 billion as of September 30, 1998 compared to $230.5  million as of
September 30, 1997, an increase of $1.67 billion.

                                       19
<PAGE>
         The increase of $2.57  billion in assets under  management at September
30, 1998  resulted  primarily  from a net  decrease of $112.4  million in market
value of managed  assets and an increase in Pilgrim Prime Rate Trust  borrowings
of $165.0 million (borrowings) and an increase in the new Private Account assets
of $1.67 billion.  Additionally,  direct sales of Open-end  Funds  accounted for
$1.07  billion of the  increase,  and direct  sales of Pilgrim  Prime Rate Trust
accounted for $158.4 million, while redemptions (including net exchange into the
Company's money market fund and the Bank and Thrift  conversion)  totaled $264.9
million and  distributions  paid in cash to  shareholders  of both  Open-end and
Closed-end Funds totaled $116.1 million.

         The Company's  operating  expenses of $27.4 million for Fiscal 1998, an
increase of $12.5 million over Fiscal 1997,  include general and  administrative
expense,  selling expense,  interest expense and depreciation and  amortization.
General and administrative expense, which totaled $12.7 million and $7.3 million
in  Fiscal  1998 and  1997,  respectively,  includes  compensation  and  related
expenses,  occupancy  and other  operating  expenses  related  to the  Company's
investment management operations and general corporate operations. Additionally,
pursuant to investment  management agreements between the Company and certain of
the Funds, the Company has agreed to limit certain expense ratios of such Funds,
and reimburses the Funds for amounts that exceed specific ratios.  During Fiscal
1998 and Fiscal 1997, such reimbursement expenses totaled $877,000 and $742,000,
respectively, and are included in general and administrative expense.

         Selling  expenses are related to the distribution of the Open-end Funds
and the Closed-end Funds, and include salaries of sales and marketing personnel,
costs related to the production of marketing materials, and commissions and fees
paid to various  Authorized  Dealers in connection with the sale of Fund shares.
Selling  expenses  were $9.2 million in Fiscal 1998  compared to $4.9 million in
Fiscal 1997. The $4.3 million increase in selling expense was due to an increase
in sales  staff as the Company  expanded  its sales  territories  to support the
increase in the sales of the Fund shares in Fiscal 1998.

         Interest  expense  was $1.2  million and  $505,000  for Fiscal 1998 and
Fiscal 1997, respectively. The increase in interest expense was primarily due to
the Company's  increase in borrowings,  which were $30.4 million as of September
30, 1998 compared to $5.5 million as of September 30, 1997.  The increase in the
Company's  borrowings resulted from the increase in commissions paid on B shares
and the equity investments made in CDOs by the Company beginning in Fiscal 1998.

         Amortization  and  depreciation  of $4.3  million  in Fiscal  1998,  an
increase of $2.0 million over Fiscal 1997, was primarily due to the amortization
of deferred  acquisition  costs which consists of commissions paid to Authorized
Dealers  in  connection  with  the  sale of Class B share  sales  (see  "Item 1.
Business-Distribution of Open-end Fund Shares").

         Year Ended September 30, 1997 compared to Year Ended September 30, 1996

         Revenues for Fiscal 1997  totaled  $21.3  million,  an increase of $6.8
million  over  Fiscal  1996  revenues.  The major  components  of the  Company's
revenues  are  management  and   administrative   fees  and  distribution  fees.
Management and administrative  fees for Fiscal 1997, net of sub-advisory fees of
$644,000 (see "Item 1.  Business-General"),  were $17.3 million,  an increase of
$4.8 million over Fiscal 1996 management and administrative  fees which were net
of sub-advisory fees of $387,000. These fees are based on the net average assets
of the Funds (see "Item 1. Business - Pilgrim  Funds").  Net assets of the Funds
totaled  $2.38  billion at September  30, 1997 versus $1.70 billion at September
30, 1996, an increase of $680.0 million. Distribution fees were $2.5 million for
Fiscal 1997, an increase of $1.3 million over Fiscal 1996. Distribution fees are
based on the net assets of the Company's  Open-end  Funds,  which totaled $676.0
million as of September  30, 1997  compared to $412.7  million at September  30,
1996, an increase of $263.3 million.

         The increase in assets of $904.0 million at September 30, 1997 resulted
primarily  from a $487.8  million  increase in the market  value of managed Fund
assets and an increase in Pilgrim Prime Rate Trust  borrowings of $140.0 million
and the new Private Account assets of $230.5 million. Additionally, direct sales
of  Open-end  Funds  accounted  for  $249.7  million  of  the  increase,   while

                                       20
<PAGE>
redemptions  (including  net exchange  into the  Company-sponsored  money market
fund) totaled $81.2 million and  distributions  paid in cash to  shareholders of
both Open-end and Closed-end Funds totaled $122.8 million.

         The  Company's  operating  expenses of $14.9 million for Fiscal 1997, a
decrease of $1.0 million over Fiscal 1996,  include  general and  administrative
expense,  selling expense,  interest expense and amortization and  depreciation.
General and administrative  expense, which totaled $7.3 million and $7.2 million
in Fiscal 1997 and Fiscal 1996, respectively,  includes compensation and related
expenses,  occupancy  and other  operating  expenses  related  to the  Company's
investment management operations and general corporate operations. Additionally,
pursuant to investment  management agreements between the Company and certain of
the Funds, the Company has agreed to limit certain expense ratios of such Funds,
and reimburses the Funds for amounts that exceed specified ratios. During Fiscal
1997 and  Fiscal  1996,  such  reimbursements  totaled  $742,000  and  $606,000,
respectively, and are included in general and administrative expense.

         Selling expenses are related to the distribution of the Open-end Funds,
and include  salaries of sales and  marketing  personnel,  costs  related to the
production  of marketing  materials,  and  commissions  and fees paid to various
Authorized Dealers in connection with the sale of Fund shares.  Selling expenses
were $4.9 million in Fiscal 1997  compared to $6.5  million in Fiscal 1996.  The
$1.6  million  decrease  in  expense  is due to the  Company's  streamlining  of
marketing  the Open-end  Funds in Fiscal 1997,  while in Fiscal 1996 the Company
was in the development stages of its marketing and sales strategies.

         Interest  expense was  $505,000 and $137,000 for Fiscal 1997 and Fiscal
1996,  respectively.  The increase in interest  expense was primarily due to the
Company's  increase in  borrowings,  which were $5.5 million as of September 30,
1997 compared to $3.6 million as of September 30, 1996.

         Amortization  and  depreciation  of $2.3  million  in Fiscal  1997,  an
increase of $275,000 over Fiscal 1996, was primarily due to the  amortization of
deferred  acquisition  costs which  consists of  commissions  paid to Authorized
Dealers  in  connection  with  the  sale of Class B share  sales  (see  "Item 1.
Business-Distribution of Open-end Fund Shares").

         Mortgage Banking (Discontinued) Operations

         The  Company  announced  the  discontinuance  of its  mortgage  banking
operations on February 28, 1995 (the "Announcement Date"). The activities of the
Company's  mortgage  banking  operations have been reflected as "Earnings (loss)
from operations of discontinued mortgage business,  net of tax" in the Company's
consolidated  statements of earnings.  As of the Announcement  Date, the Company
also  recorded a  provision  of  $986,000  for the  estimated  net loss from the
discontinuance of its mortgage banking  operations.  The provision  included the
anticipated mortgage banking revenues and expenses,  including severance expense
and all other  costs that the Company  estimated  would be incurred to phase out
these operations.  Subsequent to the Announcement  Date, during Fiscal 1995, the
Company  increased  the  provision  to  $5.3  million,  reflected  as  "Loss  on
discontinuance of mortgage operations" in the Company's  consolidated  statement
of  operations,  based  on  reevaluation  of  its  allowances  for  Discontinued
Operations.

         The  Company  recorded  no  activity  from  the  discontinued  mortgage
business in Fiscal 1998. In Fiscal 1997, the Company  recorded  earnings (net of
tax) from  discontinued  operations of $413,000  related to the  reevaluation of
certain  allowances.  The Company  recorded no  activity  from the  discontinued
mortgage business in Fiscal 1996.

         Liquidity and Capital Resources

         The  Company's  principal  liquidity  needs  arise in  connection  with
general and administrative  expenses,  selling expenses,  including  commissions
paid by the  Company  in  connection  with the sale of Fund  shares,  and equity
investments  made by the Company in  connection  with the  management of Private
Accounts.  The Company's principal liquidity and capital resources included cash
flow from  operations  and  borrowings  available at September  30, 1998 under a
$55.0 million credit agreement (the "Credit Agreement"). During Fiscal 1998, the
Company used $4.2 million in its  operations  and $16.2 million in its investing

                                       21
<PAGE>
activities and $3.9 million to repurchase the Company's stock. The Company funds
these uses of cash  through  its  financing  activities,  which  included  $24.9
million from borrowings.

         One  of the  Company's  principal  uses  of  cash  is  the  payment  of
commissions  in connection  with the sale of Open-end  Fund Class B shares.  The
Company's  payment of these  commissions is funded  primarily with the Company's
borrowings made available under the Credit Agreement.  The Company also can fund
Class B share sales by selling its  deferred  acquisition  cost (" DAC  Asset"),
which at  September  30,  1998 had a balance  of $26.6  million.  The  Company's
inability to borrow funds or sell its DAC Asset could have an adverse  effect on
the  Company's  ability to finance the  continued  sale of Open-end Fund Class B
shares.  For the year ended September 30, 1998, the Company had cash outflows of
$24.5 million for the payment Class B share commissions.

         On December 11,  1998,  PSI sold its  September  30, 1998 DAC Asset for
$26.5 million,  which  approximated  book value, as well as the right to receive
 .75% annually of the future  distribution fees and the contingent deferred sales
charges  from the  related  Class B shares.  Under the related  agreements,  the
Company  will also sell its DAC on future  Class B share sales to the  purchaser
through  November 30, 1999.  The Purchaser has a right of first refusal on a two
year extension  thereafter.  The Company is required  under its existing  Credit
Agreement  (defined  below) to use  proceeds in excess of $3.0  million from the
sale of its DAC Asset to pay down its borrowings  under the Credit Agreement and
reduce Credit Agreement  borrowings by 50% of the proceeds of the sale in excess
of $3 million.  The Company's  credit facility will be reduced by  approximately
$11.8 million as a result of this transaction.  The transaction should result in
no gain or loss since the sales price approximated book value.

         The Company  also uses a  significant  portion of its cash to invest in
the equity of Private  Accounts  that it  manages.  The  Company is  required to
invest  an  agreed  upon  percentage  in each  Private  Account  at the date the
transaction closes. The Company's inability to borrow the funds needed to invest
in the  equity of each  Private  Account  could  have an  adverse  effect on the
Company's  ability to continue to close and manage  additional  Private  Account
assets.  As of September 30, 1998,  the Company has $18.3 million in investments
in equity of Private Accounts.

         The Company  intends to  continue  funding  its  investment  management
operations with cash provided by operations and with  borrowings  obtained under
the Credit Agreement. The Company's credit agreement was amended and restated on
July 31, 1998 and allows the Company or the Company's  wholly owned  subsidiary,
Pilgrim Group, Inc. ("PGI") to borrow up to $55.0 million to be used for various
purposes  including (i) general corporate  working capital;  (ii) acquisition of
investment  management  contracts;  (iii)  financing of commissions  paid by the
Company in connection with sales of Fund shares subject to a contingent deferred
sales  charge;  (iv)  financing  Private  Account  equity  investments  and  (v)
repurchasing Company stock. The agreement contains restrictive  convenants which
require PGI and the Company to maintain  certain  financial ratios and prohibits
certain  "restricted  payment,"  including  dividends  by  the  Company  to  its
shareholders.  Borrowings  under the Credit  Agreement are  collateralized  by a
pledge by the  Company of the stock of its wholly  owned  subsidiary  PGI,  by a
pledge of PGI of the  stock of its  wholly  owned  subsidiaries,  by a  security
interest in the assets of the Company,  PGI and PGI's wholly owned subsidiaries,
and by a guarantee of PGI's wholly owned subsidiary, PII.

         At September  30, 1998,  the Company had  borrowings  of  approximately
$30.4 million  outstanding  under the Credit Agreement and  approximately  $24.6
million additional borrowings available.

         As of September 30, 1998 and September 30, 1997,  the Company,  through
its wholly owned  discontinued  mortgage  subsidiaries,  owns mortgage loans and
foreclosed  real  estate  with  principal  balances  aggregating   approximately
$396,000 and $1.1  million,  respectively.  The Company's  investments  in these
loans and foreclosed  real estate are funded with the Company's  working capital
and with borrowings.  The Company also had an allowance of $787,000 and $725,000
to provide at  September  30, 1998 and  September  30, 1997,  respectively,  for
estimated  losses  to be  incurred  upon  the  repurchase  and  resale  of loans
originated  and  indemnified  by the Company.  Any increase in  repurchase  loan
activity due to the Company's discontinued operations, beyond that forecasted by
the Company, may have an adverse effect on the Company's liquidity.

                                       22
<PAGE>
         On September 27, 1996, the Company repurchased  1,526,595 shares of its
common stock from two institutional  stockholders at a price of $4.33 per share,
or a total of $6.6 million.  These purchases were funded with  borrowings  under
the Credit  Agreement,  $3.0 million of which was borrowed on September 27, 1996
and the balance, $3.6 million, borrowed on October 2, 1996.

         On  August  5,  1997,  the  Company's   Board  of  Directors   approved
repurchasing  up to 750,000 shares of its common stock from time to time in open
market  transactions.  As of  September  30, 1998,  the Company had  repurchased
216,650 of these shares at a total purchase price of $3.9 million. On October 8,
1998,  the  Company's  Board of Directors  approved  repurchasing  an additional
500,000 shares, once the repurchase of the 750,000 shares has taken place.

         In  October  1998,  the  Company  repurchased  255,000  shares  of  the
Company's common stock at a total purchase price of $4.4 million.

         During Fiscal 1996,  the Company  redeemed 3,384 shares of its Series A
Preferred  Stock at the  liquidation  value of $100 per share,  for an aggregate
redemption price of $338,000.

         Economic Factors

         Economic changes,  including changes in inflation,  interest rates, and
financial market conditions,  may cause investors to decide against  purchasing,
or to redeem  investments  in,  certain types of mutual funds,  including  those
offered by the Company.  To the extent  investors  refrain from  purchasing  the
shares of the Company's Funds, or redeem significant amounts from the Funds, the
Company's  revenues,  and growth in such  revenues  that are derived from assets
under management, may be adversely affected.

         Additionally,  the Company  relies on borrowings to finance the payment
of commissions  on sales of shares sold with a contingent  deferred sales charge
(I.E., the Class B Shares). To the extent interest rates increase  substantially
or the Company is not able to secure adequate financing for commission payments,
sales of Class B  shares,  and  related  revenues  therefrom,  may be  adversely
affected.

         Newly Adopted Accounting Standards

         In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income."  Comprehensive  income is defined as the change in equity of a business
enterprise  during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The SFAS
requires  that all items that are  required to be  recognized  under  accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The SFAS requires that an  enterprise  (1) classify  items of other
comprehensive  income by their nature in a financial  statement  and (2) display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial  condition.  No  earnings  per  share  disclosure  of  the  effect  of
comprehensive  income is  required  under the SFAS.  The SFAS is  effective  for
fiscal years beginning after December 15, 1997,  although earlier application is
permitted  and  reclassification  of  financial  statements  for earlier  period
provided for comparative purposes is required.  The Company intends to adopt the
SFAS in  Fiscal  1999 and the  adoption  of the SFAS is not  expected  to have a
material adverse effect on the reporting requirements of the Company.

         SFAS No. 131,  "Disclosure  about Segments of an Enterprise and Related
Information,"  issued in June 1997  requires that a public  business  enterprise
report  financial and  descriptive  information  about its reportable  operating
segments.  Operating  segments  are  components  of an  enterprise  about  which
separate financial  information is available that is evaluated  regularly by the
chief  operating  decision-maker  in deciding how to allocate  resources  and in
assessing performance. The SFAS also requires that all public enterprises report
information  about the revenue derived from the enterprise  products or services
(or groups of similar  products or  services),  about the countries in which the
enterprise earns revenues and holds assets, and about major customers regardless
of whether the information is used in making operating  decisions.

                                       23
<PAGE>
However,  the SFAS does not require an enterprise to report  information that is
not prepared for internal use if reporting it would be  impracticable.  The SFAS
is effective for financial  statements for periods  beginning after December 15,
1997. In the initial year of  application,  comparative  information for earlier
years is to be  restated.  The  adoption  of the SAS is not  expected  to have a
material effect on the reporting requirements of the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Consolidated  Financial  Statements  of the Company as of September 30,
1998 and for each of the years in the  three-year  period  ended  September  30,
1998,  together  with the related notes and the Report of KPMG Peat Marwick LLP,
independent  auditors,  are set forth on the  following  pages.  Other  required
financial  information  and  schedules  are set  forth  herein,  as  more  fully
described in Item 14.

                                       24
<PAGE>
KPMG PEAT MARWICK, LLP


                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
Pilgrim America Capital Corporation:

We have audited the accompanying  consolidated balance sheets of Pilgrim America
Capital  Corporation and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the years in the three-year  period ended September 30, 1998.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Pilgrim  America
Capital  Corporation and  subsidiaries as of September 30, 1998 and 1997 and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period  ended  September  30, 1998,  in  conformity  with  generally
accepted accounting principles.


                                      /s/ KPMG Peat Marwick LLP


October 7, 1998, except as to notes 1(b),
12 and 15 to the consolidated financial
statements which are as of November 16, 1998.
Los Angeles, California

                                       25
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                               September 30,
--------------------------------------------------------------------------------
                                                             1998        1997
--------------------------------------------------------------------------------
ASSETS
 Cash and cash equivalents                                 $    763    $    219
 Investments                                                 18,808       3,127
 Accounts receivable                                            438         458
 Notes receivable                                             4,136       3,976
 Costs assigned to management contracts acquired,
   less accumulated amortization of $4,523 and $3,233        27,740      29,030
 Furniture, fixtures and equipment, less
   accumulated depreciation of $536 and $370                    879         532
 Deferred taxes                                                 777       6,420
 Deferred acquisition costs, less accumulated
   amortization of $3,442 and $772                           26,562       5,891
 Other assets                                                 3,392         994
                                                           --------    --------
TOTAL ASSETS                                               $ 83,495    $ 50,647
                                                           ========    ========

--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
 Net liabilities of discontinued operations                $    505    $    230
 Notes payable                                               30,375       5,475
 Accrued compensation                                         2,763       1,285
 Accounts payable and accrued expenses                        3,288       1,904
                                                           --------    --------
      Total liabilities                                      36,931       8,894
                                                           --------    --------
Commitment and contingencies

Stockholders' equity:
 Preferred stock, $100 par value, 100,000
   shares authorized, none issued
 Common stock, $.01 par value, 10,000,000
   shares authorized, 8,081,722 and 8,076,022
   shares issued, with 5,588,477 and 5,799,427
   shares issued and outstanding at September 30, 1998
   and September 30, 1997                                        81          54
 Less: Treasury stock, 2,493,245 and 2,276,595
   shares at September 30, 1998 and September 30, 1997      (12,530)     (8,623)
 Additional paid-in capital                                  48,790      48,795
 Unrealized gain (loss) on investments (net of tax)             (73)        538
 Retained earnings                                           10,296         989
                                                           --------    --------
      Total stockholders' equity                             46,564      41,753
                                                           --------    --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $ 83,495    $ 50,647
                                                           ========    ========
--------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       26
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                          For the Years Ended September 30,
--------------------------------------------------------------------------------
                                            1998        1997           1996
--------------------------------------------------------------------------------
REVENUES
 Management and administrative fees     $   22,935   $   17,341    $   12,556
 Private account management fees             6,339           72            --
 Distribution fees                           7,380        2,483         1,143
 Commissions                                 3,350          535           346
 Investment and other income                 3,297          857           440
                                        ----------   ----------    ----------
      Total revenues                        43,301       21,288        14,485
                                        ----------   ----------    ----------
--------------------------------------------------------------------------------
EXPENSES
 General and administrative                 12,668        7,278         7,230
 Selling                                     9,225        4,888         6,530
 Interest expense                            1,216          505           137
 Amortization and depreciation               4,339        2,265         1,990
                                        ----------   ----------    ----------
      Total expenses                        27,448       14,936        15,887
                                        ----------   ----------    ----------
Earnings (loss) from continuing
  operations before taxes                   15,853        6,352        (1,402)

 Income taxes (benefit)                      6,546       (4,959)       (1,750)
                                        ----------   ----------    ----------

EARNINGS FROM CONTINUING OPERATIONS          9,307       11,311           348

Earnings from operations of
 discontinued mortgage business,
 net of tax                                     --          413            --
                                        ----------   ----------    ----------

NET EARNINGS                            $    9,307   $   11,724    $      348
                                        ==========   ==========    ==========

--------------------------------------------------------------------------------
Earnings per common and common
 equivalent share:

Basic:
Earnings from continuing operations     $     1.62   $     1.95    $     0.05
                                        ==========   ==========    ==========

Net earnings                            $     1.62   $     2.02    $     0.05
                                        ==========   ==========    ==========

Shares used in per share calculation     5,752,584    5,793,891     7,300,106
                                        ==========   ==========    ==========
Diluted
Earnings from continuing operations     $     1.40   $     1.81    $     0.05
                                        ==========   ==========    ==========

Net earnings                            $     1.40   $     1.87    $     0.05
                                        ==========   ==========    ==========

Shares used in per share calculation     6,637,605    6,260,799     7,300,106
                                        ==========   ==========    ==========

--------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       27
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                Unrealized      Retained
                                                    Additional  Gain (Loss)      Earnings       Total
                                 Common   Treasury   Paid-in   on Investments, (Accumulated  Stockholders'
                                 Stock     Stock     Capital     Net of Tax      Deficit)       Equity
----------------------------------------------------------------------------------------------------------
<S>                             <C>      <C>        <C>         <C>            <C>            <C>
BALANCES, SEPTEMBER 30, 1995     $  54   $ (2,008)   $ 48,759    $     --       $(11,083)      $ 35,722
 Repurchase of treasury stock       --     (6,615)         --          --             --         (6,615)
 Change in unrealized
  gain (loss), net of tax           --         --          --         333             --            333
 Net earnings                       --         --          --          --            348            348
----------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996        54     (8,623)     48,759         333        (10,735)        29,788
 Stock option purchases             --         --          36          --             --             36
 Change in unrealized
  gain (loss), net of tax           --         --          --         205             --            205
 Net earnings                       --         --          --          --         11,724         11,724
----------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997        54     (8,623)     48,795         538            989         41,753
 Stock split                        27         --         (27)         --             --             --
 Partial shares cashed out          --         --          (2)         --             --             (2)
 Stock option purchases             --         --          24          --             --             24
 Repurchase of treasury stock       --     (3,907)         --          --             --         (3,907)
 Change in unrealized
  gain (loss), net of tax           --         --          --        (611)            --           (611)
 Net earnings                       --         --          --          --          9,307          9,307
----------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1998     $  81   $(12,530)   $ 48,790    $    (73)      $ 10,296       $ 46,564
                                 =====   ========    ========    ========       ========       ========
----------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       28
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                       For the Years Ended September 30,
----------------------------------------------------------------------------------------
                                                           1998        1997       1996
----------------------------------------------------------------------------------------
<S>                                                     <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings                                             $  9,307    $ 11,724    $   348
Adjustments to reconcile net earnings to
 net cash provided by (used in)
 operating activities:
 Amortization and depreciation                              4,304       2,265      1,990
 Gain on sale of investments                                 (720)        (38)        --
 (Increase) decrease  in accounts and
  notes receivable                                           (140)       (631)       954
 Increase in deferred acquisition costs
  due to subscriptions                                    (24,575)     (4,912)    (2,023)
 Decrease in deferred acquisition cost
  due to redemptions                                        1,070         281         18
 (Increase) decrease  in deferred tax asset                 6,050      (5,029)    (1,750)
 Increase (decrease) in operating liabilities               2,862      (2,586)     2,478
 (Increase) decrease  in other operating assets            (2,398)       (290)       607
                                                         --------    --------    -------
Net cash provided by (used in) operating activities        (4,240)        784      2,622
                                                         --------    --------    -------
----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Investment in Pilgrim  Funds                                (709)       (641)       (29)
 Proceeds from sale of Pilgrim  Funds                       3,047         578         --
 Equity investment in Private Accounts                    (18,525)         --         --
 Return of capital  on equity investments                     243          --         --
 Sales of furniture, fixtures and equipment                    18          --        130
 Purchases of furniture, fixtures and equipment              (580)        (72)      (244)
 Cash provided by (used in) discontinued operations           275      (2,579)      (746)
                                                         --------    --------    -------
Net cash used in investing activities                     (16,231)     (2,714)      (889)
                                                         --------    --------    -------
----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Term debt borrowing                                       24,900       1,875      3,600
 Redemption of preferred stock                                 --          --       (338)
 Proceeds from purchase of stock options                       24          36         --
 Purchase of  partial shares                                   (2)         --         --
 Purchase of treasury stock                                (3,907)         --     (6,615)
                                                         --------    --------    -------
 Net cash provided by (used in) financing activities       21,015       1,911     (3,353)
                                                         --------    --------    -------
 Net increase (decrease)  in cash and cash equivalents        544         (19)    (1,620)
 Cash and cash equivalents, beginning of the year             219         238      1,858
                                                         --------    --------    -------
CASH AND CASH EQUIVALENTS, END OF YEAR                   $    763    $    219    $   238
                                                         ========    ========    =======

----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
 Interest paid                                           $    631    $    549    $   186
 Income taxes paid                                            248          98          2
 Income tax refunds received                                   --          --         12
</TABLE>

                                       29
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS


(1) Corporate Background and Summary of Significant Accounting Policies

         (a) Corporate  Background.  On April 7, 1995,  Pilgrim  America Capital
Corporation   ("Pilgrim")  and  certain  newly  formed   subsidiaries   acquired
investment  management assets and became engaged  principally in the mutual fund
management business.

         (b) Consolidation.  The consolidated  financial  statements include the
accounts of Pilgrim  Capital's  wholly  owned  subsidiary  Pilgrim  Group,  Inc.
("PGI"), and PGI's subsidiaries Pilgrim Investments,  Inc. ("PII"), a registered
investment  advisor,   and  Pilgrim  Securities,   Inc.  ("PSI"),  a  registered
broker-dealer,  which  subsidiaries were  respectively  known as Pilgrim America
Group, Inc., Pilgrim America  Investments,  Inc. and Pilgrim America Securities,
Inc.  until  October  30,  1998.  PGI  commenced  operations  upon the  Company'
acquisition  (the  "Acquisition")  of certain assets of Atlas Holdings,  and its
subsidiaries  on April 7,  1995.  The  consolidated  financial  statements  also
include  the  accounts  of  Pilgrim  Capital's  wholly  owned  mortgage  banking
subsidiaries,  Express America T.C., Inc., EAMC Liquidation Corp., the Successor
(as of December  27, 1996) to Express  America  Mortgage  Corporation  and Wesav
Investment,  Inc.,  -2.  References  herein to the  "Company"  refer to  Pilgrim
Capital and all of its subsidiaries unless the context otherwise  requires.  All
significant   intercompany   accounts  and   transactions   are   eliminated  in
consolidation.

         Prior to April 7, 1995, the Company's  principal  business consisted of
mortgage banking activities,  including the origination,  sale, and servicing of
loans  collateralized by first mortgages on residential real estate. On February
28, 1995, the Company  announced the  discontinuance  of its remaining  mortgage
banking operations (see Note 14).  Consequently,  the Company's mortgage banking
activities are reported as discontinued operations.

         Subsequent  to  the  Acquisition  on  April  7,  1995,  the  continuing
operating  activities of the Company consist principally of providing investment
management and related  services to various  open-end and closed-end  investment
companies  currently  operating  under the Pilgrim name (the "Funds") as well as
providing  management  services to issuers of  collateralized  debt  obligations
("Private Accounts"). Accordingly, the results of continuing operations reported
in the consolidated financial statements reflect only such activities.

         (c) Cash and Cash  Equivalents.  Cash and cash equivalents  include all
cash balances and highly liquid  investments with an original  maturity of three
months or less,  including money market funds which are readily convertible into
cash.

         (d)  Fair  Value of  Financial  Instruments.  Substantially  all of the
Company's   financial   instruments   are  carried  at  fair  value  or  amounts
approximating  fair value.  Assets and certain  receivables  are carried at fair
value or contracted amounts, which approximate fair value. The fair value of all
investments  held is based  on  quoted  market  prices.  Similarly,  liabilities
including notes payable,  certain  payables and accrued  expenses are carried at
amounts approximating fair value.

         (e)  Investments.  The Company has  investments in Private  Accounts in
addition  to  other  marketable  securities.  Private  Account  investments  are
accounted for using the equity method.  Under the equity method the basis in the
investment is increased for the Company's proportionate share of earnings and is
reduced upon cash receipt and disbursement of earnings of the investments.

         Upon acquisition, the Company classifies its marketable securities into
one of three  categories:  held to maturity  securities,  trading  securities or
available for sale securities.  Held to maturity securities are those securities
the Company  has the  positive  intent and  ability to hold to maturity  and are

                                       30
<PAGE>
carried at amortized  cost.  Trading  securities are those  securities  that are
bought and held principally for the purpose of selling them in the near term and
are  reported  at fair  value,  with  unrealized  gains and losses  included  in
operations.  Available for sale securities are those securities that do not fall
into the other two  categories and are reported at fair value,  with  unrealized
gains and losses excluded from earnings and reported in a separate  component of
stockholders'  equity,  net of  related  income  taxes.  The  Company  currently
classifies all of its marketable securities as available for sale securities.

         PSI  values  all  of its  investments  at  market  in  accordance  with
broker-dealer industry practice.  Purchase and sales of investments are recorded
on a trade date basis.

         All realized gains and losses on security  transactions are computed on
the average cost method. Unrealized gains and losses are included in income.

         (f)  Furniture,   Fixtures  and  Equipment.   Furniture,  fixtures  and
equipment  are  stated  at cost,  less  accumulated  depreciation.  The  Company
provides  for  depreciation  over the assets'  estimated  useful lives of 3 to 5
years using the straight-line method.

         (g) Costs Assigned to Management Contracts Acquired.  Costs assigned to
management  contracts  acquired  represent  the  fair  value  of the  investment
management rights acquired in connection with the Acquisition and also represent
the excess of the purchase price (including  liabilities  assumed) over the fair
value of net  assets  acquired  and  resulting  costs of the  Acquisition.  Such
amounts are being amortized on a straight-line  basis over 25 years. The Company
analyzes  Costs  Assigned  to  Management  Contracts  Acquired  periodically  to
determine  whether  any  impairment  has  occurred  in  its  value.  Based  upon
anticipated  future  income from mutual  fund  operations,  it is the opinion of
Company management that there has been no impairment.

         (h) Deferred  Acquisition  Costs. The Company pays commissions of up to
4.00% to authorized  broker-dealers at the time that fund shares with contingent
deferred sales charges (Class B shares) are sold. These payments are capitalized
and  amortized  over a six-year  period,  which is the period  during  which the
contingent deferred sales charge is effective.

         The Company  periodically  analyzes the  recoverability of its Deferred
Acquisition  Costs by a comparison of the carrying amount to the net future cash
flows to be received. If necessary, a valuation allowance is recorded to reflect
the difference between the carrying amount and the estimated future cash flows.

         (i) Management Fees and Administrative  Fees. The Company receives fees
from the Funds for investment  management and administrative  services performed
as set forth in the related  agreements  between the Company and each Fund. Such
fees, net of sub-advisor fees, are recorded as income when earned.

         (j) Private Account  Management  Fees. The Company receives fees as the
investment  manager  on  Private  Accounts.  The  Company  may  be  entitled  to
additional  contingent fees if certain  investment  returns are met.  Investment
returns  vary with  each  private  account  managed.  The  Company  records  the
contingent  management  fee revenue  using the present  value of the future cash
flows expected on each Private  Account.  Current cash flows of the products are
monitored  and if  necessary  the Company  adjusts the  current  recognition  of
revenue on the contingent fee.

         (k)  Distribution Fee Income and Expenses.  Distribution  plan payments
received by the Company from the Funds are recorded as income when earned. Costs
associated  with the  marketing and sale  (distribution)  of the Fund shares are
expensed as incurred.

         (l)  Distribution  Costs  -  Managed  Funds.   Certain  of  the  Funds'
distribution  plans  (the  "reimbursement  plans")  reimburse  the  Company  for
distribution  costs, but limit the reimbursement to between .25% and .30% of the
respective  Fund's  average  daily net  assets  determined  on an annual  basis.
Unreimbursed  costs may be carried over for a three-year  period subject to the

                                       31
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

same annual percentage limitations. Distribution costs are currently expected to
exceed reimbursements for the next three-year period.  Therefore,  no receivable
is currently recorded for any un-reimbursed amounts.

         (m) Debt Issuance  Costs.  Costs incurred  obtaining debt financing for
acquisitions,  operations  and payment of sales  commissions  on  back-end  load
mutual funds managed and  distributed  by the Company are deferred and amortized
using the interest method over the term of the related loan agreement.

         (n) Income Taxes.  Deferred tax assets and  liabilities  are recognized
for  the  future  tax  consequences  attributable  to  differences  between  the
consolidated  financial  statement  carrying  amounts  of  existing  assets  and
liabilities and their respective tax bases.  Deferred tax assets and liabilities
are measured  using enacted tax rates expected to apply to taxable income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized in income in the period that includes the enactment date.

         (o) Net Earnings Per Common  Share.  Effective  December 31, 1997,  the
Company implemented Financial Accounting Standard ("SFAS") No. 128 "Earnings per
Share." This statement  provides  guidance on the  calculation and reporting the
standards for earnings per share ("EPS").  Under the SFAS, basic EPS is computed
by dividing  income  available to common  stockholders  by the weighted  average
number of common shares  outstanding for the period.  Diluted EPS is computed by
dividing income available for common stockholders by the weighted average number
of common shares  outstanding  adjusted for the effect of dilutive  common stock
equivalents, including stock options, during the period.

         EPS  information  for Fiscal 1997 and Fiscal 1996 has been  restated to
conform to the requirements of Statement No. 128.

         Additionally,  the shares outstanding,  share activity, and the EPS per
share data  reported in Fiscal  1997 and Fiscal 1996 have been  restated to give
retroactive recognition to a 50% stock dividend accounted for as a 3 for 2 stock
split that occurred in the third quarter of Fiscal 1998.

         (p) Stock Option Plan.  The Company  accounts for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25 Accounting for Stock Issued to Employees, and related interpretations. As
such,  compensation  expense  would be  recorded  on the  date of grant  only if
current market price of the underlying  stock  exceeded the exercise  price.  In
October,  1995,  the  Financial  Accounting  Standard  Board issued SFAS No. 123
Accounting for Stock-Based Compensation, which permits entities to recognize, as
expense over the vesting period, the fair value of all stock-based awards on the
date of grant.  Alternatively,  SFAS No. 123 also allows entities to continue to
apply the  provisions  of APB Opinion No. 25 and provide pro forma net  earnings
and pro forma  earnings per share  disclosure  for employee  stock option grants
made in 1995 and future years as if the fair-value-based  method defined in SFAS
No. 123 had been  applied.  The  Company  has  elected to  continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.

         (q)   Reclassifications.   Certain   prior  year   balances  have  been
reclassified to conform to current presentation.

         (r)  Use of  Estimates.  Management  has  made  certain  estimates  and
assumptions relating to the reporting of assets and liabilities to prepare these
consolidated   financial   statements  in  conformity  with  generally  accepted
accounting principles. Actual results could differ from these estimates.

(2) Note Receivable

         On September  30, 1994,  the Company sold its mortgage  loan  servicing
operations,  including the rights to service $6.3 billion in mortgage  loans, to
NationsBank Mortgage Corporation. The Company received $88.2 million at closing,
comprised of $84.0  million in cash and a promissory  note in the amount of $4.2
million.  The principal on this note is due on September  30, 1999.  The note is
subject to the right of offset with respect to certain  indemnifications made by

                                       32
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

the Company in connection with the sale. The Company had an allowance of $69,000
and $230,000 at September  30, 1998 and  September  30, 1997,  respectively,  to
cover potential claims made in connection with the indemnification provisions.

(3) Investments

         Investments  are  comprised  of  the  following  for  the  years  ended
September 30, 1998 and September 30, 1997 (in thousands):

                                                 September 30,   September 30,
                                                     1998            1997
                                                 -------------   -------------

     Investment in  Equity of Private Accounts   $   18,317       $       --
     Investment in Marketable Securities                491            3,127
                                                 ----------       ----------

          Total                                  $   18,808       $    3,127
                                                 ==========       ==========

         Investments  in marketable  securities  are carried at market value and
consist of investments  in certain Funds managed by the Company.  The cost basis
of the Company's  investments  was $612,000 and $2.2 million as of September 30,
1998 and September 30, 1997,  respectively.  Gross unrealized gains and (losses)
thereon  were  $24,000 and  $(145,000)  at  September  30, 1998 and $901,000 and
($3,000) at September  30, 1997.  During the years ended  September 30, 1998 and
September  30, 1997,  the Company  sold $2.3 million and $540,000 in  marketable
securities,  which  resulted in gross  realized  gains of $720,000  and $38,000,
respectively.

(4) Term Loan Commitment

         On July 31,  1998,  the Company and its lender  amended and restated an
existing  credit  agreement  dated April 28, 1995, used to finance the Company's
operations (the "Credit  Agreement").  The restated Credit  Agreement allows the
Company  and PGI to borrow up to $55  million  to be used for  various  purposes
including (i) general corporate working capital,  (ii) acquisition of investment
management  contracts,  (iii)  financing of  commissions  paid by the Company on
certain mutual fund shares,  (iv) financing  Private Account equity  investments
and (v) repurchasing  Company stock.  Borrowings are collateralized by assets of
Pilgrim Group, Inc., Pilgrim Securities,  Inc. and Pilgrim Investment,  Inc. and
guaranteed by the Company.  Borrowings may be drawn down until July 30, 1999 and
are repayable beginning on September 30, 1999 and ending on June 30, 2001.

         The Credit Agreement contains restrictive  convenants which require PGI
and the Company to maintain certain  financial ratios and prohibits  "restricted
payments" (including dividends and other payments) from PGI to the Company.

         As of  September  30,  1998 and  September  30,  1997 the  Company  had
borrowed  $30.4  million  and  $5.5  million,  respectively,  under  the  Credit
Agreement.  The weighted average interest rates on borrowings outstanding during
Fiscal  1998 and Fiscal 1997 were 6.67% and 7.07%,  respectively.  Additionally,
the  Company  is  obligated  to pay a  commitment  fee of 0.135%  of any  unused
borrowing availability.

                                       33
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


         The repayment  schedule based on the September 30, 1998 loan balance is
as follows (in millions):

                       September 30,          Repayment Amount
                       -------------          ----------------
                            1999                 $    3.8
                            2000                     15.2
                            2001                     11.4
                                                 ---------
                                                 $   30.4
                                                 =========

(5) Redeemable Preferred Stock

         During Fiscal 1996,  the Company  redeemed 3,384 shares of its Series A
Preferred  Stock at the  liquidation  value of $100 per share,  for an aggregate
redemption price of $338,000.

(6) Income Taxes

         Deferred tax assets are initially recognized for temporary  differences
between the consolidated  financial  statement carrying amount and the tax bases
of assets and  liabilities  which will result in future  deductible  amounts and
operating  loss and tax credit  carry  forwards.  A valuation  allowance is then
established  to reduce that deferred tax asset to the level at which it is "more
likely than not" that the tax  benefits  will be  realized.  Realization  of tax
benefits of deductible temporary  differences and operating loss or credit carry
forwards depends on having sufficient taxable income of an appropriate character
within the carry back and carry forward periods.  Sources of taxable income that
may allow for the realization of tax benefits  include (i) taxable income in the
current year or prior years that is  available  through  carryback,  (ii) future
taxable income that will result from the reversal of existing taxable  temporary
differences,  and (iii) future  taxable income  generated by future  operations.
Based on an  evaluation  of the  realizability  of  deferred  tax  asset,  as of
September 30, 1998  management  has  determined  that it is more likely than not
that the Company will generate  sufficient  taxable  income in future periods to
allow for the  realization  of its deferred tax asset.  Therefore,  no valuation
allowance has been established as of September 30, 1998.

                                       34
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


         As of September  30, 1998 and  September  30,  1997,  the Company had a
deferred  tax asset of $2.6  million and $8.0 million (as adjusted for filed tax
returns),  respectively. The tax effects of temporary differences that give rise
to significant  portions of the deferred tax assets and deferred tax liabilities
at September 30, 1998 and 1997 are presented below (in thousands):

                                                            September 30,
                                                       ----------------------
                                                       1998              1997
                                                       ----              ----
Deferred tax assets:
 Net operating loss carryforward                     $   526           $ 6,840
 Allowance for contingency                                --               163
 Repurchase allowance                                    318               290
 Deferred compensation                                 1,115               500
 Allowance for discontinued operations                    82                82
 Allowance for receivables                                28                92
 AMT credit                                              366                42
 Unrealized loss on investments                           49                --
 Other                                                    79                24
                                                     -------           -------

Total gross deferred tax assets                        2,563             8,033
Less valuation allowance                                  --                --
                                                     -------           -------

    Total deferred tax assets                          2,563             8,033
                                                     -------           -------
Deferred tax liabilities:
 Costs assigned to management contracts acquired      (1,534)           (1,199)
 Depreciation                                           (252)              (54)
 Unrealized gain on investments                           --              (360)
                                                     -------           -------

Total deferred tax liabilities                        (1,786)           (1,613)
                                                     -------           -------

 Net deferred tax assets                             $   777           $ 6,420
                                                     =======           =======

         At September 30, 1998, the Company had net operating loss carryforwards
for federal  income tax purposes of $1.3  million  that are  available to offset
future federal taxable income through the fiscal year ending September 30, 2011.

                                       35
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


Income  taxes  (benefit)  attributable  to  income  from  continuing  operations
consists of (in thousands):

                                                Current    Deferred      Total
                                                -------    --------      -----
YEAR ENDED SEPTEMBER 30, 1998

Federal                                         $   370     $ 4,836     $ 5,206
State                                              --         1,340       1,340
                                                -------     -------     -------

Total income taxes                              $   370     $ 6,176     $ 6,546
                                                =======     =======     =======
YEAR ENDED SEPTEMBER 30, 1997

Federal                                         $   223     $(4,167)    $(3,944)
State                                              --          (735)       (735)
                                                -------     -------     -------

Total income taxes (benefit)                        223      (4,902)     (4,679)
                                                -------     -------     -------

Less discontinued operations                        (72)       (208)       (280)
                                                -------     -------     -------
Income taxes (benefit) attributable to
     continuing operations                      $   151     $(5,110)    $(4,959)
                                                =======     =======     =======
YEAR ENDED SEPTEMBER 30, 1996

Federal                                         $  --       $(1,488)    $(1,488)
State                                              --          (262)       (262)
                                                -------     -------     -------

Total income taxes (benefit)                    $  --       $(1,750)    $(1,750)
                                                =======     =======     =======

         The total  income  tax  provision  (benefit)  differs  from the  amount
computed by applying the  statutory  federal  income tax rate of 35% to earnings
(loss)  in 1998 and 34% in 1997  and 1996  from  continuing  operations  for the
following reasons (in thousands):

                                                      Year Ended September 30,
Description                                          1998      1997       1996
-----------                                          ----      ----       ----

Expected taxes (benefit) on earnings (loss)
  from continuing operations                       $ 5,548   $ 2,160    $  (477)
Increase in income taxes resulting from non-
  deductible meals and entertainment expense            99        54         45
State income tax, net of federal benefit               871       381        (76)
Other                                                   28       211       --
Change in valuation allowance                         --      (7,765)    (1,242)
                                                   -------   -------    -------

Total                                              $ 6,546   $(4,959)   $(1,750)
                                                   =======   =======    =======

                                       36
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

(7) Earnings Per Share.

The following is a reconciliation  of the basic and diluted EPS computations for
the years ended September 30, 1998, 1997 and 1996:

                                            Sept. 30,    Sept. 30,    Sept. 30,
                                              1998         1997         1996
                                           ----------   ----------   ----------
                                                  (amounts in thousands,
                                            except share and per share amounts)
Earnings for basic and diluted EPS
 from continuing operations                $    9,307   $   11,311   $      348
                                           ==========   ==========   ==========
Net earnings for basic and diluted EPS     $    9,307   $   11,724   $      348
                                           ==========   ==========   ==========
Shares of common stock and common
 stock equivalents:
 Average number of common shares used
  in basic computation                      5,752,584    5,793,891    7,300,106
Effect of dilutive securities-options         885,021      466,908           --
                                           ----------   ----------   ----------
Average shares used in diluted              6,637,605    6,260,799    7,300,106
                                           ==========   ==========   ==========
Earnings per share from continuing
 operations:
 Basic                                     $     1.62   $     1.95   $     0.05
 Diluted                                   $     1.40   $     1.81   $     0.05

Net earnings per share:
 Basic                                     $     1.62   $     2.02   $     0.05
 Diluted                                   $     1.40   $     1.87   $     0.05

(8) Stockholders' Equity

         Between  January  1998 and  September  1998,  the  Company  repurchased
216,650  shares of its common stock at a total  purchase  price of $3.9 million.
The  purchases  were made in open market  transactions  pursuant to a previously
announced  authorization by the Company's Board of Directors to repurchase up to
500,000 shares of common stock based on market conditions.

         On September 27, 1996, the Company repurchased  1,526,595 shares of its
common stock from two  institutional  stockholders at a price of $4.33 per share
for a total of $6.6 million.  The Company used funds  borrowed  under the Credit
Agreement to finance the repurchase (see Note 4).

         During Fiscal 1998 and Fiscal 1997,  the Company issued 5,700 and 9,300
shares of Company  stock,  respectively,  from the result of stock options being
exercised. No stock options were exercised in Fiscal 1996.

         During the third  quarter of Fiscal  1998,  the Company had a 50% stock
dividend  accounted for as a 3 for 2 stock split. In conjunction  with the stock
split,  1,929,997 shares were issued. In addition, the Company paid cash in lieu
of issuing 68 partial shares in conjunction with the 3 for 2 stock split.

                                       37
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

(9) Stock Option Plan

         Pursuant to the  Company's  Stock Option Plan ("Plan 1"), the Company's
Board of Directors has granted  certain  officers and employees  incentive stock
options to purchase 774,000 shares of the Company's common stock as of September
30, 1998.  Under Plan 1, total options of up to 806,679  shares are available to
be granted.  Additionally,  as of September 30, 1998,  the Company had issued to
non-employee director's non-statutory stock options to purchase 75,000 shares of
common  stock.  All  options are fully  vested  after 3 years and have an 8-year
term. All stock options are granted with an exercise price equal to or exceeding
the stock's fair market value at the date of grant.

         On August 30, 1996, the Company adopted the 1996 Performance Share Plan
("Plan 2"),  approved and  administered by the Company's board of directors,  in
which certain  officers and employees were granted  interests that entitled them
to compensation  amounts  directly  related to the market price of the Company's
common stock ("Performance  Shares").  On February 11, 1997, the Company amended
Plan 2 to provide that awards under Plan 2 will be paid by the company solely in
shares of common stock and to limit  participation  in Plan 2 to persons who are
not  Executive  Officers of the Company.  As of September 30, 1998 and September
30,  1997,  Plan 2 had  307,500  and 296,250  options  granted and  outstanding,
respectively.  Under Plan 2, total  options of up to 365,700 are available to be
granted at September 30, 1997 and 357,000 at September 30, 1998. The options are
fully vested after five years and the life of the stock  options is  established
by the Plan  Committee  but shall not exceed 10 years from the  initial  date of
grant.

         The weighted average fair value at the date of grant was $17.72,  $5.55
and $1.98,  for stock  options  granted under Plan 1 and Plan 2 during the years
ended  September  30, 1998,  1997 and 1996,  respectively.  The Company used the
Black Scholes  options-pricing model with the following assumptions to calculate
the  weighted  average  fair value at the date of grant:  no  expected  dividend
yield;  risk free  interest  rate of 5.50% for Fiscal  1998 and 6.22% for Fiscal
1997 and Fiscal 1996;  an expected  life of eight years;  and a volatility  rate
calculated  using the monthly stock price for the three years preceding the date
of grant.

                                       38
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

         The Company  applies APB  Opinion 25 in  accounting  for the Plans and,
accordingly,  no  compensation  cost has been recognized for its stock option in
the consolidated financial statements.  Had the Company determined  compensation
cost based on the fair value at the grant date for its stock  options for Plan 1
and amended Plan 2 under SFAS No. 123, the  Company's net earnings for the years
ending  September  30, 1998,  1997 and 1996,  would have been reduced to the pro
forma amounts indicated below (in thousands, except per share amounts):

                                                   1998       1997       1996
                                                   ----       ----       ----
Net earnings                       As reported   $  9,307   $ 11,724   $    348
                                   Pro forma     $  8,982   $ 11,450   $    332

Per share net earnings from
  continuing operations:

    Basic:                         As reported   $   1.62   $   1.95   $    .05
                                   Pro forma     $   1.56   $   1.90   $    .05

    Diluted:                       As reported   $   1.40   $   1.81   $    .05
                                   Pro forma     $   1.35   $   1.76   $    .05

Per share net earnings (loss):

    Basic:                         As reported   $   1.62   $   2.02   $    .05
                                   Pro forma     $   1.56   $   1.98   $    .05

    Diluted:                       As reported   $   1.40   $   1.87   $    .05
                                   Pro forma     $   1.35   $   1.83   $    .05

         Pro forma net earnings  reflect only options granted under the Plans in
Fiscal  1998,  1997  and  1996.   Therefore,   the  full  impact  of  calculated
compensation  costs for the stock options under SFAS No. 123 is not reflected in
the pro forma net earnings amounts  presented above because  compensation  costs
for options issued in periods prior to Fiscal 1996 are not considered.

                                       39
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


         Stock  option  activity  during  the  periods  indicated  is as follows
(shares in thousands):

                                            Number of Shares   Range of Exercise
                                                  (1)             Prices (1)
                                            ----------------   -----------------

Options outstanding at September 30, 1996        1,153               $3.83

Options granted                                   164           $ 6.33 - $10.33

Options exercised                                 (9)                $3.83

Options cancelled                                (162)               $3.83
                                                ------          ---------------

Options outstanding at September 30, 1997        1,146          $ 3.83 - $10.33
                                                ======          ===============

Options granted                                    37           $18.67 - $26.25

Options exercised                                 (6)           $ 3.83 -  $5.75

Options cancelled                                 (20)          $ 3.83 -  $5.75
                                                ------          ---------------

Options outstanding at September 30, 1998        1,157          $ 3.83 - $26.25
                                                ======          ===============
----------

(1)  Number of shares and range of prices  adjusted for 3 for 2 stock split that
     took place in Fiscal 1998.

         As of September 30, 1998 and September 30, 1997, there were 704,300 and
448,563  shares  exercisable  under  Plan 1 and Plan 2 with a  weighted  average
exercise price of $4.01 and $3.83, respectively.

(10) Employee Benefits

         Pilgrim  America  Capital  Corporation  has  established a tax deferred
savings plan under Section 401(k) of the Internal  Revenue Code. The plan covers
all full time employees and allows for employee tax deferred contributions up to
the amount  specified by the IRS Regulation  ($10,000 in 1998 and $9,500 in 1997
and 1996).

                                       40
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


         Pursuant  to the  plan,  employees  may  contribute  up to 10% of their
salary,  subject to the maximum allowed, and the Company  automatically  matches
the  employee's  contributions,  up to 7% of the  employee's  salary.  Employees
become vested in the Company's contributions over a three-year period.

         During the years ended  September 30, 1998,  1997 and 1996, the Company
contributed $345,000, $265,000 and $273,000, respectively, to the plan.

(11) Commitments and Contingencies

         The Company is involved in various legal  proceedings that arose in the
course of its  discontinued  mortgage  operations.  Management is of the opinion
that such  proceedings  are not  material in nature and will not have a material
adverse effect on the Company.

         In conjunction with discontinued  mortgage operations,  the Company was
obligated under certain non-cancelable operating leases for equipment and office
facilities that expired September 30, 1997.

         During the years ended  September 30, 1998 and September 30, 1997,  the
Company has  provided  $52,000 and  $96,000,  respectively,  for net  discounted
future minimum lease payments relating to lease obligations  acquired from Atlas
Financial  Group,  Inc. The  Company's  operations  have been  relocated and the
facilities subleased.

         Future minimum lease payments under the Company's  operating leases for
its offices in Phoenix,  Arizona and for the offices in Los Angeles,  California
(which lease was  acquired  from Atlas  Financial  Group,  Inc.  pursuant to the
Acquisition),  as well as the sublease income related to the Los Angeles office,
are as follows (in thousands):

         September 30,   Lease Payments   Sublease Income   Net Payments
         -------------   --------------   ---------------   ------------

             1999          $  1,137          $    525         $    612
             2000             1,126               350              776
             2001               766                --              766
             2002               801                --              801
             2003               890                --              890
        And thereafter        1,744                --            1,744
                           --------          --------         --------
                           $  6,464          $    875         $  5,589
                           ========          ========         ========

         Rent  expense  included in  continuing  operations  for the years ended
September  30, 1998,  1997 and 1996,  were  $361,000,  $341,000,  and  $333,000,
respectively.

(12) Related Party Transactions

         Investment  Advisory  Agreements.  Pursuant  to  investment  management
agreements  (the  "Advisory   Agreements"),   the  Company  provides  investment
management  services  to the Funds.  Following  an initial  two-year  term,  the
Advisory  Agreements are renewable annually based upon approval by a majority of
the  respective  Fund's  disinterested  directors.  Additionally,  each Advisory
Agreement  may be  terminated  prior to its  expiration  upon 60 days  notice by
either the Company or the Fund.

         As provided in the Advisory Agreements, the Company receives management
fees  ranging  from .50% to 1.25% on an  annual  basis of the  respective  Funds
average  daily net  assets.  Management  fees  received  from the Funds,  net of

                                       41
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


sub-advisory  fees,  amounted to $21.0 million during Fiscal 1998, $15.7 million
during Fiscal 1997 and $11.2 million during Fiscal 1996. The Advisory Agreements
also contain  expense  limitation  provisions  whereby the Company has agreed to
reimburse each Fund annually,  under certain conditions,  an amount equal to all
or a portion of its investment advisory fees. Fund expense  reimbursements under
these  provisions were $877,000 during Fiscal 1998,  $742,000 during Fiscal 1997
and  $606,000  during  Fiscal  1996.  Amounts  payable  to the Funds  under such
provisions  as of  September  30, 1998 and  September  30, 1997 were $83,000 and
$95,000, respectively.

         In addition,  the Company acts as administrator  for Pilgrim Prime Rate
Trust (the  "Trust")  formerly  known as Pilgrim  America Prime Rate Trust until
November  16,  1998.  Under the terms of the  related  Advisory  Agreement,  the
Company  receives  annual  administrative  fees ranging from .10% to .15% of the
average daily net assets plus any borrowings of the Trust. The fees are computed
daily and payable monthly.

         Administrative  fees received  from the Trust  amounted to $1.9 million
during  Fiscal 1998,  $1.7 million  during  Fiscal 1997 and $1.3 million  during
Fiscal 1996.

         The  Company  also  serves as the  principal  distributor  for  Pilgrim
MagnaCap Fund;  Pilgrim High Yield Fund;  Pilgrim  Government  Securities Income
Fund;  Pilgrim  Asia-Pacific  Equity Fund;  Pilgrim  MidCap Value Fund;  Pilgrim
LargeCap  Leaders Fund;  and Pilgrim Bank and Thrift Fund,  open-end  management
investment companies (collectively, the "Open-end Funds") managed by the Company
(see  Note  13).  The  aforementioned  Funds,  with  the  exception  of  Pilgrim
Government  Securities  Income  Fund,  were  formerly  known as Pilgrim  America
MagnaCap Fund,  Pilgrim America High Yield Fund,  Pilgrim  America  Asia-Pacific
Equity Fund,  Pilgrim America MidCap Value Fund,  Pilgrim America LargeCap Value
Fund and Pilgrim America Bank and Thrift Fund, respectively,  until November 16,
1998.  Distribution fees earned from the Open-end Funds amounted to $7.4 million
in Fiscal 1998, $2.5 million in Fiscal 1997, and $1.1 million for Fiscal 1996.

         In 1998, the Company became the principal distributor of the Trust. The
Company is  entitled  to receive up to 1.00%  commission  upon the sale of Trust
shares in certain privately negotiated transactions. Commissions for sales under
these transactions were $1.5 million in Fiscal 1998.

(13) Distribution Plans

         Pursuant  to Rule  12b-1 of the  Investment  Company  Act of  1940,  as
principal  distributor for the Open-end Funds, the Company receives distribution
fees ranging from .25% to 1.00% on an annual  basis of the  respective  Open-end
Fund's  average  daily net  assets.  Also under Rule 12b-1,  the  Company  makes
ongoing payments on a quarterly basis to authorized dealers for distribution and
shareholder  servicing at annual  rates  ranging form .25% to .65% of the Fund's
average daily net assets (see note 15).

         The Company is entitled to contingent  deferred  sales charges that are
imposed upon the redemption of certain  classes of shares of the Open-end funds.
Such charges are paid by the redeeming  shareholder  and are imposed at the rate
of 5% for redemptions in the first year after purchase, declining to 4%, 3%, 3%,
2% and 1% in the second, third, fourth, fifth and sixth years, respectively (see
note 15).

(14) Discontinued Operations

         On June 9, 1994,  the Company sold its rights to service $305.5 million
of Government  National  Mortgage  Association  ("GNMA") loans. On September 30,
1994, the Company's  mortgage  servicing  portfolio and operations were sold. On
February  28,  1995,  the Company  discontinued  the  remainder  of its mortgage
banking  operations  and  recorded a  provision  for loss on  discontinuance  of
mortgage banking operations of $986,000. This provision included the anticipated
mortgage banking related revenues and expenses,  including severance expense and
all other costs that will be incurred to phase out these operations.  Subsequent
to  February  28,  1995,  during  Fiscal  1995 the  Company  increased  the loss

                                       42
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


provision  to  $5.3  million,  based  on  reevaluation  of  its  allowances  for
discontinued operations,  including legal fees and other costs relating to legal
proceedings.  During  Fiscal  1997,  no  additional  provisions  were  made  for
discontinued  operations and the Company adjusted the allowance for discontinued
operations  by  including  $413,000  (net of tax) of income from the reversal of
certain  allowances for discontinued  operations.  As of September 30, 1998, the
Company  believes  that the  remaining  allowances  are adequate to complete the
discontinuance  of  the  remaining  mortgage  banking  operations.  The  Company
believes that it has substantially  wound down its mortgage banking  operations,
but anticipates that mortgage loan related issues will continue to arise through
at least Fiscal 1999.

         Balance  Sheet.  The  balance  sheet   presentation   included  in  the
accompanying consolidated financial statements as of September 30, 1998 and 1997
has been  adjusted  to  reflect  the  assets  and  liabilities  relating  to the
Company's  mortgage  banking  operations  as  net  liabilities  of  discontinued
operations.

         The  following  table  sets  forth-certain  balance  sheet  information
related to these operations as of September 30, 1998 and 1997:


         Net Liabilities of Discontinued Operations
          (in thousands)                                      September 30,
                                                        -----------------------
                                                           1998         1997
                                                           ----         ----
         Assets
         Mortgage loans and real estate held for sale    $    396     $  1,128
                                                         --------     --------

                Total assets                                  396        1,128
                                                         --------     --------
         Liabilities
         Accounts payable and accrued expenses                901        1,358
                                                         --------     --------

                Total liabilities                             901        1,358
                                                         --------     --------

         Net liabilities of discontinued operations      $   (505)    $   (230)
                                                         ========     ========

         Operations.  The statements of operations  presentation included in the
accompanying  consolidated  financial  statements  for the  fiscal  years  ended
September  30, 1998,  1997 and 1996 has been  adjusted to reflect the results of
the mortgage banking operations as discontinued operations. Diluted earnings per
share  attributable to discontinued  operations were $0.00,  $0.06, and $0.00 in
Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.

         As of  September  30,  1998  and  1997,  the  Company  had  established
repurchase  allowances  of  $787,000  and  $725,000,  respectively,  in  accrued
expenses,  to provide for estimated  losses to be incurred upon  repurchase  and
resale of loans originated by the Company.

                                       43
<PAGE>

(15) Subsequent Event

         On December 11,  1998,  PSI sold its  September  30, 1998 DAC Asset for
$26.5 million,  which  approximated  book value, as well as the right to receive
 .75% annually of the future  distribution fees and the contingent deferred sales
charges  from the  related  Class B shares.  Under the related  agreements,  the
Company  will also sell its DAC on future  Class B share sales to the  purchaser
through  November 30, 1999.  The Purchaser has a right of first refusal on a two
year extension  thereafter.  The Company is required  under its existing  Credit
Agreement  (defined  below) to use  proceeds in excess of $3.0  million from the
sale of its DAC Asset to pay down its borrowings  under the Credit Agreement and
reduce Credit Agreement  borrowings by 50% of the proceeds of the sale in excess
of $3 million.  The Company's  credit facility will be reduced by  approximately
$11.8 million as a result of this transaction.  The transaction should result in
no gain or loss since the sales price approximated book value.

                                       44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

        None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information  respecting  (a)  continuing  directors and nominees of the
Company is set forth under the caption  "Information  Concerning  Directors  and
Nominees"  and (b)  disclosure  of  delinquent  filers  pursuant  to Item 405 of
Regulation  S-K is set forth under the caption  "Compliance  with Section  16(a)
under The Exchange Act," in the Company's Proxy  Statement  relating to its 1999
Annual  Meeting of  Stockholders  incorporated  by reference into this Form 10-K
Report,  which will be filed with the  Securities  and  Exchange  Commission  in
accordance with Rule 14a-6(c)  promulgated under the Securities  Exchange Act of
1934  (the  "1999  Proxy  Statement").  With  the  exception  of  the  foregoing
information and other  information  specifically  incorporated by reference into
this Form 10-K Report,  the Company's 1999 Proxy Statement is not being filed as
a part hereof.  Information respecting executive officers of the Company who are
not  continuing  directors or nominees is set forth at the end of Part I of this
Report.

ITEM 11. EXECUTIVE COMPENSATION

         Information  respecting  executive  compensation is set forth under the
caption "Executive Compensation" in the 1999 Proxy Statement,  which information
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  respecting security ownership of certain beneficial owners
and  management  is  included  under the  caption  "Principal  Stockholders  and
Stockholdings of Management" in the 1999 Proxy Statement,  which  information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information   respecting  certain  relationships  and  transactions  of
management  is set forth under the caption  "Certain  Transactions"  in the 1999
Proxy Statement, which information is incorporated herein by reference.

                                       45
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a) Financial Statements.                             Page or Method of Filing
                                                        ------------------------
         (1)      Report of KPMG Peat  Marwick  LLP       Page 25

         (2)      Consolidated Financial Statements       Page 26
                  and Notes thereto of the Company,
                  including   Consolidated  Balance
                  Sheets as of  September  30, 1998
                  and 1997 and related Consolidated
                  Statements   of  Earnings,   Cash
                  Flows  and  Stockholders'  Equity
                  for the years ended September 30,
                  1998, 1997 and 1996

  (b) Financial Statement Schedules

         (1) Report of KPMG Peat Marwick LLP              Page 51
         (2) Schedule I --  Condensed Financial
                            Information                   Page 52
         (3) Schedule II -- Valuation and Qualifying
                            Accounts                      Page 53

  (c) Exhibits. The following exhibits are filed as part of this Report

         3.1      Restated  Certificate   of          Incorporation by reference
                  Incorporation of Registrant         to  Exhibit   3.1  of  the
                                                      Registrant's Annual Report
                                                      on  Form   10-K   for  the
                                                      Fiscal      Year     Ended
                                                      September  30,  1993  (the
                                                      "1993 Form 10-K")

         3.2      Amended  and  Restated  Bylaws of   Incorporated  by reference
                  Registrant                          to  Exhibit  4.2.1  of the
                                                      1993 Form 10-K

         4.1      Form Of  Certificate  for  Common   Incorporated  by reference
                  Stock                               to Exhibit 4.1 of the 1993
                                                      Form 10-K

         4.2.1    Stock    Option   Plan   of   the   Incorporated  by reference
                  Registrant  (as  amended  through   to  Exhibit  4.2.1  of the
                  November 1993)                      1993 Form 10-K

         4.2.1    Form of  Incentive  Stock  Option   Incorporated  by reference
                  Agreement  for the  Stock  Option   to Exhibit 4.2 of Form S-8
                  Plan                                Registration     Statement
                                                      No.33-61274    ("S-8   No.
                                                      33-61274")

         4.2.3    Form   of   Non-statutory   Stock   Incorporated  by reference
                  Option  Agreement  for the  Stock   to Exhibit  4.3 of S-8 No.
                  Option Plan                         33-61274

         4.3      Form of  Stock  Option  Agreement   Incorporated  by reference
                  for Non-Employee Directors          to  Exhibit  4 of Form S-8
                                                      No. 33-64738

         4.5.1    Performance Share Plan              Incorporated  by reference
                                                      to  Exhibit  4.5.1  of the
                                                      1996 Form 10-K

         4.5.2    Form   of  Performance  Share       Incorporated  by reference
                  Agreement                           to  Exhibit  4.5.2  of the
                                                      1996 Form 10-K
                               46
<PAGE>
                                                      Page or Method of Filing
                                                      ------------------------

         10.1.1   Employment    Agreement   between   Incorporated  by Reference
                  Registrant    and    Robert    W.   to  Exhibit  10.1.1 of the
                  Stallings dated August 16, 1995     Report  on Form  10-K  for
                                                      the   Fiscal   Year  Ended
                                                      September  30,  1995  (the
                                                      "1995 Form 10-K)

         10.1.2   Employment    Agreement   between   Incorporated  by Reference
                  Registrant   and  James  R.  Reis   to  Exhibit  10.1.2 of the
                  dated August 16, 1995               1995 Form 10-K

         10.2.3   Form   of   Indemnity   Agreement   Incorporated  by reference
                  between the  Registrant  and each   to  Exhibit  10.9.3 of the
                  member of its Board of Directors    1992 Form 10-K

         10.3     Asset  Purchase  Agreement  dated   Incorporated  by reference
                  August    27,    1994     between   to  Exhibit  2 to Form 8-K
                  Registrant    and     NationsBank   relating  to an  event  of
                  Mortgage Corporation                August 27, 1994

         10.4     Acquisition  Agreement  among the   Incorporated  by reference
                  Registrant,  Pilgrim Group, Inc.,   to  Exhibit  2 to Form 8-K
                  Pilgrim  Management  Corporation,   relating  to an  event  of
                  Pilgrim Distributors  Corporation   December 7, 1994
                  and Palomba Weingarten

         10.5.1   Third Amended and Restated Credit   Incorporated  by reference
                  Agreement  dated  as of July  31,   to  Exhibit  10.1  to  the
                  1998  by  and   between   Pilgrim   Registrant's June 30, 1998
                  America  Capital  Corporation and   Form 10-Q
                  Pilgrim America Group Inc. and US
                  Bank  National   Association  and
                  exhibits thereto.

         10.21    Portfolio   Management  Agreement   Incorporated  by reference
                  among PII, HSBC Asset  Management   to  Exhibit  10.22  of the
                  Americas,  Inc.  and  HSBC  Asset   1995 Form 10-K
                  Management   Hong  Kong  Limited,
                  dated April 27, 1995

         10.22    Portfolio   Management  Agreement   Incorporated  by reference
                  dated May 1,  1995,  between  PII   to  Exhibit  10.23  of the
                  and CRM Advisors, LLC               1995 Form 10-K

         10.24    Investment  Management  Agreement   Incorporated  by reference
                  dated  June 6, 1995  between  PII   to  Exhibit  10.25  of the
                  and   Pilgrim   America   Masters   1995 Form 10-K
                  Series, Inc.

         10.25    Investment  Management  Agreement   Incorporated  by reference
                  dated April 7, 1995,  between PII   to  Exhibit  99.5  of Form
                  and  Pilgrim   Investment  Funds,   8-K/A   Amendment  No.  2,
                  Inc.  on  behalf  of its  Pilgrim   Event  dated  December  7,
                  High Yield Fund Series              1994

         10.26    Investment  Management  Agreement   Incorporated  by reference
                  dated  April 7, 1995  between PII   to  Exhibit  99.4  of Form
                  and Pilgrim Government Securities   8-K/A   Amendment  No.  2,
                  Income Fund                         Event  dated  December  7,
                                                      1994

         10.27    Investment  Management  Agreement   Incorporated  by reference
                  dated April 7, 1995,  between PII   to  Exhibit  99.1  of Form
                  and Pilgrim Prime Rate Trust        8-K/A,  Amendment  No.  2,
                                                      Event  date   December  7,
                                                      1994
                               47
<PAGE>
                                                      Page or Method of Filing
                                                      ------------------------
         10.28    Investment  Management  Agreement   Incorporated  by reference
                  dated April 7, 1995,  between PII   to  Exhibit  99.3  of Form
                  and Pilgrim Regional  BankShares,   8-K/A,  Amendment  No.  2,
                  Inc.                                Event  dated  December  7,
                                                      1994

         10.29    Investment  Management  Agreement   Incorporated  by reference
                  dated April 7, 1995,  between PII   to  Exhibit  99.2  of Form
                  and  Pilgrim   Investment  Funds,   9-K/A,  Amendment  No.  2,
                  Inc.   on   behalf   of   Pilgrim   Event  dated  December  7,
                  MagnaCap Fund Series                1994

         10.30    Administration  Agreement amended   Incorporated  by reference
                  and restated as of April 7, 1995,   to  Exhibit  99.6  of Form
                  between  PGI  and  Pilgrim  Prime   8-K/A,  Amendment  No.  2,
                  Rate Trust                          Event  dated  December  7,
                                                      1994

         10.31    Distribution  Plan dated April 7,   Incorporated  by reference
                  1995,  between  PII  and  Pilgrim   to  Exhibit  99.7  of Form
                  Investment  Funds, Inc. on behalf   8-K/A,  Amendment  No.  2,
                  of  its  Pilgrim   MagnaCap  Fund   Event  dated   December  7
                  series and PSI                      1994

         10.32    Distribution  Plan dated April 7,   Incorporated  by reference
                  1995,  between  PII  and  Pilgrim   to  Exhibit  99.8  of Form
                  Investment  Funds, Inc. on behalf   8-K/A,  Amendment  No.  2,
                  of its  Pilgrim  High  Yield Fund   Event  dated  December  7,
                  series and PSI                      1994

         10.33    Distribution  Plan dated April 7,   Incorporated  by reference
                  1995,  between Pilgrim Government   to  Exhibit  99.9  of Form
                  Securities  Income Fund, Inc. and   8-K/A,  Amendment  No.  2,
                  PSI                                 Event  dated  December  7,
                                                      1994

         21       Subsidiaries of Registrant          Incorporated  by reference
                                                      to  Exhibit 21 of the 1995
                                                      Form 10-K

         23       Consent of KPMG Peat Marwick LLP    Included     in     Report
                                                      at Financial     Statement
                                                      Schedule

         24       Powers of Attorney                  See Signature Page

         27       Financial Data Schedule


  (d) Reports on Form 8-K

      None

                                       48
<PAGE>

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report of Form 10-K to
be signed on its behalf by the  undersigned;  thereunto duly authorized this 9th
day of December 1998.

                                       PILGRIM AMERICA CAPITAL CORPORATION
                                       a Delaware corporation


                                       By: /s/ Robert W. Stallings
                                           -------------------------------------
                                           Robert W. Stallings
                                           Chairman of the Board,
                                           Chief Executive Officer and President



                                       49
<PAGE>
                                POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS,  that each person whose signature appears below
constitutes  and appoints  Robert W.  Stallings  and James R. Reis,  and each of
them,  his true and  lawful  attorneys-in-fact  and  agents,  with full power of
substitution and  re-substitution,  for him and in his name, place and stead, in
any and all capacities,  to sign any and all amendments to this Form 10-K Annual
Report, and to file the same, with all exhibits thereto,  and other documents in
connection therewith with the Securities and Exchange Commission,  granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing  requisite  and necessary to be done
in and about the premises,  as fully and to all intents and purposes as he might
or  could  do  in  person  hereby   ratifying  and   confirming  all  that  said
attorneys-in-fact and agents, or his substitute or substitutes,  may lawfully do
or cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report on Form 10-K has been  signed  below by the  following  persons  on
behalf of the registrant and in the capacities and on the dates indicated:

Signature                    Title                                     Date
---------                    -----                                     ----

/s/ Robert W. Stallings      Chairman of the Board, Chief       December 9, 1998
-------------------------    Executive Officer-and-President
Robert W. Stallings          (Principal Executive Officer)


/s/ James R. Reis            Vice Chairman and Chief            December 9, 1998
-------------------------    Financial Officer-(Principal
James R. Reis                Accounting Officer)


/s/ John C. Cotton           Director                           December 9, 1998
-------------------------
John C. Cotton


 /s/ Roy A. Herberger, Jr.   Director                           December 9, 1998
-------------------------
Roy A. Herberger, Jr.


/s/ John M. Holliman, III    Director                           December 9, 1998
-------------------------
John M. Holliman, III


/s/ Stephen A. McConnell     Director                           December 9, 1998
-------------------------
Stephen A McConnell


/s/ Paul J. Renze            Director                           December 9, 1998
-------------------------
Paul J. Renze
                                       50
<PAGE>

          Independent Auditors' Report Consent and Report on Schedules



The Board of Directors
Pilgrim America Capital Corporation:

The audits  referred to in our report dated October 7, 1998,  except as to notes
1(b),  12  and 15 to  the  consolidated  financial  statements  which  are as of
November 16,  1998,  included the related  financial  statement  schedules as of
September 30, 1998 and 1997 and for each of the years in the  three-year  period
ended  September  30,  1998.  These  financial   statement   schedules  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  financial  statement  schedules  based on our  audits.  In our
opinion, such financial statement schedules,  when considered in relation to the
basic consolidated  financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

We consent to the incorporation by reference in the registration  statements No.
333-23051,  No. 333-06591, No. 333-61274 and No. 33-64738 on Form S-8 of Pilgrim
America  Capital  Corporation of our report dated October 7, 1998,  except as to
notes 1(b), 12 and 15 to the consolidated  financial  statements which are as of
November  16,  1998,  relating  to the  consolidated  balance  sheets of Pilgrim
America Capital  Corporation and  subsidiaries as of September 30, 1998 and 1997
and the related  consolidated  statements of earnings,  stockholders' equity and
cash flows for each of the years in the  three-year  period ended  September 30,
1998 and our report dated December 11, 1998 included in the preceding paragraph,
which  reports  appear in the  September  30, 1998 annual report on Form 10-K of
Pilgrim America Capital Corporation.

                                      /s/KPMG Peat Marwick LLP



December 14, 1998
Los Angeles, California

                                       51
<PAGE>
--------------------------------------------------------------------------------
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PILGRIM AMERICA CAPITAL CORPORATION

IN THOUSANDS
--------------------------------------------------------------------------------
Condensed Balance Sheets
                                               September 30,   September 30,
                                                   1998            1997
                                               -------------   ------------
Assets:
Cash and cash equivalents ................       $    267        $     --
Investments ..............................            375           2,990
Investments in subsidiaries ..............         48,729          39,352

Note receivable ..........................          4,136           3,976

Receivables ..............................             --             225
Due from subsidiaries ....................         23,685              --
Deferred tax asset .......................          1,032           1,990
Other assets .............................            819             615
                                                 --------        --------

Total assets .............................       $ 79,043        $ 49,148
                                                 ========        ========
Liabilities and Stockholders' Equity:
Notes payable ............................       $ 30,375        $  5,475
Due.to subsidiaries ......................             --             252
Other liabilities ........................          2,104           1,668
                                                 --------        --------
Total liabilities ........................         32,479           7,395
                                                 --------        --------
Common stock .............................             81              54
Less: Treasury stock .....................        (12,530)         (8,623)
Additional paid in capital ...............         48,790          48,795
Unrealized gain on investments ...........            (73)            538
Retained earnings ........................         10,296             989
                                                 --------        --------
  Total stockholders' equity .............         46,564          41,753
                                                 --------        --------
Total liabilities and stockholders'
  equity .................................       $ 79,043        $ 49,148
                                                 ========        ========

Condensed Statement of  Earnings
                                               For the Years Ended September 30,
                                                 1998         1997        1996
                                               -------      -------     -------
Equity in  earnings of subsidiaries ......     $ 9,396      $ 8,289     $   588
Other gain (loss) ........................         (89)       1,091        (240)
Income tax benefit .......................          --        2,344          --
                                               -------      -------     -------
Net earnings .............................     $ 9,307      $11,724     $   348
                                               =======      =======     =======

Condensed Statements of Cash Flows
                                               For the Years Ended September 30,
                                                  1998       1997       1996
                                                  ----       ----       ----
Net cash provided by (used in)
 operating activities ........................  $(13,698)   $  400    $ 6,940
                                                --------    ------    -------
Net cash used in investing activities ........    (7,050)     (439)       (13)
                                                --------    ------    -------
Redemption of preferred stock ................        --        --       (338)
Term debt borrowings .........................    24,900        --         --
Purchase of partial shares for stock split ...        (2)       --         --
Purchase of treasury stock ...................    (3,907)       --     (6,615)
Purchase of stock options ....................        24        36         --
                                                --------    ------    -------
Net cash provided by (used in)
 financing activities ........................    21,015        36     (6,953)
                                                --------    ------    -------
Increase(decrease) in cash and
 cash equivalents ............................       267        (3)       (26)
Cash and cash equivalents, beginning
 of period ...................................        --         3         29
                                                --------    ------    -------
Cash and cash equivalents, end of period .....  $    267    $   --    $     3
                                                ========    ======    =======

                                       52
<PAGE>
--------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PILGRIM AMERICA CAPITAL CORPORATION

IN THOUSANDS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

          Column A               Column B            Column C             Column D     Column E
-----------------------------  ------------  -------------------------  ------------   --------
                                                   Additions
                                             -------------------------
                                Balance at   Charged to   Charged from                  Balance
                                beginning     costs and     to) other                   at end
        Description             of period    expenses(3)    accounts    Deductions(1)  of period
        -----------             ---------    -----------    --------    -------------  ---------
<S>                               <C>       <C>             <C>           <C>            <C>
YEAR ENDED SEPTEMBER 30, 1998
Allowance for repurchases         $  725    $  --           $   381       $  (319)       $  787
Allowance for losses                 613       --              (381)         (118)          114


YEAR ENDED SEPTEMBER 30, 1997
Allowance for restructuring       $  201    $  --           $  (103)      $   (98)       $   --
                                  ------    -----           -------       -------        ------
Allowance for repurchases          1,930       --              (709)         (496)          725
Allowance for losses                 893     (696)(3)         1,086          (670)          613
Allowance for contingencies(2)     2,554       --              (407)       (2,147)           --

YEAR ENDED SEPTEMBER 30, 1996
Allowance for restructuring       $  328    $  --           $    --       $  (127)       $  201
Allowance for repurchases          3,171       --                --        (1,241)        1,930
Allowance for losses               1,003       --                58          (168)          893
Allowance for contingencies(2)     3,000       --               528          (974)        2,554
</TABLE>

(1)  Actual  losses   charged   against   allowance,   net  of  recoveries   and
     reclassifications

(2)  The contingency  allowance was established based on a lawsuit filed against
     the Company by the Resolution Trust  Corporation.  This lawsuit was settled
     in Fiscal 1997.

(3)  The Company  determined that the allowance for discontinued  operations was
     overstated  and  recorded  income  from  discontinued  operations  (see the
     Statement of Earnings "Earnings (loss) from discontinued mortgage business,
     net of tax").