================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A

                               AMENDMENT NO. 2 TO
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

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

                             PILGRIM AMERICA CAPITAL
                                   CORPORATION


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


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

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

                          Common Stock, $.01 par value

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

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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

================================================================================
<PAGE>
The Registrant  hereby amends its Annual Report on Form 10-K for the fiscal year
ended September 30, 1998 (the "Form 10-K") as follows:

     The Amendment effects Notes 8 and 15 of Part II, Item 8 and does not effect
the   Consolidated   Balance  Sheets,   Consolidated   Statements  of  Earnings,
Consolidated  Statements of Stockholders' Equity or the Consolidated  Statements
of Cash Flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Consolidated  Financial  Statements  of the Company as of September 30,
1998 and for each of the years in the  three-year  period  ended  September  30,
1998,  together  with the related notes and the Report of KPMG Peat Marwick LLP,
independent  auditors,  are set forth on the  following  pages.  Other  required
financial  information  and  schedules  are set  forth  herein,  as  more  fully
described in Item 14.
                                        2
<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
                                        3
<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.
                                       4
<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.
                                       5
<PAGE>
PILGRIM AMERICA CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                       6
<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>
                                       7
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
                   NOTES TO CONSOLDATED FINANCIAL STATEMENTS


(1) Corporate Background and Summary of Significant Accounting Policies

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

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

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

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

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

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

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

         Upon acquisition, the Company classifies its marketable securities into
one of three  categories:  held to maturity  securities,  trading  securities or
available for sale securities.  Held to maturity securities are those securities
the Company  has the  positive  intent and  ability to hold to maturity  and are
                                       8
<PAGE>
carried at amortized  cost.  Trading  securities are those  securities  that are
bought and held principally for the purpose of selling them in the near term and
are  reported  at fair  value,  with  unrealized  gains and losses  included  in
operations.  Available for sale securities are those securities that do not fall
into the other two  categories and are reported at fair value,  with  unrealized
gains and losses excluded from earnings and reported in a separate  component of
stockholders'  equity,  net of  related  income  taxes.  The  Company  currently
classifies all of its marketable securities as available for sale securities.

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

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

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

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

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

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

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

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

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

         (l)  Distribution  Costs  -  Managed  Funds.   Certain  of  the  Funds'
distribution  plans  (the  "reimbursement  plans")  reimburse  the  Company  for
distribution  costs, but limit the reimbursement to between .25% and .30% of the
respective  Fund's  average  daily net  assets  determined  on an annual  basis.
Unreimbursed  costs may be carried over for a three-year  period subject to the
                                       9
<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
                                       10
<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.
                                       11
<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.
                                       12
<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.
                                       13
<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)
                                                   =======   =======    =======
                                       14
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

(7) Earnings Per Share.

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

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

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

(8) Stockholders' Equity

         Between  January  1998 and  September  1998,  the  Company  repurchased
216,650  shares of its common stock at a total  purchase  price of $3.9 million.
The  purchases  were made in open market  transactions  pursuant to a previously
announced  authorization by the Company's Board of Directors to repurchase up to
750,000 shares of common stock based on market conditions.

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

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

         During the third  quarter of Fiscal  1998,  the Company had a 50% stock
dividend  accounted for as a 3 for 2 stock split. In conjunction  with the stock
split,  1,929,997 shares were issued. In addition, the Company paid cash in lieu
of issuing 68 partial shares in conjunction with the 3 for 2 stock split.
                                       15
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

(9) Stock Option Plan

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

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

         The weighted average fair value at the date of grant was $17.72,  $5.55
and $1.98,  for stock  options  granted under Plan 1 and Plan 2 during the years
ended  September  30, 1998,  1997 and 1996,  respectively.  The Company used the
Black Scholes  options-pricing model with the following assumptions to calculate
the  weighted  average  fair value at the date of grant:  no  expected  dividend
yield;  risk free  interest  rate of 5.50% for Fiscal  1998 and 6.22% for Fiscal
1997 and Fiscal 1996;  an expected  life of eight years;  and a volatility  rate
calculated  using the monthly stock price for the three years preceding the date
of grant.
                                       16
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)

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

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

Per share net earnings from
  continuing operations:

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

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

Per share net earnings (loss):

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

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

         Pro forma net earnings  reflect only options granted under the Plans in
Fiscal  1998,  1997  and  1996.   Therefore,   the  full  impact  of  calculated
compensation  costs for the stock options under SFAS No. 123 is not reflected in
the pro forma net earnings amounts  presented above because  compensation  costs
for options issued in periods prior to Fiscal 1996 are not considered.
                                       17
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


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

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

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

Options granted                                   164           $ 6.33 - $10.33

Options exercised                                 (9)                $3.83

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

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

Options granted                                    37           $18.67 - $26.25

Options exercised                                 (6)           $ 3.83 -  $5.75

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

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

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

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

(10) Employee Benefits

         Pilgrim  America  Capital  Corporation  has  established a tax deferred
savings plan under Section 401(k) of the Internal  Revenue Code. The plan covers
all full time employees and allows for employee tax deferred contributions up to
the amount  specified by the IRS Regulation  ($10,000 in 1998 and $9,500 in 1997
and 1996).
                                       18
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


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

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

(11) Commitments and Contingencies

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

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

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

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

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

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

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

(12) Related Party Transactions

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

         As provided in the Advisory Agreements, the Company receives management
fees  ranging  from .50% to 1.25% on an  annual  basis of the  respective  Funds
average  daily net  assets.  Management  fees  received  from the Funds,  net of
                                       19
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


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

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

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

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

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

(13) Distribution Plans

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

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

(14) Discontinued Operations

         On June 9, 1994,  the Company sold its rights to service $305.5 million
of Government  National  Mortgage  Association  ("GNMA") loans. On September 30,
1994, the Company's  mortgage  servicing  portfolio and operations were sold. On
February  28,  1995,  the Company  discontinued  the  remainder  of its mortgage
banking  operations  and  recorded a  provision  for loss on  discontinuance  of
mortgage banking operations of $986,000. This provision included the anticipated
mortgage banking related revenues and expenses,  including severance expense and
all other costs that will be incurred to phase out these operations.  Subsequent
to  February  28,  1995,  during  Fiscal  1995 the  Company  increased  the loss
                                       20
<PAGE>
                       PILGRIM AMERICA CAPITAL CORPORATION
            Notes to Consolidated Financial Statements - (Continued)


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

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

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


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

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

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

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

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

         As of  September  30,  1998  and  1997,  the  Company  had  established
repurchase  allowances  of  $787,000  and  $725,000,  respectively,  in  accrued
expenses,  to provide for estimated  losses to be incurred upon  repurchase  and
resale of loans originated by the Company.
                                       21
<PAGE>
(15) Subsequent Event

         On  November  9,  1998,  PSI  signed a  Letter  of  Intent  to sell its
September 30, 1998 DAC Asset for $26.5 million,  which  approximated book value,
as well as the right to receive .75%  annually of the future  distribution  fees
and the contingent deferred sales charges from the related Class B shares. Under
the related agreements, the Company will also sell its DAC Asset on future Class
B share sales to the purchaser  through  November 30, 1999.  The Purchaser has a
right of first  refusal  on a two year  extension  thereafter.  The  Company  is
required under its existing Credit Agreement  (defined below) to use proceeds in
excess of $3.0 million from the sale of its DAC Asset to pay down its borrowings
under the Credit Agreement and reduce Credit Agreement  borrowings by 50% of the
proceeds of the sale in excess of $3 million. The Company's credit facility will
be reduced by approximately  $11.8 million as a result of this transaction.  The
transaction  should result in no gain or loss since the sales price approximated
book value.

         On  October  8,  1998,  the  Company's  Board  of  Directors   approved
repurchasing  500,000  shares of the  Company's  common  stock after the 750,000
shares are repurchased  from the October 1997 Board  approval.  In October 1998,
the Company  repurchased 255,000 shares of the Company's common stock at a total
purchase price of $4.4 million.
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<PAGE>
         Pursuant to the  requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to report on
Form  10-K  to be  signed  on its  behalf  by the  undersigned;  thereunto  duly
authorized this 15th day of January 1999.

                                 PILGRIM AMERICA CAPITAL CORPORATION
                                 a Delaware corporation


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

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