-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IX1VZwT3ICS8fgzNCsCDlL2Z0oPN4b6mXGZy3Tl+qe0ggpqIS3huJ/WfX1uPMC2A wvMeEWkc8YElrPOidAtzlw== 0000950147-99-000453.txt : 19990512 0000950147-99-000453.hdr.sgml : 19990512 ACCESSION NUMBER: 0000950147-99-000453 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM AMERICA CAPITAL CORP CENTRAL INDEX KEY: 0000882860 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 860670679 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14703 FILM NUMBER: 99617407 BUSINESS ADDRESS: STREET 1: STE 1250 STREET 2: 40 N CENTRAL AVE, CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: 40 NORTH CENTRAL AVE STREET 2: STE 1250 CITY: PHOENIX STATE: AZ ZIP: 85004 FORMER COMPANY: FORMER CONFORMED NAME: FIRST WESTERN CORPORATION/DE DATE OF NAME CHANGE: 19930328 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1999 Commission File Number 0-19799 PILGRIM AMERICA CAPITAL CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 86-0670679 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (602) 417-8100 ------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 5,152,977 Shares of Common Stock outstanding on April 30, 1999 -------------------------------------------------------------- INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements (a) Condensed Consolidated Financial Statements............. 3 (b) Notes to Condensed Consolidated Financial Statements.... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.........17 Item 6. Exhibits and Reports on Form 8-K............................17 Signatures...........................................................18 2 ITEM 1. FINANCIAL STATEMENTS PILGRIM AMERICA CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) March 31, September 1999 30, 1998 - -------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 451 $ 763 Investments 21,699 18,808 Accounts receivable 2,511 1,566 Notes receivable 4,139 4,136 Costs assigned to management contracts acquired, less accumulated amortization of $5,168 and $4,523 27,095 27,740 Furniture, fixtures and equipment, less accumulated depreciation of $671 and $536 1,278 879 Deferred acquisition costs, less accumulated amortization of $114 and $3,442 835 26,562 Incentive management fee receivable 1,965 1,103 Other assets 1,623 1,938 ----------- ----------- TOTAL ASSETS $ 61,596 $ 83,495 =========== =========== - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Current income taxes payable $ 124 $ - Deferred tax liability 1,445 - Notes payable 6,975 30,375 Accrued compensation 1,671 2,763 Accounts payable and accrued expenses 3,461 3,793 ----------- ----------- Total liabilities 13,676 36,931 ----------- ----------- Stockholders' equity: Common stock, $.01 par value, 10,000,000 shares authorized, 8,085,722 and 8,081,722 shares issued, with 5,302,877 and 5,588,477 shares outstanding at March 31, 1999 and September 30, 1998 81 81 Less: Treasury stock of 2,782,845 and 2,493,245 at March 31, 1999 and September 30, 1998 (17,757) (12,530) Additional paid-in capital 48,804 48,790 Retained earnings 16,801 10,296 Accumulated other comprehensive earnings Unrealized loss on investments, net of tax (9) (73) ----------- ----------- Total stockholders' equity 47,920 46,564 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,596 $ 83,495 =========== =========== - -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 PILGRIM AMERICA CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------- Three months ended Six months ended March 31, March 31, 1999 1998 1999 1998 ---------------------------- --------------------------- REVENUES: Management and administrative fees $ 6,788 $ 5,246 $ 13,538 $ 10,282 Structured finance products management fees 3,102 965 6,315 1,653 Distribution fees 1,263 1,546 2,486 2,680 Commissions 105 554 326 815 Investment and other income 943 994 2,193 1,431 ------------- ------------- ------------- ------------ Total revenues 12,201 9,305 24,858 16,861 ------------- ------------- ------------- ------------ EXPENSES: General and administrative 3,882 2,737 7,996 4,895 Selling 2,017 2,229 4,620 3,829 Interest expense 168 238 334 392 Amortization and depreciation 429 823 860 1,622 ------------- ------------- ------------- ------------ Total expense 6,496 6,027 13,810 10,738 ------------- ------------- ------------- ------------ Earnings before income taxes 5,705 3,278 11,048 6,123 Income taxes 2,331 1,363 4,543 2,541 ------------- ------------- ------------- ------------ NET EARNINGS $ 3,374 $ 1,915 $ 6,505 $ 3,582 ============= ============= ============= ============ Earnings per common and common equivalent share Basic: Net earnings $ 0.63 $ 0.33 $ 1.22 $ 0.62 ============= ============= ============= ============ Shares used in per share calculation 5,319,620 5,763,182 5,332,394 5,781,539 ============= ============= ============= ============ Diluted: Net earnings $ 0.55 $ 0.29 $ 1.06 $ 0.54 ============= ============= ============= ============ Shares used in per share calculation 6,127,957 6,598,157 6,122,852 6,593,027 ============= ============= ============= ============ - --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 PILGRIM AMERICA CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS)
Three months ended Six months ended March 31, March 31, 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Net earnings $ 3,374 $ 1,915 $6,505 $3,582 Other comprehensive earnings, net of tax Unrealized holding gains (losses) arising during the period 1 (24) 64 (62) Less: Reclassification adjustment for gains included in net earnings - (296) - (425) ---------- --------- ---------- ---------- Comprehensive earnings $ 3,375 $ 1,595 $6,569 $3,095 ========== ========= ========== ========== - ---------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 PILGRIM AMERICA CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
For the Six Months Ended March 31, - ---------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 6,505 $ 3,582 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization and depreciation 815 1,622 Gain on sale of investments - (720) Gain on sale of deferred acquisition costs (228) - Increase in accounts receivable (948) (1,270) Increase in incentive management fee receivable (862) (386) Increase in deferred acquisition costs due to subscriptions (6,399) (10,924) Decrease in deferred acquisition costs due to redemptions 6 325 Net change in deferred tax asset/current tax liability 2,304 2,541 Decrease in operating liabilities (1,424) (204) Increase in other operating assets (462) (248) ------------- ------------ Net cash used in operating activities (693) (5,682) ------------- ------------ - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in Pilgrim Funds - 12 Sale of Pilgrim Funds - 2,327 Investments in structured finance products (4,045) (4,750) Principal distributions from structured finance product investments 1,305 - Sales of furniture, fixtures and equipment - 7 Purchases of furniture, fixtures and equipment (535) (326) ------------- ------------ Net cash used in investing activities (3,275) (2,730) ------------- ------------ - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock (5,227) (753) Proceeds from exercise of stock options 14 - Proceeds from sale of deferred acquisition costs 32,269 - Term debt borrowing (repayment) (23,400) 9,350 ------------- ------------ Net cash provided by financing activities 3,656 8,597 ------------- ------------ Net increase (decrease) in cash and cash equivalents (312) 185 Cash and cash equivalents, beginning of period 763 219 ------------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 451 $ 404 ============= ============ - ---------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $ 778 $ 230 Income taxes paid 2,385 - - ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 PILGRIM AMERICA CAPITAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF FINANCIAL STATEMENT PRESENTATION PRINCIPLES OF CONSOLIDATION. The accompanying condensed consolidated financial statements of Pilgrim America Capital Corporation and its subsidiaries (the "Company") were prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and six months ended March 31, 1999 are not necessarily indicative of the results which may be expected for the fiscal year ending September 30, 1999. For additional information, refer to the consolidated financial statements for the fiscal year ended September 30, 1998 which are included in the Company's Form 10-K/A. The condensed consolidated financial statements include the Company's wholly owned subsidiary, Pilgrim Group, Inc. ("PGI") and PGI's wholly owned subsidiaries, Pilgrim Investments, Inc. ("PII"), a registered investment advisor, and Pilgrim Securities, Inc. ("PSI"), a registered broker/dealer (collectively "Pilgrim"). The condensed consolidated financial statements also include the Company's wholly-owned mortgage banking subsidiaries, Express America TC, Inc., EAMC Liquidation Corp. ("EAMC"), and EAMC's wholly-owned subsidiaries, Wesav Investment Corporation and Wesav Investments Inc.-2. The activities of the Company consist primarily of providing investment management and related services to various open-end and closed-end investment companies (each a "Fund" and collectively the "Pilgrim Funds" or the "Funds") and Structured Finance Products operating under the Pilgrim name. The results of operations reported in the condensed consolidated financial statements reflect these investment management activities. INVESTMENTS. The Company has investments in Structured Finance Products in addition to other marketable securities. In recording income from its investments in Structured Finance Products, the Company evaluates the Structured Finance Products' investments for impairment by comparing the net present values of projected future cash flows with the investments' carrying values. The investments' cash flows and timings are a function of actual and forecasted loan and bond defaults and their related losses, trading gains and losses, projected interest receipts and expenses, and net cash flow allocations based on product specific indenture requirements. In projecting defaults and losses, the Company reviews specific problem credits and forecasts the anticipated losses. The remaining credits in the portfolios are forecasted using default assumptions of 2% annually with related recovery rates of 70% of the defaults. Projected interest receipts and expenses are based on current portfolio and market interest rates. COSTS ASSIGNED TO MANAGEMENT CONTRACTS ACQUIRED. Costs assigned to management contracts acquired represent the fair value of the investment management rights acquired through the acquisition in April 1995 of such management contracts (the "Acquisition") and also represent the excess of the purchase price (including liabilities assumed) over the fair value of net assets acquired and resulting costs from the Acquisition. These amounts are being amortized on a straight-line basis over 25 years. The Company periodically analyzes costs assigned to management contracts acquired to determine whether any impairment in value has occurred. Based upon anticipated future cash flows from operations, in the opinion of management there has been no impairment. DEFERRED ACQUISITION COSTS. The Company pays commissions of up to 4.00% to authorized broker-dealers at the time that certain Fund shares are sold. The commissions are recovered via distribution fees received from the related shares and contingent deferred sales charges ("CDSC"s) received should the shareholders redeem shares during a specified period (up to six years). Such commission costs are capitalized as Deferred Acquisition Costs ("DAC") and amortized over the period that the CDSC is in effect. On December 11, 1998, the Company sold without recourse its existing September 30, 1999 DAC asset related to certain of the Funds' shares (the "B Shares") and has agreed to sell DAC assets generated on future B Share sales thereafter through November 1999. The Company 7 PILGRIM AMERICA CAPITAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS funds the DAC daily and sells the asset monthly. The purchaser of the DAC asset is entitled to 0.75%, annualized, in distribution fees paid from B Share assets and all CDSCs received from any redemptions of the related B Shares. Prior to the sale of the DAC asset, the Company amortized the B Share DAC asset over a six-year period, which is the period during which the CDSC is in effect for such Shares. INCENTIVE MANAGEMENT FEES RECEIVABLE. The Company receives management fees from the Structured Finance Products as follows: (i) between 0.15% and 0.35% base management fee which is generally senior to leveraged borrowings in the account, (ii) between 0.20% and 0.35% secondary management fee which is subordinated to certain payments on leveraged borrowings and (iii) an additional management fee on each Structured Finance Product ranging from 0.10% to 0.25% of annual net assets if specified investment returns are met ("Incentive Management Fees"). Incentive Management Fees are typically expected to be received in future periods. Incentive Management Fee revenues represent the increase in the present value of the Incentive Management Fee Receivable for the period for each Structured Finance Product. In determining the present value of the Incentive Management Fee Receivable, the Company projects the timing of the Incentive Management Fee payments based on product specific projected returns to the equity investors. Product specific equity returns and their timings are a function of forecasted loan and bond defaults and their related losses, trading gains and losses, projected interest receipts and expenses, and net cash flow allocations based on product specific indenture requirements. In projecting defaults and losses, the Company reviews specific problem credits and forecasts the anticipated losses. The remaining credits in the portfolios are forecasted using default assumptions of 2% annually with related recovery rates of 70% of the defaults. Projected interest receipts and expenses are based on current portfolio and market interest rates. If the projected investor returns are in excess of the minimums defined in the indentures, the Company uses a 10% discount rate to calculate the present value of the related Incentive Management Fee. Should the anticipated performance of the Structured Finance Product result in a present value lower than Incentive Management Fees accrued, the Company would be required to write down the receivable to its net present value, to reflect the impairment of the asset. Additionally, volatility of investment performance may result in lower income recognition in some periods. The Incentive Management Fee Receivable is reported separately on the Company's condensed consolidated balance sheet. INCOME TAX. Deferred tax assets and liabilities are initially recognized for temporary differences between the consolidated financial statement carrying amount and the tax bases of assets and liabilities which will result in future deductible amounts and operating loss and tax credit carryforwards. A valuation allowance is then established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax benefits will be realized. Based on management's analysis, it is anticipated that all the deferred tax assets will be utilized, therefore, no valuation allowance has been established as of March 31, 1999. NET EARNINGS PER SHARE. Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing income available for common shareholders by the weighted average number of common shares outstanding adjusted for the effect of dilutive common stock equivalents, including stock options, during the period. 8 PILGRIM AMERICA CAPITAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following is a reconciliation of the basic and diluted EPS computations for the three and six months ended March 31, 1998 and 1999 (amounts in thousands, except per share amounts):
Three months ended Six months ended March 31 March 31 1999 1998 1999 1998 ------ ------ ------ ------ Net earnings for basic and diluted EPS $3,374 $1,915 $6,505 $3,582 ====== ====== ====== ====== Shares of common stock and common stock equivalents: Average number of common shares used in basic computation 5,320 5,763 5,332 5,782 Effect of dilutive securities - options 808 835 791 811 ------ ------ ------ ------ Average shares used in diluted computation 6,128 6,598 6,123 6,593 ====== ====== ====== ====== Net earnings per share: Basic $ 0.63 $ 0.33 $ 1.22 $ 0.62 ====== ====== ====== ====== Diluted $ 0.55 $ 0.29 $ 1.06 $ 0.54 ====== ====== ====== ======
COMPREHENSIVE INCOME. Effective October 1, 1998 the Company has adopted SFAS No. 130 "Reporting Comprehensive Income". Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes to equity during a period except those resulting from investments by owners and distribution to owners. The SFAS requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The SFAS requires that an enterprise (1) classify items of other comprehensive income by their nature in a financial statement and (2) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of the statement of financial condition. No earnings per share disclosure of the effect of comprehensive income is required under the SFAS. The SFAS is effective for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for a comparative purpose is required. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is a holding company that, through its wholly owned subsidiaries, provides investment management and related services for seven open-end Funds, one closed-end Fund and six Structured Finance Products. 9 RESULTS OF OPERATIONS The following table presents comparative quarterly data regarding assets under management, Fund share sales and increases in Structured Finance Products assets for the four quarters ended March 31, 1999:
PILGRIM FUNDS SELECTED FUND DATA (UNAUDITED) ($000,000) ------------------------------------------------------- March 31, December 31, September 30, June 30, 1999 1998 1998 1998 ---------- ---------- ---------- ---------- OPEN-END FUNDS: Beginning Assets $ 1,899.9 $ 1,614.3 $ 1,786.3 $ 1,508.1 Direct Sales 105.1 178.7 210.0 359.3 Direct Redemptions (138.3) (85.1) (91.7) (51.9) Exchanges In (Out)(1) (8.4) 2.1 (8.5) 4.1 Investment Activities (2) (31.2) 189.9 (281.8) (33.3) ---------- ---------- ---------- ---------- Ending Assets 1,827.1 1,899.9 1,614.3 1,786.3 ---------- ---------- ---------- ---------- CLOSED-END FUNDS: (5) Beginning Assets 1,751.3 1,663.4 1,574.6 1,473.2 Direct Sales (4) -- 28.0 71.6 71.5 Investment Activities (2) (18.1) 59.9 17.2 29.9 ---------- ---------- ---------- ---------- Ending Assets 1,733.2 1,751.3 1,663.4 1,574.6 ---------- ---------- ---------- ---------- STRUCTURED FINANCE PRODUCTS: (6) Beginning Assets 2,068.3 1,896.0 1,378.5 870.0 Increases (3) 98.4 172.3 517.5 508.5 ---------- ---------- ---------- ---------- Ending Assets 2,166.7 2,068.3 1,896.0 1,378.5 ---------- ---------- ---------- ---------- Ending Assets Under Management $ 5,727.0 $ 5,719.5 $ 5,173.7 $ 4,739.4 ========== ========== ========== ==========
(1) NET EXCHANGES FROM (TO) THE COMPANY'S SPONSORED MONEY MARKET FUND. (2) INVESTMENT ACTIVITIES INCLUDE NET INVESTMENT INCOME, REALIZED GAIN/(LOSS), CHANGE IN APPRECIATION/(DEPRECIATION) AND NET CASH DISTRIBUTIONS TO SHAREHOLDERS. INVESTMENT ACTIVITIES FOR CLOSED-END FUNDS INCLUDE ASSETS ACQUIRED USING BORROWED FUNDS. (3) INCLUDES ASSETS ACCUMULATED IN STRUCTURED FINANCE PRODUCT TRANSACTIONS THAT HAD NOT CLOSED AS OF THE RELATED QUARTER END DATE. SUCH TRANSACTIONS WERE IN THE RAMP UP STAGES AT THOSE DATES. (4) REGISTRATION STATEMENTS COVERING SECURITIES TO BE ISSUED PURSUANT TO A CASH PURCHASE PLAN AND A SHELF OFFERING FOR PRIME RATE TRUST (THE "PROGRAMS") WERE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND ARE NOW EFFECTIVE. (5) THE COMPANY'S CLOSED-END FUND IS ALLOWED TO BORROW UP TO 33 1/3% OF ASSETS FOR INVESTMENT PURPOSES. (6) STRUCTURED FINANCE PRODUCTS ARE CAPITALIZED PRIMARILY THROUGH DEBT FINANCING. QUARTER ENDED MARCH 31, 1999 TO QUARTER ENDED MARCH 31, 1998 Net earnings for the March 31, 1999 quarter amounted to $3.4 million or $.55 per diluted share compared to net earnings of $1.9 million or $.29 per diluted share for the quarter ended March 31, 1998. REVENUES. Revenues for the March 31, 1999 quarter were $12.2 million, an increase of $2.9 million or 31% over revenues for the March 31, 1998 quarter. Management and administrative fees, the Company's largest revenue source, were $6.8 million in the current quarter, an increase of $1.6 million or 31% compared to the March 31, 1998 quarter. These revenues are derived from the Company's open-end and closed-end Funds, which averaged $3.6 billion in assets under management 10 during the current quarter, an increase of $877 million or 32% over Fund assets under management in the quarter ended March 31, 1998. Structured Finance Product management fees increased $2.1 million or 210% over the comparable quarter as a result of the increase of Structured Finance Product month end average assets under management of $1.3 billion or 177%. Distribution fees of $1.3 million for the quarter ended March 31, 1999 decreased $283,000 or 18% compared to the quarter ended March 31, 1998, even though Fund assets which generate distribution fee income increased $553 million or 43% during the comparable quarters. The decrease in distribution fee income is attributable to the fact that the Company sold its DAC asset and the related rights to receive 0.75% of the 1.00% annualized distribution fees paid by the Funds' B Share assets effective September 30, 1998. Accordingly, no related B share distribution fees were recorded during the current quarter. Investment and other income for the March 31, 1999 quarter was $943,000, a decrease of $51,000 or 5% over the March 31, 1998 quarter. The components of investment and other income consist primarily of investment income from Structured Finance Products and other income consisting primarily of gains from the sale of certain Company assets. Investment income was $812,000 for the three months ended March 31, 1999, an increase of $379,000 or 88% over the three months ended March 31, 1998. Other income of $131,000 for the three month ended March 31, 1999, decreased $430,000 or 76% compared to the quarter ended March 31, 1998. The decrease in other income is primarily due to a $65,000 gain recorded for the three months ended March 31, 1999 in connection with the ongoing sales of the DAC asset compared to a $501,000 gain the Company recognized in the March 31, 1998 quarter due to the sale of cash investments made initially in the Pilgrim Funds at the time the Funds were established. The net effect of the increase in investment income of $379,000 and the decrease in other income of $430,000 is a $51,000 net decrease in investment and other income. EXPENSES. Total expenses, excluding amortization, depreciation and interest expense, for the current quarter were $5.9 million, an increase of $933,000 or 19% compared to the March 31, 1998 quarter. This net increase in expenses was primarily a result of a $1.1 million increase in general and administrative expenses due to an increase in personnel and compensation, a $212,000 decrease in selling expenses primarily related to a decrease in the Company's costs for sales of Pilgrim Funds and direct expenses being reimbursed to the Company for distributing eleven Nicholas-Applegate retail Open-end Funds ("NACM Funds"). The Company entered into an agreement during January 1999 with Nicholas-Applegate Capital Management ("NACM") to acquire the right to manage the NACM Funds and as of February 1, 1999 the Company's broker dealer subsidiary, PSI, began distributing shares of the NACM Funds. NACM has agreed to reimburse the Company for the direct costs of selling shares of the NACM funds up to certain limits based on the expenses incurred. The Company has reduced its selling expenses by $986,000 for the quarter ended March 31, 1999 for the direct costs attributable to distributing the NACM Funds. This distribution agreement and the reimbursement of expenses will remain in place until the Company completes the purchase of the right to manage the NACM Funds during May 1999 (see "Subsequent Event" below). Interest expense decreased to $168,000 in the quarter ended March 31, 1999 a decrease of $70,000 or 29% compared to the quarter ended March 31, 1998. The decrease in interest expense between quarters is primarily attributable to the sale of the DAC asset in December 1998. The funds received in December from the sale of the DAC asset were used to pay down debt outstanding under the Company's Credit Agreement (see "Liquidity"). Amortization and depreciation expenses decreased $394,000 primarily as a result of sale of the DAC asset. The DAC asset consisted of commissions paid on the sale of certain Funds shares. Prior to the sale of the DAC asset these commissions were capitalized and amortized over a six-year period. SIX MONTHS ENDED MARCH 31, 1999 TO SIX MONTHS ENDED MARCH 31, 1998 Net earnings for the six months ended March 31, 1999 were $6.5 million or $1.06 per diluted share compared to $3.6 million or $.54 per diluted share for the six months ended March 31, 1998. REVENUES. Revenues for the six months ended March 31, 1999 were $24.9 million, an increase of $8.0 million or 47% over revenues for the six months ended March 31, 1998. 11 Management and administrative fees, the Company's largest revenue source, were $13.5 million in the current six months, an increase of $3.3 million or 32% compared to the six months ended March 31, 1998. These revenues are derived from the Company's open-end and closed-end Funds, which averaged $3.5 billion in assets under management during the first six months of the current fiscal year, an increase of $928 million or 36% over Fund assets under management in the six months ended March 31, 1998. Structured Finance Product management fees increased $4.7 million or 282% over the comparable six months as a result of the increase of $1.5 billion or 232% in Structured Finance Products month end average assets under management. Distribution fees of $2.5 million, for the six months ended March 31, 1999 decreased $194,000 or 7% compared to the six months ended March 31, 1998, even though fund assets which generate distribution fee income increased $624 million or 53% during the comparable six months. The decrease in distribution fee income is attributable to the Company's sale of its DAC asset on December 11, 1998 and the related rights to receive 0.75% of the 1.00% annualized distribution fees paid by the Funds' B Share assets. Accordingly, no related distribution fees were recorded during the current fiscal year. Investment and other income for the six months ended March 31, 1999 was $2.2 million, an increase of $762,000 or 53% over the six months ended March 31, 1998. The components of investment and other income consist primarily of investment income from Structured Finance Products and other income consisting primarily of gains from the sale of certain Company assets. Investment income was $1.8 million for the six months ended March 31, 1999 an increase of $1.2 million or 171% compared to the six months ended March 31, 1998. Other income was $352,000 for the six months ended March 31, 1999 a decrease of $ 470,000 or 57% compared to the six months ended March 31, 1998. This decrease is primarily due to a $228,000 gain recorded for the six months ended March 31, 1999 in connection with the ongoing sales of the DAC asset compared to a $720,000 gain the Company recognized during the six months ended March 31, 1998 due to the sale of cash investments made initially in the Pilgrim Funds at the time the Funds were established. The net effect of the increase in investment income of $1.2 million and the decrease in other income of $470,000 is a $762,000 net increase in investment and other income. EXPENSES. Total expenses, excluding amortization, depreciation and interest expense, for the six months ended March 31, 1999 were $12.6 million an increase of $3.9 million or 45% compared to the six months ended March 31, 1998. This increase was primarily a result of a $3.1 million increase in general and administrative expenses due to an increase in personnel and compensation, a $791,000 increase in selling expenses primarily related to a increase in the Company's costs for sales and marketing in the quarter ended December 31, 1998 reduced by expense reimbursements due to the Company for distributing shares of the NACM Funds in the quarter ended March 31, 1999. The Company entered into an agreement during January 1999 with NACM to acquire the right to manage the NACM Funds and as of February 1, 1999 the Company's broker dealer subsidiary, PSI, began distributing shares of the NACM Funds. NACM has agreed to reimburse the Company for the direct costs of selling shares of the NACM funds up to certain limits based on the expenses incurred. The Company has reduced its selling expenses for the quarter ended March 31, 1999 by $986,000 for the direct costs of distributing the NACM funds. This distribution agreement and the reimbursement of expenses will remain in place until the Company completes the purchase of right to manage the NACM Funds during May 1999 (see "Subsequent Event" below). Interest expense decreased to $334,000 for the six months ended March 31, 1999 a decrease of $58,000 or 15% compared to the six months ended March 31, 1998. The decrease in interest expense between the comparable periods is primarily attributable to the sale of the DAC asset in December 1998. The Company was reimbursed by the purchaser of the DAC asset for the interest expense that the Company incurred related to borrowings between the effective date of the sale, September 30, 1998, and the date the funds were received at the closing of the transaction in December 1998. The funds received in December from the sale of the DAC asset were used to pay down debt outstanding under the Company's Credit Agreement (see "Liquidity" below). Amortization and depreciation expenses decreased $762,000 primarily as a result of the sale of the DAC asset. The DAC asset consisted of commissions paid on the sale of certain Funds' shares. Prior to the sale of the DAC asset these commissions were capitalized and amortized over a six-year period. SUBSEQUENT EVENT On January 28, 1999, the Company entered into an agreement ("Agreement Date") with Nicholas-Applegate Capital Management ("NACM"), an investment management firm in San Diego, California to acquire the rights to 12 manage and distribute eleven open-end retail NACM Funds with net assets totaling $1.4 billion. The agreement was approved by the Fund's trustees and is subject to the approval of the Fund's shareholders and review by regulatory agencies. The transaction is expected to close May 21, 1999. The purchase price to be paid at closing is approximately $23.5 million, adjusted for sales, redemptions and changes in market value of the funds between the Agreement Date and the close. As of February 1, 1999, the Company became the distributor of the Nicholas-Applegate open-end retail mutual funds. LIQUIDITY The Company's principal liquidity needs arise in connection with general and administrative expenses, selling expenses, including commissions paid by the Company in connection with the sale of Fund shares, and investments made by the Company in connection with the management of Structured Finance Products. The Company also purchases shares of its common stock pursuant to an authorization by its board of directors. The Company's principal sources of liquidity and capital resources include cash flow from operations and borrowings available under a $43.3 million credit agreement ("the Credit Agreement"). During the first six months of fiscal 1999, the Company's operations used net cash of $693,000 and the Company used $3.3 million of net cash in its investing activities including $4.0 million used for the Company's equity investment in a new Structured Finance Product asset which was partially offset by $1.3 million in principal distributions received by the Company from these investments. The Company had a net increase in cash from financing activity due to the $32.3 million received from the ongoing sales of the DAC asset offset by $5.2 million in purchases of the Company's stock and a decrease in borrowings of $23.4 million. One of the Company's principal uses of cash is the payment of commissions in connection with the sale of B Shares. Such costs are capitalized as DAC assets and are recovered through distribution fees and CDSC fees received from the B Share assets. On December 11, 1998, the Company sold its September 30, 1998 DAC asset for $26.5 million and agreed to sell any DAC assets generated through B Share sales through November 1999, (B Share Sales Agreement") with a right of first refusal on a two-year extension thereafter. The purchaser of the DAC asset is entitled to 0.75%, annualized, in distribution fees paid from B Share assets and all CDSCs received from any redemptions of the related B Shares. If the Company's B Shares Sales Agreement expires and the Company is unable to sell its DAC assets or to borrow to fund commissions, the Company's ability to finance the continued sale of open-end Fund B Shares could be adversely effected. The Company uses a significant portion of its cash to invest in Structured Finance Products that it manages. The Company may be required to invest an agreed upon percentage in each new Structured Finance Product on the date the transaction closes. If the Company was unable to generate funds from operations or to borrow funds needed to invest in new Structured Finance Products this could have an adverse effect on the Company's ability to continue to close and manage additional Structured Finance Product assets. As of March 31, 1999 the Company had $20.1 million invested in Structured Finance Products. The Company intends to continue funding its investment management operations with cash provided by operations and with borrowings obtained under the Credit Agreement. The Company's Credit Agreement was amended and restated on December 22, 1998, and allows the Company or the Company's wholly owned subsidiary Pilgrim Group, Inc. ("PGI") to borrow up to $43.3 million. The borrowings can be used for various purposes including (i) general corporate working capital; (ii) acquisition of investment management contracts; (iii) financing of commissions paid by the Company in connection with sales of Fund shares subject to a contingent deferred sales charge, (iv) financing Structured Finance Product investments and (v) repurchasing Company stock. The agreement contains restrictive covenants which require PGI and the Company to maintain certain financial ratios and prohibits certain "restricted payments" including dividends by the Company to its shareholders. Borrowings under the Credit Agreement are collateralized by a pledge by the Company of the stock of PGI, by a pledge of PGI of the stock of its wholly owned subsidiaries, by a security interest in the assets of the Company, PGI and PGI's wholly owned subsidiaries, Pilgrim Investments, Inc. ("PII") and Pilgrim Securities, Inc., and by a guarantee by PGI's wholly owned subsidiary, PII. The Company will need approximately $25 million for the acquisition of the NACM Funds including related expenses and is negotiating with its current lenders as well as others to expand its existing credit agreement. The Company anticipates the increase in the credit agreement will be by an amount sufficient to fund this acquisition and the borrowing facility will be in place prior to closing the NACM acquisition. 13 At March 31, 1999 the Company had borrowings of approximately $7.0 million outstanding under the Credit Agreement and had approximately $36.3 million additional borrowings available. On August 5, 1997, the Company's Board of Directors approved purchasing up to 750,000 shares of its common stock from time to time in open market transactions. The Company may use cash generated from operations or borrowings obtained under the Credit Agreement to purchase the shares. As of April 30, 1999, the Company had purchased 659,150 shares pursuant to this authorization. In August 1998, the Company's Board of Directors approved the purchase from time to time of an additional 500,000 shares of common stock. YEAR 2000 Many existing computer programs only use two digits to identify a year in the date field. The change from 1999 to 2000 may cause many computer applications to fail or create erroneous results. The endeavor to correct this year 2000 problem has commonly become known as Y2K and affects virtually all companies. The Company is working to ensure that its information technology systems ("systems") will, along with those of its third party service providers ("third parties" or "third party"), continue to function properly upon the arrival of the year 2000. The Company has developed and is implementing a comprehensive Y2K plan (the "plan") to complete all internal system upgrades or conversions by the fourth quarter of fiscal 1999. A significant part of the plan involves upgrading hardware and software to newer versions that have been certified to be Y2K compliant. To date, most of the Company's current hardware and software systems have been certified, by the manufacturers, as Y2K compliant. Based on the Company's plan, it is estimated that incremental expenses for the Y2K project will not have a material impact on the Company's operations or financial results. To date, the Company has spent approximately $817,000 on upgrading its hardware and software systems to those that are Y2K compliant and to accommodate the Company's growth. The Company estimates that the remaining cost to complete the implementation of the plan will be between $200,000 and $500,000. The Company will use its own cash or to the extent available borrow from its line of credit for any Y2K expenditure. It is the Company's policy to capitalize all costs for hardware and software that have a useful life of over one-year. The cost of these assets will be depreciated based on the estimated useful life. Costs for remediation and testing are expensed as incurred. The Company is measuring its progress by following the three action phases outlined in its plan: Assessment, Remediation/Implementation and Testing. The Assessment phase included completing an inventory of all-internal and external systems, office equipment, third party dependencies, physical facilities, business issues and creating a budget and strategy to address the Y2K issue. The Remediation/Implementation phase includes upgrading or replacing hardware and software systems, issuance of Company statements of Y2K readiness, compliance with regulatory disclosure requirements, development of a Y2K contingency plan and contacting and monitoring third parties. The Testing phase includes several levels of testing some of which rely upon the third parties. The Company must test internal systems on a stand-alone basis and also complete point-to-point testing with some of its third parties. Additionally, the Company will obtain the results of certain third party testing that will be conducted on behalf of the Company and its affiliates on an industry wide basis. The table below summarizes the status of the Company's Y2K readiness. - -------------------------------------------------------------------------------- Status of Y2K Readiness - -------------------------------------------------------------------------------- Y2k Plan Phase % Completed Completion Target Date As of April 1, 1999 - -------------------------------------------------------------------------------- Assessment 100% 01/31/99 - -------------------------------------------------------------------------------- Remediation/Implementation 95% 09/30/99 - -------------------------------------------------------------------------------- Testing 90% 10/31/99 - -------------------------------------------------------------------------------- The Company's core business activities are highly dependent upon certain third parties that are classified as Y2K "mission critical". A failure of any single mission critical third party or combination of parties could likely have a material negative impact to the Company' ability to conduct its business. As part of its plan, the Company has been monitoring the Y2K progress of such mission critical third parties. To date based upon written disclosures provided by such third parties, the Company has not received any significant indication that a mission critical third party will likely experience a Y2K failure. 14 Below is a summary table that sets forth the most current Y2K status as disclosed by certain of the Company's mission critical third parties:
Mission Critical Third Party - Y2K Status ----------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Third Party Current Status Last Update - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Fund Transfer Agent The five major systems of the Transfer Agent system 4/99 are Y2K ready. Testing will continue through the second quarter of 1999. - -------------------------------------------------------------------------------------------------------------------- Fund Custodian The information technology (IT) applications: 2/99 Correction 99% complete Testing & Implementation 94% complete Level 2 Testing 86% Complete Level 3 Testing 67% Complete - -------------------------------------------------------------------------------------------------------------------- The Custodian has distributed questionnaires on readiness, testing, 2/99 and market evaluation to subcustodians. We will be obtaining a report of the progress. - -------------------------------------------------------------------------------------------------------------------- Fund Accounting Agent Achieved goal of Y2K readiness production 4/99 environment by 12/98. Testing will continue throughout 1999. - -------------------------------------------------------------------------------------------------------------------- Communication Vendors Both vendors have remediation and renovation well under way. 4/99 - -------------------------------------------------------------------------------------------------------------------- Electrical Vendor All IT and non IT systems have been inventoried. All renovations 4/99 are scheduled for completion by mid 1999. - -------------------------------------------------------------------------------------------------------------------- Corporate Banker Systems are compliant. Testing continues through mid-1999 4/99 - --------------------------------------------------------------------------------------------------------------------
The Company is developing a contingency plan with the objective of providing reasonable alternatives to systems, third party vendors, facilities and procedures enabling the Company to conduct its core business operations if confronted with a Y2K failure. The scope of the contingency plan includes mission critical systems, physical facilities and the Company's communication systems. The contingency plan will provide the Company guidance should it or any of the Company's primary third party providers fail to meet its goals and be Year 2000 compliant and includes an alternate vendor list for its third party mission critical providers. The Company has determined that even though it has a list of alternative vendors selected, it cannot ensure that these alternates will be Y2K ready or have the wherewithal to accept the Company business. The Company has also determined that there are some third party mission critical vendors that do not have an alternate source. The Company relies heavily on its third party mission critical systems to conduct its day to day business operations and to the extent that its contingency plan fails, the Company's financial condition may be adversely effected. The Company's ability to manage the Y2K issue is subject to uncertainties beyond its control and actual results could differ materially from what has been discussed above. There are several factors that could effect the Y2K issue for the Company, including; the success of the Company in identifying systems and programs that are affected by Y2K; the amount and nature of testing on internal and external systems that is required: the installation, programming, and systems work related to upgrading or replacing each of the affected programs; the cost, magnitude and availability of labor and consulting to complete the required Y2K projects and the success of the Company's external third party providers and other industry or governmental entities in addressing their Y2K issues and assessing their risks. The failure of the Company, the Company's mission critical third party providers or other industry or governmental entities to resolve Y2K issues could have a material adverse affect on the Company's business, financial condition, and results of operations. The Company could become the subject of legal claims regarding its inability to operate its business due to Y2K failures by it or any of its mission critical third party vendors. The Company is also regulated by several governmental agencies that may decide to impose fines or sanctions that could adversely effect the Company's ability to do business or in some cases require the Company to cease operations. The Company could also experience a decline in assets under management if investors in its Funds become concerned about the 15 Y2K problem and withdraw their investments. A decline in assets under management would have an adverse effect upon the Company's business, financial condition and results of operations. FORWARD LOOKING STATEMENT When used in this Form 10-Q and in future filings by the Company with the Securities and Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases, "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward looking" statements, within the meaning of the Private Securities Litigation Reform Act of 1995. All assumptions, anticipations, expectations and forecasts contained herein are forward looking statements that involve risks and uncertainties. Discussions in Management's Discussion and Analysis about the Company's estimated completion dates for phases of the Company's Year 2000 plan, related cost estimates, statements about possible effects of the year 2000 problem and related contingency plans are also "forward looking" statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date, made, and should be read in conjunction with the risk disclosures. The Company wishes to advise readers that the factors in the Year 2000 discussed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company will not undertake and specifically declines any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 16 PART II - OTHER INFORMATION ITEMS 1 THROUGH 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's annual meeting of stockholders was held on February 24, 1999, for the purpose of electing two directors to the Company's Board of Directors, each to serve a three-year term and for the purpose of approving a stock option program for the board of directors of the Company. At the meeting, a quorum being present, votes cast in the election of the directors were as follows:
Nominee Votes For Votes Against Votes Withheld Broker Non Votes - -------------------- --------- ------------- -------------- ---------------- Robert W. Stallings 4,784,567 - 2,949 - John M. Holliman III 4,782,967 - 4,549 -
At the meeting, a quorum being present, votes cast in the proposal to approve the directors' stock option plan were as follows:
Agenda Votes For Votes Against Votes Withheld Broker Non Votes - --------------------------- --------- ------------- -------------- ---------------- Directors Stock Option Plan 4,149,419 627,314 10,783 -
Both nominees were elected and the director's stock option plan were approved. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Nicholas-Applegate Capital Management Purchase Agreement Dated January 28, 1999 10.2 Employment Agreement of Howard Tiffen 27.0 Financial Data Schedules (b) Reports on Form 8-K. None 17 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PILGRIM AMERICA CAPITAL CORPORATION Date: May 10, 1999 /s/ James R. Reis ------------------------------------------ James R. Reis Vice-Chairman and Chief Financial Officer (Principal Accounting Officer) 18 EX-10.1 2 NICHOLAS-APPLEGATE PURCHASE AGREEMENT Exhibit 10.1 ASSET PURCHASE AGREEMENT by and among PILGRIM AMERICA CAPITAL CORPORATION, PILGRIM INVESTMENTS, INC., PILGRIM SECURITIES, INC., NICHOLAS-APPLEGATE CAPITAL MANAGEMENT and NICHOLAS-APPLEGATE SECURITIES Dated January 28, 1999 TABLE OF CONTENTS PAGE ARTICLE I THE SALE ..................................................3 1.1 Sale of Assets.............................................3 1.2 No Liabilities Assumed.....................................4 1.3 The Closing................................................5 1.4 Purchase Price.............................................5 1.5 Deferred Purchase Price....................................8 1.6 Material Adverse Effect....................................9 1.7 Allocation of Purchase Price..............................10 1.8 Calculation of The Purchase Price.........................10 ARTICLE II REPRESENTATIONS AND WARRANTIES OF PURCHASER, PILGRIM INVESTMENTS, INC. AND PILGRIM SECURITIES, INC. ................................................11 2.1 Organization and Authority................................11 2.2 Authorization.............................................12 2.3 Accuracy of Representations and Documents.................13 2.4 Brokers and Finders.......................................13 2.5 Litigation and Other Proceedings..........................13 2.6 Certain Information Provided by Purchaser.................13 2.7 Registration of PII under the Advisers Act................14 2.8 Registration of PSI as a Broker-Dealer....................14 2.9 Code of Ethics............................................14 2.10 Disqualifications..........................................14 2.11 Financial Statements.......................................15 2.12 Absence of Changes.........................................16 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND DISTRIBUTOR.........16 3.1 Organization and Authority................................16 3.2 Authorization.............................................16 3.3 Title to Assets...........................................17 3.4 Accuracy of Representations and Documents.................18 3.5 Certain Information provided by Seller, Distributor and the Trust.................................................18 3.6 Brokers and Finders.......................................18 3.7 Contracts.................................................18 3.8 No Defaults under Contracts or Agreements.................19 3.9 Additional Representations and Warranties relating to Seller, Distributor and the Trust.........................20 3.10 Absence of Certain Changes.................................26 3.11 Insurance..................................................27 -i- 3.12 Trust Records; Copies of Documents.........................28 ARTICLE IV CONDUCT OF BUSINESS PRIOR TO THE CLOSING..........................28 4.1 Conduct Prior to Closing..................................28 4.2 Redemption of Institutional Assets of Nicholas-Applegate Funds.....................................................30 4.3 Consents and Approvals....................................31 ARTICLE V COMPLIANCE WITH FEDERAL SECURITIES LAWS............................32 5.1 Cooperation in Obtaining Necessary Approvals to Consummate Intentions of Parties..........................32 5.2 Required Fund Actions.....................................35 5.3 Section 15(f).............................................35 ARTICLE VI ADDITIONAL AGREEMENTS.............................................37 6.1 Current Information.......................................37 6.2 Access. .................................................38 6.3 Information...............................................39 6.4 Qualification of the Nicholas-Applegate Funds.............39 6.5 Press Releases, Etc.......................................40 6.6 Administrative Fees and Other Expenses of the Nicholas- Applegate Funds...........................................40 6.7 Rule 12b-1 Fees...........................................41 6.8 Performance Records of Sub-Advised Series.................43 6.9 Resale Penalty............................................44 6.10 Employees.................................................44 6.11 Road Shows................................................44 6.12 Transferred Series........................................45 ARTICLE VII CONDITIONS ......................................................45 7.1 Conditions to Each Party's Obligations to Consummate......45 7.2 Conditions to Obligation of Purchaser to Consummate.......46 7.3 Conditions to Obligation of Seller and Distributor to Consummate................................................49 ARTICLE VIII INDEMNIFICATION.................................................51 8.1 Indemnification...........................................51 8.2 Claims Procedures.........................................53 8.3 Indemnification Limits....................................56 ARTICLE IX TERMINATION ......................................................56 9.1 Termination...............................................56 9.2 Effect of Termination and Abandonment.....................57 ARTICLE X GENERAL PROVISIONS.................................................57 10.1 Notices. .................................................57 10.2 Counterparts...............................................58 -ii- 10.3 Governing Law..............................................59 10.4 Expenses. 59 10.5 Waiver, Amendment..........................................59 10.6 Entire Agreement; No Third-Party Beneficiaries.............60 10.7 Assignment.................................................60 10.8 Captions and Gender........................................60 10.9 Consent to Jurisdiction....................................60 10.10 Waiver of Jury Trial......................................60 ARTICLE XI 11.1 Certain Defined Terms......................................60 -iii- LIST OF EXHIBITS AND SCHEDULES Schedule A - Sub-Advised Series Schedule B - Transferred Series Schedule C - Stand-Alone Series Schedule 1.4 - Example of Purchase Price Schedule 3.7 - Contracts Schedule 3.9(l) - Affiliated Brokerage Transactions Schedule 3.9(m) - Code of Ethics Schedule 3.11 Insurance Schedule 6.6(c) - Expense Limits Schedule 6.7 - 12b-1 Fees Schedule 6.10 - Non-Competition Exhibit 5.1(a)(i) - Form of New Advisory Agreement Exhibit 5.1(a)(ii) - Form of Sub-Advisory Agreement Exhibit 5.1(a)(v) - Form of Expense Limitation Agreement Exhibit 5.2(a) - Form of Interim Distribution Agreement Exhibit 5.2(b) Form of New Distribution Agreement Exhibit 7.2(c) - Form of Opinion of Counsel to Seller and Distributor Exhibit 7.2(d) - Form of Opinion of Counsel to Trust and Nicholas-Applegate Funds Exhibit 7.3(d) - Form of Opinion of Counsel to Purchaser, PII and PSI -iv- ASSET PURCHASE AGREEMENT THIS AGREEMENT, made this __ day of January, 1999, by and among Pilgrim America Capital Corporation, a Delaware corporation ("Purchaser" or "PACC"), Pilgrim Investments, Inc., a Delaware corporation ("PII"), Pilgrim Securities, Inc., a Delaware corporation ("PSI"), Nicholas-Applegate Capital Management, a California limited partnership ("Seller" or "NACM") and Nicholas-Applegate Securities, a California limited partnership (the "Distributor"). RECITALS: WHEREAS, Nicholas-Applegate Small Cap Growth Fund, Nicholas-Applegate Mid-Cap Growth Fund, Nicholas-Applegate Emerging Countries Fund, Nicholas-Applegate Worldwide Growth Fund, Nicholas-Applegate International Small Cap Growth Fund, Nicholas-Applegate International Core Growth Fund, Nicholas-Applegate High Yield Fund, Nicholas-Applegate Large Cap Growth Fund, Nicholas-Applegate Convertible Fund, Nicholas-Applegate High Quality Bond Fund, and Nicholas-Applegate Balanced Growth Fund (each a "Series" and collectively, the "Nicholas-Applegate Funds") are series of the Nicholas-Applegate Mutual Funds, a business trust organized under the laws of Delaware and registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end management investment company (the "Trust"); and WHEREAS, Seller serves as an investment adviser to the Nicholas-Applegate Funds pursuant to an investment advisory agreement dated September 7, 1997, as amended from time to time, between Seller and the Trust on behalf of each Series (the "Advisory Agreement"); and WHEREAS, Distributor serves as principal underwriter to the Nicholas-Applegate Funds pursuant to a distribution agreement between Distributor and the Trust, on behalf of each Series, dated April 19, 1993, as amended from time to time (the "Distribution Agreement"); and WHEREAS, PII, an indirect subsidiary of Purchaser, is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), and serves as investment adviser to certain investment companies registered under the Investment Company Act; and WHEREAS, PSI, an indirect subsidiary of Purchaser, is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and serves as distributor to certain investment companies registered under the Investment Company Act; and WHEREAS, Seller desires, in accordance with the terms and conditions of this Agreement, to sell certain assets as hereinafter set forth and Purchaser desires, in accordance with the terms and conditions of this Agreement, to purchase such assets; and WHEREAS, Purchaser and Seller desire that PII act as investment adviser to the Nicholas-Applegate Funds; and WHEREAS, Purchaser and Seller desire that Seller act as sub-adviser to certain of the Series of the Nicholas-Applegate Funds as set forth on Schedule A hereto (the "Sub-Advised Series"); and WHEREAS, Purchaser and Seller desire that the Nicholas-Applegate High Yield Fund, as set forth on Schedule B (the "Transferred Series"), transfer all of its assets (held immediately before the transfer) and liabilities to another investment company or series thereof for which PII serves as investment adviser solely in exchange for voting stock of such acquiring company or a series (the "Transfer"); and WHEREAS, Purchaser and Seller desire that all Series other than the Transferred Series and Sub-Advised Series as set forth on Schedule C will receive all their investment advisory services from PII (the "Stand-Alone Series"); and -2- WHEREAS, Seller and Distributor intend that the Advisory Agreement and Distribution Agreement will be terminated on or about the Closing Date (as that term is defined herein) of this Agreement, and Purchaser and Seller intend that on or about the Closing Date (as that term is defined herein) of this Agreement, PII will, subject to approval by the Trustees of the Trust and the shareholders of each Series, enter into a new advisory agreement relating to each Series and that PSI will, subject to approval by the Board of Trustees of the Trust, enter into a new distribution agreement relating to each Series; and WHEREAS, Purchaser and Seller intend that on or about the Closing Date (as defined herein) of this Agreement, Seller will, subject to approval by the Trustees of the Trust and the shareholders of each of the Sub-Advised Series, enter into a sub-advisory agreement with PII relating to each of the Sub-Advised Series; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth and intending to be legally bound, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I THE SALE 1.1 Sale of Assets. Subject to the terms and conditions set forth in this Agreement, at the closing of the transaction contemplated by this Agreement (the "Closing"), Seller agrees to sell and deliver to Purchaser all of the right, title and interest in and to that portion of its business relating to the management by Seller of the Retail Assets of the Nicholas-Applegate Funds, which shall include, but shall not be limited to: (a) duly certified copies of all books and records relating to the investment advisory services provided by Seller to the Trust that are in Seller's possession (including, but not limited to, all sales literature, promotional literature, catalogs and -3- similar materials, investment advisory materials and prospectuses, annual reports and any other information base pertaining to the Nicholas-Applegate Funds); and (b) duly certified copies of all books and records relating to the distribution services provided by Distributor to the Nicholas-Applegate Funds with respect to the Retail Assets that are in Seller's possession as the same may exist on the Closing Date (as defined herein) (collectively the items referred to in this Section 1.1, the "Assets"). Such sale and transfer shall be made to Purchaser free and clear of any liens, charges, liabilities, obligations, claims, licenses, security interests, encumbrances, restrictions and rights of others of any kind ("Encumbrances") in existence or arising in connection with events occurring prior to the Closing Date, provided that Purchaser shall have the right to assign any part or all of such Assets to PII, PSI or any direct or indirect subsidiary of Purchaser. 1.2 No Liabilities Assumed. Seller represents, warrants and covenants with and to Purchaser, PSI, and PII that Purchaser, PSI, and PII shall not assume any debts, obligations or liabilities, direct or indirect, contingent or otherwise, known or unknown, of any nature whatsoever of Seller or in connection with any of the Assets or the business of Seller or the management and distribution of the Nicholas-Applegate Funds which exist or may arise as a result of events occurring or circumstances in existence prior to the Closing, except as otherwise provided in Section 6.7, Section 7.3(g), Article VIII and Section 10.4. Without limiting the generality of the foregoing, Purchaser, PSI and PII shall not be responsible for any business, occupation, withholding, income or similar tax, or any other taxes of any kind, of Seller. Purchaser, PSI and PII represent, warrant and covenant with and to Seller and Distributor that Seller and Distributor shall not assume any debts, obligations or liabilities, direct or indirect, contingent or otherwise, known or unknown, of any nature whatsoever relating to or in connection with the Transfer; except as otherwise provided in Section 5.1(c). Seller represents, warrants and covenants with and to Purchaser, PSI and PII that Purchaser, PSI and PII shall not assume any debts, obligations or liabilities, direct or indirect, contingent or otherwise, known or unknown, of any nature whatsoever in connection with the class of shares designated as -4- "Institutional Shares" or with the transactions contemplated by Section 4.2 of this Agreement. 1.3 The Closing. (a) Subject to and upon the terms and conditions of this Agreement, at the Closing (i) Seller shall sell and deliver the Assets to Purchaser, including such bills of sale, endorsements, assignments, documents of title, and other instruments of transfer and conveyance necessary to transfer the Assets to Purchaser, free and clear of all Encumbrances and sufficient to vest in Purchaser all right, title and interest of Seller in the Assets; (ii) Purchaser shall deliver to Seller the Purchase Price, as set forth in Section 1.8, and (iii) the documents to be executed and delivered pursuant to Article VII hereof shall be so executed and delivered. (b) The Closing shall take place at the offices of Dechert Price & Rhoads, 1775 Eye Street, NW, Washington, DC at 10:00 a.m., Eastern time, on April 30, 1999, or as soon as practicable thereafter on such other date and time as Purchaser and Seller may agree (the "Closing Date"). The obligations of the parties to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver of the other conditions set forth in Article VII hereof. 1.4 Purchase Price. (a) Subject to the terms and conditions of this Agreement, as payment for the Assets, Purchaser hereby agrees to pay to Seller a purchase price (the "Purchase Price"), which shall be calculated as follows: (i) for the Sub-Advised Series, 200% of the Net Annual Management Fee (as described below) of each Sub-Advised Series as of the date of this Agreement (the "Measurement Date"); plus -5- (ii) for each Transferred Series, 400% of the Gross Annual Management Fee (as described below) of each Transferred Series as of the Measurement Date; plus (iii) for each Stand Alone Series, 400% of the Net Annual Management Fee of each Stand Alone Series as of the Measurement Date; less (iv) $240,000. The "Gross Annual Management Fee" is equal to the product of (1) the net assets of the pertinent Series as of the close of business on the applicable date, and (2) the effective annual advisory fee rate payable to Seller by the Series under the Advisory Agreement. The "Net Annual Management Fee" is equal to the product of (1) the net assets of the pertinent Series as of the close of business on the applicable date, and (2) the effective annual advisory fee payable to Seller by the Series under the Advisory Agreement, less the annualized expense reimbursements and fee waivers accruing to the Retail Assets of the related Series for the three months ending December 31, 1998, calculated in the manner illustrated on Schedule 1.4. (b) For the following transactions involving Series' shares, the Purchase Price will be adjusted as follows: (i) for redemptions of shares, exchanges out of a Series and dividends and distributions made to shareholders whether reinvested in shares of the Series or not, after the Measurement Date through the Closing Date, which shares existed at the Measurement Date ("Redeemed Shares"), the Purchase Price will be reduced by the portion of the Purchase Price as calculated under Section 1.4(a)(i), (ii), or (iii) allocable to such Redeemed Shares; -6- (ii) for purchases of shares, exchanges into a Series from another Series and reinvested dividends, after the Measurement Date through the Closing Date, which shares remain outstanding at Closing Date ("Purchased Shares"), the Purchase Price will be increased by the value attributable to such shares calculated in accordance with Section 1.4(a)(i), (ii), or (iii) above, as applicable, except that the net asset value of the Purchased Shares shall be based on the actual net asset value paid for such shares (without regard to any sales load thereon) on that date such shares were issued ("Purchase Date"). For purposes of this Section 1.4(b)(ii) annualized expense reimbursements and fee waivers calculated pursuant to Section 1.4(a) shall be applied pro rata to the net assets of the Purchased Shares for the Sub-Advised Series. (c) For all shares that were outstanding at the Measurement Date and remain outstanding at the Closing Date ("Continuing Shares") and for Purchased Shares that remain outstanding at the Closing Date, the Purchase Price will be further increased or decreased as follows: (i) A hypothetical purchase price attributable to the Continuing Shares shall be determined as provided in Section 1.4(a)(i), (ii), (iii), and (iv) above, and a hypothetical adjustment to the purchase price for the Purchased Shares shall be determined as provided in Section 1.4(b)(ii), above, based on the net asset values of such Continuing and Purchased Shares as of the dates and times provided in those subsections. (ii) A hypothetical purchase price attributable to the Continuing Shares shall be determined as provided in Section 1.4(a)(i), (ii), (iii), and (iv) above, and a -7- hypothetical adjustment for the Purchased Shares shall be determined as provided in Section 1.4(b)(ii), above, except that such price shall be based on the net asset values of such Continuing and Purchased Shares as of the close of business on the Closing Date. (iii) The Purchase Price will be increased or decreased by 50% of the amount that the total value calculated in Section 1.4(c)(ii) exceeds or is less than, respectively, the total value calculated in Section 1.4(c)(i). (d) All calculations of the net asset value of a Series or Redeemed Shares, Purchased Shares, and Continuing Shares shall be based on the shares outstanding in the classes of each Series designated as classes "A," "B," "C," and "Advisory Shares" (or "Q") (collectively, "Retail Assets"), and shall not take into account any shares outstanding in the class designated as "Institutional Shares" (or "I"). An example of the calculation of the Purchase Price based upon several assumptions as stated therein is in Schedule 1.4. (e) The Purchase Price shall be paid in full on the Closing Date by wire transfer of immediately available federal funds to an account or accounts designated by Seller. 1.5 Deferred Purchase Price. With respect to each Sub-Advised Series for so long as a Sub-Advisory Agreement (as defined herein) with Seller is in effect, Purchaser shall also pay to Seller a deferred purchase price ("Deferred Purchase Price") in the event that: (a) the Sub-Advisory Agreement is terminated (which shall not include an assignment of a Sub-Advisory Agreement that does not terminate such agreement pursuant to Rule 2a-6 under the Investment Company Act) for any reason, so that neither Seller nor an Affiliate of Seller serves as sub-adviser to a Sub-Advised Series, or -8- (b) upon the organization or the entering into of an investment advisory agreement by Purchaser or an Affiliate respecting a registered investment company or series thereof with investment objective(s), policies, restrictions, and strategies that are substantially the same as those of a Sub-Advised Series and that is intended to be offered in the retail market. The Deferred Purchase Price shall equal 400% of the product of (A) the effective annual sub-advisory fee rate payable to Seller by PII based upon the net assets existing at the close of business on the business day immediately prior to the Effective Date, as adjusted to take into account any waiver of its fees by Seller or absorption of the Series' operating expenses by Seller as of the Effective Date (which shall be based on the annualized expense reimbursements and fee waivers accruing to the Series for the three complete calendar months prior to the Effective Date); and (B) the net asset value of the Sub-Advised Series as of the close of the business day immediately prior to the Effective Date. The Effective Date shall, in the case of (a) above, be the earlier of the effective date of the termination of the Sub-Advisory Agreement or 60 days after notice of termination of the Sub-Advisory Agreement is received by any party to that Agreement, and, in the case of (b) above, be the date that the newly organized investment company or series thereof commences operations or the date the Purchaser or its Affiliate begins serving under the investment advisory agreement referred to therein. The Deferred Purchase Price shall be paid to Seller in immediately available funds no later than 45 days after the Effective Date. 1.6 Material Adverse Effect. When used in this Agreement the term "Material Adverse Effect" (i) with respect to Seller, Distributor or the Trust (a "Seller Material Adverse Effect") shall mean (A) a material adverse effect (whether taken individually or in the aggregate with all other such effects) other than as provided in (C) below, on the financial condition, business or results of operations as they relate to the Retail Assets, of (i) Seller and Distributor, taken as a whole or (ii) the Nicholas-Applegate Funds; (B) any event, circumstance or condition affecting any such entity which would prevent or materially delay the consummation of the transactions contemplated by this Agreement; -9- or (C) an adjustment in the Preliminary Purchase Price as calculated pursuant to Section 1.4(b) and 1.4(c) that would result in a reduction that is greater than twenty-five percent (25%) of the Purchase Price calculated pursuant to Section 1.4(a) as of the Measurement Date; and (ii) with respect to Purchaser (a "Purchaser Material Adverse Effect") shall mean any event, circumstance or condition affecting Purchaser which (A) would prevent or materially delay the consummation of the transactions contemplated by this Agreement; (B) an event that would materially affect the ability to pay the Purchase Price and Deferred Purchase Price; or (C) a material adverse effect (whether taken individually or in the aggregate with all other such effects) on the financial condition, business, or results of operations of (i) Purchaser, or (ii) PII and PSI, taken as a whole. 1.7 Allocation of Purchase Price. The parties shall cooperate in determining the allocation of the Purchase Price for all purposes (including tax and financial accounting) amongst the Assets prior to Closing. The Purchaser will cooperate (at no additional out of pocket expense to Purchaser) with Seller to structure the Deferred Purchase Price in a manner that will cause it to be characterized as capital gain rather than ordinary income for federal income tax and financial accounting purposes to the extent permissible. 1.8 Calculation of the Purchase Price. (a) At least two business days prior to the Closing, Seller shall deliver to Purchaser a reasonably detailed calculation of the Preliminary Purchase Price (as defined below) based on the Retail Assets in the Nicholas-Applegate Funds as of the close of business on a business day not more than seven business days prior to the Closing (the "Preliminary Purchase Price"). At the Closing, Purchaser shall pay such amount to Seller in accordance with Section 1.4(e). Within five business days following the Closing, Seller shall deliver to Purchaser a reasonably detailed calculation of the actual Purchase Price based on the Retail Assets in the Nicholas-Applegate Funds as of the close of business on the business day immediately prior to the Closing Date. Unless Purchaser objects to the calculation of such actual Purchase Price in accordance with Section 1.8(b), Purchaser shall pay to Seller or Seller shall reimburse Purchaser, as appropriate, -10- the difference (without interest) between the Preliminary Purchase Price paid at Closing and the actual Purchase Price so calculated. Any such payment or reimbursement shall be paid by wire transfer of immediately available funds within three business days of the delivery of the calculation of the actual Purchase Price by Seller to Purchaser. (b) In the event that Purchaser disagrees with the calculation of the actual Purchase Price provided in accordance with Section 1.8(a) it shall so notify Seller in writing within two business days of the receipt of such calculation from Seller. Following such notification the parties shall work together in good faith to come to an agreement on the calculation of the actual Purchase Price over the next ten business days. To the extent that the parties cannot reach an agreement on the actual Purchase Price within such time period, the parties agree to use their collective best efforts to retain PricewaterhouseCoopers LLP for the purpose of conducting an independent third party review of the actual Purchase Price determination. All costs related to retention of PricewaterhouseCoopers LLP shall be borne equally by Purchaser and Seller. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PURCHASER, PILGRIM SECURITIES, INC., AND PILGRIM INVESTMENTS, INC. Purchaser, PSI and PII represent and warrant to Seller and Distributor as follows: 2.1 Organization and Authority. Each of Purchaser, PII and PSI are duly organized and in good standing in the jurisdiction of its incorporation, and have (i) full corporate power, right and authority to enter into and carry out each of its obligations under this Agreement, to own each of its properties and assets, and to carry on each of its business as it is now being and is proposed to be conducted; and (ii) all necessary governmental authorizations to own or lease each of its properties and assets and to conduct each of its business. -11- 2.2 Authorization. (a) This Agreement and each document, agreement and instrument to be executed by it pursuant to or as contemplated by this Agreement, has been duly authorized, executed and delivered by Purchaser, PII and PSI, and no further proceedings on the part of Purchaser, PII or PSI are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement and each document, agreement and instrument to be executed by Purchaser, PII and PSI (as the case may be) is the legal valid and binding obligation of Purchaser, PSI and PII (as the case may be), enforceable in accordance with its terms, subject to bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting creditor's rights generally and to general equity principles. (b) Neither the execution, delivery and performance of this Agreement and each document, agreement and instrument to be executed by Purchaser, PII or PSI (as the case may be) pursuant to or as contemplated by this Agreement nor the consummation by Purchaser, PSI or PII of the transactions contemplated hereby and thereby, will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or the creation of any Encumbrance upon any of the properties or assets of Purchaser, PII or PSI under any of the terms, conditions or provisions of (x) the organizational documents or Bylaws of Purchaser, PII or PSI or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Purchaser, PII or PSI may be bound, or to which Purchaser, PII or PSI or the properties or assets of Purchaser, PII or PSI may be subject, or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Purchaser, PSI or PII or to any of the properties or assets of Purchaser, PSI or PII. (c) Except as provided in Article V, no material notice to, filing with, authorization of, exemption by, or consent or approval of, any regulatory authority is -12- necessary for the consummation by Purchaser, PII or PSI of the transactions contemplated by this Agreement. 2.3 Accuracy of Representations and Documents. No representation, warranty or certification made by Purchaser, PII or PSI or any officer thereof in this Agreement, schedules (if any) or any certificate provided for under this Agreement is false or misleading in any material respect or contains any material misstatement of fact. 2.4 Brokers and Finders. None of Purchaser, PII or PSI nor any of their officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted, directly or indirectly, for Purchaser, PII or PSI (or any of its officers, directors or employees), in connection with this Agreement or the transactions contemplated hereby. 2.5 Litigation and Other Proceedings. There is no litigation or legal (or other) action, suit, proceeding, investigation or audit, pending, or to the best knowledge of Purchaser, PII and PSI, threatened at law or in equity, or before any federal, state, municipal or other governmental department, commission, bureau, board, agency or instrumentality, domestic or foreign, or before any arbitrator, by or against Purchaser, PII or PSI or any of their respective officers of directors relating to their activities, or any event which would (i) have a Purchaser Material Adverse Effect or (ii) prevent or prohibit PII or PSI from acting as investment adviser or as principal underwriter, respectively, to the Nicholas-Applegate Funds. There are no judgments, injunctions, orders or other judicial or administrative mandates outstanding against or affecting Purchaser, PII or PSI. 2.6 Certain Information Provided by Purchaser. The information supplied by Purchaser, PII or PSI that is included in the materials provided to the Trust in connection with any filings required under the federal securities laws to obtain the approvals described in Article V hereof, is complete in all material respects and does not at the time provided contain (at the time it is distributed, filed or provided, as the case may be) any statement which, at the time and in light of the circumstances under which it is made, is -13- false or misleading with respect to any material fact, and will not omit to state any material fact necessary in order to make the statements therein not false or misleading or (with respect to information supplied by Purchaser, PII or PSI and included in proxy statements) necessary to correct any statement or any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading. 2.7 Registration of PII under the Advisers Act. On the Closing Date, PII will be duly registered under the Advisers Act as an investment adviser with the SEC and will be in compliance in all material respects with the Advisers Act and the rules and regulations thereunder. 2.8 Registration of PSI as a Broker-Dealer. On the Closing Date, PSI will be duly registered under the Exchange Act as a broker-dealer with the SEC and will be in compliance in all material respects with the Exchange Act and the rules and regulations thereunder, including, but not limited to, the net capital requirements thereof. On the Closing Date, PSI will be a member in good standing of the NASD and will be in compliance in all material respects with all applicable rules and regulations of the NASD, including, without limitation, the Conduct Rules. PSI is registered as a broker-dealer in each state in which it is required to be registered in connection with the offering of shares of the Nicholas-Applegate Funds and, to the knowledge of PSI, is in compliance in all material respects with all applicable state securities laws. 2.9 Code of Ethics. PII has adopted a formal code of ethics and a written policy regarding personal trading. Such code and policy comply in all materials respects with Section 17(j) of the Investment Company Act, Rule 17j-1 thereunder and Section 204A of the Advisers Act, respectively. To the knowledge of PII, there has been no violation of its code of ethics and personal trading policy which would constitute a fraud upon the investment companies managed by PII. 2.10 Disqualifications. To the knowledge of PII and PSI, no person "associated" (as defined under the Advisers Act) with PII or PSI has for a period of five -14- years prior to the date hereof been convicted of any crime or is or has been subject to any disqualification that would be a basis for denial, suspension or revocation of registration of an investment adviser under Section 203(e) of the Advisers Act or Rule 206(4)-4(b) thereunder or of a broker-dealer under Section 15 of the Exchange Act, and no "affiliated person" (as defined under the Investment Company Act) of PII or PSI has during a period of five years prior to the date hereof been convicted of any crime or is or has been subject to any disqualification that would be a basis for disqualification as an investment adviser for any investment company pursuant to Section 9(a) of the Investment Company Act; and to PII's knowledge, there is no basis for, or proceeding or investigation that is reasonably likely to become the basis for, any such disqualification, denial, suspension or revocation. 2.11 Financial Statements. The Purchaser has made or will make available to the Seller copies of (a) the consolidated balance sheets of the Purchaser and its subsidiaries as of September 30, 1998, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended September 30, 1998, all as reported in the Purchaser's Annual Reports on Form 10-K for September 30, 1998 filed with the SEC under the Exchange Act, in each case accompanied by the audit report of KPMG LLP, independent auditors for the Purchaser, and (b) the unaudited consolidated balance sheets of the Purchaser and its subsidiaries as of December 31, 1998, all as reported in Purchaser's Quarterly Report on Form 10-Q filed with the SEC under the Exchange Act. The financial statements fairly present the consolidated financial position and results of consolidated operations and cash flows and changes in stockholders' equity of the Purchaser and its subsidiaries for the respective fiscal periods or as of the respective dates set forth therein, and each of such statements (including the related notes, when applicable) has been prepared in accordance with GAAP consistently applied during the periods involved, except as otherwise set forth in the notes thereto (subject, in the case of unaudited interim statements, to normal year-end adjustments). -15- 2.12 Absence of Changes. Since September 30, 1998, no event or development has occurred that has had or could reasonably be expected to have any Purchaser Material Adverse Effect. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND DISTRIBUTOR Seller and Distributor represent and warrant to Purchaser, PII and PSI as follows: 3.1 Organization and Authority. Each of Seller and Distributor is duly organized as a limited partnership in good standing under the laws of its state of organization, and has (i) full power, right and authority to enter into and carry out its obligations under this Agreement, to own its properties and assets and to conduct its business; and (ii) all necessary governmental authorizations to own or lease its properties and assets. Neither Seller nor Distributor is required to qualify to do business in any state or foreign jurisdiction where not already so qualified and where failure to qualify would constitute a Seller Material Adverse Effect. 3.2 Authorization. (a) This Agreement and each document, agreement and instrument to be executed by Seller and Distributor pursuant to or as contemplated by this Agreement, has been duly authorized, executed and delivered by Seller and Distributor, and no further proceedings on the part of Seller or Distributor are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement and each document, agreement and instrument to be executed by Seller and Distributor (as the case may be) is the legal, valid and binding obligation of Seller or Distributor, enforceable in accordance with its terms, subject to bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting creditors' rights generally and to general equity principles. -16- (b) Neither the execution, delivery and performance of this Agreement and each document, agreement and instrument to be executed by Seller and Distributor pursuant to or as contemplated by this Agreement nor the consummation by Seller and Distributor of the transactions contemplated hereby and thereby, will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or the creation of any Encumbrance upon any of the properties or assets of Seller, Distributor or the Trust under any of the terms, conditions or provisions of (X) the organizational documents or Bylaws of Seller, Distributor or the Trust, or (Y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Seller, Distributor or the Trust are a party or by which Seller, Distributor or the Trust may be bound, or to which Seller, Distributor or the Trust, or the properties or assets of Seller, Distributor or the Trust, may be subject; or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation of any governmental, regulatory or self-regulatory authority applicable to Seller, Distributor or the Trust or to any of the properties or assets of Seller, Distributor or the Trust. (c) Except as contemplated by Article V, no notice to, filing with, authorization of, exemption by, or consent or approval of, any regulatory authority or other person is necessary for the consummation by Seller, Distributor or the Trust of the transactions contemplated by this Agreement. (d) Except as contemplated by Article V hereof, no action of the partners of the Seller or the shareholders of the Trust is required in connection with the transactions contemplated by this Agreement. 3.3 Title to Assets. Seller or its Affiliates own, and on the Closing Date Purchaser will acquire, good and marketable title to the Assets, free and clear of all Encumbrances. -17- 3.4 Accuracy of Representations and Documents. No representation, warranty or certification made by Seller, Distributor or any officer thereof in this Agreement, the Schedules hereto, or any certificate provided for under this Agreement is false or misleading or contains any material misstatement of fact. 3.5 Certain Information provided by Seller, Distributor and the Trust. The information supplied by Seller, Distributor and the Trust that is included in (i) the materials provided to the Board of Trustees of the Trust in connection with the approvals described in Article V hereof, and (ii) the proxy solicitation materials to be distributed to the shareholders of the Nicholas-Applegate Funds in connection with the approvals described in Article V hereof, is complete in all material aspects and does not contain (at the time it is distributed, filed or provided as the case may be) any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, and will not omit to state any material fact necessary in order to make the statements therein not false or misleading or (with respect to information provided by Seller, Distributor, or the Trust included in proxy statements) necessary to correct any statement or any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading. 3.6 Brokers and Finders. Seller will pay any financial advisory fees, brokerage fees, commissions or finder's fees incurred with respect to the use of any broker or finder which has acted, directly or indirectly, for Seller (or any of Seller's officers, directors or employees), in connection with this Agreement or the transactions contemplated hereby. 3.7 Contracts. Except as set forth on Schedule 3.7, or as set forth in any other schedule hereto, none of the Trust or Series is a party or subject to: (a) any contract or agreement not fully performed for the purchase for its own account or sale of any asset, property, commodity, material, services or equipment, including without limitation fixed assets, but excluding portfolio securities acquired in -18- the ordinary course of business consistent with past practice or which was not entered into in the ordinary course of business consistent with past practice; (b) any contract containing covenants limiting the freedom of the Trust or the Nicholas-Applegate Funds to compete either in any line of business or with any person or entity; (c) any license agreement (as licensor or licensee); (d) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for the borrowing of money; (e) any contract or agreement not referred to in another clause of this Section 3.7 (all of which are listed on Schedule 3.7) which by its terms does not terminate and is not terminable without penalty by the Trust upon notice of 60 days or less; (f) any contract or agreement relating to the provision of investment advisory, subadvisory, administrative, distribution, brokerage, transfer agency or custody services; (g) any employment, consulting, retirement or severance agreement; or (h) any other contract, agreement, arrangement or understanding, whether written or oral, that was not entered into in the ordinary course of business consistent with past practice. 3.8 No Defaults under Contracts or Agreements. (a) None of the Series is in default in any material respect under any lease, contract, mortgage, promissory note, deed of trust, loan, guaranty or other commitment or arrangement to which the Series is a party or by which it is bound, and to the knowledge of Seller, no event has occurred or condition exists that with notice or the passage of time would constitute such a default. -19- (b) Seller is not in default under any material contract or other agreement relating to or affecting its management of the Retail Assets of the Nicholas-Applegate Funds nor, to the knowledge of Seller, does any condition exist which with notice or lapse of time or both would constitute such a default, and each such contract or other agreement is in full force and effect. 3.9 Additional Representations and Warranties relating to Seller, Distributor and the Trust. (a) Since inception, the Trust (and any predecessor investment company from which assets were transferred to the Trust) has been a duly registered investment company in compliance in all material respects with the Investment Company Act and the rules and regulations promulgated thereunder, and duly registered or licensed and in good standing under the laws of each jurisdiction in which failure to be so registered or licensed would have a material adverse effect on the Trust. The Trust (and any predecessor investment company from which assets were transferred to the Trust) is or was (as applicable), and has been since inception, in material compliance with all applicable federal and state laws, rules, regulations and orders. Since their initial offering, shares of each of the Series have been duly qualified for sale under the securities laws of each jurisdiction in which they have been sold or offered for sale at such time or times during which such qualification was required. The offering and sale of shares of each of the Series have been registered under the Securities Act of 1933, as amended (the "Securities Act"), during such period or periods for which such registration was required, the related registration statement has become effective under the Securities Act, no stop order suspending the effectiveness of such registration statement has been issued and no proceedings for that purpose have been instituted or, to the best knowledge of the Seller, are contemplated. Such registration statement under the Investment Company Act and/or the Securities Act has, at all times when such registration statement was effective, complied in all material respects with the requirements of the Investment Company Act and the Securities Act then in effect and neither such registration statement nor any amendments thereto contained at the time such registration statement became effective -20- and during which time that the registration statement was in use, an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Copies of the current registration statement of the Trust under the Investment Company Act and/or the Securities Act have been made available to Purchaser. All shares of each of the Series were sold pursuant to an effective registration statement and have been duly authorized and are validly issued, fully-paid and non-assessable. The Distributor has sold the shares of the Series in accordance with applicable federal securities laws and any sales literature or advertisements utilized by Distributor to promote each of the Series have been prepared in material compliance with federal securities laws; and no such sales literature or advertisements have contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Each of the Trust's (and any predecessor investment company from which assets were transferred to the Trust) investments made since inception have been made in accordance in all material respects with its investment objectives, policies and restrictions set forth in the registration statement in effect at the time the investments were made and have been held in accordance in all material respects with its respective investment objectives, policies and restrictions, to the extent applicable and in effect at the time such investments were held. (b) Correct and complete copies of all of the current investment advisory agreements and distribution or underwriting contracts, plans adopted pursuant to Rule 12b-1 under the Investment Company Act or arrangements for the payment of service fees (as such term is defined in Rule 2830 of the NASD Conduct Rules), and all administrative services and other services agreements, if any (collectively, the "Mutual Fund Agreements"), pertaining to the Trust and in effect on the date of this Agreement (i) have been made available to Purchaser prior to the date hereof and (ii) are in full force and effect. As to the Trust (and any predecessor investment company from which assets were transferred to the Trust), there has been in full force and effect an investment -21- advisory, sub-advisory, distribution or underwriting agreement (as applicable) at all times since the inception of the Trust (and any predecessor investment company from which assets were transferred to the Trust), and each Mutual Fund Agreement pursuant to which Seller has received compensation respecting its activities in connection with the Trust was duly approved in accordance with the applicable provisions of the Investment Company Act. (c) There are no special restrictions, consent judgments or Securities and Exchange Commission ("SEC") or judicial orders on or with regard to the Trust currently in effect. (d) Each of the Series has qualified and elected to be treated as a regulated investment company under Subchapter M of the Code and has so qualified and elected in each year since such Series was treated as a corporation for federal income tax purposes, including until the Closing occurs. No Series has received assets from an entity treated as a corporation (other than a corporation treated as a regulated investment company) for federal or state income tax purposes in a transaction in which no gain or loss was recognized by the corporation. Neither Seller, nor to the knowledge of Seller, any Series, has received any notice of communication affecting the federal or state income tax status of any Series or any predecessor investment company from which assets were transferred to a Series. (e) The Trust (and any predecessor investment company from which assets were transferred to the Trust), as pertains to each Series, has paid or caused to be paid all federal, state, local, foreign and other taxes, government fees or the like, including, but not limited to, income taxes, excise taxes, estimated taxes, alternative minimum taxes, franchise taxes, capital stock taxes, sales taxes, use taxes, ad valorem or value added taxes, employment and payroll-related taxes, withholding taxes, and transfer taxes, whether or not measured in whole or in part by net income, and all deficiencies, or other additions to tax, interest, fines and penalties owed by them (collectively, "Taxes" and, each individually, a "Tax"), required to be paid by the Trust or such Series, whether -22- disputed or not. The Trust, as pertains to each Series, has, in accordance with applicable law, timely filed all federal, state, local and foreign tax returns (including information returns) required to be filed by them, and all such returns correctly and accurately set forth in all material respects the amount of any Taxes or reportable income, as the case may be, relating to the applicable period. For each taxable period of the Trust in the last five fiscal years, the Trust has made available to Purchaser correct and complete copies of all the Trust's federal, state, local and foreign income tax returns (including information returns), examination reports and statements of deficiencies assessed against or agreed to by the Trust. (f) Neither the Internal Revenue Service nor any other governmental authority responsible for the imposition or collection of any Tax (a "Taxing Authority") is now asserting or, to the knowledge of the Seller, threatening to assert against the Trust any deficiency or claim for additional Taxes. To the knowledge of Seller, no claim has ever been made by a Taxing Authority in a jurisdiction where the Trust does not file reports and returns that the Trust is or may be subject to taxation by, or may be liable to file information returns in, that jurisdiction. There are no security interests on any assets of the Trust that arose in connection with any failure to pay any Taxes. The Trust has never entered into a closing agreement pursuant to Section 7121 of the Code. There has not been any audit by any Taxing Authority of any tax period of the Trust, and to the knowledge of Seller, no such audit is in progress, and the Trust has not been notified by any Taxing Authority that any such audit is contemplated or pending. No extension of time with respect to any date on which a tax return was or is to be filed by the Trust is in force, and no waiver or agreement by the Trust is in force for the extension of time for the assessment or payment of any Taxes. (g) Neither Seller, any person who is an "affiliated person" (as defined in the Investment Company Act) or any other "interested person" (as defined in the Investment Company Act), receives or is entitled to receive any compensation directly or indirectly (i) from any person in connection with the purchase or sale of securities or other property to, from or on behalf of the Trust, other than the bona fide ordinary compensation as -23- principal underwriter for the Trust or as broker in connection with the purchase or sale of securities in compliance with Section 17(e) of the Investment Company Act, or (ii) from the Trust or its security holders for other than bona fide investment advisory or administrative services. Accurate and complete disclosure of all such compensation arrangements has been made in the registration statement of the Trust filed under the federal securities laws. (h) Seller has made available to Purchaser correct and complete copies of the audited financial statements, prepared in accordance with GAAP, of the Trust for the past five fiscal years, and unaudited financial statements, prepared in accordance with GAAP, of the Trust for the six-month period ending September 30, 1998 and the eight-month period ending November 30, 1998 (each hereinafter referred to as a "Mutual Fund Financial Statement"). Each of the Mutual Fund Financial Statements fairly presents the consolidated financial position and the results of operations and cash flows for the respective periods indicated or as of the respective dates set forth herein of the Trust, and each of such statements (including the related notes, when applicable) has been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as otherwise set forth in the notes thereto (subject, in the case of unaudited interim statements, to normal year-end adjustments). (i) There is no litigation or legal (or other) action, suit, proceeding or investigation at law or in equity pending or, to the best knowledge of Seller and Distributor, threatened in any court or before or by any governmental agency or instrumentality, department, commission, board, bureau or agency, or before any arbitrator, by or against the Trust, or any of the Nicholas-Applegate Funds or, to Seller's and Distributor's knowledge, any officer or director thereof or Seller or Distributor relating to the activities of the Trust or any of the Nicholas-Applegate Funds, any disqualification of Seller under Section 9(a) of the Investment Company Act, or any event which would require Seller to give an affirmative response to any of the questions in Item 11 of Seller's Form ADV (or any similar or successor form) or require the Distributor to give an affirmative response to any of the questions under Item 7 of Distributor's Form -24- BD (or any similar or successor form). There are no judgments, injunctions, orders or other judicial or administrative mandates outstanding against or affecting the Seller, Distributor, Trust, any of the Nicholas-Applegate Funds or, to the knowledge of Seller and Distributor, any officer or director thereof relating to the activities of or affecting the Trust or any of the Nicholas-Applegate Funds. (j) The exhibit list in the current registration statement of the Trust includes all of the documents that would be required to be included thereon if such registration statement were being refiled. (k) Seller has furnished Purchaser or provided access to, with respect to each of the Nicholas-Applegate Funds, complete and correct copies of (i) Annual and Semi-Annual Reports and proxy statements of the Trust and Series pertaining to the last five years of the Trust and Series, each in the form delivered to the Trust and Series' shareholders, as well as any additional report or other material generally delivered to such shareholders since the delivery of such Annual Report or Semi-Annual Report, as the case may be; (ii) all Prospectuses, together with Statements of Additional Information of the Trust, filed with the SEC in the last five years and (iii) all Annual Reports of the Trust (on Form N-SAR) together with any and all exhibits annexed thereto from the last five years of the Trust; each in the form filed with the SEC (all of the foregoing documents referred to in (i), (ii) and (iii) being collectively referred to herein as the "Trust Statements"). The information contained in the Trust Statements does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make any material statement made therein, in light of the circumstances under which they were made, not misleading. The financial statements, including, without limitation, the Statement of Assets and Liabilities, the Statement of Operations and the Statement of Changes in Net Assets, and the notes thereto set forth in any such Annual or Semi-Annual Report fairly present the financial position of the Trust and the Series as at the dates of such statements and the results of its operations for the periods covered thereby in accordance with GAAP consistently applied (except as noted therein). Since the end of the period covered by the most recent Annual or Semi-Annual -25- Report, there has occurred no event or condition which would (i) require the Trust to file an additional amendment, registration statement, prospectus, prospectus supplement, report or other document with the SEC, which document has not been so filed with the SEC and delivered to Purchaser or (ii) require the Trust to conduct a meeting of its stockholders. (l) The Trust has adopted procedures relating to brokerage transactions on a securities exchange through an affiliated broker which meet the requirements of Rule 17e-1 under the Investment Company Act and, except as indicated in Schedule 3.9(l), the Trust has been in compliance with such procedures since its inception. (m) The Trust has adopted a Code of Ethics which meets the requirements of Rule 17j-1 under the Investment Company Act and, to the knowledge of Seller, except as indicated on Schedule 3.9(m), there has been no violation of such Code of Ethics which would constitute a fraud upon the Trust. (n) Where the Trust has issued and offered for sale multiple classes of shares of a Series, such classes have been issued and sold in compliance with Rule 18f-3 under the Investment Company Act and in conformity with the applicable requirements of Revenue Procedure 96-47. (o) The reorganization of the Nicholas-Applegate Funds from a master-feeder structure to a multi-class structure on July 24, 1998 (the "Reorganization") resulted in the recognition of no gain or loss for the Trust or any Series as set forth in the tax opinion dated July 24, 1998 from Paul, Hastings, Janofsky & Walker LLP. The Reorganization was consummated in compliance with applicable federal securities law. (p) Since the date of the last effective registration statement of the Trust, there have been no changes made to any expense limitations or fee waivers pertaining to the Nicholas-Applegate Funds. 3.10 Absence of Certain Changes. Since the dates of the most recent audited financial statements for the Trust, no event or development has occurred that has had or -26- would reasonably be expected to have a Seller Material Adverse Effect on the Trust. Since the dates of the most recent audited financial statements referred to in Section 3.9 hereof, except as permitted by Section 4.2 herein, with respect to each of the Series, the Trust has not: (a) declared, set aside, made or paid any dividend or other distribution in respect of its capital stock or other equity interests or otherwise purchased or redeemed, directly or indirectly, any shares of its capital stock or other equity interests, except in the ordinary course of its business consistent with past practice; (b) adopted, or amended in any material respect, any employment, collective bargaining, bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation or other plan, agreement, trust, fund or arrangement for the benefit of any Trustees of the Trust; (c) amended its Certificate of Trust or By-laws or any other organizational documents; (d) changed in any significant respect its accounting practices, policies or principles, except as may be required under applicable law or generally accepted accounting principles; (e) operated its business in any manner other than in the ordinary course of business consistent with past practice; (f) changed the investment objective, policies or restrictions; or (g) taken any action or omitted to take any action that is reasonably likely to result in the occurrence of, or agreed or committed to do, any of the foregoing. 3.11 Insurance. The Trust has in full force and effect such insurance as is required by the Investment Company Act, and has directors' and officers' and errors and omissions' insurance in amounts believed by Seller to be adequate and appropriate. The -27- Trust is not in material default under any such insurance policy and all claims made under such policies in the last ten years are listed on Schedule 3.11 hereto. True, correct and complete copies of all Trust insurance policies pertaining to the operation of the Trust have been made available to Purchaser and all premiums that are due and payable have been paid. 3.12 Trust Records; Copies of Documents. The record books of the Trust accurately record all material corporate action taken by its respective shareholders and Board of Trustees and committees and, originals or true, correct and complete copies of such documents have been made available to Purchaser for review. ARTICLE IV CONDUCT OF BUSINESS PRIOR TO THE CLOSING 4.1 Conduct Prior to Closing. Each of Seller and Distributor hereby covenant and agree with Purchaser that, prior to the Closing, unless the prior written consent of Purchaser shall have been obtained (which consent shall not be unreasonably withheld or delayed) and except as otherwise provided in Section 4.2 of this Agreement and as expressly contemplated in this Agreement, each of Seller and Distributor shall, to the extent pertaining to the Nicholas-Applegate Funds, use reasonable best efforts to cause the Trust to operate their business only in the usual, regular and ordinary course and in accordance with past practice and, in the case of Seller and Distributor, to the extent pertaining to the Nicholas-Applegate Funds, conduct its business in a manner comporting with the standards of portfolio management and service quality heretofore met by it, and shall to the extent pertaining to the Nicholas-Applegate Funds use its reasonable best efforts to preserve intact its business organization and assets and maintain its rights, franchises and business and customer relations necessary to run such portion of its business as currently run. Subject to the authority of the Trustees of the Trust, from the date hereof until the Closing, Seller hereby covenants and agrees to use its reasonable best efforts to ensure that, without the prior written consent of Purchaser (which consent -28- shall not be unreasonably withheld or delayed), except in connection with the transactions contemplated by this Agreement: (a) the Nicholas-Applegate Funds shall not incur any indebtedness for borrowed money, or issue or sell any debt securities or prepay any debt, except in the ordinary course of business consistent with prior practice; (b) the Nicholas-Applegate Funds shall not pledge or hypothecate any of their properties or assets, tangible or intangible, except in the ordinary course of business consistent with past practice; (c) the Nicholas-Applegate Funds shall not, except where required in the exercise of their fiduciary obligations, have any action (other than in connection with the transactions contemplated hereby) taken by them, other than actions in the ordinary course of business, including, but not limited to, making any changes to the investment policies of any of the Series; (d) the Nicholas-Applegate Funds shall not forgive or cancel any debts or claims, or waive any rights except in the ordinary cause of business consistent with prior practice; (e) the Nicholas-Applegate Funds shall not enter into any agreement, commitment or other transaction, other than agreements entered into in the ordinary course of business consistent with prior practice; (f) the Trust shall not, except as may be required by applicable law and after notice to Purchaser, adopt, or amend in any material respect, any employment, collective bargaining, bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation or other plan, agreement, trust, fund or arrangement for the benefit of trustees of the Nicholas-Applegate Funds; (g) the Trust shall not, except such changes as may be proposed by Purchaser or as may be required by applicable law and after written notice to Purchaser, amend its Certificate of Trust or By-laws or any other organizational documents; -29- (h) the Trust shall not change in any material respect its accounting practices, policies or principles, except as may be required by applicable law or generally accepted accounting principles and after notice to Purchaser; (i) the Nicholas-Applegate Funds shall not incur any liability or obligation (whether absolute, accrued, contingent or otherwise and whether direct or as guarantor or otherwise with respect to the obligations of others), except in the ordinary course of business consistent with past practice or as otherwise permitted hereunder; (j) Seller, the Distributor and Nicholas-Applegate Funds shall not make any material changes in policies or practices relating to selling practices or other terms of sale or accounting therefor or in policies of employment unless required by applicable law or generally accepted accounting principles and after notice to Purchaser; (k) the Nicholas-Applegate Funds shall not enter into any type of business not conducted as of the date of this Agreement or create or organize any subsidiary or enter into or participate in any joint venture or partnership; (l) the Nicholas-Applegate Funds shall not enter into any agreement or transactions or make any amendment or modification to any existing agreement outside of the ordinary course of business, unless required by applicable law or generally accepted accounting principles and after notice to Purchaser; or agree or commit to do any of the foregoing. (m) no Nicholas-Applegate Fund shall take any action that could be reasonably expected to affect its ability to qualify as a "regulated investment company" under Subchapter M of the Code. The Transferred Series shall not knowingly take any action that could reasonably be expected to affect the tax-free status of the Transfer, except as necessary to meet its obligations under Section 4.2. 4.2 Redemption of Institutional Assets of Nicholas-Applegate Funds. Seller and Distributor agree to take all lawful steps necessary so that no shares of the class of any series designated as "Institutional Shares" (or "I") are outstanding as of the Closing -30- Date. Towards this end, Seller and Distributor shall have the right to (a) solicit shareholders of the I shares of the series between this date and the date of the Closing to redeem their I shares and invest the proceeds in portfolios organized by Seller other than the Nicholas-Applegate Funds, or in other accounts managed by Seller; (b) to reorganize the I shares so that they are no longer a class of any series of the Trust; or (c) to merge the I shares into series of another trust advised by Seller. As between Seller and Purchaser, Seller shall be responsible and liable for all expenses, losses, and costs related to such solicitation or other means utilized by Seller and Distributor to effectuate the removal of the Institutional Shares. Seller and Distributor covenant and agree that any solicitation efforts shall be conducted in compliance with reasonable industry practices and in compliance with applicable laws. 4.3 Consents and Approvals. Subject to the terms and conditions herein provided, each of the parties hereto agrees to cooperate with the other and use its reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under all applicable laws, regulations and contractual arrangements to consummate and make effective the transactions contemplated by this Agreement. The parties hereto covenant and agree to take no action, and Seller hereby covenants and agrees to use its reasonable best efforts to prevent the Trust, subject to the authority of the Board of Trustees of the Trust, from taking any action (i) which would render any of the representations and warranties contained herein untrue in any material respect at and as of the Closing Date, or (ii) which would materially and adversely affect the ability of the parties to satisfy any of the conditions set forth in Article VII hereof. -31- ARTICLE V COMPLIANCE WITH FEDERAL SECURITIES LAWS 5.1 Cooperation in Obtaining Necessary Approvals to Consummate Intentions of Parties. (a) In anticipation of the Closing, and thereafter as necessary, the parties hereto shall cooperate, in a manner in compliance with the Investment Company Act, with one another to obtain the following approvals: (i) for the Nicholas-Applegate Funds to enter into an investment management agreement with PII in substantially the form attached hereto as Exhibit 5.1(a)(i) (the "New Advisory Agreement"). Seller agrees, in a manner in compliance with the Investment Company Act, to use its best efforts to induce the Trust to call a meeting of its Board of Trustees and a meeting of the shareholders of each of the Series to consider and approve the New Advisory Agreement. (ii) for PII to enter into a sub-advisory agreement with Seller in substantially the form attached hereto as Exhibit 5.1(a)(ii) (the "Sub-Advisory Agreement"). Seller agrees, in a manner in compliance with the Investment Company Act, to use its best efforts to induce the Trust to call a meeting of its Board of Trustees and a meeting of its shareholders of the Sub-Advised Series to consider and approve the entering by the Sub-Advised Series into the Sub-Advisory Agreement. Purchaser agrees, in respect of each Series, that after Closing and until payment of the Deferred Purchase Price for that Series, Purchaser will, in a manner in compliance with the Investment Company Act, to use its reasonable best efforts to cause Seller to be paid a subadvisory fee for each Sub-Advised Series equal to 50% of its then effective annual advisory fee for each such Series (after fee waivers and expense limitations are accounted for); (iii) subject to Section 6.12, for each of the Transferred Series to approve a transfer of all their assets and liabilities to an investment company or -32- series thereof for which PII serves as investment adviser and that has investment policies that are compatible with those of the Transferred Series (such investment company or series the "PII Acquiring Fund" and such transaction, referred to previously as the "Transfer"). Subject to Section 6.12, Seller agrees, in a manner in compliance with the Investment Company Act, to use its best efforts to induce the Trust to call a meeting of its Board of Trustees and a meeting of the shareholders of the Transferred Series to consider and approve the Mergers. (iv) for the Nicholas-Applegate Funds to take such actions as may be necessary to cause the Board of Trustees of the Trust to be reconstituted consistent with the agreement of the parties. Seller covenants and agrees in a manner in compliance with the Investment Company Act to use its best efforts to induce the Trust to call a meeting of its Board of Trustees and a meeting of the shareholders of the Trust for the purpose of appointing and electing the trustees selected by the parties. (v) for the Nicholas-Applegate Funds to enter into a Expense Limitation Agreement with PII and Seller in substantially the form attached hereto as Exhibit 5.1(a)(v). (b) If the Board of Trustees of the Trust approves the items specified in Section 5.1(a)(i) and (ii), above, Seller shall assist the Trust to prepare and file with the SEC as soon as is reasonably practicable any proxy materials relating to the transactions contemplated by this Agreement that are required to be prepared and filed (the "Proxy Statement"). Seller covenants and agrees that any material provided by Seller or the Trust that is included in the Proxy Statement shall comply as to form in all material respects with all applicable requirements of federal securities laws and shall be accurate and complete and not contain any untrue statement of material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. Seller shall assist, in a manner in compliance with the federal securities laws and other applicable -33- law, in the solicitation of proxies for the required shareholder meetings and shall use its reasonable best efforts to obtain approval from the shareholders and the Board of Trustees of the Trust of the matters referred to herein. Purchaser covenants and agrees that any material provided by Purchaser, PII or PSI that is included in the Proxy Statement shall comply as to form in all material respects with all applicable requirements of federal securities laws and shall be accurate and complete and not contain any untrue statement of material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances in which they were made, not misleading. (c) If the Board of Trustees of the Trust approves the items specified in Section 5.1(a)(iii) above, Seller shall assist the Trust and Purchaser shall assist the PII Acquiring Fund to prepare and file with the SEC as soon as is reasonably practicable any proxy/prospectus materials relating to the Transfers contemplated by this Agreement that are required to be prepared and filed (the "Proxy/Prospectus"). Seller covenants and agrees that any material provided by Seller or the Trust that is included in the Proxy/Prospectus shall comply as to form in all material respects with all applicable requirements of federal securities laws and shall be accurate and complete and not contain any untrue statement of material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. Purchaser covenants and agrees that any material provided by Purchaser or the PII Acquiring Fund that is included in the Proxy/Prospectus shall comply as to form in all material respects with all applicable requirements of federal securities laws and shall be accurate and complete and not contain any untrue statement of material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. Seller shall assist, in a manner in compliance with the federal securities laws and other applicable law, in the solicitation of proxies for the required shareholder meetings to approve the Transfers and shall use its reasonable best efforts to obtain approval from the shareholders and the Board of Trustees -34- of the Trust of the matters referred to herein. Purchaser shall be responsible and liable for all expenses, losses and costs related to the consummation of the Transfers except those expenses, losses and costs incurred by Seller in providing information for the Proxy/Prospectus and otherwise complying with this Section 5.1. 5.2 Required Fund Actions. Seller shall use its reasonable best efforts, in a manner in compliance with the Investment Company Act, to induce the Board of Trustees of the Trust, to approve, with respect to each of the Series: (a) entering into an Interim Distribution Agreement (as complies with the Investment Company Act) with PSI in substantially the form attached hereto as Exhibit 5.2(a) (the "Interim Distribution Agreement"), to commence upon the date of this Agreement or as provided in its terms. (b) entering into a written distribution agreement (as complies with the Investment Company Act) with PSI in substantially the form attached hereto as Exhibit 5.2(b) (the "New Distribution Agreement") with respect to each of the Series other than the Transferred Series, to commence upon termination of the Interim Distribution Agreement; and in connection therewith, changing the names of the Nicholas-Applegate Funds to such names as may be requested by Purchaser; and (c) entering into such written fund service agreements (as comply with the Investment Company Act) as may be necessary to replace fund service agreements in existence prior to Closing, provided, however, that the terms of the replacement fund service agreements shall not be any more burdensome to the Nicholas-Applegate Funds in any material respect than the current agreements unless otherwise agreed to by Seller. 5.3 Section 15(f). (a) Seller and Purchaser intend to structure and complete the transactions contemplated by this Agreement, and Purchaser intends thereafter to conduct the affairs of the Nicholas-Applegate Funds, in such a manner as to obtain the benefits and protections of Section 15(f) of the Investment Company Act. -35- (b) Purchaser, PII and PSI covenant and agree to: (i) use best efforts to comply with, and use best efforts to cause the Nicholas-Applegate Funds to comply with, the provisions contained in Section 15(f)(1)(A) of the Investment Company Act for the period specified therein. For this purpose, "best efforts" shall mean Purchaser, PII and PSI: (A) causing to be distributed to the Trustees of the Nicholas-Applegate Funds on at least an annual basis, a questionnaire containing questions reasonably designed to elicit information pertaining to the status of such Trustees as "interested persons" (for purposes of Section 15(f)(1)(A) of the Investment Company Act) of PII or its Affiliates, or of the predecessor investment adviser to the Series (including "interested persons" of Seller or its Affiliates) (collectively, the "Relevant Entities"); (B) requesting Trustees to promptly notify PII of any change in their status under Section 15(f)(1)(A) of the Investment Company Act; (C) at such time as they learn of a change in the status of a Trustee that would cause more than 25% of the members of the Board of Trustees of Nicholas-Applegate Funds to be "interested persons" of Relevant Entities, taking reasonable steps to correct such situation as promptly as practicable, including causing any Trustees affiliated with PII or any of its Affiliates to resign from the Board to the extent required to correct such situation; -36- (D) obtaining the agreement of any transferee of all or a portion of the business of PII to comply with provisions substantially identical to the provisions of this Section 5.3(b); and (E) taking such additional steps (which shall not require the incurrence of any out-of-pocket expenses by Purchaser or its Affiliates) as Seller may from time to time reasonably request in writing in connection with compliance with Section 15(f)(1)(A) of the Investment Company Act. (c) Purchaser, PII and PSI covenant and agree to use best efforts to comply with, and use best efforts to cause each Series to comply with, the provisions contained in Section 15(f)(1)(B) of the Investment Company Act for the period specified therein. In connection therewith, Purchaser, PII and PSI will obtain the agreement of any transferee of all or a portion of the business of PII to comply with provisions substantially identical to the provisions of this Section 5.3(c). ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Current Information. (a) Seller or Distributor (as the case may be) will promptly notify Purchaser of any material change in the normal course of the business of the Nicholas-Applegate Funds or of any complaints from a governmental or regulatory authority or a self-regulatory body, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of any litigation that comes to its attention which would, in any manner, challenge, prevent, alter or materially delay any of the transactions contemplated hereby, and Seller or Distributor (as the case may be) will -37- keep Purchaser fully informed with respect to any event which would cause or constitute a breach or default, or would have caused or constituted a breach or default had such event occurred or been known to Seller or Distributor prior to the date hereof, of any of the representations, warranties or covenants of Seller or Distributor contained in or referred to in this Agreement or any Schedule or Exhibit referred to in this Agreement, in which case Seller or Distributor (as the case may be) shall give detailed written notice thereof to Purchaser and Seller or Distributor (as the case may be) shall use its reasonable best efforts to prevent or promptly remedy the same. Seller will also notify Purchaser of the status of regulatory applications, third party consents, shareholder approvals and registration amendments required pursuant to Article V hereof. (b) Purchaser will promptly notify Seller and Distributor of (i) any complaints from a governmental or regulatory authority or a self-regulatory body, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of any litigation that comes to its attention with respect to Purchaser which would, in any manner, challenge, prevent, alter or materially delay any of the transactions contemplated hereby, and Purchaser will keep Seller and Distributor fully informed with respect to such events; (ii) any event which would cause or constitute a breach or default, or would have caused or constituted a breach or default had such event occurred or been known to Purchaser prior to the date hereof, of any of the representations, warranties or covenants of Purchaser contained in or referred to in this Agreement or any Schedule or Exhibit referred to in this Agreement, in which case Purchaser shall give detailed written notice thereof to Seller and Distributor and Purchaser shall use its reasonable best efforts to prevent or promptly remedy the same; and (iii) the status of regulatory applications, third party consents, shareholder approvals and registration amendments required pursuant to Article V hereof. 6.2 Access. Seller shall upon reasonable notice afford to Purchaser and its representatives such access during normal business hours throughout the period prior to the Closing Date to counsel and the accountants to the Trust, any books and records included in the Assets and the Trust's books, records, properties, and to such other -38- information as Purchaser may reasonably request, provided such access does not unreasonably interfere with the business of Seller and the Trust. 6.3 Information. Purchaser shall hold, and shall cause its respective partners, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a regulatory authority is necessary in connection with any necessary regulatory approval or unless compelled to disclose by judicial or administrative process or by other requirement of law or the applicable requirements of any regulatory agency or relevant stock exchange, all nonpublic records, books, contracts, instruments, computer data and other data and information (collectively, the "Information") concerning Seller and Distributor or, during the period from the date hereof until the Closing Date, the Trust (or, if required under a contract with a third party, such third party) furnished to Purchaser by Seller, Distributor or the Trust or their respective representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (a) previously known by such party on a non-confidential basis, (b) in the public domain through no fault of Purchaser or its employees or agents or (c) later lawfully acquired from other sources by the party to which it was furnished), and Purchaser shall not release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and, to the extent permitted above, regulatory authorities. In the event of the termination of this Agreement, Purchaser shall return or destroy all information furnished to it and its representatives and all analyses, compilations, data, studies or other documents prepared by them or their representatives containing or based in whole or in part on any such furnished information or reflecting Purchaser's review of the Nicholas-Applegate Funds. 6.4 Qualification of the Nicholas-Applegate Funds. Subject to the authority of the Board of Trustees of the Trust, up to and until the Closing Date Seller will use its reasonable best efforts to cause the Nicholas-Applegate Funds to take no action (i) that would prevent each Series from qualifying as a "regulated investment company", within the meaning of Section 851 of the Code, or (ii) that would be inconsistent with each -39- Series' prospectus and other offering, advertising and marketing materials. The provisions of this Section 6.4 shall not apply to the Transfer. 6.5 Press Releases, Etc.. Up to and until the Closing Date, Purchaser, Seller and Distributor will consult with each other as to the form, substance and timing of any press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby and no such press release or other public disclosure shall be made without the consent of the other party, which shall not be unreasonably withheld or delayed; provided, however, that the parties may make such disclosures as are required by law after making reasonable best efforts in the circumstances to consult in advance with the other parties. 6.6 Administrative Fees and Other Expenses of the Nicholas-Applegate Funds. (a) For a period of two years from the Closing Date, Purchaser covenants and agrees that neither it nor its Affiliates (as defined herein) will directly or indirectly charge the Nicholas-Applegate Funds fees for the provision of administrative services. (b) For a period of two years from the Closing Date, Purchaser covenants and agrees that neither it nor its Affiliates (as defined herein) will increase any fees charged to the Nicholas-Applegate Funds, except to the extent not prohibited by Section 15(f) of the Investment Company Act. Purchaser may increase sales charges on any class to the extent necessary to conform with sales charges on the same class of other mutual funds managed by PII. (c) For a period of two years from the Closing Date, Purchaser covenants and agrees that its Affiliates (as defined herein) and it will maintain the limits on operating expenses shown on Schedule 6.6(c) hereto. (d) To the extent Purchaser or an Affiliate enters into agreement with a Sub-Advised Series to seek recoupment of expenses that are waived or reimbursed, Purchaser and Seller will share equally any recoupment of such fee waivers, fund subsidies or -40- expense reimbursements collected from the Sub-Advised Series after the Closing Date through the date of termination of the Sub-Advisory Agreement. Purchaser will promptly pay Seller its share of such reimbursements. Purchaser does not presently intend to collect reimbursements related to fee waivers incurred prior to Closing. "Affiliate" shall mean with respect to any person or entity (the "first party"), any other person or entity that directly or indirectly controls, or is controlled by, or is under common control with, such first party. The term "control" means the possession, directly or indirectly, of the power to (a) vote twenty-five percent (25%) or more of the outstanding voting securities of such person or entity, or (b) otherwise direct the management or policies of such person or entity by contract or otherwise. 6.7 Rule 12b-1 Fees. (a) Purchaser, PII and PSI agree: (i) to use reasonable best efforts so long as any Class B shares of the Series outstanding at the Closing remain outstanding, including Other Shares (as defined herein), to cause there to be no decrease in the rate of 12b-1 fees, as listed on Schedule 6.7 hereto, paid by any Series with respect to assets attributable to Class B shares of such Series outstanding at the Closing; (ii) so long as any Class B shares of the Series outstanding at the Closing remain outstanding, including Other Shares, to pay to Seller or, in Seller's discretion, its assignee, the 12b-1 fees paid by any Series with respect to assets attributable to Class B shares of such Series outstanding at the Closing; (iii) that Seller or, in Seller's discretion, its assignee, shall be entitled to receive all contingent deferred sales charges paid at any time after the Closing with respect to Class B shares of the Series outstanding at the Closing and that, except as otherwise permitted in accordance with arrangements described in the prospectus, such sales charges shall not be waived without the consent of Seller; -41- (iv) that Seller acknowledges that the obligations of Purchaser, PII and PSI with respect to 12b-1 fees pursuant to this Section 6.7 are subject to the existence of a plan pursuant to Rule 12b-1 of the Investment Company Act, and no payments of 12b-1 fees would be required upon termination of a plan pursuant to Rule 12b-1 of the Investment Company Act by the Board of Trustees of Nicholas-Applegate Funds or termination of the New Distribution Agreement by the Trust. Seller acknowledges that the obligations of Purchaser, PII and PSI pursuant to this Section 6.7(a) are subject to the receipt of such fees by PSI or its assignee from a Series. (v) that Seller and its Affiliates will not be responsible for providing any financing for Purchaser or its Affiliates with respect to sales of any class of shares of the Series following the Closing. Seller and Purchaser intend to coordinate and cooperate to approach a third party to investigate: (A) the availability and pricing of a financing facility with such third party for Purchaser with respect to sales of Class B shares of the Series to be made following the Closing; and (B) the possible assignment by the Seller to such third party of the right to receive (I) the 12b-1 fees paid following the Closing with respect to assets attributable to Class B shares of the Series outstanding at the Closing, and (II) the contingent deferred sales charges paid following the Closing with respect to Class B shares of the Series outstanding at the Closing; in the event the Seller assigns the rights described in this clause (B) to such a third party, Purchaser agrees to promptly remit to the Seller the portion of the proceeds of such assignment received by Purchaser or its Affiliates (if any) attributable to the Seller's rights assigned to such third party. (vi) Purchaser and its Affiliates agree to cooperate with the Seller in all reasonable respects in connection with the Seller's assignment to a third party or retention of its rights to receive the 12b-1 fees and the contingent deferred sales charges described in this Section 6.7(a), including without limitation providing representations, warrants -42- and covenants customarily provided in connection with such an assignment or retention of such rights. (b) PSI and Purchaser agree that so long as any Class B shares of the Funds outstanding at the Closing remain outstanding, including Other Shares, to use reasonable best efforts to cause brokers receiving trail commissions with respect to assets attributable to shares of the Nicholas-Applegate Funds outstanding at the Closing to continue receiving such commissions at the same rates as in effect at the Closing (as described in the prospectus) for so long as such assets remain invested in the Nicholas-Applegate Funds but only to the extent the shareholder services fees under the 12b-1 plan received by PSI are sufficient to pay such 12b-1 trail commissions. (c) In the event that any of the Funds are merged into other funds, or otherwise recognized such that any such Fund is not the survivor of such merger or reorganization, the provisions of Section 6.7(a) and 6.7(b) shall be deemed to apply to such successor fund. Each of the parties shall be responsible for all expenses, losses and costs incurred by it in accordance with Section 6.7(a)(v) and (vi); provided, however, that Seller shall pay any reasonable attorneys' fees incurred by Purchaser and its Affiliates not to exceed a maximum amount of $50,000. For purposes of this Section 6.7, "Other Shares" shall be defined as shares into which such outstanding Class B shares are exchanged and shares issued upon reinvestment of any dividends declared on Class B shares outstanding on the Closing Date, as reasonably estimable. To the extent the 12b-1 plan and/or shareholder servicing agreement is amended, the parties agree to construe this Section 6.7 in the same manner as intended to be applied to the current plans. 6.8 Performance Records of Sub-Advised Series. Purchaser and PII agree that Seller may, to the extent permissible under applicable law, use after the Closing Date the performance records of any Sub-Advised Series following the Closing Date but only with respect to performance during the period that the Sub-Advisory Agreement remains in effect for such Series. Seller agrees that Purchaser or its Affiliates may, to the extent -43- permissible under applicable law, use after the Closing Date the performance records of any Sub-Advised Series earned prior to the Closing Date for so long as the Sub-Advisory Agreement remains in effect for such Series. 6.9 Resale Penalty. If, within one year following the Closing Date, Purchaser enters into an agreement requiring it to seek shareholder consent to assign to a third party the right to advise or distribute any Sub-Advised Series, whether or not still sub-advised by Seller at that time, Purchaser shall promptly pay a fee to Seller in immediately available funds of $4,000,000. 6.10 Non-Competition. Except for any existing advisory and sub-advisory relationships to the series of investment companies as set forth on Schedule 6.10, until the second anniversary of the Closing, neither Seller nor any of its Affiliates will serve or act as an investment adviser or sub-adviser to any open-end investment company registered under the Investment Company Act or series thereof (i) having investment objectives substantially similar to those of any of the Sub-Advised Series for which Seller then serves as sub-adviser and (ii) whose shares are offered through distribution channels directed primarily to U.S. retail investors. Notwithstanding the foregoing, Seller may distribute on a non-retail basis and/or act as adviser or sub-adviser to open-end mutual funds in the institutional 401(k) market, so long as all classes of shares of such funds carry no 12b-1 fees, loads or shareholder service fees in excess of 0.25%. "Institutional 401(k) market" shall mean the market comprised of institutions which desire to utilize one or more of Seller's funds as a 401(k) investment option, as well as the 401(k) "Taft Hartley" market covered by the agreement between Seller and Trust Fund Advisors. 6.11 Road Shows. For a total of not more than four days in any calendar year, the Seller will make available in Phoenix, Arizona one or more of its senior investment personnel sufficiently conversant with matters pertaining to each of the Sub-Advised Series for the purpose of either attending a meeting of the Board of Trustees of the Trust or making such presentations to dealers and potential dealers as may regard matters pertaining to each Sub-Advised Series. It is understood that Seller shall not be required -44- to make available more than one representative for each Sub-Advised Series and that one person may act as a representative for one or more than one Sub-Advised Series so long as such representative is sufficiently conversant with matters pertaining to the relevant Series for which he or she is acting as representative. The Purchaser or PSI shall reimburse the Seller for the reasonable out-of-pocket expenses incurred by the Seller in making such senior representatives available and shall provide reasonable advance notice to the Seller of each meeting or presentation. 6.12 Transferred Series. Purchaser agrees to use its reasonable best efforts to induce the investment company managed by PII that plans to assume the assets of the Transferred Series to obtain an opinion of counsel to the investment company that the Transfer constitutes a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code, dated as of the closing of the Transfer. In the event that such opinion cannot be obtained, Purchaser agrees to treat the Transferred Series as a Stand-Alone Series hereunder. ARTICLE VII CONDITIONS 7.1 Conditions to Each Party's Obligations to Consummate. The respective obligations of each party to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver at or prior to the Closing of the following conditions: (a) Regulatory Approvals. The transactions contemplated by this Agreement shall have been approved by all federal, state, foreign or local governmental or regulatory authorities or self-regulatory bodies, the approval of which is required to permit consummation thereof, without the imposition of any condition or requirement of any commitment which is reasonably likely to have a Purchaser Material Adverse Effect or Seller Material Adverse Effect (as the case may be) with respect to any of the parties -45- hereto; and all waiting periods arising under applicable law shall have duly lapsed or been terminated. (b) No Orders. None of Purchaser, PII, PSI, Seller, Distributor or any Series shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of any of the transactions contemplated by this Agreement. (c) Litigation. No action or proceeding shall have been instituted or threatened by any court, governmental body, self-regulatory body or other person or entity and remain pending before any court, governmental body or self-regulatory body or be threatened, to restrain or prohibit or to recover damages in respect of any or all of the transactions contemplated by this Agreement; nor shall any governmental body or other person or entity have notified any party to this Agreement or any of its affiliates that consummation of any or all of the transactions contemplated by this Agreement would constitute a violation of the laws of any jurisdiction or that it intends to commence any action or proceeding to restrain or prohibit or to recover damages in respect of any or all of the transactions contemplated by this Agreement, unless such governmental body or other person or entity shall have withdrawn such notice and abandoned such action or proceeding. (d) Consents. All consents or approvals of the Boards of Trustees of the Trust and the shareholders of the Nicholas-Applegate Funds that are required to be obtained in connection with the transactions contemplated hereby, including those specified in Article V, shall have been obtained. 7.2 Conditions to Obligation of Purchaser to Consummate. The obligation of Purchaser to consummate the transactions contemplated hereby shall be subject to the fulfillment or waiver at or prior to the Closing of the following additional conditions: (a) Representations and Warranties. Each of the representation and warranties of Seller and Distributor contained in this Agreement and in any Schedule or Exhibit -46- attached hereto shall be true and correct in all material respects as of the Closing Date as though made at and as of the Closing Date (it being understood that representations and warranties that speak as of a specified date shall continue to speak as of the date specified), and Purchaser shall have received a signed certificate of each of Seller and Distributor to that effect. (b) Performance of Obligations. Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Purchaser shall have received a signed certificate of Seller to that effect. (c) Opinion of Counsel to Seller and Distributor. Purchaser shall have received the opinion of Paul Hastings Janofsky & Walker LLP, counsel to Seller and Distributor, or other counsel reasonably acceptable to Purchaser, dated the Closing Date, addressed to Purchaser substantially in the form set forth in Exhibit 7.2(c). (d) Opinion of Counsel to the Trust and the Nicholas-Applegate Funds. Purchaser shall have received the favorable opinion of Paul Hastings Janofsky & Walker LLP, counsel to the Trust and the Nicholas-Applegate Funds, dated the Closing Date, addressed to Purchaser substantially in the form set forth in Exhibit 7.2(d). (e) Nicholas-Applegate Funds Trustees. All of the persons recommended by Purchaser to serve as Trustees of the Nicholas-Applegate Funds shall have been elected by the stockholders of each respective Series. (f) Delivery. Seller and/or Distributor (as the case may be) shall have executed and delivered to Purchaser the following: (i) certified copies of resolutions of the partners of Seller and Distributor authorizing the execution of this Agreement and each of the agreements, documents and instruments contemplated hereby to which Seller and/or Distributor is a party; -47- (ii) a copy of the Certificate of Limited Partnership of Seller and Distributor; (iii) true, correct and complete copies of each of the agreements, documents and instruments contemplated hereby to which Seller and/or Distributor is a party, and all agreements, documents, instruments and certificates delivered or to be delivered in connection therewith by Seller and/or Distributor, including evidence of termination of such agreements between Seller and/or Distributor and the Trust, with respect to the Nicholas-Applegate Funds, where applicable to consummate the transactions contemplated by this Agreement; (iv) a certificate of the Secretary of Seller on behalf of Seller certifying that the resolutions and Certificate of Limited Partnership provided for in paragraphs (i) and (ii) above pertaining to Seller are in full force and effect and have not been amended or modified, and that the officers of Seller are those persons named in the certificate; (v) a certificate of the Secretary of Distributor on behalf of Distributor certifying that the resolutions and Certificate of Limited Partnership provided for in paragraphs (i) and (ii) above pertaining to Distributor are in full force and effect and have not been amended or modified, and that the officers of Distributor are those persons named in the certificate; (vi) all bills of sale, deeds, assignments and other instruments of transfer referenced herein which are necessary to transfer the Assets; and (vii) such other certificates and documents as are required hereby or are reasonably requested by Purchaser. (g) Material Adverse Change. Since the date of this Agreement, there shall have been no event or condition or events or conditions which, either individually or in the aggregate, has had or could reasonably be expected to have a Seller Material Adverse Effect, and Purchaser shall be provided with a certificate from the President of each of Seller and Distributor to that effect at the Closing. -48- (h) Further Assurances. Purchaser shall have received such other certificates and instruments signed by Seller and/or Distributor as Purchaser may reasonably request to consummate the transactions contemplated hereby. 7.3 Conditions to Obligation of Seller and Distributor to Consummate. The obligation of Seller and Distributor to consummate the transactions contemplated hereby shall be subject to the fulfillment or waiver at or prior to the Closing of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties of Purchaser, PII and PSI contained in this Agreement and in any Schedule or Exhibit attached hereto, shall be true and correct in all material respects as of the Closing as though made at and as of the Closing (it being understood that representations and warranties that speak as of a specified date shall continue to speak as of the date so specified), and Seller and Distributor shall have received a signed certificate of Purchaser to that effect. (b) Performance of Obligations. Purchaser, PII and PSI shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing, and Seller and Distributor shall have received a signed certificate of Purchaser to that effect. (c) Delivery. Purchaser shall have executed and delivered to Seller the following: (i) certified copies of resolutions of the board of directors and, to the extent necessary, stockholders of Purchaser, PII and PSI authorizing the execution of this Agreement, and each of the agreements, documents and instruments contemplated hereby to which Purchaser is a party; (ii) a copy of the Amended and Restated Certificate of Incorporation of Purchaser, and the Amended and Restated Certificate of Incorporation of each of PII and PSI, each of which is certified as of a recent date by the Secretary of State of the State of Delaware; -49- (iii) true, correct and complete copies of each of the agreements, documents and instruments contemplated hereby to which Purchaser, PII or PSI is a party, and all agreements, documents, instruments and certificates delivered or to be delivered in connection therewith by Purchaser, PII or PSI; (iv) a certificate of the Secretary of each of Purchaser, PII and PSI on behalf of Purchaser, PII or PSI (as the case may be) certifying that the resolutions, Amended and Restated Certificates of Incorporation, and By-laws provided in paragraphs (i) and (ii) above are in full force and effect had have not been amended or modified, and that the officers of each entity are those persons named in the certificate; (v) the Purchase Price to be delivered as consideration at the Closing Date pursuant to Section 1.4 hereof; and (vi) such other certificates and documents as are required hereby or are reasonably requested by Seller. (d) Opinion of Counsel to Purchaser, PII and PSI. Seller shall have received the opinion of Bryan Cave LLP, counsel to Purchaser, PII and PSI, dated the Closing Date, addressed to Seller, Distributor and the Trust, substantially in the form set forth in Exhibit 7.3(d). (e) Material Adverse Change. Since the date of this Agreement, there shall have been no event or condition, or events or conditions, which, either individually or in the aggregate, has had or could reasonably be expected to have a Purchaser Material Adverse Effect, and Seller and Distributor shall be provided with a certificate from the President of Purchaser to that effect at the Closing. (f) Further Assurances. Seller and Distributor shall have received such other certificates and instruments signed by Purchaser as Seller and Distributor shall reasonably request. -50- (g) Schwab Contract. PSI shall have assumed the obligations of the Distributor pursuant to the terms of the Services Agreement dated as of September 14, 1995 among Charles Schwab & Co., Inc., Distributor and the Trust and the Operating Agreement dated as of the same date between the same parties. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification. (a) Seller and Distributor shall indemnify and hold Purchaser, PII and PSI and their respective subsidiaries and Affiliates (including persons serving as directors, officers, registered representatives, members, employees or controlling persons thereof, and their respective successors and assigns, each a "Purchaser Indemnified Party" and collectively, the "Purchaser Indemnified Parties"), harmless from and against all liabilities, demands, claims, actions or causes of action, assessments, losses (including, but not limited to, diminution in value), fines, penalties, costs (including, but not limited to, reasonable attorneys' and expert witness fees), taxes, damages and expenses, including, without limitation, those asserted by any federal, state, local or foreign governmental entity, third party, or former or present employee of any kind or nature whatsoever (any and all of the foregoing being referred to as "Losses" or individually a "Loss"), sustained by Purchaser, PII, PSI, any such director, trustee, officer or controlling person or their respective successors or assigns to the extent any such Loss arises out of or by virtue of (i) any breach of a representation or warranty made by Seller and Distributor herein; (ii) any liability incurred by PSI pursuant to distribution services provided to the Nicholas-Applegate Funds or Distributor in respect of the Nicholas-Applegate Funds as of the date of this Agreement through and including the Closing Date arising in connection with the use of any materials prepared by Seller or Distributor, or written information provided by such parties, or arising from an untrue statement of a material fact in the prospectus or registration statement for any of the Nicholas-Applegate Funds or an omission to state a material fact required to be stated therein or necessary to make a statement therein, in light of the circumstances under which it was made, not -51- misleading, except insofar as such untrue statements or omissions were made in reliance upon information furnished by Purchaser, PII or PSI in writing for use in such documents; or (iii) any failure to perform any covenant or agreement of Seller herein; provided, however, that except as set forth below, such indemnification shall not apply to any Claim (as defined below) for which notice pursuant to Section 8.2 has not been received by an indemnifying party on or before the date (W) on which the applicable statute of limitations expires with respect to Losses that arise out of or by virtue of (i), (ii) or (iii) of this Section 8.1 and relate to Taxes; (X) on which the applicable statute of limitations expires with respect to Losses that arise out of or by virtue of (i), (ii), or (iii) of this Section 8.1 and relate to Section 15(f) of the Investment Company Act; (Y) six months following the date on which the covenants specified in Sections 6.6, 6.7 and 6.9 expire for any Losses pertaining to any failure to perform such covenants; provided, however that Losses incurred following the second anniversary of the Closing Date pertaining to this section (Y) shall not include any consequential damages; and (Z) that is the second anniversary of the Closing Date for all other Losses except Losses pertaining to any failure to perform any covenant specified in Section 6.6, 6.7 and 6.9, (each an "Indemnification Cut-Off Date"). In the event Seller and Distributor or any of their respective successors or assigns (X) reorganizes or consolidates with or merges into or enters into another business combination transaction with any other person or entity and is not the resulting, continuing or surviving corporation or entity of such consolidation, merger or transaction, or (Y) liquidates, dissolves or transfers all or substantially all of its properties and assets to any person or entity, then, and in each such case, proper provisions shall be made so that the successors and assigns of Seller and Distributor as the case may be assume the obligations set forth in this Section 8.1(a). (b) Purchaser, PII and PSI shall indemnify and hold Seller, Distributor, the Trust and their respective Affiliates and subsidiaries (including persons serving as directors, officers, registered representatives, members, employees or controlling persons thereof, and their respective successors and assigns, each a "Seller Indemnified Party" and collectively, the "Seller Indemnified Parties"), harmless from and against all Losses -52- sustained or incurred by Seller, Distributor or by the Trust, any such director, trustee officer or controlling person or their respective successors or assigns to the extent any such Loss arises out of or by virtue of (i) any breach of a representation or warranty made by Purchaser herein; (ii) any failure to perform any covenant or agreement of Purchaser herein; and (iii) any misleading statements or representations concerning the Nicholas-Applegate Funds (other than statements or representations contained in the Nicholas-Applegate Funds' current Prospectuses and Statements of Additional Information or any other written material Seller or Distributor has provided to Purchaser, PII or PSI relating to the Nicholas-Applegate Funds) made by PSI or its employees or the wrongful conduct of PSI in connection with services rendered under the Interim Distribution Agreement provided, however, that except as set forth below, such indemnification shall not apply to any Claim (as defined below) for which notice pursuant to Section 8.2 has not been received by Purchaser on or before the respective Indemnification Cut-Off Date to which the Losses pertain. In the event Purchaser or any of its successors or assigns (i) reorganizes or consolidates with or merges into or enters into another business combination transaction with any other person or entity and is not the resulting, continuing or surviving corporation or entity of such consolidation, merger or transaction, or (ii) liquidates, dissolves or transfers all or substantially all of its properties and assets to any person or entity, then, and in each such case, proper provisions shall be made so that the successors and assigns of Purchaser assume the obligations set forth in this Section 8.1(b). 8.2 Claims Procedures. (a) An indemnified party may make claims for indemnification hereunder by giving written notice thereof to the indemnifying party within the period in which indemnification claims can be made hereunder (a "Claim"). If indemnification is sought for a claim or liability asserted by a third party, the indemnified party shall also give written notice thereto to the indemnifying party promptly after it receives notice of the claim or liability being asserted, but the failure to do so shall not relieve the indemnifying -53- party from any liability except to the extent that it is prejudiced by the failure or delay in giving such notice. Such notice shall summarize the bases for the claim for indemnification and any claim or liability being asserted by a third party. Within twenty (20) business days after receiving such notice the indemnifying party shall give written notice to the indemnified party stating whether it disputes the claim for indemnification and whether it will defend against any third party claim or liability at its own cost and expense. (b) The indemnifying party shall be entitled to direct the defense against a third party claim or liability with counsel selected by it (subject to the consent of each indemnified party, which consent shall not be unreasonably withheld or delayed) as long as the indemnifying party is conducting a good faith and diligent defense. Each indemnified party shall at all times have the right to participate fully in the defense of a third party claim or liability at its own expense directly or through counsel; provided, however, that if the named parties to the action or proceeding include either both the indemnifying party and/or one or more indemnified parties and an indemnified party is reasonably advised by a third party lawyer that representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, an indemnified party may engage separate counsel. If no such timely notice of intent to defend a third party claim or liability is given by the indemnifying party, or if such good faith and diligent defense is not being or ceases to be conducted by the indemnifying party, the indemnified party shall have the right, at the expense of the indemnifying party, to undertake the defense of such claim or liability (with counsel selected by the indemnified party with the consent of the indemnifying party which consent shall not be unreasonably withheld or delayed). In no circumstances shall the indemnifying party be required to pay the expenses of more than one counsel for the indemnified party. The indemnified party shall obtain the written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed) prior to compromising or settling such claim or liability. If the third party claim or liability is one that by its nature cannot be defended solely by the indemnifying party, then the indemnified party shall make -54- available such information and assistance as the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense, at the expense of the indemnifying party. (c) The indemnified party shall take all reasonable steps to mitigate all Losses, including, but not limited to, availing itself of any defenses, limitations, rights of contribution, claims against third parties and other rights at law (it being understood that any out of pocket costs reasonably paid to third parties in connection with such mitigation shall constitute Losses), and shall provide such evidence and documentation of the nature and extent of any Loss as may be reasonably requested by the indemnifying party. (d) An indemnifying party shall not, without the written consent (which shall not be unreasonably withheld or delayed) of the indemnified party or parties, settle or compromise any indemnifiable Losses or permit a default or consent to entry of any judgment unless the claimant and the indemnifying party provide to the indemnified party or parties an unqualified release from all liability in respect of the claim. Notwithstanding the foregoing, if a settlement offer solely for money damages is made by the applicable third party claimant, and the indemnifying party notifies the indemnified party in writing of the indemnifying party's willingness to accept the settlement offer and make the entire payment required, and the indemnified party declines to accept such offer, the indemnified party may continue to defend such claim at its own expense, free of any participation by the indemnifying party, and the amount of any ultimate liability with respect to such indemnifiable claim that the indemnifying party has an obligation to pay hereunder shall be limited to the lesser of (i) the amount of the settlement offer that the indemnified party declined to accept or (ii) the aggregate Losses of the indemnified party with respect to such claim. If the indemnifying party makes any payment on any claim, the indemnifying party shall be subrogated, to the extent of such payment, to all rights and remedies of the indemnified party to any insurance benefits or other claims of the indemnified party with respect to such claim. -55- (e) Absent fraud or criminal activity, the remedies provided for in this Article VIII shall constitute the sole and exclusive remedy for any claims made for breach of the representations and warranties contained herein. 8.3 Indemnification Limits. Except as otherwise provided in Section 8.2(e) and this Section 8.3, the parties shall not be liable for indemnification under this Article VIII for any Losses (i) unless and until the Claims (as defined herein) of the indemnified party exceed $250,000, at which time the indemnified party shall only be entitled to receive indemnification for all Losses in excess of $250,000 or (ii) for any amounts in the aggregate greater than $7,500,000; provided, however that such deductible and cap shall not apply to any Losses (W) that relate to Taxes, (X) that relate to Section 8.1(a)(ii) and (b)(iii), (Y) specified under Section 8.1(Y) or (Z) that relate to Section 15(f) of the Investment Company Act. Notwithstanding the foregoing, the maximum amount of indemnification payable by Purchaser, PII and PSI on the one hand, and Seller and Distributor on the other hand under the terms of this Article VIII shall not exceed the Purchase Price. ARTICLE IX TERMINATION 9.1 Termination. At any time prior to the Closing Date, this Agreement may be terminated as follows: (a) by mutual written consent of Seller and Purchaser; (b) by either Seller or Purchaser at any time after August 31, 1999 if the Closing shall not theretofore have occurred; (c) by either Seller or Purchaser in the event of the breach by the other party of (i) any representation or warranty contained herein or in any schedule or document delivered herewith which has resulted or is reasonably likely to result in a Material Adverse Effect with respect to the non-breaching party; or (ii) any agreement contained herein, which -56- breach cannot be or has not been cured within 30 days after written notice to the party committing such breach; (d) by Purchaser or Seller, pursuant to written notice to the other party, if the conditions and approvals required under Article V and Article VII shall not have been satisfied at or prior to August 31, 1999; or if it has become reasonably certain that any of such approvals or conditions will not be satisfied at or prior to August 31, 1999; (e) by either Seller or Purchaser if any permanent injunction or action by any court or other governmental agency or body of competent jurisdiction enjoining, denying approval of or otherwise prohibiting consummation of any of the transactions contemplated by this Agreement shall become final and nonappealable; (f) at the election of Purchaser or Seller, if any litigation or judicial, governmental, administrative or arbitration or any investigation or governmental inquiry (collectively, "Action") shall have been instituted, or is known to be contemplated, or is threatened in writing: which is related to and could reasonably be expected to have a Purchaser Material Adverse Effect or Seller Material Adverse Effect, as applicable. 9.2 Effect of Termination and Abandonment. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby pursuant to this Article IX, no party hereto (or any of its directors or officers) shall have any liability or further obligation to any other party to this Agreement, provided that nothing herein will relieve any party from liability for any breach of this Agreement covered by Section 9.1(c) above or the provisions of Sections 6.3, 6.5 and 10.4. ARTICLE X GENERAL PROVISIONS 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be given and deemed to have been duly received (i) on the date given if delivered personally or by telex or telecopy or (ii) on the date received if mailed by -57- registered or certified mail (return receipt requested), to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Purchaser, to: Mr. James M. Hennessy Executive Vice President Pilgrim America Capital Corporation Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4424 Telecopy: 602-417-8301 Copy to: Jeffrey S. Puretz, Esq. Dechert Price & Rhoads 1775 Eye Street, N.W. Washington, D.C. 20005 Telecopy: (202) 261-3333 (b) if to Seller, to: Nicholas-Applegate Capital Management 600 West Broadway, 29th Floor San Diego, California 92101 Attn: E. Blake Moore Telecopy: 619-687-8138 Copy to: Raj Marphatia, Esq. Ropes & Gray One International Place Boston, Massachusetts 02110 Telecopy: 617-951-7050 10.2 Counterparts. This Agreement may be executed in counterparts (including executed counterparts delivered and exchanged by facsimile transmission) each of which -58- shall be deemed to constitute an original, but all of which together shall constitute one and the same instrument. 10.3 Governing Law. This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of California without regard to its conflict of law principles, except to the extent federal law may apply. 10.4 Expenses. (a) Except as specifically provided herein, each party hereto will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby, including attorney's fees. (b) Seller and Purchaser shall bear equally the costs and expenses pertaining to the printing, distribution and solicitation of all Proxy Statements for the Nicholas-Applegate Funds other than the Transferred Series, including attorneys' fees; provided, however, that Purchaser shall not bear any expenses pertaining to the redemption of the Institutional Class of shares and other activities described in Section 4.2 herein. (c) Purchaser shall bear the costs and expenses pertaining to the printing, distribution, and solicitation of all Proxy/Prospectuses for the Transferred Series, including attorney's fees. 10.5 Waiver, Amendment. Any provision of this Agreement may be (i) waived by the party benefited by the provision, or (ii) amended or modified at any time (including the structure of the transactions contemplated hereby, or any part thereof), by an agreement in writing among the parties hereto and executed in the same manner as this Agreement. Any waiver of any terms or conditions or of the breach of any covenant, representation or warranty of this Agreement in one instance shall not operate as or be deemed or construed as a further or continuing waiver of any other breach of such term, condition, covenant, representation or warranty, nor shall any failure or delay at any time or times to enforce or require performance of any provision hereof operate as a waiver of or affect in any manner such party's right at a later time to enforce or require performance -59- of such provision or of any provision hereof; provided, however, that no such waiver, unless it, by its own terms, explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance. 10.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement represents the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made. All terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns. Nothing in this Agreement, other than Section 8.1 hereof, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. 10.7 Assignment. This Agreement may not be assigned by any party hereto without the written consent of the other parties. This Agreement shall be binding upon and enforceable by, and shall inure to the benefit of, the parties hereto and their respective successors, heirs, executors, administrators and permitted assigns. 10.8 Captions and Gender. The captions in this Agreement are for convenience only and shall not affect the construction or interpretation of any term or provision hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, as the context may require. 10.9 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably and unconditionally waives trial by jury in any legal action or proceeding relating to this agreement and for any counterclaim therein. 10.10 License to Use Nicholas-Applegate Name. It is understood that Seller and its Affiliates own all right, title and interest in and to the name "Nicholas-Applegate -60- Capital Management," "Nicholas-Applegate" or any derivative thereof or logo associated with that name (the "Nicholas-Applegate marks"). Seller hereby grants to PII and its Affiliates and the Nicholas-Applegate Funds a non-exclusive and non-assignable license to use the Nicholas-Applegate marks in offering materials of the Nicholas-Applegate Funds, or in promotional, sales or other marketing materials with respect to the Nicholas-Applegate Funds. Purchaser, PII or PSI, on behalf of its Affiliates and the Nicholas-Applegate Funds, shall obtain the prior approval of Seller for the public release of any materials bearing the Nicholas-Applegate marks. The grant of license by Seller shall terminate automatically with respect to a particular Series upon termination of the Sub-Advisory Agreement with respect to such Series. Upon termination of such Agreement, PII and its Affiliates shall immediately cease to use the Nicholas-Applegate marks with respect to that Series. ARTICLE XI 11.1 Certain Defined Terms. The following terms used in this Agreement will have the meanings specified below (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Action" has the meaning specified in Section 9.1(f). "Advisory Agreement" has the meaning specified in the Recitals to this Agreement. "Affiliate" has the meaning specified in Section 6.6(d). "Assets" has the meaning specified in Section 1.1(b). "Claim" has the meaning specified in Section 8.2(a). "Closing" has the meaning specified in Section 1.1. "Closing Date" has the meaning specified in Section 1.3(b). -61- "Continuing Shares" has the meaning specified in Section 1.4(c). "Deferred Purchase Price" has the meaning specified in Section 1.5. "Distributor" has the meaning specified in the Preamble to this Agreement. "Distribution Agreement" has the meaning specified in the Recitals to this Agreement. "Encumbrances" has the meaning specified in Section 1.1(b). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Gross Annual Management Fee" has the meaning specified in Section 1.4(a). "Indemnification Cut-Off Date" has the meaning specified in Section 8.1(a). "Information" has the meaning specified in Section 6.3. "Interim Distribution Agreement" has the meaning specified in Section 5.2(a). "Investment Advisers Act" shall mean the Investment Advisers Act of 1940, as amended. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended. "Loss" has the meaning specified in Section 8.1(a). "Measurement Date" has the meaning specified in Section 1.4(a)(i). "Mutual Fund Agreements" has the meaning specified in Section 3.9(b). "Mutual Fund Financial Statement" has the meaning specified in Section 3.9(h). "NACM" shall mean Nicholas-Applegate Capital Management or Seller. -62- "Net Annual Management Fee" has the meaning specified in Section 1.4(a). "New Advisory Agreement" has the meaning specified in Section 5.1(a)(i). "New Distribution Agreement" has the meaning specified in Section 5.2(b). "Nicholas-Applegate Funds" has the meaning specified in the Recitals to this Agreement. "Nicholas-Applegate marks" has the meaning specified in Section 10.10. "Other Shares" has the meaning specified in Section 6.7. "PACC" shall mean Pilgrim America Capital Corporation or Purchaser. "PII" shall mean Pilgrim Investments, Inc. "PII Acquiring Fund" has the meaning specified in Section 5.1(a)(iii). "Preliminary Purchase Price" has the meaning specified in Section 1.8(a). "Proxy/Prospectus" has the meaning specified in Section 5.1(c). "Proxy Statement" has the meaning specified in Section 5.1(b). "PSI" shall mean Pilgrim Securities, Inc. "Purchase Date" has the meaning specified in Section 1.4(b)(ii). "Purchase Price" has the meaning specified in Section 1.4(a). "Purchased Shares" has the meaning specified in Section 1.4(b)(ii). "Purchaser" has the meaning specified in the Preamble to this Agreement. "Purchaser Indemnified Party" has the meaning specified in Section 8.1(a). "Purchaser Material Adverse Effect" has the meaning specified in Section 1.6. -63- "Redeemed Shares" has the meaning specified in Section 1.4(b)(i). "Reorganization" has the meaning specified in Section 3.9(o). "Retail Assets" has the meaning specified in Section 1.4(d). "SEC" shall mean the United States Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Seller" shall mean Nicholas-Applegate Capital Management. "Seller Material Adverse Effect" has the meaning specified in Section 1.6. "Seller Indemnified Party" has the meaning specified in Section 8.1(b). "Series" has the meaning specified in the Recitals to this Agreement. "Stand-Alone Series" has the meaning specified in the Recitals to this Agreement. "Sub-Advised Series" has the meaning specified in the Recitals to this Agreement. "Sub-Advisory Agreement" has the meaning specified in Section 5.1(a)(ii). "Taxes" has the meaning specified in Section 3.9(e). "Taxing Authority" has the meaning specified in Section 3.9(f). "Transfer" has the meaning specified in the Recitals and Section 5.1(a)(iii). "Transferred Series" has the meaning specified in the Recitals to this Agreement. [CONTINUED ON NEXT PAGE] -64- "Trust" has the meaning specified in the Recitals to this Agreement. "Trust Statements" has the meaning specified in Section 3.9(k). IN WITNESS WHEREOF, the parties have duly executed this Agreement, all as of the date first written above. PILGRIM AMERICA CAPITAL CORPORATION By: _____________________________________ Name: Title: PILGRIM INVESTMENTS, INC. By: _____________________________________ Name: Title: PILGRIM SECURITIES, INC. By: _____________________________________ Name: Title: NICHOLAS-APPLEGATE CAPITAL MANAGEMENT By: _____________________________________ Name: Title: NICHOLAS-APPLEGATE SECURITIES By: _____________________________________ Name: Title: -65- SCHEDULE A Nicholas-Applegate Small Cap Growth Nicholas-Applegate Mid Cap Growth Nicholas-Applegate Large Cap Growth Nicholas-Applegate Emerging Countries Nicholas-Applegate Worldwide Growth Nicholas-Applegate International Small Cap Growth Nicholas-Applegate International Core Growth Nicholas-Applegate Convertible Fund -66- SCHEDULE B Nicholas-Applegate High Yield Fund -67- SCHEDULE C Nicholas-Applegate Balanced Growth Fund Nicholas-Applegate High Quality Bond Fund .0. -68- EX-10.2 3 EMPLOYMENT AGREEMENT DATED FEBRUARY 1, 1998 Exhibit 10.2 EMPLOYMENT AGREEMENT DATED FEBRUARY 1, 1998 BY AND BETWEEN PILGRIM AMERICA INVESTMENTS, INC. AND HOWARD C. TIFFEN 1 TABLE OF CONTENTS ARTICLE I DUTIES AND TERM...........................................1 1.1 Employment................................................1 1.2 Position and Responsibilities.............................1 1.3 Term......................................................2 1.4 Location..................................................2 ARTICLE II COMPENSATION..............................................2 2.1 Base Salary...............................................2 2.2 Bonus Payment.............................................2 2.3 Additional Benefits.......................................3 ARTICLE III TERMINATION OF EMPLOYMENT.................................4 3.1 Death or Retirement of Executive..........................4 3.2 By Executive..............................................4 3.3 By Company................................................4 ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT...............5 4.1 Upon Termination for Death or Disability..................5 4.2 Upon Termination by Company for Cause or by Executive Without Good Reason.......................................6 4.3 Upon Termination by the Company Without Cause or by Executive for Good Reason..............................6 ARTICLE V RESTRICTIVE COVENANTS.....................................8 5.1 Non-Competition...........................................8 5.2 Non-Disparagement.........................................9 5.3 Remedies..................................................9 5.4 Scope of Article.........................................10 ARTICLE VI MISCELLANEOUS............................................10 6.1 Definitions..............................................10 6.2 Key Man Insurance........................................12 6.3 Mitigation of Damages; Set-Off; Dispute Resolution.......12 6.4 Successors; Binding Agreement............................13 6.5 Modification; No Waiver..................................13 6.6 Severability.............................................13 6.7 Notices..................................................14 2 6.8 Assignment...............................................14 6.9 Entire Understanding.....................................14 6.10 Executive's Representations..............................14 6.11 Governing Law............................................14 EXHIBIT A DISPUTE RESOLUTION PROCEDURES............................16 * * * 3 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this "Agreement") made and entered into as of this 1st day of February, 1998, by and between PILGRIM AMERICA INVESTMENTS, INC. a Delaware corporation (the "Company"), and HOWARD C. TIFFEN ("Executive"). R E C I T A L S: - - - - - - - - WHEREAS, the Company believes continued employment of the Executive is important for the continued success of the Company, and the Board of Directors has directed the Company to enter into an Employment Agreement with the Executive to assure the Executive's continued service; and WHEREAS, the Executive has agreed to continue to serve the Company as Senior Vice President and Senior Portfolio Manager of the Company and as an officer of Pilgrim America Prime Rate Trust (the "Fund") on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises, and of the mutual covenants and agreements herein contained, the parties hereby agree as follows: A G R E E M E N T: - - - - - - - - - ARTICLE I DUTIES AND TERM 1.1 Employment. In consideration of their mutual covenants and other good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the Company agrees to retain Executive in its employ, and Executive agrees to remain in the employ of the Company, upon the terms and conditions herein provided. 1.2 Position and Responsibilities. (a) Executive shall serve as Senior Vice President and Senior Portfolio Manager of the Company and as President and Senior Portfolio Manager of the Fund (or in a capacity and with a title of at least substantially equivalent quality). In the foregoing roles, the Executive shall render investment advisory and other management services to the Company and the Fund of the type customarily performed by persons situated in a similar capacity. Executive agrees to perform services not inconsistent with his position as shall from time to time be assigned to him by the Chairman of the Company. 1 (b) During the period of his employment hereunder, Executive shall devote substantially all of his business time, attention, skill and efforts to the faithful performance of his duties hereunder. 1.3 Term. The term of Executive's employment under this Agreement shall commence on the date first above written and shall continue, unless sooner terminated, until January 31, 1999. Upon the expiration of the initial or any subsequent term of this Agreement, this Agreement shall be automatically renewed for an additional one (1) year term, unless either party has, at least sixty (60) days prior to the expiration of the then current term, provided the other party with written notice of its or his intention not to renew this Agreement. 1.4 Location. During the period of his employment under this Agreement, Executive shall not be required, except with his prior written consent, to relocate his principal place of employment outside Maricopa County, Arizona. Required travel on the Company's business shall not be deemed a relocation. ARTICLE II COMPENSATION For all services rendered by Executive in any capacity during his employment under this Agreement, including, without limitation, services as an officer or member of any committee of the Company, the Company shall compensate Executive as follows: 2.1 Base Salary. The Company shall pay to Executive an annual base salary of not less that $200,000 (such amount is hereinafter referred to as the "Base Salary") during the term hereof; provided, however, that in the event the Company institutes a salary reduction program which affects the aggregate compensation and benefits of all of the Company's executive personnel by at least the same percentage, then Executive's Base Salary may be reduced by such percentage (and the term "Base Salary" as used in this Agreement shall refer to Base Salary as so adjusted). Executive's Base Salary shall be paid in equal semi-monthly installments. The Base Salary shall be reviewed annually by the Board or a committee designated by the Board and the Board or such committee may, in its discretion, increase the Base Salary. 2.2 Bonus Payment. During the period of Executive's employment under this Agreement, Executive shall be entitled to bonus payments, if any shall be due, as authorized by the Chairman of the Company. Such cash or other bonuses shall be in addition to, and shall not be deemed to be a substitute for, the Executive's right to the annual Base Salary described above. 2 2.3 Additional Benefits. Executive shall be entitled to participate in all employee benefit and welfare programs, plans and arrangements (including, without limitation, pension, profit sharing, supplemental pension and other retirement plans, insurance, hospitalization, medical and group disability benefits, travel or accident insurance plans) and to receive fringe benefits, such as dues and fees of professional organizations and associations, which are from time to time available to the Company's executive personnel; provided, however, there shall be no duplication of termination or severance benefits, and to the extent that such benefits are specifically provided by the Company to Executive under other provisions of this Agreement, the benefits available under the foregoing plans and programs shall be reduced by any benefit amounts paid under such other provisions. Executive shall during the period of his employment hereunder continue to be provided with benefits at a level which shall in no event be less in any material respect than the benefits made available to Executive by the Company as of the date of this Agreement. Notwithstanding the foregoing, the Company may terminate or reduce benefits under any benefit plans and programs to the extent such reductions apply uniformly to all key executives of the Company entitled to participate therein, and Executive's benefits shall be reduced or terminated accordingly. Specifically, without limitation, Executive shall receive the following benefits: (a) Short-Term Disability Benefits. In the event of Executive's failure substantially to perform his duties hereunder on a full-time basis as a result of incapacity due to physical or mental illness, the Company shall continue to pay the Base Salary to Executive during the period of such incapacity for a period not exceeding 90 consecutive days or for periods aggregating not more than 90 days during any twelve-month period, but only in the amounts and to the extent that disability benefits payable to Executive under Company-sponsored insurance policies are less than Executive's Base Salary as of the date the incapacity began. In addition, if Executive's incapacity continues through the end of the year and if, based on the criteria utilized by the Company to determine Annual Bonuses for its executive personnel and on Executive's performance prior to his incapacity, Executive would have been entitled to an Annual Bonus for that year had he continued in active employment until the end of the year, the Company shall pay Executive a prorated Annual Bonus for the year in which his incapacity commenced equal to the product of the Annual Bonus which Executive would have received for that year had he continued active employment to the end of the year, multiplied by a fraction, the numerator of which is the number of months during the year prior to Executive's incapacity, and the denominator of which is twelve (12). (b) Relocation Expenses. In the event Executive's principal place of employment is relocated by mutual consent of the parties outside Maricopa County, Arizona, the Company shall reimburse Executive for all usual relocation expenses reasonably incurred by Executive and his household in moving to the new location, including, without limitation, moving expenses and rental payments for temporary living quarters in the area of relocation for a period not to exceed six months. 3 (c) Reimbursement of Business Expenses. The Company shall, in accordance with standard Company policies, pay, or reimburse Executive for, all reasonable travel and other expenses incurred by Executive in performing his obligations under this Agreement such expenses shall include, but not be limited to, any seminars, courses or other educational materials or arrangements required in order for Executive to retain his National Association Securities Dealer ("NASD") license. (d) Vacations. The Executive shall be entitled to paid vacations in accordance with policies generally applicable to executive officers of the Company in effect from time to time. The timing of such vacations shall be scheduled in a reasonable manner by the Executive, consistent with his duties and responsibilities to the Company. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 Death or Retirement of Executive. Executive's employment under this Agreement shall automatically terminate upon the death or Retirement (as defined in Section 6.1) of Executive. 3.2 By Executive. Executive shall be entitled to terminate his employment under this Agreement by giving Notice of Termination (as defined in Section 6.1) to the Company: (a) for Good Reason (as defined in Section 6.1); (b) at any time without Good Reason. 3.3 By Company. The Company shall be entitled to terminate Executive's employment under this Agreement by giving Notice of Termination to Executive: (a) in the event of Executive's Total Disability (as defined in Section 6.1); (b) for Cause (as defined in Section 6.1); and (c) at any time without Cause. 4 ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If Executive's employment hereunder is terminated in accordance with the provisions of Article III hereof, except for any other rights or benefits specifically provided for herein following his period of employment, the Company shall be obligated to provide compensation and benefits to Executive only as follows, subject to the provisions of Section 5.3 hereof: 4.1 Upon Termination for Death, Retirement or Disability. If Executive's employment hereunder is terminated by reason of his death, Retirement or Total Disability, the Company shall: (a) pay Executive (or his estate) or beneficiaries any Base Salary which has accrued but not been paid as of the termination date (the "Accrued Base Salary"); (b) pay Executive (or his estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to his Base Salary multiplied by a fraction the numerator of which is the number of accrued unused vacation days and the denominator of which is 260 (the "Accrued Vacation Payment"); (c) reimburse Executive (or his estate) or beneficiaries for expenses incurred by him prior to the date of termination which are subject to reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses"); (d) provide to Executive (or his estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of Executive's death or Total Disability under applicable law; (e) pay Executive (or his estate) or beneficiaries a prorated Annual Bonus for the year in which Executive died, retired or became totally disabled equal to the product of the Annual Bonus which Executive would have received for that year had he continued his active employment until the end of the year, based on the criteria utilized by the Company to determine Annual Bonuses for its executive personnel and on his performance for the year prior to his death, retirement or total disability, multiplied by a fraction, the numerator of which is the number of months during the year prior to Executive's death, retirement or total disability, and the denominator of which is twelve (12) ("Accrued Bonus"); (f) Executive (or his estate) or beneficiaries shall have the right to exercise all vested unexercised stock options outstanding at the termination date in 5 accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. The amounts specified in Section 4.1(a), (b) and (c) shall be paid by the Company as soon as practical after Executive's death, retirement or total disability but in no event later than required by law. The benefits specified in Section 4.1(d) shall be paid or provided at the time specified in the governing plan documents and/or under applicable law. The amount specified in Section 4.1(e) shall be paid no later than the date on which Annual Bonuses for the year in which the Executive died, retired or become totally disabled would be paid to the Company's executive personnel in the ordinary course of business. 4.2 Upon Termination by Company for Cause or by Executive Without Good Reason. If Executive's employment hereunder is terminated by the Company for Cause, or if Executive terminates his employment with the Company other than (x) upon Executive's death or Total Disability or (y) for Good Reason, the Company shall: (a) pay Executive the Accrued Base Salary; (b) pay Executive the Accrued Vacation Payment; (c) pay Executive the Accrued Reimbursable Expenses; (d) pay Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay Executive any Annual Bonus with respect to a prior fiscal year which has accrued but has not been paid; and (f) if Executive's employment is terminated by the Company for Cause, he shall forfeit the right to exercise any vested options not exercised prior to his termination, but if Executive terminates his employment without Good Reason, Executive shall have the right to exercise all vested unexercised stock options outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. The amount specified in Section 4.2(e) shall be paid no later than the date on which Annual Bonuses for the year in which the Executive is terminated would be paid to the Company's executive personnel in the ordinary course of business. 4.3 Upon Termination by the Company Without Cause or by Executive for Good Reason. If Executive's employment hereunder is terminated by the Company without Cause or by Executive for Good Reason, the Company shall: 6 (a) pay Executive the Accrued Base Salary; (b) pay Executive the Accrued Vacation Payment; (c) pay Executive the Accrued Reimbursable Expenses; (d) the Executive and his dependants shall continue to be covered for twelve (12) months, under the same terms and conditions, by the medical, dental, vision and group life insurance plans maintained by the Company which covered that Executive and his dependants prior to the Executive's termination date. The Executive and the Company shall share the cost of such continued coverage in the same proportions as they shared the cost of such coverage prior to the Executive's termination date. To the extent allowed by applicable law for purposes of satisfying the Company's obligation under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") to continue group health care coverage to the Executive and his dependents as a result of the Executive's termination of employment, the period during which the Executive is permitted to continue to participate in the Company's medical, dental and/or vision plans under this Section 4.3(c) shall not be treated as part of the period during which the Executive and his dependants are entitled to continued coverage under the Company's group health plans under COBRA. Following the end of the continuation period specified in this Section 4.3(c), the Executive and his dependants shall be covered under the Company's medical, dental and/or vision plans as required under the provisions of COBRA; (e) pay Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (f) pay Executive any Annual Bonus with respect to a prior fiscal year which has accrued but has not been paid; and (g) pay Executive a lump sum cash payment as liquidated damages an amount equal to 1.5 times the sum of Executive's annual rate of Base Salary as in effect at the time of Executive's termination of employment, plus an amount equal to 1.5 times the average Annual Bonus paid to Executive with respect to the three (3) years (or the number of years of Executive's employment if less than three (3) years) preceding Executive's termination date, which amount shall be determined by dividing the total dollar amount paid to Executive as Annual Bonuses during such period of years by three (3) (or the number of years of Executive's employment if less than three (3) years). Such payment to the Executive shall be made within fifteen (15) days after the Executive's last day of employment with the Company. The liquidated damages amount shall not be reduced by any compensation which the Executive may receive for other employment with another employer after termination of his employment with the Company or otherwise; and in addition; 7 (h) Executive shall have the right to exercise all vested unexercised stock options outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. ARTICLE V RESTRICTIVE COVENANTS 5.1 Non-Competition. (a) By execution of this Agreement, Executive agrees that during his employment with the Company and for a period of 18 months following the date of termination of his employment hereunder for Cause by the Company or for other than Good Reason by the Executive (the "Non-Competition Period"), Executive will not, within the United States (in which territory Executive acknowledges that the Company has sold or marketed its products or services and conducted its Business, as defined in Section 5.1(d) as of the date hereof), directly or indirectly, compete with the Company by carrying on a business that is substantially similar to the management of senior loans conducted by the Company and Executive. Executive agrees that the 18 month period referred to in the preceding sentence shall be extended by the number of days included in any period of time during which he is or was engaged in activities constituting a breach of this Section 5.1. (b) Definition of "Compete". For the purposes of this Section 5.1, the term "compete" shall mean with respect to the Business: (i) managing, supervising, or otherwise participating in a management or sales capacity; (ii) calling on, soliciting, taking away, accepting as a client or customer, or attempting to call on, solicit, take away, or accept as a client or customer, any individual, partnership, corporation, company, association, or other entity that was a client or customer of the Company as of immediately prior to the date hereof; (iii) hiring, soliciting, taking away, or attempting to hire, solicit, or take away, either on Executive's behalf or on behalf of any other person or entity, any person serving immediately prior to the date hereof or during the term hereof as an employee in connection with the Business; or (iv) entering into or attempting to enter into any business substantially similar to the Business, either alone or with any individual, partnership, corporation, company, association, or other entity. (c) Direct or Indirect Competition. For the purposes of this Section 5.1, the words "directly or indirectly" as they modify the word "compete" shall mean (i) acting as an agent, representative, consultant, fund manager, officer, director, member, independent contractor, or employee of any entity or enterprise that is competing (as defined in Section 5.1(b) hereof) with the Business, (ii) participating in any such competing entity or enterprise as an owner, partner, limited partner, joint venturer, 8 member, creditor, or stockholder (except as a stockholder holding less than a five percent (5%) interest in a corporation whose shares are actively traded on a regional or national securities exchange or in the over-the-counter market), and (iii) communicating to any such competing entity or enterprise the names or addresses or any other information concerning any past, present, or identified prospective client or customer of the Company or any entity having title to the goodwill of the Company with respect to the Business. (d) Business. For purposes of this Agreement, the term "Business" shall mean the Fund and any business the Company is engaged in as of the date that this Agreement is executed or may subsequently engage in while this Agreement is in effect. (e) Executive expressly agrees and acknowledges that this covenant not to compete is reasonable as to time and geographical area and does not place any unreasonable burden upon him; 5.2 Non-Disparagement. During the term of this Agreement and the Non-Competition Period, neither Executive nor the Company shall disparage the other, and neither shall disclose to any third party the conditions of Executive's employment with the Company except as may be required (i) pursuant to applicable law or regulations, including the rules and regulations of the Securities and Exchange Commission, (ii) to effectuate the provisions of employee plans or programs and insurance policies, or (iii) as may be otherwise contemplated herein or unless such information becomes publicly available without fault of the party making such disclosure. 5.3 Remedies. Executive expressly agrees and acknowledges that the covenants set forth in Sections 5.1 and 5.2 are necessary for the protection of the interests of the Company and its affiliates because of the nature and scope of their business and his position with the Company. Further, Executive acknowledges that any breach of such covenants would result in irreparable damage to the Company, and that money damages will not sufficiently compensate the Company for its injury caused thereby, and that the remedy at law for any breach or threatened breach of any of such covenants will be inadequate and, accordingly agrees, that the Company shall, in addition to all other available remedies (including without limitation, seeking such damages as it can show it has sustained by reason of such breach but excluding punitive damages), be entitled to injunctive relief or specific performance and that in addition to such money damages he may be restrained and enjoined from any continuing breach of this covenant not to compete without any bond or other security being required of any court. Executive further acknowledges and agrees that if such covenants, or any of them, are deemed to be unenforceable and/or the Executive fails to comply with this Article V, the Company has no obligation to provide any compensation or other benefits described in Article IV hereof. The remedies set forth in this Section 5.3 shall be included in any award in favor of the Company under Exhibit A hereto. 9 5.4 Scope of Article. For purposes of this Article V, unless the context otherwise requires, the term "Company" includes Pilgrim America Capital Corporation and its direct and indirect subsidiaries. ARTICLE VI MISCELLANEOUS 6.1 Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Accrued Base Salary" - as defined in Section 4.1(a); (b) "Accrued Benefits" - as defined in Section 4.1(d); (c) "Accrued Bonus" - as defined in Section 4.1(e); (d) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c); (e) "Accrued Vacation Payment" - as defined in Section 4.1(b); (f) "Annual Bonus" - as defined in Section 2.2; (g) "Base Salary" - as defined in Section 2.1; (h) "Board" - shall mean the Board of Directors of the Company; (i) "Cause" shall mean the occurrence of any of the following: (i) Executive's gross and willful misconduct which causes demonstrable and serious INJURY to the Company; (ii) Executive's engaging in conduct of a criminal nature that may have an adverse impact on the Company's standing and reputation (including a conviction of a crime for violating applicable securities laws); (iii) the continued and unjustified failure or refusal by Executive to perform the duties required of him by this Agreement which failure or refusal shall not be cured within thirty (30) days following receipt by Executive of written notice from the Board specifying the factors or events constituting such failure or refusal; or 10 (iv) Executive's breach of his obligation under Section 1.2(b) hereof which shall not be cured within thirty (30) days after written notice thereof to Executive. (j) "Expiration" shall mean the expiration of Executive's employment hereunder in accordance with Section 1.3; (k) "Good Reason" shall mean the occurrence of any of the following: (i) Material change by the Company in Executive's positions, function, duties, staff support or responsibilities which would cause Executive's position with the Company to become of less dignity, responsibility and importance than those associated with his functions, duties or responsibilities as of January 31, 1998; (ii) Executive's Base Salary as the same may be increased from time to time is significantly reduced by the Company (unless such reduction is pursuant to a salary reduction program as described in Section 2.1 hereof) or there is a material reduction in the benefits that are in effect for the Executive on January 31, 1998 in accordance with Section 2.3 (unless such reduction is pursuant to a uniform reduction in benefits for all key executives participating in such benefit plans); (iii) Except with Executive's prior written consent, relocation of Executive's principal place of employment to a location outside of Maricopa County, Arizona; or (iv) Other material breach of this Agreement by the Company, which breach is not cured within thirty (30) days after written notice thereof is received by the Company. (l) "Non-Competition Period" - as defined in Section 5.1(a); (m) "Notice of Termination" shall mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. Each Notice of Termination shall be delivered at least thirty (30) days prior to the effective date of termination; (n) "Retirement" shall mean normal retirement on or after age 65; 11 (o) "Termination" shall mean the termination of Executive's employment hereunder other than upon expiration of the term of such employment in accordance with Section 1.3; (p) "Total Disability" shall mean Executive's failure substantially to perform his duties hereunder on a full-time basis for a period exceeding 90 consecutive days or for periods aggregating more than 90 days during any twelve-month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether Executive is or was physically or mentally unable to perform his duties under this Agreement, such dispute shall be submitted for resolution to a licensed physician agreed upon by the Board and Executive, or if an agreement cannot be promptly reached, the Board and Executive shall promptly select a physician, and if these physicians cannot agree, the physicians shall promptly select a third physician whose decision shall be binding on all parties. If such a dispute arises, Executive shall submit to such examinations and shall provide such information as such physician(s) may request, and the determination of the physician(s) as to Executive's physical or mental condition shall be binding and conclusive. Notwithstanding the foregoing, if Executive participates in any group disability plan provided by the Company which offers long-term disability benefits, "Total Disability" shall mean total disability as defined therein. 6.2 Key Man Insurance. The Company shall have the right, in its sole discretion, to purchase "key man" insurance on the life of Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, Executive shall take such physical examinations and supply such information as may be reasonably requested by the insurer. To the extent allowed by law, the Company shall direct the insurer to treat such information provided by Executive as confidential information which shall not be disclosed to the Company, its employees or agents. 6.3 Mitigation of Damages; Set-Off; Dispute Resolution. (a) Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment. (b) If there shall be any dispute between the Company and Executive (i) in the event of any termination of Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by Executive, whether Good Reason existed, or (iii) otherwise arising out of this Agreement, the dispute shall be resolved in accordance with the dispute resolution procedures set forth in Exhibit A hereto, the provisions of which are incorporated as a part hereof, and the parties hereto hereby agree that (a) such dispute resolution procedures shall be the exclusive method for resolution of disputes under this Agreement and (b) to the extent allowed by law the NASD arbitration provisions shall not apply to disputes arising under this Agreement; provided, however, that (1) either party may seek preliminary judicial 12 relief if, in its judgment, such action is necessary to avoid irreparable injury during the tendency of such procedures, and (2) nothing in Exhibit A shall prevent either party from exercising the rights of termination set forth in this Agreement. In the event of a dispute hereunder as to whether a termination by the Company was for Cause or by the Executive for Good Reason, until there is a resolution and award as provided in Exhibit A, the Company shall pay all amounts, and provide all benefits, to Executive and/or Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide hereunder as though such termination were by the Company without Cause or by Executive for Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts, except upon receipt of a written undertaking by or on behalf of Executive (and/or Executive's family or other beneficiaries, as the case may be) to repay, without interest or penalty, as soon as practicable after completion of the dispute resolution all such amounts to which Executive (or Executive's family or other beneficiaries, as the case may be) is ultimately adjudged not to be entitled with respect to the payment of such disputed amount(s). IT IS EXPRESSLY UNDERSTOOD THAT BY SIGNING THIS AGREEMENT, WHICH INCORPORATES BINDING ARBITRATION, THE COMPANY AND EXECUTIVE AGREE, EXCEPT AS SPECIFICALLY PROVIDED OTHERWISE IN SECTION 5.3 AND THIS SECTION 6.3(B), TO WAIVE COURT OR JURY TRIAL AND TO WAIVE PUNITIVE, STATUTORY, CONSEQUENTIAL AND ANY DAMAGES, OTHER THAN COMPENSATORY DAMAGES. 6.4 Successors; Binding Agreement. This Agreement shall be binding upon any successor to the Company and shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.5 Modification; No Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any other term or condition. 6.6 Severability. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Agreement, shall not affect the validity or enforceability of any other covenant or agreement contained herein. If, in any judicial proceeding, a court shall refuse to enforce one or more of the covenants or agreements contained herein because the duration thereof is too long, or the scope thereof is too broad, it is expressly agreed between the 13 parties hereto that such duration or scope shall be deemed reduced to the extent necessary to permit the enforcement of such covenants or agreements. 6.7 Notices. All the notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, to the parties hereto at the following addresses: If to the Company, to it at: Pilgrim America Investments, Inc. Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004 Attn: Chairman If Executive, to him at: Howard C. Tiffen (At his personal residence as noted In the Company records). 6.8 Assignment. This Agreement and any rights hereunder shall not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.9 Entire Understanding. This Agreement (together with the Exhibit incorporated as a part hereof) constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. 6.10 Executive's Representations. Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of his duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. 6.11 Governing Law. This Agreement shall be construed in accordance with and governed for all purposes by the laws of the State of Arizona applicable to contracts executed and wholly performed within such state. 14 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Company: PILGRIM AMERICA INVESTMENTS, INC. By: ---------------------------------- Robert W. Stallings Executive: HOWARD C. TIFFEN -------------------------------------- 15 EXHIBIT A DISPUTE RESOLUTION PROCEDURES ----------------------------- A. If a controversy should arise which is covered by Section 6.3 of Article VI, then not later than three (3) months from the date of the event which is the subject of dispute either party may serve on the other a written notice specifying the existence of such controversy and setting forth in reasonably specific detail the grounds thereof ("Notice of Controversy"); provided that, in any event, the other party shall have at least thirty (30) days from and after the date of the Notice of Controversy to serve a written notice of any counterclaim ("Notice of Counterclaim"). The Notice of Counterclaim shall specify the claim or claims in reasonably specific detail. If the Notice of Controversy or the Notice of Counterclaim, as the case may be, is not served within the applicable period, the claim set forth therein will be deemed to have been waived, abandoned and rendered unenforceable. B. Following receipt of the Notice of Controversy (or the Notice of Counterclaim, as the case may be), there shall be a three week period during which the parties will make a good faith effort to resolve the dispute through negotiation ("Period of Negotiation"). Neither party shall take any action during the Period of Negotiation to initiate arbitration proceedings. C. If the parties should agree during the Period of Negotiation to mediate the dispute, then the Period of Negotiation shall be extended by an amount of time to be agreed upon by the parties to permit such mediation. In no event, however, may the Period of Negotiation be extended by more than five weeks or, stated differently, in no event may the Period of Negotiation be extended to encompass more than a total of eight weeks. D. If the parties agree to mediate the dispute but are thereafter unable to agree within a week on the format and procedures for the mediation, then the effort to mediate shall cease, and the Period of Negotiation shall terminate four weeks from the Notice of Controversy (or the Notice of Counterclaim, as the case may be). E. Following the termination of the Period of Negotiation, the dispute (including the main claim and counterclaim, if any) shall be settled by arbitration, governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq. ("FAA"), and judgment upon the award may be entered in any court having jurisdiction thereof. The format and procedures of the arbitration are set forth below (referred to below as the "Arbitration Agreement"). 16 F. A notice of intention to arbitrate ("Notice of Arbitration") shall be served within 45 days of the termination of the Period of Negotiation. If the Notice of Arbitration is not served within this period, the claim set forth in the Notice of Controversy (or the Notice of Counterclaim, as the case may be) will be deemed to have been waived, abandoned and rendered unenforceable. G. The arbitration, including the Notice of Arbitration, will be governed by the Commercial Rules of the America Arbitration Association ("AAA") in effect on the date of the Notice of Arbitration, except that the terms of this Arbitration Agreement shall control in the event of any difference or conflict between such Rules and the terms of this Arbitration Agreement. H. The arbitrator shall reach a decision on the merits on the basis of applicable legal principles as embodied in the law of the State of Arizona. The arbitration hearing shall take place in Phoenix, Arizona. I. There shall be one arbitrator, regardless of the amount in controversy. The arbitrator selected, in order to be eligible to serve, shall be a lawyer in Phoenix, Arizona with at least 15 years specializing in either general commercial litigation or general corporate and commercial matters. In the event the parties cannot agree on a mutually acceptable single arbitrator from the list submitted by the AAA, the AAA shall appoint the arbitrator who shall meet the foregoing criteria. J. At the time of appointment and as a condition thereto, the arbitrator will be apprised of the time limitations and other provisions of this Arbitration Agreement and shall indicate such dispute resolver's agreement to comply with such provisions and time limitations. K. During the 30 day period following appointment of the arbitrator, either party may serve on the other a request for limited numbers of documents directly related to the dispute. Such documents will be produced within seven days of the request. L. Following the thirty-day period of document production, there will be a forty-five day period during which limited depositions will be permissible. Neither party will take more than 5 depositions, and no deposition will exceed three hours of direct testimony. M. Disputes as to discovery or prehearing matters of a procedural nature shall be promptly submitted to the arbitrator pursuant to telephone conference call or otherwise. The arbitrator shall make every effort to render a ruling on such interim matters at the time of the hearing (or conference call) or within five business days thereafter. 17 N. Following the period of depositions, the arbitration hearing shall promptly commence. The arbitrator will make every effort to commence the hearing within thirty days of the conclusion of the deposition period and, in addition, will make every effort to conduct the hearing on consecutive business days to conclusion. O. An award will be rendered, at the latest, within nine months of the date of the Notice of Arbitration and within thirty days of the close of the arbitration hearing. The award shall set forth the grounds for the decision (findings of fact and conclusions of law) in reasonably specific detail. The award shall be final and nonappealable except as provided in the FAA and except that a court of competent jurisdiction shall have the power to review whether, as a matter of law, based upon the findings of fact by the arbitrator, the award should be confirmed or should be modified or vacated in order to correct any errors of law made by the arbitrator. Such judicial review shall be limited to issues of law, and the parties agree that the findings of fact made by the arbitrator shall be final and binding on the parties and shall serve as the facts to be relied upon by the court in determining the extent to which the award should be confirmed, modified or vacated. The award may only be made for compensatory damages, and if any other damages (whether exemplary, punitive, consequential, statutory or other) are included, the award shall be vacated and remanded, or modified or corrected, as appropriate to promote this damage limitation. 18 EX-27 4 FDS --
5 882860 PILGRIM AMERICA CAPITAL CORPORATION 1,000 U.S. DOLLARS 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 1 451 21,699 2,511 0 0 24,661 1,949 671 61,596 5,256 0 0 0 81 47,839 61,596 0 24,858 0 0 13,476 0 334 11,048 4,543 6,505 0 0 0 6,505 1.22 1.06
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