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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ____________ to ____________
Commission File Number 0-8841
The Pioneer Group, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-5657669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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60 STATE STREET,
BOSTON, MASSACHUSETTS 02109
(617) 742-7825
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
Based on the last sale price of the Registrant's Common Stock on the Nasdaq
National Market of $28.875 on March 24, 1998, the aggregate market value of the
shares of voting stock held by non-affiliates of the Registrant on that date was
$621,603,011.
As of March 24, 1998, 25,391,170 shares of the Registrant's Common Stock,
$0.10 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the 1997 Annual Report to Stockholders are incorporated by
reference into Parts I, II and IV (as indicated in such parts).
(2) Certain information called for by Part III (as indicated therein) is
incorporated from the Registrant's definitive proxy materials for use in
connection with the 1998 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
WORLDWIDE FINANCIAL SERVICES. The Pioneer Group, Inc., a corporation
organized under the laws of the State of Delaware in 1956 (the "Company"), and
its wholly owned subsidiaries, are engaged in four lines of financial services
businesses in the United States: (i) investment manager to 33 open-end U.S.
registered investment companies and one closed-end U.S. registered investment
company (collectively, the "mutual funds") and six institutional accounts, (ii)
distributor of shares of open-end mutual funds, (iii) shareholder servicing
agent for open-end mutual funds, and (iv) venture capital investor and manager.
The Company also provides global real estate management and advisory services to
institutions and corporations in the U.S., Russia and Poland.
The Company's international financial services businesses include
investment operations in: (i) Warsaw, Poland, where the Company manages and
distributes units of four mutual funds available to Polish Citizens, owns 98% of
a brokerage company and 50% of a unitholder servicing agent and manages an
institutional venture capital fund, (ii) Dublin, Ireland, where the Company
distributes shares of, manages and services six offshore investment funds sold
primarily in Western Europe, and (iii) Moscow, Russia, where the Company
provides financial services, including investment advisory, investment banking,
brokerage and transfer agency services, distributes shares of, manages and
services two open-end mutual funds available to Russian citizens and owns 51% of
the First Voucher Fund, the largest Russian voucher investment fund. In
addition, the Company has investment management operations in the Czech Republic
and has invested in investment management operations in India and Taiwan.
NATURAL RESOURCE DEVELOPMENT. The Company's indirect wholly owned
subsidiary, Pioneer Goldfields Limited ("Pioneer Goldfields"), conducts mining
and exploration activities in the Republic of Ghana and exploration activities
elsewhere in Africa. Pioneer Goldfields' principal asset is its ownership of 90%
of the outstanding shares of Teberebie Goldfields Limited, which operates a gold
mine in the western region of the Republic of Ghana. The Company also
participates in several natural resource development ventures in Russia. The
Company's subsidiary, Pioneer Forest, Inc. ("Pioneer Forest"), conducts (through
three Russian subsidiaries) timber harvesting and timber development activities
in the Russian Far East. Pioneer Forest's principal asset is its ownership of
95% of the outstanding shares of Closed Joint-Stock Company "Forest-Starma,"
which commenced commercial timber operations in January 1997. The Company also
is conducting a gold exploration project in the same region.
WORLDWIDE FINANCIAL SERVICES
DOMESTIC INVESTMENT MANAGEMENT
The Company's domestic investment management business includes the U.S.
registered mutual funds, the offshore funds registered in Ireland and private
institutional accounts, all of which are advised by the Company's wholly owned
subsidiary, Pioneering Management Corporation ("Pioneering Management"). This
business also includes distribution, shareholder servicing and transfer agency
activities related to these investment products.
U.S. Mutual Funds. Pioneering Management serves as investment manager to
33 domestic open-end mutual funds and one domestic closed-end mutual fund,
consisting of eight domestic growth portfolios, seven international growth
portfolios, nine growth and income portfolios, six income portfolios, two
tax-free income portfolios and two money market portfolios. These portfolios
include Pioneer Independence Fund which commenced operations in March 1998. All
of these funds (hereinafter referred to collectively as the "Funds") are
registered under the Investment Company Act of 1940, as amended (the "1940
Act").
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At March 15, 1998, the Funds had aggregate net assets of approximately
$21.7 billion. In managing such assets, Pioneering Management employed at March
1, 1998, 135 persons on a full-time basis, including 20 fund managers and 46
investment analysts and support staff.
Pioneering Management manages each Fund pursuant to a management contract
which is renewable annually by vote of either the Fund's Board of Trustees
(including a majority of members who are not "interested persons" as defined
under the 1940 Act) or the Fund's shareholders. All management contracts
terminate if assigned and may be terminated by either party without penalty on
60 days' written notice. The management contracts for the Funds (other than
Funds that were established in 1997 or 1998) were all renewed for an additional
year in 1997. Under these contracts, Pioneering Management is authorized in its
discretion to buy and sell securities for the accounts of the Funds, subject to
certain limitations. In addition, the management contracts between the Funds and
Pioneering Management define the ordinary operating expenses to be assumed by
each.
As compensation for its management services, Pioneering Management receives
management fees from the Funds that range from 0.40% to 1.25% per year of
average daily net assets depending on the Fund. Three of the Funds (including
the two largest Funds) have a management fee that is adjusted based upon the
Fund's performance relative to the performance of an established index
("performance fees"). The Board of Trustees of three additional funds has
recently approved fee increases, which, if approved by shareholders, will add
performance fees to two of these three funds. For 1997, 1996 and 1995,
Pioneering Management received revenues from management fees from the Funds of
approximately $107 million, $76 million and $54 million, respectively. On an
interim basis, Pioneering Management has agreed not to impose a portion of its
management fees and to make other arrangements, if necessary, to limit operating
expenses of selected Funds. Pursuant to this policy, Pioneering Management
limited management fees or otherwise incurred expenses of approximately $1.8
million, $2.4 million and $3.6 million pursuant to expense limitation agreements
with selected Funds during 1997, 1996 and 1995, respectively. Management fees
from Pioneer II, the Company's largest Fund, were approximately $40 million, $29
million and $22 million in 1997, 1996 and 1995, respectively.
Irish Offshore Funds. In 1995, subsidiaries of the Company organized three
offshore funds incorporated under the laws of the Republic of Ireland, Pioneer
Global Equity Fund Plc (the "Global Equity Fund"), Pioneer Global Bond Fund Plc
(the "Global Bond Fund") and Pioneer DM Cashfonds Plc ("Cashfonds"). In 1997,
three additional funds, Pioneer European Equity Fund Plc (the "European Equity
Fund"), Pioneer U.S. Real Estate Fund Plc (the "U.S. Real Estate Fund") and
Pioneer Central & Eastern European Fund Plc (the "C&E Fund"), began operations.
Global Equity Fund, European Equity Fund, U.S. Real Estate Fund, C&E Fund,
Global Bond Fund and Cashfonds are referred to collectively as the "Irish
Funds." Pioneer Management (Ireland) Limited ("Pioneer Ireland"), a wholly owned
subsidiary of the Company, serves as investment adviser, distributor and
shareholder servicing agent of the Irish Funds. Pioneering Management serves as
a subadvisor for the Irish Funds. As compensation for its advisory services,
Pioneer Ireland receives annual management fees from each of Global Equity Fund,
European Equity Fund and U.S. Real Estate Fund of 1.25% of average daily net
assets. Pioneer Ireland receives annual management fees from the C&E Fund,
Global Bond Fund and Cashfonds of 1.50%, 0.85% and 0.60% of average daily net
assets, respectively. Pioneering Management receives a portion (not to exceed
75%) of the management fee paid to Pioneer Ireland. The Irish Funds are
currently sold in Germany and Austria, but the Company anticipates that they
eventually will be sold in other foreign markets. At March 15, 1998, the Irish
Funds had aggregate net assets of approximately $283 million.
Pioneer Ireland's main office is located in Dublin, Ireland. It also
maintains an office in Hamburg, Germany. At March 1, 1998, Pioneer Ireland had
103 employees, including management and support staff.
Institutional Accounts. Pioneering Management acts as an investment
manager to three private institutional accounts and two collective investment
vehicles for institutional investors and acts as a subadvisor to one of a series
of portfolios utilized as funding vehicles for a variable life insurance fund
(hereinafter referred to collectively as the "Institutional Accounts"). The
Institutional Accounts had aggregate assets of
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approximately $ 636 million at March 15, 1998. In 1997, the Company formed
Pioneer Global Institutional Advisors to coordinate the Company's global
institutional investment management initiatives.
DISTRIBUTION ACTIVITIES
The Company's indirect wholly owned subsidiary, Pioneer Funds Distributor,
Inc. ("Pioneer Distributor"), acts as principal underwriter and distributor of
the shares of the Funds (except Pioneer Interest Shares, a closed-end fund which
does not continuously offer its shares). In 1997, Pioneer Distributor sold
shares of the Funds with an aggregate offering price of $2.9 billion, including
Class A Shares (as defined below) with an aggregate offering price of $2.0
billion, Class B Shares (as defined below) with an aggregate offering price of
$558 million, Class C Shares (as defined below) with an aggregate offering price
of $141 million and shares of Pioneer Variable Contracts Trust with an aggregate
offering price of $211 million. In connection therewith, Pioneer Distributor
received aggregate commissions of $60.9 million, of which $53.8 million was
reallowed to approximately 1,400 independent broker-dealers throughout the
United States and in several foreign countries. In 1996, Pioneer Distributor
received aggregate commissions of $66.2 million, of which $59.1 million was
reallowed to broker-dealers. In 1995, Pioneer Distributor received aggregate
commissions of $58.7 million, of which $53.1 million was reallowed to
broker-dealers. One broker-dealer was responsible for approximately 10% of sales
in 1997, 9% of sales in 1996 and 7% of sales in 1995.
Underwriting Contracts. Pioneer Distributor provides its underwriting and
distribution services pursuant to underwriting contracts, which are
substantially identical, with each of the Funds. These one-year contracts are
renewable annually by vote of the Fund's Board of Trustees (including a majority
of those Trustees who are not "interested persons" as defined under the 1940
Act) or shareholders. Each contract terminates if assigned and may be terminated
by either party on 60 days' written notice without penalty. The underwriting
contracts for each of the Funds (other than Funds that were established in 1997
and 1998) were all renewed for an additional year in 1997.
Sales Charges. Generally, purchasers of shares of the Funds pay a sales
charge at the time of purchase which is the difference between the offering
price of the shares and the net asset value of the shares, and which varies
generally as a percentage of the offering price. These are referred to as
front-end load shares ("Class A Shares"). Sales charges on Class A Shares range
from zero to 5.75% depending on the Fund and the amount invested. Most of the
sales charge on Class A Shares is reallowed by Pioneer Distributor to
broker-dealers through whom the shares are sold. This reallowance varies
generally as a percentage of the offering price on sales under $1 million.
Reallowances range from 1.0% to 5.0% depending on the Fund and the amount of the
sale. Broker-dealer reallowances on new funds and during certain short-term
promotions may be increased to 100% or more of the sales charge.
The Company also offers a multi-class share structure for the Funds (except
Pioneer Interest Shares and Pioneer Variable Contracts Trust) (the "multi-class
funds") pursuant to which the multi-class funds offer both the traditional
front-end load shares, or Class A Shares, as well as two classes of back-end
load shares ("Class B Shares" and "Class C Shares"). On Class B Shares, the
investor does not pay any sales charge unless he or she redeems before the
expiration of the minimum holding period, which ranges from three to six years.
These early redemptions are subject to a contingent deferred sales charge (a
"CDSC"), which ranges from 2.0% to 4.0%. On Class C Shares, the investor does
not pay any sales charge unless he or she redeems within one year of purchase in
which event a CDSC of 1.0% is imposed. The Company began offering Class B Shares
in April 1994 and Class C Shares in January 1996. Class C Shares are not
available on all multi-class funds.
With respect to sales of Class A Shares, Pioneer Distributor may, in its
discretion, pay a commission to broker-dealers that initiate and are responsible
for sales of $1 million but less than $50 million, ranging from 0.10% to 1.0%,
depending on the Fund, and the amount of the sale. Certain purchases not subject
to an initial sales charge may be subject to a CDSC of 1.0% in the event of
certain redemption transactions within one year. With respect to sales of Class
B Shares, Pioneer Distributor will generally pay commissions to broker-dealers
related to sales and service of such shares ranging from 2% to 4% of the sales
transaction amount (including a service fee of 0.25% for the first year). With
respect to sales of Class C Shares, Pioneer
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Distributor will pay commissions to broker-dealers related to sales and service
of such shares of 1% of the sales transaction amount (including a service fee of
0.25% for the first year). During 1997, 1996 and 1995, in connection with sales
of Class B Shares, Pioneer Distributor paid commissions to broker-dealers of
$16.3 million, $23.2 million and $14.9 million, respectively.
Pioneer Distributor's cash flow may be adversely affected by vigorous sales
of back-end load shares because its recovery of the cost of commissions paid up
front to dealers is spread over a period of years. During this period, the
Company bears the costs of financing and the risk of market decline. Pioneer
Distributor is reimbursed for such commissions from payments by the Funds under
distribution plans (see "Distribution Plans" below) and from CDSCs paid by
redeeming investors before the expiration of the holding periods.
Distribution Plans. Each of the Funds (except Pioneer Interest Shares and
Pioneer Variable Contracts Trust) has one or more distribution plans pursuant to
Rule 12b-1 under the 1940 Act which provides for certain payments to be made to
Pioneer Distributor. With respect to Class A Shares, the distribution plans (the
"Class A Plans") provide for payments by such Funds of certain expenses up to
0.25% per annum of average daily net assets (0.15% for Pioneer Cash Reserves
Fund, a money market fund). With respect to Class B and Class C Shares, the
distribution plans (the "Class B Plans" and "Class C Plans," respectively)
provide for payments by such funds of fees relating to (a) distribution services
in an amount not to exceed 0.75% per annum of the average daily net assets of
the Class B or Class C Shares and (b) personal and account maintenance services
in an amount not to exceed 0.25% of the average daily net assets of the Class B
or Class C Shares. The distribution plans are subject to annual renewals which
require the approval of the Funds' Board of Trustees, including a majority of
Trustees who are not "interested persons" of the Funds. In 1997, the Trustees of
the Funds (other than Funds that were established in 1997 and 1998) renewed the
Class A, Class B and Class C Plans. In 1997, 1996 and 1995, Pioneer Distributor
received distribution fees of $13.1 million, $7.7 million and $2.5 million,
respectively.
Domestic Sales of Shares of the Funds. Pioneer Distributor is a registered
broker-dealer (see "Regulation" below), employing approximately 120 full-time
personnel, including 22 regional sales representatives who are responsible for
territories comprising most of the United States and Puerto Rico and who work
with broker-dealers to promote sales of Fund shares in their respective
territories. Substantially all of the Funds' shares are sold to the public by
securities sales persons registered with the National Association of Securities
Dealers, Inc. (the "NASD") who act as representatives of broker-dealer firms,
which are members of the NASD and which have signed sales agreements with
Pioneer Distributor. Shares of the Funds may be sold in all states, by
broker-dealers and registered representatives licensed in those states.
International Sales of Shares of the Funds. Pioneer Distributor's wholly
owned subsidiary, Pioneer Fonds Marketing GmbH ("Pioneer Fonds Marketing"), a
company registered under the laws of the Republic of Germany, performs marketing
and sales activities with respect to sales of shares of certain of the Funds in
Europe, primarily Germany, Austria and Switzerland. Pioneer Fonds Marketing
currently has 20 full-time employees. In 1997, approximately 16% of the total
sales of the Funds' shares were sold outside of the United States. Pioneer Fonds
Marketing also performs marketing and sales activities with respect to sales of
the Irish Funds in Western Europe.
In 1998, Pioneer Distributor established Pioneer Global Funds Distributor,
Ltd. ("Global Funds Distributor") to serve as the exclusive worldwide
distributor of the Irish Funds. Global Funds Distributor, a wholly owned
subsidiary of Pioneer Distributor, is registered under the laws of Bermuda and
maintains its registered office in that country. Global Funds Distributor will
enter into an agreement with Pioneer Fonds Marketing with respect to sales of
the Irish Funds in Western Europe.
Additional Information. For more information on sales of mutual fund
shares for the five years ended December 31, 1997, see "Sales of Mutual Fund
Shares" in the 1997 Annual Report to Stockholders, which information is
incorporated herein by reference.
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SHAREHOLDER AND RELATED SERVICES
Pioneering Services Corporation. At December 31, 1997, the Funds had
approximately 1,117,000 active shareholder accounts, including approximately
386,000 Individual Retirement Accounts ("IRAs") and other tax-qualified
retirement accounts. Mutual fund shareholders accounts and, in particular,
qualified accounts, require an exceptional amount of shareholder communications
and transfer agency services. The Company's wholly owned subsidiary, Pioneering
Services Corporation ("Pioneering Services"), has been providing transfer agent
and shareholder services to the Funds since in 1985. At March 1, 1998,
Pioneering Services employed 308 full-time personnel, including 53 employees who
are located at its processing facility in Omaha, Nebraska.
As shareholder servicing agent for the Funds, Pioneering Services has
entered into agreements with each Fund (except Pioneer Interest Shares) pursuant
to which it received in 1997 an annual active account fee of $22.75 for equity
fund accounts, $30.00 for fixed-income fund accounts and $28.00 for money market
fund accounts. Such agreements are subject to annual renewals which require the
approval of the Funds' Boards, including a majority of members who are not
"interested persons," and may be canceled by either party on 60 days' notice.
For 1997, 1996 and 1995, Pioneering Services received revenues from service fees
from the Funds and Pioneer Interest Shares (in 1996 and 1995) of approximately
$27 million, $25 million and $22 million, respectively.
In February 1997, Pioneer Ireland assumed responsibilities as
sub-shareholder servicing agent for certain of the Funds. In that capacity,
Pioneer Ireland provides, under the direction of Pioneering Services,
shareholder and transfer agency services to Fund shareholders who are citizens
of Germany, Austria and Switzerland. Pioneer Ireland also provides similar
services to the shareholders of the Irish Funds.
Trustee/Custodian. The Company acts as the trustee/custodian for accounts
which are IRAs or other qualified retirement accounts and receives an annual fee
of $10 for each such account, payable by shareholders with such accounts, up to
maximum annual fees of $20 for shareholders with multiple accounts of one plan
type. Shareholders also have the option of paying a one-time fee of $100 in lieu
of the annual account fee. During 1997, 1996 and 1995, the Company received fees
in connection with its services as trustee/custodian of $4.4 million, $3.9
million and $3.7 million, respectively.
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For more information on assets under management and sales of mutual fund
shares for the five years ended December 31, 1997, and other industry segment
information for the three years ended December 31, 1997, see "Assets Under
Management at December 31," "Sales of Mutual Fund Shares" and Note 16-Financial
Information by Business Segment included under Notes to Consolidated Financial
Statements, all of which are included in the 1997 Annual Report to Stockholders
and are incorporated herein by reference.
U.S. AND CENTRAL AND EASTERN EUROPE VENTURE CAPITAL
U. S. VENTURE CAPITAL OPERATIONS
In 1981, the Company organized a wholly owned subsidiary, Pioneer Capital
Corporation ("Pioneer Capital"), for the purpose of making venture capital
investments and managing venture capital funds. In 1986, Pioneer Capital
organized a wholly owned subsidiary, Pioneer SBIC Corp. ("PSBIC"), which is the
general partner of Pioneer Ventures Limited Partnership ("PVLP"). PVLP is a
Small Business Investment Company ("SBIC") licensed by the U.S. Small Business
Administration (the "SBA"). PSBIC is the general partner of PVLP and has an
approximate 99% interest in PVLP. The limited partnership interests in PVLP
represent a less than 1% interest in PVLP and are owned by the four officers of
Pioneer Capital (the "Pioneer Capital Principals") who are responsible for the
operations and overall success of PVLP.
In 1995, Pioneer Capital formed Pioneer Ventures Limited Partnership II
("PVLP II"), a new SBIC. Pioneer Ventures Management L.P. ("PVM") serves as the
general partner of PVLP II. PVM's general partner is Pioneer Management SBIC
Corp., a corporation the shareholders of which are the Pioneer Capital
Principals. PVM's limited partners are the Company and the Pioneer Capital
Principals. The Company holds
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an 11.7% limited partnership interest in PVLP II and a 99% limited partnership
interest in PVM, which owns 2.3% of PVLP II. At March 15, 1998, PVLP II had
$10.7 million of unfunded commitments from investors.
At December 31, 1997, Pioneer Capital and PVLP held approximately $17.6
million of investments (at cost) in 20 privately held companies and $2.7 million
(at cost) in nine publicly held companies. The aggregate value of these
investments as of December 31, 1997, was $41.0 million. During 1997, Pioneer
Capital and PVLP had net realized and unrealized gains of $13.8 million from
their venture capital investment portfolio. At December 31, 1997, Pioneer
Capital and PVLP had a total of $10.2 million in cash available for additional
investments. Additional capital for investments is available to PVLP through the
sale of SBA guaranteed debentures. Through December 31, 1997, PVLP had availed
itself of a total of $4.95 million of SBA guaranteed debentures that mature at
various times between 1998 and 2003 and bear interest at rates between 6.12% and
9.8%.
At December 31, 1997, PVLP II held approximately $20.6 million of
investments (at cost) in 13 privately held companies. The aggregate value of
these investments as of December 31, 1997, was $24.3 million. During 1997, PVLP
II had net realized and unrealized gains of $2.4 million from its venture
capital investment portfolio. At December 31, 1997, PVLP II had a total of $3.7
million in cash available for additional investments.
Pioneer Capital and its affiliates utilize a diversified approach to
venture capital investing. Investments are in early-stage businesses seeking
initial financing as well as more mature businesses in need of capital for
expansion, acquisitions, management buyouts or recapitalizations. In general,
Pioneer Capital, PVLP and PVLP II invest in New England-based companies in a
variety of industries. At March 1, 1998, Pioneer Capital had eight employees.
Venture capital investment portfolio valuations are reviewed quarterly by
the Company's Board of Directors and the values of such investments are adjusted
when circumstances require. As a general rule, an investment is adjusted up or
down, as the case may be, to conform to the price paid by a sophisticated new
third-party investor in any subsequent round of financing. An investment may
also be written down if the venture company is substantially behind its business
plan and may be written up if there is some other compelling reason for doing
so. For PVLP and PVLP II, securities that are publicly traded are valued on a
valuation date at the average of the last bid price on the valuation date and
the preceding two days in the principal market in which such securities are
traded, with an appropriate discount if such securities are restricted or thinly
traded. For Pioneer Capital, securities that are publicly traded are valued on
the valuation date at the closing price on the principal market on which such
securities are traded, with an appropriate discount if such securities are
restricted or thinly traded.
POLISH VENTURE CAPITAL OPERATIONS
In 1995, the Company's wholly owned subsidiary, Pioneer International
Corporation ("Pioneer International"), organized two limited partnerships,
Pioneer Poland U.S. L.P. ("PPUSLP") and Pioneer Poland U.K. L.P. ("PPUKLP"), for
the purpose of raising funds for venture capital investment in Poland. Pioneer
International's wholly owned subsidiaries, Pioneer Poland U.S. (Jersey) Ltd. and
Pioneer Poland U.K. Ltd., are the general partners of PPUSLP and PPUKLP,
respectively. During 1995, PPUSLP and PPUKLP (collectively, the "Pioneer Poland
Fund") raised $60 million in commitments from U.S. and European investors. The
Company has committed approximately $2.5 million to each limited partnership, of
which 75% has been drawn down by the Pioneer Poland Fund. This commitment
provides the Company with a 7% indirect interest in PPUSLP and a 9% indirect
interest in PPUKLP. At December 31, 1997, Pioneer Poland Fund held approximately
$16.4 million of investments (at cost) in eight privately held Polish companies,
had committed contractually to invest an additional $7.1 million in these
companies and had reserved an additional $15.6 million for future financing
rounds of the existing portfolio. The value of these investments as of December
31, 1997, pursuant to the valuation guidelines established by the European
Venture Capital Association, was approximately $15.7 million, exclusive of
further commitments and reserves. The responsibilities for managing the Pioneer
Polish Fund are shared by Pioneering Management (Jersey) Ltd. and Pioneer
Investment Poland Ltd., each of which is a wholly owned subsidiary of Pioneer
International.
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RUSSIAN VENTURE CAPITAL OPERATIONS
The Company is in the process of establishing the Pioneer Russia Direct
Equity Fund, L.P. (the "Direct Equity Fund"), a fund focused on venture capital
investment in Russia. The Direct Equity Fund will make investments in small- to
medium- sized Russian companies that are in a position to respond to the growing
consumer demand for products and services in Russia. The Company's 81.7%-owned
subsidiary, Pioneer First Russia, Inc. ("PFR"), will serve as the Direct Equity
Fund's investment advisor. PFR's Russian subsidiary, Pioneer Investments, will
serve as the Direct Equity Fund's investment manager. The Direct Equity Fund
intends to raise $150 million, primarily from U.S. and European institutional
investors, during 1998. The Company will commit to invest $4.5 million in the
Direct Equity Fund. See "Financial Services -- Russia" below.
FINANCIAL SERVICES -- POLAND
Polish Mutual Funds. In 1992, subsidiaries of the Company organized and
began distributing units of Pioneer First Polish Trust Fund (the "First Polish
Fund"), the first mutual fund in Poland, and organized a related joint venture
unitholder services business, Financial Services Limited ("FSL"). In 1995, two
additional funds, Pioneer Aggressive Investment Trust Fund (the "Aggressive
Investment Fund") and Pioneer Interest Bearing Securities Trust (the "Interest
Bearing Fund"), began operations. In 1997, an additional fund, Pioneer
Privatization Trust Fund (the "Privatization Fund"), began operations. Pioneer
First Polish Investment Fund Joint Stock Company ("Pioneer First Polish") serves
as an investment manager and distributor of units of the First Polish Fund,
Aggressive Investment Fund, Interest Bearing Fund and Privatization Fund
(collectively, the "Polish Funds"). As compensation for its management services,
Pioneer First Polish receives management fees of 2.00% per annum of average
daily net assets. At March 1, 1998, Pioneer First Polish employed 109 full-time
persons, including management and support staff. Pioneer First Polish is a
wholly owned subsidiary of Pioneer International. At March 15, 1998, the Polish
Funds had aggregate net assets of approximately $494 million. Sales of units of
the Polish Funds were $203 million, $169 million and $21 million in 1997, 1996
and 1995, respectively.
Financial Services Limited. In January 1992, the Company's subsidiary,
Pioneer International, established FSL, which is 50% owned by Pioneer
International and 50% owned by Bank Polska Kasa Opieki, S.A. FSL acts as the
unitholder servicing agent for the Company's Polish mutual funds. Under the
terms of the agreements with the funds, FSL receives annual fees equal to the
Polish zloty ("PLN") equivalent of $21.00 per account. In 1997, such fees
aggregated approximately PLN 15.1 million (approximately $4.5 million). FSL
provides similar unitholder services to an unaffiliated fund group. At December
31, 1997, FSL serviced approximately 222,000 unitholder accounts. FSL employs
116 full-time persons.
Polish Brokerage Operations. In March 1996, Pioneer International acquired
approximately 86% of Pioneer Polski Dom Maklerski, S.A., a Polish brokerage
operation ("PPDM"). Pioneer International now holds 98% of PPDM. PPDM provides
brokerage services to Polish and U.S. institutions and Polish citizens. PPDM
also provides investment advice and analysis and portfolio management services.
FINANCIAL SERVICES -- RUSSIA
In April 1995, the Company acquired approximately 51% of the shares of
First Voucher Fund (the "Voucher Fund"), the largest voucher investment fund
established in Russia in connection with that country's privatization program.
The Voucher Fund has over 2 million shareholders and 125 portfolio investments
as of March 15, 1998. The shares were issued by the Voucher Fund to two newly
formed subsidiaries of Pioneer Omega, Inc. ("Pioneer Omega"), a Delaware
corporation in which the Company owns 90% of the outstanding stock.
The Company's Russian investment operations, which include Pioneer First
(Company for the Management of Investment Funds), Pioneer Securities, Pioneer
Services, Pioneer Investments and Pioneer Bank, are consolidated under Pioneer
Omega's subsidiary, Pioneer First Russia, Inc. ("PFR"). In October 1996, PFR
executed agreements with the International Finance Corporation ("IFC"), a member
of the World Bank Group, pursuant to which IFC agreed to invest $4 million in
PFR to acquire an 18.3% equity interest. This
7
<PAGE> 9
transaction was completed in January 1997. At March 1, 1998, PFR and its
subsidiaries employed 373 persons.
Pioneer First serves as investment manager to the Voucher Fund and Pioneer
First Unit Investment Fund, Russia's first open-ended unit investment fund.
Pioneer First Unit Investment Fund, which invests mainly in Russian government
bonds, was launched in November 1996. The Company launched its second open-ended
unit investment fund, Pioneer First Liquid Shares, in November 1997. Pioneer
Securities provides brokerage services, corporate financing and financial
advisory services to Russian and western corporations and institutional
investors. Pioneer Securities is a member of the National Association of
Securities Market Participants (NAUFOR), the self regulatory organization for
Russian brokers. Pioneer Services, a domestic registrar and shareholder services
company, serves as the registrar for the Voucher Fund and the unit investment
funds. Pioneer Investments will serve as investment manager to a direct equity
fund to be sold to western institutional investors. See "U.S. and Central and
Eastern Europe Venture Capital -- Russian Venture Capital Operations" above.
Pioneer Bank, in which the Company has a 57.7% interest, is a medium-sized
Russian bank with a full currency license that provides a variety of payment
services in rubles and hard currency. Pioneer Bank also participates in the
Russian government debt market. In February 1998, subsidiaries of the Company
signed agreements pursuant to which AS Eesti Forekspank ("Forekspank"), a
banking institution based in Tallinn, Estonia, agreed to acquire a 35% ownership
interest in Pioneer Bank. This ownership percentage may increase depending on
the earnings of the bank over the next three years. Forekspank will also
participate significantly in the management of Pioneer Bank.
In 1997, Russian financial services had revenues and net income of $54.5
million and $5.3 million, respectively. In 1996, this segment had revenues and
net income of $21.1 million and $1.3 million, respectively. In 1995, this
segment had revenues and net income of $5.8 million and $1.4 million,
respectively. In 1997 and 1996, Pioneer Securities had revenues from its
brokerage operations of approximately $34.2 million and $1.6 million,
respectively. In 1997 and 1996, Pioneer Bank had revenues of approximately $12.3
million and $15 million, respectively, from its banking activities.
FINANCIAL SERVICES -- CZECH REPUBLIC
In 1995, subsidiaries of the Company organized and began distributing
Pioneer Czech Investment Company Trust Fund (the "Pioneer Czech Fund") in the
Czech Republic. Pioneer Czech Investment Company, a.s., a wholly owned
subsidiary of Pioneer International ("Pioneer Czech"), serves as investment
adviser and distributor of participation certificates in the Pioneer Czech Fund.
As compensation for its management services, Pioneer Czech receives management
fees of 2% of average daily net assets. Pioneer Czech employs 26 full-time
persons. As of March 15, 1998, the Pioneer Czech Fund had net assets with a
market value of approximately $50 million.
REAL ESTATE MANAGEMENT AND ADVISORY SERVICES
In 1996, the Company established Pioneer Real Estate Advisors, Inc.
("Pioneer Real Estate") to provide real estate advisory and management services
to institutional investors and corporations in the U.S. and in Central and
Eastern Europe, primarily Russia and Poland. Pioneer Real Estate is based in
Boston and conducts its operations in Russia through representative offices in
Moscow and St. Petersburg and a 65%-owned Russian subsidiary and in Poland
through a wholly owned subsidiary. Pioneer Real Estate is currently pursuing two
primary objectives. First, it seeks to invest and manage capital in the
commercial real estate markets of Central and Eastern Europe on behalf of pooled
investment vehicles, individual institutional investors and the Company. Second,
it seeks to provide advisory services, including property management, facilities
management, development management and feasibility and valuation analysis, to
the pooled investment vehicles it manages and to third parties.
In Poland, Pioneer Real Estate is developing a $60 million Polish real
property fund (the "Polish Real Estate Fund") to be sold to Polish and Western
institutional investors. At March 15, 1998, the Polish Real Estate Fund had
received investor commitments in the aggregate amount of $22 million and
significant negotiations are underway for the balance of the equity commitments.
Pioneer Real Estate will commit to invest $2 million in the Polish Real Estate
Fund. Pioneer Real Estate, together with its joint venture partner,
8
<PAGE> 10
Banc One Capital Corporation, has been selected by the Overseas Private
Investment Corporation ("OPIC") to operate and manage a $240 million pooled
investment vehicle (the "Pioneer -- Banc One Real Estate Fund") which will
invest in commercial property projects in Central and Eastern Europe, primarily
Russia and the newly independent states of the former Soviet Union. The Pioneer
- -- Banc One Real Estate Fund will be funded with $80 million of equity
investments from Western institutional investors and $160 million of debt
financing guaranteed by OPIC. Pioneer Real Estate will commit to invest $4
million in the Pioneer -- Banc One Real Estate Fund. Pioneer Real Estate expects
that the Pioneer -- Banc One Real Estate Fund will become operational in the
second quarter of 1998 and the balance of 1998 will be devoted to seeking
capital commitments.
Pioneer Real Estate also manages the real estate activities of the
Company's worldwide subsidiaries. In that connection, Pioneer Real Estate,
through its representative office in Moscow, manages the Meridian Commercial
Towers, an 18 story office tower located in Northern Moscow, which is owned by
the Voucher Fund. Pioneer Real Estate currently has 38 employees.
OTHER INVESTMENT MANAGEMENT INITIATIVES
India. Kothari Pioneer AMC Ltd. ("Kothari Pioneer"), an Indian company of
which Pioneering Management owns 45%, Investment Trust of India Limited, an
Indian corporation, owns 49%, and the employees of Kothari Pioneer own 6%,
serves as investment adviser to 10 private sector mutual funds for Indian
citizens. These funds had aggregate net assets of approximately $61 million at
March 15, 1998.
Taiwan. The Company is a 10% participant in a joint venture in Taiwan,
which was organized to manage and distribute investments in Taiwanese investment
companies.
COMPETITION
Management and Distribution Services. The mutual fund industry is
intensely competitive. Many organizations in this industry are attempting to
sell and service the same clients and customers, not only with mutual fund
investments but also with other financial products. Some of the Company's
competitors have more products and product lines and substantially greater
assets under management and financial resources. The Company believes it is
competitive in terms of price and performance with other firms providing similar
advisory services to investment companies and to pension plans and endowment
funds and with firms engaged in distributing investment company shares.
The distribution of mutual fund shares has been significantly affected by
(i) the growth in the number of funds available for sale, in particular, no-load
funds, the shares of which are sold primarily through direct sales approaches
without any sales charge, (ii) the evolution of service fees payable to
broker-dealers that provide continuous services to their clients in connection
with their investments in a mutual fund, (iii) the aggressive entry of banks and
investment banking firms into the industry, and (iv) the development and
implementation of complex distribution systems employing multiple classes of
shares and master-feeder fund structures. Typically, the underwriter or
distributor that pays a service fee is reimbursed by the mutual fund under a
plan of distribution pursuant to Rule 12b-1 under the 1940 Act. All of the Funds
distributed by Pioneer Distributor now pay such service fees to broker-dealers.
See "Domestic Investment Management -- Distribution Activities -- Distribution
Plans" above.
Success in the investment advisory and mutual fund share distribution
businesses is substantially dependent on the Funds' investment performance. Good
performance stimulates sales of the Funds' shares and tends to keep redemptions
low. Sales of Funds' shares generate higher management fees and distribution
revenues (which are based on assets of the Funds). Good performance also
attracts private institutional accounts to Pioneering Management. Conversely,
relatively poor performance results in decreased sales and increased redemptions
of the Funds' shares and the loss of private accounts, with corresponding
decreases in revenues to the Company. In 1997, the performance of the Funds
managed by Pioneering Management was generally competitive with comparable
mutual funds offered by others and with relevant indices and benchmarks approved
by the Funds' Boards.
9
<PAGE> 11
Shareholder Services. The shareholder services industry is extremely
competitive. Pioneering Services believes that it is providing high quality
shareholder services for the Funds and their shareholders at rates that are
competitive in the industry. The Company believes that effective shareholder
services are vital to success in this industry. While these services have
historically been provided by banks and other institutions with greater
resources than Pioneering Services, the Company believes that Pioneering
Services generally outperforms such competitors because it is dedicated
exclusively to the provision of such services to the Funds and their
shareholders, rather than to a number of different customers.
Venture Capital. The venture capital industry both in the United States
and abroad is extremely competitive. In the process of investing and attempting
to raise funds from entities other than the Company, Pioneer Capital and the
Company's foreign venture capital subsidiaries must compete with a large number
of venture capital firms, many of which have substantially larger staffs, more
experience in raising funds, and more capital to invest.
Real Estate Management and Advisory Business. The real estate management
and advisory business both in the United States and abroad is extremely
competitive. Pioneer Real Estate must compete with a large number of real estate
firms, many of which have been in existence for many years and have
substantially more resources than those available to Pioneer Real Estate.
REGULATION
Each of the Funds is registered under the 1940 Act and the Securities Act
of 1933, as amended. As registered investment companies, the Funds are subject
to extensive regulation governing all aspects of their operations. In addition
to being subject to the regulatory authority of the U.S. Securities and Exchange
Commission (the "SEC"), the Funds are also subject to certain limited regulation
by the securities regulators in all 50 states and in the foreign jurisdictions
in which certain of the Funds are registered.
Pioneer Distributor, as a registered broker-dealer under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), is required, among other
things, to maintain certain records, file reports with the SEC, supervise
employees and deal fairly with customers, all in accordance with the 1934 Act
and the rules and regulations promulgated thereunder. Pioneer Distributor is
also registered as a broker-dealer in all 50 states and, as such, is subject to
regulation by the state securities regulators in all such states. Pioneer
Distributor is a member of the NASD, a securities industry self-regulatory body
which is itself regulated by the SEC under the 1934 Act. As a member of the
NASD, Pioneer Distributor is required to abide by the standards, including
pricing practices, set forth in the Articles of Incorporation, the By-Laws and
the Rules of Fair Practice of the NASD.
Pioneering Management, as investment manager of the Funds, adviser to the
Institutional Accounts and investment adviser to the Irish Funds, is registered
pursuant to the Investment Advisers Act of 1940, as amended, and as such is
subject to certain recordkeeping, SEC reporting, compensation and supervisory
rules and regulations.
Each of Pioneering Services and Pioneer Ireland, as transfer agent and
sub-transfer agent, respectively, for the Funds, is registered as a transfer
agent pursuant to the 1934 Act and as such is subject to SEC recordkeeping and
reporting requirements and certain other rules and regulations.
The SEC has jurisdiction over registered investment companies, registered
investment advisers, broker-dealers and transfer agents and, in the event of a
violation of applicable rules or regulations, may take action which could have a
serious effect on Pioneering Management's, Pioneer Distributor's, Pioneering
Services' or Pioneer Ireland's businesses.
The Polish Funds were established under, and are regulated by, the Public
Trading in Securities and Trust Funds Act of March 22, 1991, as amended.
Pioneer Global Bond Fund Plc, Pioneer Global Equity Fund Plc, Pioneer U.S.
Real Estate Fund Plc, Pioneer European Equity Fund Plc and Pioneer Central and
Eastern European Fund Plc are each authorized by The Central Bank of Ireland
under the European Communities (Undertakings for Collective Investment in
10
<PAGE> 12
Transferable Securities) Regulations, 1989 (S.I. No. 78 of 1989) of Ireland.
Pioneer DM Cashfonds Plc is authorized by The Central Bank of Ireland as an
investment company with "designated" status pursuant to Part XIII of the
Companies Act, 1990.
CONTRACTUAL RELATIONSHIPS
The businesses of the Company, Pioneering Management, Pioneer Distributor,
Pioneering Services, Pioneer First Polish, FSL and Pioneer Ireland are dependent
upon their associations and contractual relationships with the funds they serve.
In the event any of the management contracts, underwriting contracts or service
agreements were canceled or not renewed pursuant to the terms thereof, the
Company may be substantially adversely affected. The Company, Pioneering
Management, Pioneer Distributor, Pioneering Services, Pioneer First Polish, FSL
and Pioneer Ireland consider their respective relationships with such funds to
be good and they have no reason to believe that their respective management,
underwriting and service contracts will not be negotiated on a reasonable basis
in the future; however, there is no assurance that such funds will continue
these relationships.
RELATIONSHIP WITH INSTITUTIONAL ACCOUNTS
Pioneering Management's advisory agreements with its institutional
investors are generally terminable on short notice. The trustees or corporate
officials who control such accounts are usually free to change investment
advisers without cumbersome legal procedures. In the past, private accounts have
terminated their agreements with Pioneering Management for various reasons such
as performance, business combinations which result in the merging of accounts
advised by Pioneering Management into accounts managed by other investment
advisers, or changes in the structure or funding of pension plans.
11
<PAGE> 13
NATURAL RESOURCE DEVELOPMENT
GOLD MINING
The results of the gold mining business are substantially attributable to
the operations of Teberebie Goldfields Limited ("TGL"), the principal operating
subsidiary of the Company's indirect wholly owned subsidiary, Pioneer
Goldfields, a corporation organized under the laws of Guernsey, Channel Islands,
which conducts mining and exploration activities in the Republic of Ghana and
exploration activities elsewhere in Africa. Pioneer Goldfields' principal asset
is its ownership of 90% of the outstanding shares of Teberebie Goldfields
Limited, a corporation organized under the laws of the Republic of Ghana. TGL is
engaged in the exploration, mining, and processing of gold ore on a mining
concession located in the Western Region of the Republic of Ghana. The Republic
of Ghana holds the remaining 10% ownership interest in TGL. Gold mining results
are also affected by the exploration activities in the Russian Far East of
Closed Joint-Stock Company "Tas-Yurjah Mining Company," a Russian Company in
which the Company has a 52.5% beneficial interest. Exploration costs are charged
to operations as incurred.
TGL shipped approximately 263,000 ounces of gold in 1997, contributing
$89.5 million to the Company's revenues. In 1996 and 1995, TGL shipped
approximately 203,000 and 236,000 ounces of gold, respectively. A three-year
financial summary for the gold mining business segment is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
------------- ------------- -------------
<S> <C> <C> <C>
Revenues................................ $ 89.5 $ 78.3 $90.2
Net Income.............................. $ (2.8) $ 2.6 $14.0
Total Assets............................ $152.9 $149.6 $82.8
</TABLE>
The effective tax rate (credit) (U.S., Russia and Ghana combined) for the
gold mining segment in 1997, 1996 and 1995 was (15%), 32% and 35%, respectively.
TEBEREBIE GOLDFIELDS LIMITED
Organization and Mining Lease. In 1986, the Company and a joint venture
partner organized TGL for the purpose of evaluating the feasibility of mining
gold on several tracts of land in the Teberebie concession area ("Teberebie") in
the Republic of Ghana. In February 1988, TGL entered into a mining lease with
the Republic of Ghana (the "Government") pursuant to which TGL received
exclusive gold mining rights for a term of 30 years. Under this lease, the
Government is entitled to annual royalties of between 3.0% and 12.0% of TGL
revenue, which rate will vary based on TGL's operating profit margin and its
level of capital expenditures, and is assured a continuing 10% equity interest
in TGL. In April 1989, the Company purchased the joint venture partner's
interest for $3.7 million, primarily in cash. In 1992, TGL was granted a second
26-year mining lease over two contiguous areas to the north and west of the
original lease area, the terms of which are substantially similar to the
original lease. Since the commencement of commercial production in 1991, TGL has
paid royalties to the Government in the amount of 3.0% of TGL's annual revenue.
Teberebie Mine Site. The Teberebie mine site consists of mining
concessions covering an area of approximately 42 square kilometers. It is
located in the Western Region of the Republic of Ghana and is approximately six
kilometers south of the town of Tarkwa. The Teberebie mine is geographically
approximately 200 kilometers west of, and 330 kilometers by road from, Accra,
the capital of the Republic of Ghana. It is approximately 95 kilometers by road
from Takoradi, which is one of Ghana's two major ports and the point of entry
for most of the imported equipment used at the Teberebie mine.
Geology. The basement rocks of Ghana are precambrian in age and form part
of a regional structure known as the West African Shield. The rocks that
constitute the West African Shield are both sedimentary and igneous in origin.
These rocks have been subjected to pressure and temperature alteration and
deformation. Some of the altered rocks (metamorphic rocks) have a greenish
coloration, and areas exhibiting these features are known as greenstone belts.
There are a number of greenstone belts around the world. They attract the
attention of commercial geologists because various minerals, particularly gold,
are associated with them. In Ghana, the major gold producers operate along
various prominent gold-bearing belts that extend for
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<PAGE> 14
a distance of some 300 kilometers in a trend from northeast to southwest. These
gold-bearing belts consist of both greenstone and sedimentary formations. TGL
mines the sedimentary formations.
Locally, the thick sedimentary sequence is called the Tarkwaian system and
gold is found in the upper, coarser horizons. At Teberebie, gold occurs in a
sedimentary sequence known as the Banket formation. This formation consists of a
series of sedimentary strata with siltstones, mudstones and sandstones
interspersed with some coarser pebble horizons. Where the well-rounded pebbles
are particularly large, the horizon is known as a conglomerate. Gold is found in
the matrix that binds these pebbles together. The Banket formation has broad
similarities to the Witwatersrand reef conglomerate in South Africa. As such, it
is younger than the Birimian greenstone rocks that underlie it. The region has
been subject to folding, faulting and shearing. Structurally, the Banket
formation consists of a gently folded syncline, trending from northeast to
southwest. The western limb of the syncline extends over 6.5 kilometers on the
property, with the eastern limb reaching the surface just beyond the eastern
boundary of the mining concession. The western and eastern limbs outcrop on the
surface about four kilometers apart. At the center of the syncline at Teberebie,
the mineralized horizons are some 400 meters below surface. In the south, the
western limb dips to the east at about 35 degrees. This dip flattens toward the
north where it is approximately only ten degrees.
The deposit at the Teberebie mine is a paleoplacer where gold occurs in
free-milling state with other heavy minerals in a matrix of a quartz pebble
conglomerate. The gold particles are fine-grained, ranging from two to 280
microns, averaging approximately 100 microns in diameter. The origin of the gold
has not been identified, although it may have been derived from the underlying
Birimian basement rocks.
Gold Reserves. The earliest known exploration on the Teberebie property
was conducted in the early 1890's when several adits were driven into the ridge.
Records indicate that approximately 15,000 tonnes of ore was extracted from
adits and drifts prior to World War II. Four of these adits were cleared and
systematically sampled. At the end of 1992, TGL had drilled a total of 18,545
meters in 296 holes on the property. Holes were drilled on 74 cross-sections
perpendicular to the gold bearing ridge along a strike length of 6,050 meters,
with three to five drill holes per section. Sections were 50 to 100 meters
apart, and drill hole spacing on each section was 50 to 100 meters. In 1993, TGL
drilled 16 in-fill ore holes advancing 930 meters on one ridge designed to move
reserves from the possible to proven and probable categories. In 1994, TGL
drilled 5,090 meters in 39 holes on the property. Contiguous with this, 2,551.5
meters of exploratory drilling in 11 holes was completed. In 1995, TGL drilled
3,420 meters in 18 holes on the property. In addition, TGL drilled a total of
2,568 meters in seven exploration drill holes and 765 meters in 12 site
investigations and geotechnical holes. In 1996, TGL drilled a total of 8,648
meters in 53 holes on the property.
Reserves (proven and probable categories) represent that portion of TGL's
resource which can be reasonably assumed to be economically and legally
extracted based on demonstrated practice or detailed tests and studies. The
contained ounces are the product of the estimated ore tonnes multiplied by the
grade. These reserves have been adjusted for anticipated losses resulting from
mining activities, but do not reflect recovered product.
TGL's proven and probable gold reserves as of December 31, 1997 are set
forth in the table below. The design cut-off grade used to delineate the
reserves is 0.58 grams per tonne (g/t) of ore at a gold price of $340 per ounce.
An independent mining consultant has certified these reserves.
PROVEN AND PROBABLE RESERVES ($340/OZ.)
<TABLE>
<CAPTION>
CONTAINED GOLD,
TONNES (ORE) GRADE (G/T) OUNCES
------------ ----------- ---------------
<S> <C> <C> <C>
Total Reserves........................ 159,180,000 1.19 6,090,000
</TABLE>
TGL's last reported proven and probable reserve estimate was 9.1 million
ounces as of December 31, 1995. Approximately 1.7 million ounces of the decrease
in proven and probable reserves is attributable primarily to the use in the mine
model of a lower gold price ($340 per ounce versus $385 per ounce) and normal
reduction for mine production during 1996 and 1997. The balance of the
difference is attributable to allowances for previously reported slope
instability issues, haul road refinements and physical mine design
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<PAGE> 15
parameters, and miscellaneous refinements associated with the transition to more
comprehensive mine modeling software. Based on the current mining method (bulk
mining and heap leaching) at TGL, it is estimated that recoverable gold from
these open pit reserves will aggregate approximately 4.9 million ounces.
Reported gold reserves are estimates. As such, no assurance can be given that
the indicated quantities of gold will be produced. In addition, gold price
fluctuations may render ore reserves containing relatively lower grades of gold
mineralization uneconomic to mine. At December 31, 1997 and March 1, 1998, the
market price of gold was $290 per ounce and $297 per ounce, respectively.
Mining and Processing. The Teberebie mine is a conventional open pit, heap
leach operation. Mining at Teberebie is a technically simple drill and blast,
load and haul operation, carried out on three contiguous ridges along a strike
length of some 6.5 kilometers. The ridges, running from south to north, are
named Teberebie, Awunaben and Mantraim. The mine is currently an open pit mine
operating from two pits, the Teberebie/Awunaben pit and the Mantraim pit.
TGL processes its ore using a conventional heap leach operation at three
locations on the Teberebie concession: the East, West, and South Plants. Each
plant was developed during successive phases of project development (see
"Development and Expansion" below). The recently completed Phase III mine
expansion, increased annual crushing capacity to approximately 12 million tonnes
of ore. Ore is crushed in the near-pit gyratory crusher which serves as the
primary crusher for the West Plant and the new South Plant. A jaw crusher, with
a capacity of 3.0 million tonnes per year, continues to be the primary crusher
for the original East Plant. Cement is added to the crushed ore to bind the ore
and to raise its alkalinity to a level conducive to cyanide leaching. The
agglomerate of ore and cement is then placed on a heap leach and is then treated
with a diluted cyanide solution that percolates through the material dissolving
the gold. The diluted cyanide solution containing the dissolved gold drains into
collection ponds. From there, the solution is pumped to an adjacent adsorption
desorption refinery plant (the "ADR Plant") where it passes through a series of
activated carbon adsorption columns. The gold contained in the solution is
adsorbed onto the carbon and the solution is then recirculated to the barren
solution pond where it is refortified with sodium cyanide. Gold is then
chemically stripped from the carbon adsorption columns and recovered from the
stripper solution by electrowinning onto stainless steel cathodes. The cathodes
are removed approximately every two weeks at each ADR Plant, at which time the
gold sludge is washed off and dried. The sludge is then mixed with flux and
smelted to produce dore.
Gold Production and Sales. TGL began shipping gold in October 1990. In the
second quarter of 1991, the mine reached then commercially feasible production
levels (about 1,000 ounces per week), and reached full production levels (about
2,000 ounces per week) during the fourth quarter of 1991. Set forth below is a
chart showing TGL's gold shipments for the years ended December 31, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
(OUNCES) (OUNCES) (OUNCES)
-------- -------- --------
<S> <C> <C> <C>
TGL Gold Shipments........................... 263,000 203,000 235,000
</TABLE>
During 1997, gold production increased to 263,000 ounces of gold or 5,100
ounces per week. During the year, TGL implemented its Phase III mine expansion,
including the start-up of the new gyratory crusher and South Plant and
modifications to the West Plant. Also, TGL produced its one-millionth ounce of
gold in January 1997. Gold production in 1998 is estimated to be approximately
340,000 ounces.
The average realized price of gold sold by TGL during 1997, 1996 and 1995
was $340, $385 and $383 per ounce, respectively. With the exception of 1997, the
average realized price was based on the market spot price of gold at the time of
sale. In 1997, the average realized price of gold includes proceeds from the
sale of floor program options of $15 per ounce. Spot prices of gold fluctuate
widely and are affected by a number of factors including supply and demand,
inflation expectations, the strength of the U.S. dollar and interest rates.
At present, TGL does not enter into forward gold sales or otherwise engage
in gold price hedging. In the fourth quarter of 1996, TGL entered into a series
of put options which secured a minimum selling price of $340 per ounce to cover
1997 estimated production. When the market price of gold declined below $340 per
ounce between February and December 1997, the Company continued to ship gold to
the refineries and sold
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<PAGE> 16
the put options, receiving payment for the difference between the market price
of gold and approximately $340 per ounce. In May 1997, TGL purchased additional
options at an exercise price of $320 per ounce to cover estimated production for
the first four months of 1998. The Company may consider additional hedging
strategies if and when it deems circumstances appropriate.
TGL's cash costs per ounce and total costs per ounce for 1997, 1996 and
1995 are summarized on the following table:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Costs Per Ounce................................... $230 $266 $198
Total Costs Per Ounce.................................. $337 $361 $277
</TABLE>
Development and Expansion. TGL has completed three major capital
expenditure programs at the Teberebie mine to date, designated Phase I, Phase II
and Phase III. Phase I included the development of the mine site and the
construction of the crushing and processing facility known as the East plant.
Phase II, which was completed in 1994, included the construction of a crushing
and processing facility that replicated the East plant and is known as the West
plant. Phase III, which was completed in 1997, included a further heap leach
operation and a near-pit gyratory crushing facility which acts as a primary
crushing facility for both the existing West Plant and the new South Plant. The
Phase III mine expansion increased annual crushing capacity to 12 million tonnes
of ore. The Phase III expansion plan did not require the construction of a third
ADR Plant to support the South Plant. Instead, the existing ADR Plant at the
West Plant was upgraded with a second carbon absorption train and a modified
stripping circuit. The first gold pour associated with the South Plant occurred
in April 1997, but the plant was not fully operational until the fourth quarter.
The cost of the Phase III mine expansion aggregated approximately $56 million,
including 1997, 1996 and 1995 capital expenditures of $5.4 million, $48.1
million and $2.6 million, respectively.
Customers. During the year ended December 31, 1997, gold sales aggregated
$89.5 million. During 1997, gold shipments from TGL in Ghana to two unaffiliated
European refiners accounted for $43.9 million and $41 million, respectively, of
total sales, or 95% of such sales. Because of the worldwide demand for gold, the
Company does not believe that the loss of such customers would have a material
adverse effect on the Company or its subsidiaries. The remaining 5% of sales
related to the sales of put options associated with TGL's gold price floor
program and the sale of carbon residue with gold value to a Ghanaian firm.
Employees. At March 1, 1998, TGL had 1,469 employees, 1,433 of which are
Ghanaians. The terms of employment and compensation for junior TGL staff, known
as monthly rated employees, are determined pursuant to a collective bargaining
agreement between TGL and the Ghana Mineworkers' Union. The terms of the
collective agreement (other than pay levels) are negotiated every three years.
Pay levels are negotiated annually. The current collective bargaining agreement
expires in January 1999. TGL experienced a two-day work stoppage in each of 1994
and 1996. The 1994 work stoppage was related to the annual pay level
negotiations under the union contract. The 1996 work stoppage was related to two
employee dismissals resulting from a determination by TGL and local union
officials that the employees had violated the disciplinary code. The union did
not organize the 1996 work stoppage. Neither work stoppage had a material effect
on TGL's operations and TGL continues to believe that its relations with its
employees are excellent.
There is, however, a shortage of available labor with the requisite skills
and experience necessary to operate large-scale mining equipment. TGL has
experienced and continues to experience some difficulty in recruiting employees
with the necessary skills. With the continued development of mines in Ghana, and
in the vicinity of the Teberebie mine, in particular, the shortage will likely
continue and perhaps become more acute.
Regulation and Taxation. Mining activities in the Republic of Ghana are
governed by PNDCL 153, the Minerals and Mining Law of 1986 (the "MML").
The Republic of Ghana is currently developing a system of environmental
regulation that applies to TGL's operations. However, it has always been a
strategic objective of the Company to minimize the effects of its subsidiaries'
mining operations on the environment. TGL has developed an overall environmental
action plan, a reagent spill management plan, a decommissioning plan and has
initiated site rehabilitation and revegetation studies.
15
<PAGE> 17
In 1994, the Ghana Environmental Protection Agency (the "GEPA") was
established to regulate environmental matters to ensure implementation of
government policies concerning the environment. In May 1994, the Minister of the
Environment, through the Minerals Commission, produced legislative proposals
relating to the environmental regulation of mines and the GEPA produced draft
guidelines relating to air and water quality. The management of TGL regarded
these guidelines as satisfactory and workable. These guidelines were followed by
the publication for consultation of draft regulations that provoked considerable
controversy among the mining community in Ghana and were subsequently withdrawn.
In January 1997, the GEPA published for comment revised draft effluent water
quality water regulations. The comment period has expired, and the draft
effluent water quality regulations are being implemented as guidelines. It is
not possible at this time to determine the effect, if any, the new regulations
may have on TGL's operations.
In the first quarter of 1994, the Republic of Ghana enacted the Minerals
and Mining (Amendment) Act of 1994 which reduced the income tax rate for mining
companies from 45% to 35%. Pursuant to the terms of the MML, income taxes may be
deferred until recovery of capital investment. Accordingly, deferred taxes at
December 31, 1997, 1996 and 1995, were $7.6 million, $9.6 million and $7.5
million, respectively. Income taxes were deferred during all of 1996 and 1997.
Income tax payments to the Republic of Ghana during 1995 were $14.1 million. Of
such taxes paid in 1995, $5.5 million was attributable to the tax year ended
December 31, 1994.
Insurance. The Company maintains $65.5 million of "political risk"
insurance principally from OPIC, covering 90% of its equity and loan guarantees.
This insurance also covers 90% of the Company's proportionate share of TGL's
cumulative retained earnings. The OPIC equity and retained earnings coverage is
presently limited to a ceiling of $63.1 million; however, the Company intends to
apply to increase the ceiling in 1998. There can be no assurance that such OPIC
insurance will become available in 1998. The Company also secured $9 million
foreign exchange exposure insurance from another source to hedge 90% if its
exposure to a limited recourse provision contained in the OPIC Phase III
expansion financing. In addition to other commercial insurance coverage, TGL has
secured business interruption coverage of up to $19.0 million for losses
associated with machinery breakdown and property damage and to defray continuing
infrastructure and interest costs.
Recent Developments. TGL estimates 1998 gold production at approximately
340,000 ounces. The estimate has been decreased by 20,000 ounces from TGL's
previously reported target of 360,000 ounces reflecting lower than expected
crushing equipment availability in the first quarter of 1998. TGL's gold
production is dependent upon a number of factors that could cause actual gold
production to differ materially from projections, including obtaining and
maintaining necessary equipment, accessing key supplies, including electrical
power and fuel, and hiring and training supervisory personnel and skilled
workers. Gold production is also affected by the time lag inherent in heap
leaching technology, subject to changing weather conditions and dependent on the
continued political stability in the Republic of Ghana.
In early 1998, the Republic of Ghana experienced power shortages which
adversely affected TGL's ability to crush and process ore. Presently, certain
processes at the mine are supported by back-up power generation equipment. TGL
is in the process of leasing additional equipment to support all of its power
generation requirements. The use of such equipment will increase the power costs
per tonne processed.
EXPLORATION ACTIVITIES OF PIONEER GOLDFIELDS
Since the end of 1993, in addition to continuing to develop the Teberebie
mine, Pioneer Goldfields has increased its exploration activities in the
Republic of Ghana and in other African countries. These activities are currently
conducted by TGL in Ghana and by Pioneer Goldfields in Niger. In 1997, Pioneer
Goldfields discontinued exploration activities in Zimbabwe. As a result, Pioneer
Goldfields is in the process of dissolving its Zimbabwe-registered company,
Lobengula Exploration and Mining Company, Ltd. In 1997, Pioneer Goldfields
incurred exploration costs of approximately $1.9 million, approximately $1.7
million of which related to exploration activities outside of Ghana. In 1996,
Pioneer Goldfields incurred exploration costs of approximately $1.3 million,
approximately $1.2 million of which related to exploration activities outside of
Ghana.
16
<PAGE> 18
EXPLORATION ACTIVITIES OF TAS-YURJAH MINING COMPANY
In 1994, the Company entered into a joint venture, Closed Joint-Stock
Company "Tas-Yurjah Mining Company" ("Tas-Yurjah"), with a Russian company to
explore potential gold mining properties in the Khabarovsk Territory of the
Russian Far East. The Company currently owns a 50% direct interest and a 2.5%
indirect interest in Tas-Yurjah. In 1995, Tas-Yurjah secured a license to
conduct exploration activities over a 240 square kilometer area (the "licensed
area"). Tas-Yurjah plans to conduct drilling and geochemical and geological
surveys to further examine anomalies located in the licensed area during 1998.
At December 31, 1997, the Company had expended approximately $3.9 million for
exploration work related to Tas-Yurjah, of which $1.7 million had been expended
in 1997. The Company expects to spend approximately $2.1 million for exploratory
work at Tas-Yurjah in 1998.
TIMBER VENTURES
The Company holds a majority controlling interest in three companies
located in the Khabarovsk Territory of the Russian Far East, Closed Joint-Stock
Company "Forest-Starma" ("Forest-Starma"), Closed Joint-Stock Company
"Amgun-Forest" ("Amgun-Forest") and Closed Joint-Stock Company "Udinskoye"
(Udinskoye"). The Company has consolidated its ownership of these three
companies under its wholly owned subsidiary, Pioneer Forest, Inc. ("Pioneer
Forest"). Of the three companies, Forest-Starma is the only company which is
operational. Forest-Starma, which is located on Siziman Bay in the Vanino
district of the Khabarovsk Territory, has developed a modern logging camp,
including a harbor facility, from which it exports timber to markets in the
Pacific Rim, primarily Japan and South Korea.
Leasehold and Cutting Rights. Forest-Starma, Amgun-Forest and Udinskoye
have each entered into long-term lease arrangements that provide significant
leasehold acreage and annual cutting rights. In the aggregate, the three
subsidiaries have leasehold rights in the Russian Far East comprising 926,400
hectares (approximately 2.3 million acres), with annual cutting rights of
approximately 1.0 million cubic meters. Forest-Starma is actively engaged in
negotiations to expand its existing leasehold. The current leasehold rights of
each of the projects are set forth below:
<TABLE>
<CAPTION>
FOREST-STARMA AMGUN-FOREST UDINSKOYE
------------- ------------ ---------
<S> <C> <C> <C>
Hectares (acres)................... 240,000* 485,400 201,000
(593,000)* (1,200,000) (497,000)
Annual Cutting Rights (m(3))....... 361,000* 350,000 300,000
</TABLE>
- ---------------
* Forest-Starma is in the process of finalizing lease agreements for additional
leasehold rights that will give it total cutting rights of approximately
555,000 cubic meters over a territory of 390,100 hectares (approximately
964,000 acres).
Ownership Structure. Pioneer Forest currently has a 95% direct interest in
Forest-Starma. The Company has signed an agreement to acquire an additional 2%
direct interest in Forest-Starma. The transfer is currently awaiting regulatory
approvals. Pioneer Forest also has an 80.6% direct interest and 7.1% indirect
interest in Amgun-Forest and a 72% direct interest and 4.2% indirect interest in
Udinskoye.
Timber Operations. Timber is harvested at Forest-Starma according to
international sustainable development standards using advanced planning and
implementation of the best available management practices as defined in the U.
S. Forest Service stewardship guidelines and the United Nations Conference on
Environment and Development principles. Five production crews consisting, in
aggregate, of four harvesters, eight skidders, and five processors form the
backbone of the logging operation. The harvesters cut the trees which are then
skidded to five processors which delimb and buck the timber into logs. The logs
are hauled on company constructed roads by log trucks approximately 50
kilometers to a lower landing log yard for sorting and scaling prior to
shipment. The lower landing is equipped with log loaders and other equipment
necessary for maintaining the log yard and delivering sorted logs to the harbor
for shipment. Sorted logs are delivered to the harbor based upon a manifest
received from Forest-Starma's marketing agent, Rayonier, Inc. The logs are then
delivered to the dock and placed on ships by crane. Forest-Starma has
constructed and maintains a self-contained camp with living quarters for between
250 and 300 workers, a modern maintenance and parts facility, on site offices
and advanced communications equipment.
17
<PAGE> 19
Timber Production. Timber harvesting commenced in the first quarter of
1995 and the first shipments of timber (acquired in the development phase)
totaling approximately 30,000 cubic meters occurred in the third and fourth
quarter of 1995. In 1996, Forest-Starma shipped approximately 133,000 cubic
meters of timber (acquired in the development phase). Since the project was
still in the development phase, the related revenues of $10.1 million were used
to offset capitalized interest and development costs. In January 1997,
Forest-Starma commenced commercial production of timber and amortization of
deferred development costs. During 1997, Forest-Starma produced and shipped
257,000 cubic meters and 194,000 cubic meters of timber, respectively.
Forest-Starma is expected to produce approximately 360,000 cubic meters of
timber in 1998. A three-year financial summary for the timber business segment
is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
------------- ------------- -------------
<S> <C> <C> <C>
Revenues................................ $11.9 $ -0- $ -0-
Net Income.............................. $(6.7) $(0.5) $ -0-
Total Assets............................ $51.0 $43.4 $33.2
</TABLE>
Customers. In 1997, Forest-Starma shipped 57% of its timber to six
unaffiliated customers in Japan and 43% of its timber to eight unaffiliated
customers in South Korea.
Employees. At March 1, 1998, Forest-Starma had 543 Russian employees. In
addition, 14 expatriate employees and consultants of the Company's employment
company subsidiary are seconded to Forest-Starma. At Amgun-Forest and Udinskoye,
there are 20 and 10 employees, respectively, all of whom are Russians. Such
employees are not unionized nor are they a party to a collective bargaining
agreement. Salaries are determined annually based on the prevailing market
prices for timber industry employees within the region.
Capital Structure. Capital required by this venture is now projected at
approximately $59.9 million through the end of 1998. At December 31, 1997,
project financing aggregated $54.3 million, including $38.2 million in
subordinated debt and accrued interest provided by the Company, $8.7 million in
unpaid liabilities to the Company for ongoing operating expenses and $7.4
million in outstanding third party financing. The Company expects to convert
approximately $15 million of subordinated debt to equity in 1998. Forest-Starma
completed a $9.3 million project financing with OPIC in July 1996, of which $7.4
million remained outstanding at December 31, 1997. As a condition to the OPIC
financing, the Company was required to execute a Project Completion Agreement
pursuant to which the Company would advance funds to Forest-Starma, as
necessary, to permit Forest-Starma to fulfill all of its financial obligations,
including cost overruns related to project development, until such time as
Forest-Starma satisfies a production test and certain financial and project
development benchmarks. Scheduled third-party debt service for 1998 is expected
to aggregate $2 million. Direct investment in Forest-Starma by the Company
aggregated $38.3 million at December 31, 1997.
Insurance. In connection with its investment in Forest-Starma, the Company
has secured OPIC political risk insurance in an amount of up to $47 million
which would protect 90% of the Company's equity investment and loans and a
proportionate share of cumulative retained earnings. In addition, the Company
has secured OPIC business income loss insurance of up to $5 million for
Forest-Starma.
Amgun-Forest and Udinskoye. The Amgun-Forest timber project is located in
the Polina Osipenko District of the Khabarovsk Territory, approximately 150
kilometers northwest of the city of Komsomolsk-on-Amur and further inland than
Forest-Starma. Duharian Larch, Yeddo Spruce and Amur Fir are the principal
commercial tree species in the project area, with larch constituting
approximately 67% of the exportable product and whitewood (Yeddo Spruce and Amur
Fir together) constituting the balance. The Udinskoye timber project is also
located in the Polina Osipenko District of the Khabarovsk Territory, west of the
Amgun-Forest timber project. The project area encompasses the towns of
Kherpuchi, Oglongi and Udinsk. Duharian Larch is the principal commercial tree
species in the project area, with a small component of Yeddo Spruce.
Pioneer is considering developing Amgun-Forest and Udinskoye, and both
projects are currently undergoing feasibility analysis. Depending upon factors
such as capital availability, management resources, market demand and the
stabilization of larch prices, Pioneer may elect to develop these projects in
the future. Since inception, the Company provided funding and services to
Amgun-Forest and Udinskoye aggregating $3.8 million, including $1 million in
1997.
18
<PAGE> 20
METALS VENTURES
Since 1991, a subsidiary of the Company, Pioneer Metals and Technology,
Inc., has been involved in a development-stage business in Russia, through its
subsidiary, for the manufacture, production and sale of powdered metals,
permanent magnets and various trading endeavors.
FUTURE OPERATING RESULTS
Certain of the information contained in this Annual Report on Form 10-K,
including information with respect to the Company's plans and strategies for its
worldwide financial services and natural resource development businesses,
consists of forward-looking statements. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," "projects," "estimates" and
similar expressions are intended to identify forward-looking statements.
Important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are set forth in the 1997
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which is hereby
incorporated by reference.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company and its subsidiaries conduct their principal operations from
leased premises with approximately 157,000 square feet at 60 State Street,
Boston, Massachusetts, under two leases. The first to expire of these leases
(which covers substantially all of the space) expires in 2002, with two
five-year renewal options. The rent expense for these premises was approximately
$3.5 million in 1997. The Company believes that its facilities are adequate for
its current needs and that additional space will be available as needed.
Teberebie Goldfields Limited, conducts mining operations in Tarkwa, Ghana.
The Republic of Ghana has granted TGL land concessions of approximately 42
square kilometers. The operating facilities included on the Teberebie mine site
include approximately 48 housing and office buildings, one gyratory crusher, two
three-stage crushing plants, one four-stage crushing plant, heap leaching
facilities and ponds, two processing plants and refineries, a clinic, a
laboratory, a warehouse and an eight-bay maintenance shop for heavy equipment.
TGL believes that its facilities are generally in a state of good repair and
adequate for its current needs and that additional facilities will be
constructed as needed.
In December 1992, Pioneer First Polish purchased a 38-year capital lease,
convertible to perpetual use, on a two-year-old, 373-square-meter office
building in Warsaw. Pioneer First Polish is currently subleasing the property to
an unaffiliated corporation for a three-year term that commenced on March 1,
1995. Through March 1999, the Company's Polish subsidiaries have leased
approximately 2,000 square meters of office space in Warsaw. FSL also leases
approximately 1,400 square meters of office space and 502 square meters of
storage space in Warsaw. The terms of the leases range from one to five years.
The Company's 95%-owned subsidiary, Forest-Starma, is pursuing the
development of timber production in the Khabarovsk Territory of Russia under two
long term leases comprising 340,000 hectares (approximately 593,000 acres) in
the aggregate with annual cutting rights of 361,000 cubic meters. Forest-Starma
is in the process of finalizing lease agreements for additional leasehold rights
that will give Forest-Starma total cutting rights of approximately 555,000 cubic
meters over a territory of 390,100 hectares (approximately 964,000 acres).
Amgun-Forest and Udinskoye, the Company's other majority-owned Russian timber
ventures, each have a long-term lease (50 years) relating to timber harvesting.
The Amgun-Forest lease covers 485,400 hectares (approximately 1,200,000 acres)
with annual cutting rights of 350,000 cubic meters. The Udinskoye lease covers
201,000 hectares (approximately 497,000 acres) with annual cutting rights of
300,000 cubic meters.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company or its
subsidiaries is a party or of which any of their property is subject, other than
ordinary routine litigation incidental to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
<PAGE> 21
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the executive officers of the
Company, and a description of the positions and offices each holds with the
Company and its significant subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
---- --- -----------------------------------------------------------
<S> <C> <C>
John F. Cogan, Jr. .................. 71 President, Chief Executive Officer and Chairman of the
Board of the Company since 1962. Chairman of Pioneering
Management since 1993 and President of Pioneering
Management from 1962 to 1993. Director of Pioneering
Management since 1962. Chairman and Director of Pioneer
Distributor. Chairman, President and Trustee of each of the
registered investment companies in the Pioneer Family of
Mutual Funds. President and Director of Pioneer
International, Pioneer Omega and Pioneer First Russia.
Director of Pioneering Services, Pioneer Capital, Pioneer
Real Estate and Pioneer Forest. Chairman and Director of
Pioneer Goldfields, TGL, Closed Joint Stock Company Company
"Pioneer Metals International", Forest-Starma, Pioneer
Investments ("Pioneer Investments"), Amgun-Forest and
Udinskoye. Chairman of Supervisory Board of Pioneer First
Polish, Pioneer Czech and Pioneer Fonds Marketing. Director
of Pioneer Ireland and each of the Irish Funds. Chairman of
Global Funds Distributor. Senior Partner of the Boston law
firm, Hale and Dorr LLP, counsel to the Company.
Robert L. Butler..................... 57 Executive Vice President of the Company since 1985.
Director of the Company since 1988. President and Director
of Pioneer Distributor since 1989. Director of Pioneering
Management, Pioneering Services, Pioneer International and
Pioneer Real Estate. Member of Supervisory Board of Pioneer
First Polish and Pioneer Czech. Vice Chairman of the
Supervisory Board of Pioneer Fonds Marketing. Director of
Pioneer Ireland and each of the Irish Funds. Deputy
Chairman and Managing Director of Global Funds Distributor.
Previously, Vice President of the NASD.
David D. Tripple..................... 54 Executive Vice President of the Company since 1986.
President of Pioneering Management since 1993 and Chief
Investment officer and Director of Pioneering Management
since 1986. Executive Vice President of Pioneering
Management from 1986 to 1993. Executive Vice President and
trustee of each of the registered investment companies in
the Pioneer Family of Mutual Funds. Director of Pioneer
Distributor, Pioneer Capital, Pioneer International,
Pioneer Investments, Pioneer Real Estate, Pioneer Omega,
Pioneer First Russia, Pioneer Ireland and each of the Irish
Funds. Member of Supervisory Board of Pioneer First Polish
and Pioneer Czech.
William H. Keough.................... 60 Senior Vice President and Chief Financial Officer of the
Company since 1986. Treasurer of the Company, Pioneer
Distributor, Pioneering Management, Pioneering Services,
Pioneer Capital, Pioneer International, Pioneer Real
Estate, Pioneer Omega and Pioneer First Russia. Treasurer
of each of the registered investment companies in the
Pioneer Family of Mutual Funds.
Timothy T. Frost..................... 42 Vice President of the Company since 1995. Director and Vice
President of Pioneer Omega and Pioneer First Russia. Senior
Vice President of Pioneer International. Vice President of
Pioneer Real Estate. Previously, Managing Director of
Financial Services Volunteer Corps.
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES
---- --- -----------------------------------------------------------
<S> <C> <C>
Lucien Girard, III................... 64 Vice President of the Company. Managing Director and Chief
Executive of Pioneer Goldfields and TGL. Director of
Pioneer Metals and Technology, Inc. ("Pioneer Metals").
Stephen G. Kasnet.................... 52 Vice President of the Company since 1995. President of
Pioneer Real Estate since January 1996. Trustee and Vice
President of Pioneer Real Estate Shares and Vice President
of Pioneer Variable Contracts Trust. Previously, Managing
Director, First Winthrop Corporation and Winthrop Financial
Associates. Chairman of the Board of Warren Bancorp and
Warren Five Cents Savings Bank and Director of Bradley Real
Estate, Inc.
John F. Lawlor....................... 64 Vice President of the Company and Pioneering Management.
Director of Pioneer Goldfields, TGL, Forest-Starma, Amgun-
Forest, Udinskoye Closed Joint Stock Company "Pioneer
Metals International", Pioneer Forest, Pioneer Ireland and
each of the Irish Funds. Director and Vice President of
Pioneer Metals.
Alicja K. Malecka.................... 51 Vice President of the Company and Pioneer Real Estate.
Senior Vice President of Pioneer International. President
of Pioneer First Polish, the Polish Funds and Pioneer
Investment Poland, Sp.zo.o. Member of the Supervisory Board
of FSL and Pioneer Czech.
Frank M. Polestra.................... 72 Vice President of the Company since 1975. President and
Director of Pioneer Capital since 1981. President and
Director of Pioneer SBIC Corp.
William H. Smith, Jr................. 62 Vice President of the Company and President and Director of
Pioneering Services since 1985. Vice President and Director
of Pioneer International. Director of Pioneer Ireland and
each of the Irish Funds. Member of the Supervisory Board of
FSL. Previously, President of Securities Fund Services,
Inc. between 1981 and 1985.
Joseph P. Barri...................... 51 Secretary of the Company since 1978. Secretary of each of
the registered investment companies in the Pioneer Family
of Mutual Funds, Pioneering Management, Pioneer Capital,
Pioneer Distributor, Pioneering Services, Pioneer Omega,
Pioneer First Russia and Pioneer International. Senior
Partner of the Boston law firm, Hale and Dorr LLP, counsel
to the Company.
Robert P. Nault...................... 34 General Counsel and Assistant Secretary of the Company
since 1995. Assistant Secretary of each of the registered
investment companies in the Pioneer Family of Mutual Funds,
Pioneering Management, Pioneer Capital, Pioneer
Distributor, Pioneering Services, Pioneer International,
Pioneer Omega, Pioneer First Russia and Pioneer Goldfields.
Secretary of Pioneer Real Estate and Pioneer Forest.
Previously, Junior Partner of the Boston law firm, Hale and
Dorr LLP, counsel to the Company.
</TABLE>
21
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Incorporated by reference from the 1997 Annual Report to Stockholders under
the captions "Information Relating to Shares," "Dividends on Common Stock" and
"Price Range of Common Stock."
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference from the 1997 Annual Report to Stockholders under
the caption "Five Year Summary of Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference from the 1997 Annual Report to Stockholders under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The quantitative and qualitative disclosures about market risk are not
effective for the Company for this filing. The accounting policy disclosures
have been included in the Notes to the Consolidated Financial Statements which
are included in the 1997 Annual Report to Stockholders and incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference from the 1997 Annual Report to Stockholders under
the caption "Consolidated Financial Statements and Notes to Consolidated
Financial Statements" and "Report of Independent Public Accountants."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEMS 10-13.
The information required for Part III in this Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 1998 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Security Ownership
of Certain Beneficial Owners, Directors and Executive Officers," "Election of
Directors," "Directors' Meetings and Fees," "Committee Meetings," "Executive
Compensation," "Stock Option Grants and Exercises," "Certain Transactions" and
"Compliance with Section 16 of the Securities Exchange Act of 1934." Information
regarding executive officers of the Company is also furnished in Part I of this
Annual Report on Form 10-K under the heading "Executive Officers of the
Company."
22
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are included as part of this Annual Report on
Form 10-K.
1. FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... 33*
Consolidated Statements of Income for the Three years Ended
December 31, 1997......................................... 34*
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... 35*
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1997............... 36*
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997................................... 37*
Notes to Consolidated Financial Statements.................. 38*
</TABLE>
- ---------------
* Refers to page number in 1997 Annual Report to Stockholders. Each such
financial statement or report is hereby incorporated herein by reference to
the 1997 Annual Report to Stockholders which is filed as an exhibit to this
report.
2. FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
3. EXHIBITS:
The exhibits filed with or incorporated into this Annual Report on Form
10-K are listed on the "Index to Exhibits" below.
(b) Reports on Form 8-K:
None.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 30, 1998.
THE PIONEER GROUP, INC.
BY: /s/ JOHN F. COGAN, JR.
----------------------------------
JOHN F. COGAN, JR.,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN F. COGAN, JR. Principal Executive Officer and March 30, 1998
- --------------------------------------------------- Director
JOHN F. COGAN, JR.
/s/ WILLIAM H. KEOUGH Principal Financial Officer and March 30, 1998
- --------------------------------------------------- Principal Accounting Officer
WILLIAM H. KEOUGH
/s/ ROBERT L. BUTLER Director March 30, 1998
- ---------------------------------------------------
ROBERT L. BUTLER
/s/ MAURICE ENGLEMAN Director March 30, 1998
- ---------------------------------------------------
MAURICE ENGLEMAN
/s/ ALAN J. STRASSMAN Director March 30, 1998
- ---------------------------------------------------
ALAN J. STRASSMAN
/s/ JASKARAN S. TEJA Director March 30, 1998
- ---------------------------------------------------
JASKARAN S. TEJA
/s/ DAVID D. TRIPPLE Director March 30, 1998
- ---------------------------------------------------
DAVID D. TRIPPLE
/s/ JOHN H. VALENTINE Director March 30, 1998
- ---------------------------------------------------
JOHN H. VALENTINE
</TABLE>
24
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C> <C>
3.1(17) -- Certificate of Incorporation, as amended
3.2(1) -- By-Laws, as amended
10.1(15) -- Form of Management Contract with Pioneer Mutual Funds
10.2(15) -- Form of Investment Company Service Agreement with Pioneer
Mutual Funds
10.3(1)(7) -- Retirement Benefit Plan and Trust
10.4(5)(7) -- 1988 Stock Option Plan, as amended
10.5(5) -- Lease, dated as of July 3, 1991, between the Trustees of 60
State Street and the Company
10.6(2)(7) -- Form of Employment Agreements with Regional Vice Presidents
10.7(15) -- Revised Form of Underwriting Contract with Pioneer Funds
10.8(3)(7) -- 1990 Restricted Stock Plan
10.9(4) -- Deed of Warranty, dated December 3, 1987, between the
Government of Republic of Ghana, Teberebie Goldfields
Limited and The Pioneer Group, Inc.
10.10(4) -- Lease, dated February 2, 1988, between the Government of the
Republic of Ghana and Teberebie Goldfields Limited
10.11(4) -- Map of Mining Operations in Tarkwa, Ghana
10.12(6) -- Refining Agreement, dated as of August 23, 1993, between
Teberebie Goldfields Limited and Metalor
10.13(6) -- OPIC Contract of Insurance Against Inconvertibility,
Expropriation and Political Violence between OPIC and
Pioneer Goldfields Limited, dated August 12, 1993
10.14(6) -- Credit Agreement, dated as of June 1, 1993, between
Teberebie Goldfields Limited and Skandinaviska Enskilda
Banken
10.15(8) -- Agreement, dated May 10, 1994, between Teberebie Goldfields
Limited and Johnson Matthey PLC
10.16(8) -- Contract, dated May 30, 1994, among Timber Harvesting
Equipment Sales, Inc., Joint-Stock Company "Forest-Starma"
and the Company
10.17(8) -- Contract, dated August 4, 1994, among Morbark Northwest,
Inc., Joint-Stock Company "Forest-Starma" and the Company
10.18(8) -- Contract, dated May 25, 1994, among Caterpillar Overseas
S.A., Joint-Stock Company "Forest Starma" and the Company
10.19(8) -- OPIC Contract of Insurance Against Business Income Loss
between OPIC and the Company, effective September 30, 1992,
as amended (No. D581)
10.20(8) -- OPIC Contract of Insurance Against Business Income Loss
between OPIC and the Company, effective September 30, 1992,
as amended (No. D582)
10.21(8) -- OPIC Contract of Insurance Against Inconvertibility,
Expropriation and Political Violence between OPIC and the
Company, effective September 30, 1992 as amended (No. D547)
10.22(8) -- OPIC Contract of Insurance Against Inconvertibility,
Expropriation and Political Violence between OPIC and the
Company, effective September 30, 1992 (No. D545)
10.23(8) -- Consulting Agreement, dated as of January 2, 1995, between
the Company and Pioneer First Polish Trust Fund Joint Stock
Company ("Pioneer Poland")
10.24(8) -- Services Contract, dated January 1, 1994, between Pioneering
Services Corporation and Financial Services Limited
10.25(8) -- Agreement, dated June 25, 1992, between Pioneer Poland and
Bank Polska Kasa Opieka S.A. ("Bank Pekao")
10.26(8) -- Agreement, dated as of June 25, 1992, between Bank Pekao and
Pioneer International Corporation
10.27(8) -- Agreement, dated June 25, 1992, between Bank Pekao and
Pioneer Poland
10.28(8) -- Agreement, dated September 24, 1992, between Pioneer Poland
and Financial Services Limited
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C> <C>
10.29(9) -- Master Share Purchase Agreement dated as of April 7, 1995 by
and among Pioneer Omega, Inc. and First Voucher Fund
10.30(9) -- Agreement dated as of April 7, 1995 by and among Pioneer
Omega, Inc. and DOM Investment Company
10.31(9) -- Agreement dated as of April 7, 1995 by and among Pioneer
Omega, Inc. and Moscow International Business Centre Limited
10.32(9) -- Stockholders Agreement dated as of April 11, 1995 by and
among the Company and Moscow International Business Centre
Limited
10.33(10) -- Collective Agreement dated as of July 3, 1995 between
Teberebie Goldfields Limited and the Ghana MineworkerI Union
of T.U.C.
10.34(11) -- Contract of Insurance Against Incontrovertibility,
Expropriation and Political Violence dated September 29,
1995 between the Overseas Private Investment Corporation and
the Company
10.35(7)(12) -- 1995 Restricted Stock Plan
10.36(12) -- Credit Agreement between Teberebie Goldfields Limited and
Skandinaviska Enskilda Banken AB dated as of March 11, 1996
10.37(7)(13) -- 1995 Employee Stock Purchase Plan
10.38(13) -- Loan Agreement dated as of April 23, 1996, by and between
Teberebie Goldfields Limited and Caterpillar Financial
Services Corporation.
10.39(13) -- Chattel Mortgage dated as of April 23, 1996, by and between
Teberebie Goldfields Limited and Caterpillar Financial
Services Corporation.
10.40(13) -- Credit Agreement dated as of June 6, 1996, by and among the
Company, Certain of its subsidiaries, the Lenders and The
First National Bank of Boston, as agent for itself and the
other Lenders.
10.41(13) -- Loan Agreement dated as of May 16, 1996, by and between
Teberebie Goldfields Limited and Caterpillar Financial
Corporation.
10.42(14) -- Sublease dated as of August 15, 1996, between the Company
and Citizens Financial Group, Inc.
10.43(16) -- Subscription Agreement dated as of October 16, 1996, between
Pioneer First Russia, Inc. and International Finance
Corporation.
10.44(16) -- Shareholders Agreement dated as of October 16, 1996, among
Pioneer Omega, Inc. and Pioneer First Russia, Inc. and
International Finance Corporation.
10.45(16) -- Put and Call Agreement dated as of October 16, 1996, among
Pioneer First Russia, Inc. and Pioneer Omega, Inc. and
International Finance Corporation.
10.46(16) -- Credit Facility Agreement dated 19th December, 1996, for
Pioneer Real Estate Advisors, Inc. provided by Banque
Societe Generale Vostok.
10.47(16) -- First Amendment to Lease dated as of the 31st day of January
1994, by and between the Trustees of 60 State Street Trust
and the Company.
10.48(16) -- Second Amendment to Lease dated as of September 30, 1996, by
and between The Trustees of 60 State Street Trust and the
Company.
10.49(16) -- Third Amendment to Lease dated as of November 15, 1996, by
and between The Trustees of 60 State Street Trust and the
Company.
10.50(16) -- Finance Agreement dated as of October 25, 1996, between
Teberebie Goldfields Limited and the Overseas Private
Investment Corporation.
10.51(16) -- Project Completion Agreement dated as of October 28, 1996,
among Teberebie Goldfields Limited, the Company and Overseas
Private Investment Corporation.
10.52(16) -- Overseas Private Investment Corporation Contract of
Insurance Against Inconvertibility, Expropriation and
Political Violence between the Overseas Private Investment
Corporation and Pioneer Omega, Inc.
10.53(17) -- Finance Agreement between Closed Joint-Stock Company
"Forest-Starma" and Overseas Private Investment Corporation
dated as of December 21, 1995.
10.54(17) -- Project Completion Agreement among Closed Joint-Stock
Company "Forest-Starma", the Company, International
Joint-Stock Company "Starma Holding" and Overseas Private
Investment Corporation dated as of December 21, 1995.
10.55(17) -- Closed Joint-Stock Company "Forest-Starma" Promissory Note
in the principal amount of $9.3 million dated as of July 1,
1996.
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C> <C>
10.56(17) -- Amendment to Finance Agreement dated as of June 24, 1996
between Closed Joint-Stock Company "Forest-Starma" and
Overseas Private Investment Corporation.
10.57(17) -- Amendment No. 1 to Credit Agreement dated as of April 23,
1997, among the Company, certain of its subsidiaries, the
Lenders and The First National Bank of Boston.
10.58(18) -- Amendment No. 2 to Credit Agreement dated as of June 30,
1997, by and among the Company, certain of its subsidiaries,
the Lenders and BankBoston, N.A. f/k/a/ The First National
Bank of Boston.
10.59(18)(7) -- 1997 Stock Incentive Plan
10.60(19) -- Note Agreement dated as of August 14, 1997 by and between
the Company and The Travelers Insurance Company.
10.61* -- Amendment No. 3 to Credit Agreement dated as of June 30,
1997, by and among the Company, certain of its subsidiaries,
the Lenders and BankBoston, N.A. f/k/a/ The First National
Bank of Boston
10.62* -- Investment Agreement dated as of February 11, 1998 by and
between AS Eesti Forekspank and ZAO Pioneer Bank.
10.63* -- Fourth Amendment to Lease dated as of September 11, 1997, by
and between The Trustees of 60 State Street Trust and the
Company.
11* -- Computation of Earnings Per Share.
13* -- 1997 Annual Report to Stockholders (which is not deemed
"filed" except with respect to the portions specifically
incorporated herein by reference)
21(16) -- Subsidiaries
23* -- Consent of Arthur Andersen LLP
27.97* -- Financial Data Schedule (1997)
27.96* -- Financial Data Schedule (1996)
27.95* -- Financial Data Schedule (1995)
</TABLE>
- ---------------
* Filed herewith
(1) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1986.
(2) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988.
(3) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989.
(4) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.
(5) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
(6) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
(7) Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
(8) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(9) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995.
(10) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
<PAGE> 29
(11) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995.
(12) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(13) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
(14) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(15) Incorporated herein by reference to the exhibits to the Registration
Statement on Form N-1A for the Pioneer Micro Cap Fund (File Nos. 333-18639,
811-07985) filed December 23, 1996.
(16) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(17) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997.
(18) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(19) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
<PAGE> 1
Exhibit 10.61
THE PIONEER GROUP, INC.
CREDIT AGREEMENT
AMENDMENT NO. 3
This Agreement, dated as of August 14, 1997, is among The Pioneer Group,
Inc., a Delaware corporation (the "Company"), certain of its subsidiaries listed
on the signature pages hereto, the Lenders (as defined in the Credit Agreement
referenced below) and BankBoston, N.A., f/k/a The First National Bank of Boston,
as agent (the "Agent") for itself and the other Lenders. The parties agree as
follows:
1. REFERENCE TO CREDIT AGREEMENT: DEFINITIONS. Reference is made to the Credit
Agreement dated as of June 6, 1996, among the Company, certain of its
subsidiaries, the Lenders and the Agent (as amended, modified and in effect
prior to giving effect to this Agreement, the "Credit Agreement"). Terms defined
in the Credit Agreement as amended hereby (the "Amended Credit Agreement") and
not otherwise defined herein are used herein with the meanings so defined.
Except as the context otherwise explicitly requires, the capitalized terms
"Section" and "Exhibit" refer to sections hereof and exhibits hereto.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to all of the terms and conditions
hereof and in reliance upon the representations and warranties set forth in
Section 3, the Credit Agreement is amended as follows, effective upon the date
(the "Amendment Date") that the conditions specified in Section 4 are satisfied,
which conditions must be satisfied no later than August 25, 1997 or this
Agreement shall be of no force or effect:
a. AMENDMENT OF SECTION 1.44. Section 1.44 of the Credit Agreement is
amended to read in its entirety as follows:
"1.44. "COMPANY TOTAL DEBT" means, at any date, the following indebtedness
of the Company and the Core Mutual Fund Subsidiaries (excluding the B Share
Loan):
(a) Indebtedness in respect of borrowed money;
(b) Indebtedness evidenced by notes, debentures or similar instruments;
(c) Indebtedness in respect of Capitalized Leases;
(d) Indebtedness in respect of the deferred purchase price of assets (other
than normal trade accounts payable in the ordinary course of business);
(e) Indebtedness in respect of mandatory redemption or dividend rights on
capital stock (or other equity);
<PAGE> 2
(f) Indebtedness in respect of unfunded pension liabilities.
(g) Indebtedness in respect of financial Guarantees (other than the OPIC
Guarantee to the extent such OPIC Guarantee is financially insured under
the Lloyds Policy) and letters of credit; and
(h) Indebtedness calculated in accordance with GAAP in respect of tax
deficiencies asserted in a notice of deficiency from the IRS issued
pursuant to Section 6212 (or similar or successor provisions) of the
Code.
For purposes of this Section 1.44 only, "Indebtedness" shall be calculated
on a Combined basis for the Company and the Core Mutual Fund Subsidiaries only,
and the amount of any Guarantee under this Section 1.44 and the amount of
Indebtedness resulting from such Guarantee shall be the stated or potential
maximum amount for which the Company is or may be directly or indirectly
liable."
b. AMENDMENT OF SECTION 1.47. Section 1.47 of the Credit Agreement is
amended to read in its entirety as follows:
"1.47. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum of:
(a) the aggregate amount of interest, including payments in the
nature of interest under Capitalized Leases, accrued by the Company or
the Core Mutual Fund Subsidiaries (whether such interest is reflected as
an item of expense or capitalized), or other interest in respect of
other Indebtedness for which the Company or any Core Mutual Fund
Subsidiary may be liable directly or as a Guarantor (but only to the
extent of the Company's stated or potential maximum liability in respect
of such Indebtedness), calculated in accordance with GAAP on a Combined
basis for the Company and the Core Mutual Fund Subsidiaries only, pills
(b) the aggregate amount of all required or mandatory scheduled
payments, prepayments and sinking fund payments with respect to
principal paid or accrued by the Company or any Core Mutual Fund
Subsidiary in respect of Financing Debt other than the B Share Loan and
the Revolving Loan,
(c) only for periods after the B Share Conversion Date, the extent
to which the prepayments on the B Share Term Loan required by Section
4.3 exceed the B Share Collection Amount."
c. AMENDMENT OF SECTION 1.52. Section 1.52 of the Credit Agreement is
amended to read in its entirety as follows:
-2-
<PAGE> 3
"1.52. "CREDIT DOCUMENTS" means:
(a) this Agreement and the Notes, each as from time to time in effect;
(b) all financial statements, reports, notices and certificates
delivered to any of the Lenders by the Company or any Subsidiary in connection
herewith or therewith;
(c) the Intercreditor Agreement, dated August 25, 1997, by and among the
Company, the Agent on behalf of the Lenders and The Travelers Insurance Company,
as amended and in effect from time to time; and
(d) any other present or future agreement or instrument from time to
time entered into among the Company or any Subsidiary on the one hand, and the
Agent or all the Lenders, on the other hand, relating to, amending or modifying
this Agreement or any other Credit Document referred to above or which is stated
to be a Credit Document (including the separate letter agreement between the
Company and the Agent relating to certain fees of the Agent), each as from time
to time in effect."
d. ADDITION OF SECTION 1.123A. A new Section 1.123A is added to the Credit
Agreement immediately after Section 1.123 of the Credit Agreement to read in its
entirety as follows:
"1.123A. "SENIOR NOTE AGREEMENT" means the Note Agreement, dated August
25, 1997, between the Company and The Travelers Insurance Company,
relating to the Senior Notes of the Company, as amended from time to
time in accordance with Section 7.18."
e. ADDITION OF SECTION 1.123B. A new Section 1.123B is added to the Credit
Agreement immediately after Section 1.123A of the Credit Agreement to read in
its entirety as follows:
"1.123B. "SENIOR NOTES" means the 7.95% Senior Notes due 2004 of the
Company, as amended from time to time in accordance with Section 7.18."
f. AMENDMENT OF SECTION 4.2.3, Section 4.2.3 of the Credit Agreement is
amended to read in its entirety as follows:
"4.2.3. PREPAYMENT OF REVOLVING LOAN. Within five Banking Days after the
consummation of any underwritten public offering or other sale of any
equity interest in any of the Pioneer Goldfields Entities pursuant to
Section 7.11.5, the Company shall apply to the prepayment of the
Revolving Loan and the permanent reduction of the Maximum Amount of
Revolving Credit an amount equal to the sum of (i) the product of (x)
the ratio which the Maximum Amount of Revolving Credit in effect at such
time bears to
-3-
<PAGE> 4
the sum of such Maximum Amount of Revolving Credit plus $20,000,000,
multiplied by (y) an amount equal to fifty percent (50%) of the net cash
proceeds received by the Company or any of its Subsidiaries in such
offering or sale, plus (ii) an amount of cash equal to the aggregate
amount of Senior Notes not so purchased pursuant to Section 7.11.5 of
the Senior Note Agreement. For purposes of this Section 4.2.3, "net cash
proceeds" shall reflect the deduction of any federal, state or local tax
obligations which the Company or any Subsidiary may have as a result of
such public offering or sale."
g. AMENDMENT TO SECTION 7.6.2. Section 7.6.2 of the Credit Agreement is
amended to read in its entirety as follows:
"7.6.2. Indebtedness of the Company and each Subsidiary of the Company
which is not a Core Mutual Fund Subsidiary, including Indebtedness in
respect of the Senior Note Agreement, PROVIDED, that immediately before
and after giving effect to the incurrence of such Indebtedness, no
Default exists."
h. ADDITION OF SECTION 7.7.3. A new Section 7.7.3 is added to the Credit
Agreement immediately after Section 7.7.2 of the Credit Agreement to read in its
entirety as follows:
"7.7.3. Guarantees by the Core Mutual Fund Subsidiaries pursuant to
Section 6 of the Senior Note Agreement."
i. ADDITION OF SECTION 7.8.14. A new Section 7.8.14 is added to the Credit
Agreement immediately after Section 7.8.13 to read in its entirety as follows:
"7.8.14. The agreement by the Company and the Core Mutual Fund
Subsidiaries contained in Section 7.8 of the Senior Note Agreement not
to create, incur or enter into, or suffer to be created or incurred or
to exist, any Lien other than as permitted in such Section 7.8."
j. ADDITION OF SECTION 7.18. A new Section 7.18 is added to the Credit
Agreement immediately after Section 7.17 of the Credit Agreement to read in its
entirety as follows:
"7.18 SENIOR NOTE AGREEMENT MATTERS.
7.18.1. The Company will not, and will not permit any Subsidiary to,
without the prior written consent of the Required Lenders, (i)
voluntarily repay or prepay any Indebtedness outstanding under the
Senior Note Agreement, (ii) consent to any amendment of the amount or
-4-
<PAGE> 5
date of any required repayment or prepayment of any Indebtedness
outstanding under the Senior Note Agreement except for an amendment of
any such date to a date on or after the earlier of (x) the date of such
required repayment or prepayment as in effect prior to such amendment
and (y) the ninety-first day after the termination of this Agreement.
7.18.2. The Company will not, and will not permit any Subsidiary
to, enter into any amendment, modification or supplement to the Senior
Note Agreement that contains conditions, covenants or events of default
that are more burdensome or restrictive to the Company or such
Subsidiary than those contained in the Senior Note Agreement are to the
Company on the date hereof."
k. AMENDMENT TO EXHIBIT 1.126. Exhibit 1.126 of the Credit Agreement is
amended to read in its entirety as set forth on Exhibit 1.126 hereto.
3. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders to enter
into this Agreement, the Company represents and warrants to each of the Lenders
that:
a. LEGAL EXISTENCE, ORGANIZATION. Each of the Company and its
Subsidiaries is duly organized and validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with all power and
authority, corporate or otherwise, necessary to (a) enter into and perform this
Agreement, the Amended Credit Agreement and each other Credit Document to which
it is party and (b) own its properties and carry on the business now conducted
or proposed to be conducted by it. Each of the Company and its subsidiaries has
taken, or shall have taken on or prior to the Amendment Date, all corporate or
other action required to make the provisions of this Agreement, the Amended
Credit Agreement and each other Credit Document to which it is party the valid
and enforceable obligations they purport to be.
b. ENFORCEABILITY. The Company and each of its Subsidiaries which are
signatories hereto have duly executed and delivered this Agreement. Each of this
Agreement and the Amended Credit Agreement is the legal, valid and binding
obligation of the Company and such Subsidiaries and is enforceable in accordance
with its terms.
c. NO LEGAL OBSTACLE TO AGREEMENTS. Neither the execution, delivery or
performance of this Agreement, nor the performance of the Amended Credit
Agreement, nor the consummation of any other transaction referred to in or
contemplated by this Agreement, nor the fulfillment of the terms hereof or
thereof, has constituted or resulted in or will constitute or result in:
(1) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company or any Subsidiary is a party
or
-5-
<PAGE> 6
by which it is bound, or of the Charter or By-laws of the Company or any
Subsidiary;
(2) the violation of any law, judgment, decree or governmental order,
rule or regulation applicable to the Company or any Subsidiary;
(3) the creation under any agreement, instrument, deed or lease of any
Lien upon any of the assets of the Company or any Subsidiary; or
(4) any redemption, retirement or other repurchase obligation of the
Company or any Subsidiary under any Charter, By-law, agreement, instrument,
deed or lease.
No approval, authorization or other action by, or declaration to or filing with,
any governmental or administrative authority or any other Person is required to
be obtained or made by the Company or any Subsidiary in connection with the
execution, delivery and performance of this Agreement or the performance of the
Amended Credit Agreement, or the consummation of the transactions contemplated
hereby or thereby.
d. NO DEFAULT. Immediately before and after giving effect to the amendments
set forth in Section 2, no Default will exist.
e. INCORPORATION OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in Section 8 of the Credit Agreement are true and correct
on the date hereof as if originally made on and as of the date hereof (except to
the extent any representation or warranty refers to a specific earlier date).
4. CONDITIONS. The effectiveness of this Agreement shall be subject to the
satisfaction of the following conditions:
a. OFFICER'S CERTIFICATE. The representations and warranties contained in
Section 3 shall be true and correct as of the Amendment Date with the same force
and effect as though originally made on and as of such date; no Default shall
exist on the Amendment Date prior to or immediately after giving effect to this
Agreement; as of the Amendment Date, no Material Adverse Change shall have
occurred; and the Company shall have furnished to the Agent on the Amendment
Date a certificate to these effects, in substantially the form of Exhibit 4.1,
signed by an Executive Officer or a Financial Officer.
b. PROPER PROCEEDINGS. All proper corporate proceedings shall have been
taken by each of the Company and the Subsidiaries to authorize this Agreement,
the Amended Credit Agreement and the transactions contemplated hereby and
thereby. The Agent shall have received copies of all documents, including
records of corporate proceedings which the Agent may have requested in
connection therewith, such
-6-
<PAGE> 7
documents, where appropriate, to be certified by proper corporate or
governmental authorities.
c. EXECUTION BY LENDERS. Each of the Lenders shall have executed and
delivered this Agreement to the Company.
5. FURTHER ASSURANCES. Each of the Company and the Subsidiaries will, promptly
upon request of the Agent from time to time, execute, acknowledge and deliver,
and file and record, all such instruments and notices, and take all such action,
as the Agent deems necessary or advisable to carry out the intent and purposes
of this Agreement.
6. GENERAL. The Amended Credit Agreement and all of the other Credit Documents
are each confirmed as being in full force and effect. This Agreement, the
Amended Credit Agreement and the other Credit Documents referred to herein or
therein constitute the entire understanding of the parties with respect to the
subject matter hereof and thereof and supersede all prior and current
understandings and agreements, whether written or oral, with respect to such
subject matter. The invalidity or unenforceability of any provision hereof shall
not affect the validity or enforceability of any other term or provision hereof.
The headings in this Agreement are for convenience of reference only and shall
not alter, limit or otherwise affect the meaning hereof. Each of this Agreement
and the Amended Credit Agreement is a Credit Document and may be executed in any
number of counterparts, which together shall constitute one instrument, and
shall bind and inure to the benefit of the parties and their respective
successors and assigns, including as such successors and assigns all holders of
any Note. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE COMMONWEALTH OF
MASSACHUSETTS.
Each of the undersigned has caused this Agreement to be executed and delivered
by its duly authorized officer as an agreement under seal as of the date first
above written.
THE PIONEER GROUP, INC. PIONEERING SERVICES CORP.
By: /s/ By: /s/
----------------------------- ---------------------------------
Title: Title:
60 State Street 60 State Street
Boston, Massachusetts 02109-1820 Boston, Massachusetts 02109-1820
-7-
<PAGE> 8
PIONEERING MANAGEMENT
CORPORATION
By: /s/
-----------------------------
Title:
60 State Street
Boston, Massachusetts 02109-1820
PIONEERING MANAGEMENT (IRELAND) LTD.
By: /s/
-----------------------------
Title:
60 State Street
Boston, Massachusetts 02109-1820
PIONEER FUNDS DISTRIBUTOR, INC.
By: /s/
-----------------------------
Title:
60 State Street
Boston, Massachusetts 02109-1820
-8-
<PAGE> 9
BANKBOSTON, N.A.
By: /s/
-----------------------------
Title: Vice President
Financial Institutions Division
100 Federal Street - 15th Floor
Boston, Massachusetts 02110
Telecopy: (617) 434-1537
Telex: 940581
THE BANK OF NEW YORK
By: /s/
-----------------------------
Title:
One Wall Street, OWS-1
Securities Industry Division
New York, NY 10286
Telecopy: (212) 809-9566
Telex:
SOCIETE GENERALE
By: /s/
-----------------------------
Title:
1221 Avenue of the Americas
New York, New York 10020
Telecopy: (212) 278-7153
-9-
<PAGE> 10
STATE STREET BANK & TRUST COMPANY
By: /s/
-----------------------------
Title:
225 Franklin Street, 8th Floor
Asset-Based Finance
Boston, MA 02110
Telecopy: (617) 338-4041
BANQUE NATIONALE DE PARIS
By: /s/
-----------------------------
Title:
499 Park Avenue, 7th Floor
New York, 10022
Telecopy: (212) 415-9707
MELLON BANK, N.A.
By: /s/
-----------------------------
Title:
One Mellon Bank Center
Mail Code: 1510270
Pittsburgh, PA 15258
Telecopy: (412) 234-8087
-10-
<PAGE> 11
QUARTERLY "B" SHARE BORROWING BASE CALCULATION
TOTAL ESTIMATED COLLECTIBLE AMOUNT
1. Calculate the Average Asset Under Management (AAUM) by averaging the prior
six months daily net asset values by Fund
2. Eight Year Projection of Assets Under Management by Quarterly Bucket
a. Calculate the six month average redemption rate by dividing the total
dollars redeemed over the prior six months by the AAUM calculated in (1)
above
b. Reduce the Assets Under Management calculated in (1) by the calculated
redemption rate (2.a.) to determine the projected AUM each year
3. Projected Annual Collection of CDSC (backend sales charge)
a. Calculate the historical six month redemptions charged a CDSC and use
this to determine the percentage of assets redeemed in (2.b.) which are
subject to a backend charge vs. those which are not
b. Apply the percentage (calculated in 3.a.) to each of the quarterly
buckets to determine the total assets redeemed each year.
c. Apply the applicable CDSC rate (from Pioneer's sales fee schedule) to
the redemptions calculated in (3.b.) to determine the total collectible
CDSC amount
4. Projected Collection of Asset Based Sales Charges (ABSC)
a. Multiply 75 bpts each year to the projected AUM calculated in 2 above
5. Sum Projected CDSC and ABSC collections in 3 and 4 above for the eight year
period to determine the total collectible amount
6. Subtract from the total collectible amount in (5) the product of (i) the
percentage which the aggregate amount of Senior Notes outstanding comprises
of the sum of (x) the aggregate amount of Senior Notes outstanding plus (y)
the aggregate amount of the B Share an and Revolving Loan outstanding,
multiplied by (ii) the aggregate amount of the B Share Loan outstanding, to
determine the Total Estimated Collectible Amount.
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<PAGE> 12
7. Determine the Net Dealer Advances adjusted for ABSCs collected at original
cost for sales prior to the loan agreement.
8. Compare the Total Estimated Collectible Amount in (6) to the net dealer
advances in (7) to determine the coverage ratio
-12-
<PAGE> 13
OFFICER'S CERTIFICATE
Pursuant to Section 4.1 of Amendment No. 3 to Credit Agreement dated as of
August __ 1997 (the "Amendment") among The Pioneer Group, Inc., a Delaware
corporation (the "Company"), certain of its subsidiaries signatories thereto,
the Lenders and BankBoston, N.A., f/k/a The First National Bank of Boston, as
agent (the "Agent") for itself and the other Lenders, which amends the Credit
Agreement dated as of June 6, 1996 (as amended, modified and in effect prior to
giving effect to the Amendment, the "Credit Agreement"), among the Company,
certain of its subsidiaries signatories thereto, the Lenders and the Agent, the
Company hereby certifies that the representations and warranties contained in
Section 3 of the Amendment are true and correct on and as of the Amendment Date
with the same force and effect as though originally made on and as of the
Amendment Date; no Default exists on the Amendment Date or will exist
immediately after giving effect to the Amendment; and as of the Amendment Date,
no Material Adverse Change has occurred.
Terms defined in the Amendment and not otherwise defined herein are used
herein with the meanings so defined.
This certificate has been executed by a duly authorized Executive Officer or
Financial Officer this ____ day of August, 1997.
THE PIONEER GROUP, INC.
By:________________________________
Name:
Title:
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<PAGE> 14
INTERCREDITOR AGREEMENT
INTERCREDITOR AGREEMENT dated as of August 14, 1997 between: (x) the
institutional investor listed first on the Signature Pages hereof (herein,
together with the holders from time to time of the Senior Notes referred to
below, the "SENIOR NOTEHOLDERS"), and (y) the lenders (including the agent bank)
listed on the Signature Pages hereof (herein, together with any other
institution which may become a lender under the Credit Agreement referred to
below, the "BANKS").
WHEREAS, the Senior Noteholder listed on the Signature Pages hereof proposes
to purchase 7.95% Senior Notes due 2004 (the "SENIOR NOTES") of The Pioneer
Group, Inc. (the "Company"), issued in an aggregate original principal amount of
$20,000,000 pursuant to the Note Agreement dated as of August 14, 1997 (as
hereafter amended, modified or supplemented from time to time, the "NOTE
AGREEMENT") entered into by such Senior Noteholder with the Company and certain
of its Subsidiaries designated therein as Guarantors;
WHEREAS, the Company is a party to the Credit Agreement dated as of June 6,
1996 among the Company, certain of its Subsidiaries which are signatories
thereto, including Subsidiaries designated therein as Borrower Subsidiaries or
Guarantors, each Bank and the Agent (as amended, modified or supplemented and in
effect from time to time, the "CREDIT AGREEMENT"), pursuant to which certain
revolving credit and term loan facilities have been made available to the
Company and said Borrower Subsidiaries;
WHEREAS, pursuant to the Note Agreement the existing Subsidiaries of the
Company designated as Guarantors therein have jointly and severally guaranteed
the payment of all obligations of the Company under the Note Agreement and the
Senior Notes and all other Credit Obligations referred to in the Note Agreement
and certain other Subsidiaries may hereafter guarantee such obligations by
joining the Note Agreement pursuant to Section 9.6 thereof (such existing and
future guarantees are collectively the "SENIOR NOTE GUARANTEES"), and pursuant
to the Credit Agreement the Company and said Subsidiaries also have jointly and
severally guaranteed the payment of all obligations of the Company and said
Borrower Subsidiaries in respect of such revolving credit and term loan
facilities and all other Credit Obligations referred to in the Credit Agreement
and certain other Subsidiaries may hereafter guarantee such obligations by
joining the Credit Agreement pursuant to Section 6.9 thereof (such existing and
future guarantees are collectively the "CREDIT AGREEMENT GUARANTEES"); and
WHEREAS, it is a condition precedent to the purchase of the Senior Notes
under the Note Agreement that the Banks enter into this Agreement; and
NOW, THEREFORE, the parties hereto agree as follows:
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<PAGE> 15
1. DEFINED TERMS. The following terms shall have the following respective
meanings:
"BANKS" has the meaning specified in the Introduction hereof.
"COMPANY" has the meaning specified in the first "Whereas" hereof.
"CREDIT AGREEMENT" has the meaning specified in the second "Whereas" hereof.
"CREDIT AGREEMENT GUARANTEES" has the meaning specified in the third
"Whereas" hereof.
"CREDIT AGREEMENT OBLIGATIONS" means the Credit Obligations as defined in
the Credit Agreement.
"EXPOSURE PERCENTAGE" means, with respect to any Senior Noteholder or Bank
at any particular time, the result of dividing (i) the sum of the aggregate
principal amount of all Senior Obligations then outstanding and held by such
Senior Noteholder or Bank plus accrued interest then due and payable in respect
of such aggregate principal amount by (ii) the sum of the aggregate principal
amount of all Senior Obligations then outstanding plus all accrued interest then
due and payable in respect thereof as aforesaid.
"GUARANTOR" means any Guarantor under the Note Agreement and any Guarantor
under the Credit Agreement.
"GUARANTOR'S OBLIGATIONS" means, as to any Guarantor, the obligations of
such Guarantor with respect to principal and interest under the Senior Note
Guarantees and the Credit Agreement Guarantees.
"NOTE AGREEMENT" has the meaning specified in the first "Whereas" hereof.
"PERSON" means and includes an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
"REQUIRED HOLDERS" means the holders of at least 66-2/3% in aggregate
principal amount of the outstanding Senior Notes.
"REQUIRED LENDERS" has the meaning specified in the Credit Agreement.
"SENIOR NOTE GUARANTEES" has the meaning specified in the third "Whereas"
hereof.
-15-
<PAGE> 16
"SENIOR NOTEHOLDERS" has the meaning specified in the Introduction hereof.
"SENIOR NOTE OBLIGATIONS" means the Credit Agreement Obligations as defined
in the Note Agreement.
"SENIOR OBLIGATIONS" means the Senior Note Obligations and the Credit
Agreement Obligations.
2. PARI PASSU NATURE OF GUARANTOR'S OBLIGATIONS. The Senior Noteholders and
the Banks acknowledge and agree that they intend that all Guarantor's
Obligations will rank PARI PASSU in right of payment (including without
limitation equal in seniority) to each other, notwithstanding any claim or
proceeding relating to or affecting any Guarantor asserted by or on behalf of
the Company or such Guarantor, the bankruptcy estate of such Guarantor, the
Banks, the Senior Noteholders or any of their respective successors or assigns
under any law relating to bankruptcy, insolvency, reorganization or fraudulent
conveyance and without regard to any differences between the consideration
received or other benefits, if any, respectively derived by such Guarantor from
or in exchange for its Senior Note Guarantee and its Credit Agreement Guarantee
and from or in exchange for the incurrence of the Guarantor's Obligations of
such Guarantor. In furtherance of the foregoing, the Senior Noteholders and the
Banks acknowledge and agree that they shall not assert or in any way claim that
a Guarantor did not derive equal and ratable benefits from and in exchange for
its Senior Note Guarantee and its Credit Agreement Guarantee.
3. PRO RATA SHARING OF CERTAIN PAYMENTS.
(a) In the event that, at any time after the commencement and continuance
(or within the applicable preference period in a bankruptcy case) of any such
claim or proceeding referred to in Section 2 above relating to the Company or
any Guarantor, any holder of Senior Obligations realizes any amount in any
manner inconsistent with the intent expressed in Section 2 above, including
without limitation by the exercise of the right of setoff or banker's lien in
respect of any account or against any other asset maintained by the Company or
any Guarantor in respect of any Senior Obligations, then, subject to the
limitations of subsection (b) below: (i) such holder of Senior Obligations (the
"PURCHASING HOLDER") shall purchase (for cash or, if any such consideration
realized is other than cash, then at the Purchasing Holder's option, such other
consideration or cash equivalent to the fair market value of such consideration)
without recourse or warranty, from each other holder of Senior Obligations, an
interest in all of the Senior Obligations held by such other holder in an
aggregate amount equal to the amount so realized by the Purchasing Holder
multiplied by such other holder's Exposure Percentage before giving effect to
such realized amount and (ii) such other adjustments shall be made from time to
time as shall be equitable to ensure that all holders of Senior Obligations
share such payment ratably; provided that if all or any portion of the amount so
realized is thereafter recovered from the Purchasing Holder, such purchase
-16-
<PAGE> 17
from each other holder of Senior Obligations shall be rescinded and the purchase
price restored (pro rata, based on each holder's Exposure Percentage immediately
before the purchase was made) to the extent of such recovery, but without
interest. For purposes of this Section all amounts realized by a Purchasing
Holder in respect of the Senior Obligations at any time prior to the payment in
full of all Senior Obligations held by such Purchasing Holder shall be deemed to
be applied by such Purchasing Holder to such Senior Obligations.
(b) No Purchasing Holder shall be obligated to purchase any interest in the
Senior Obligations held by any other holder of Senior Obligations if such other
holder's willful misconduct (unrelated to questions of consideration or benefits
as described in subsection (a) above) is determined in the applicable proceeding
to be the basis for avoidance or subordination, in whole or in part, of such
other holder's Senior Obligations.
4. AMENDMENT OR WAIVER OF THIS AGREEMENT. None of the terms and conditions
of this Agreement may be amended or waived in any manner whatsoever unless in
writing duly signed by the Required Holders and the Required Banks.
5. TERMINATION. This Agreement shall terminate on the date upon which either
one of the following conditions is satisfied: (a) all Senior Note Obligations
have been indefeasibly paid in full, or (b) all commitments to lend under the
Credit Agreement have been terminated and all Credit Agreement Obligations have
been indefeasibly paid in full.
6. INTERCREDITOR AGREEMENT CONTROLS. If any provision of this Agreement
shall be inconsistent with, or contrary to, any provision in the Note Agreement,
the Credit Agreement, any instrument evidencing any Senior Note Obligation or
any Credit Agreement Obligation, any Senior Note Guarantee or any Credit
Agreement Guarantee, the provision in this Agreement shall be controlling and
shall supersede such inconsistent provision to the extent necessary to give full
effect to all provisions contained in this Agreement.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
8. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be given to the parties hereto at the
following addresses (or at such other address as any party, including any
subsequent holder from time to time of the Senior Notes or any subsequent agent
under the Credit Agreement, may hereafter designate by notice to the other
parties hereto at the time)
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<PAGE> 18
SENIOR NOTEHOLDER:
The Travelers Insurance Company
One Tower Square
Hartford, CT 06183-2030
Attention: Securities Department Private Placements
Telecopy: 860-954-5243
BANKS:
BankBoston, N.A.
Financial Institutions Division
100 Federal Street - 15th Floor
Boston, Massachusetts 02110
Telecopy: 617-434-1537
The Bank of New York
One Wall Street, OWS-l
Securities Industry Division
New York, New York 10286
Telecopy: 212-809-9566
Societe Generale
1221 Avenue of the Americas
New York, New York 10020
Telecopy: 212-278-7153
State Street Bank & Trust Company
225 Franklin Street, 8th Floor
Asst-Based Finance
Boston, Massachusetts 02110
Telecopy: 617-338-4041
Banque Nationale de Paris
499 Park Avenue, 7th Floor
New York, New York 10022
Telecopy: 212-415-9707
Mellon Bank, N.A.
One Mellon Bank Center
Mail Code: 1510370
Pittsburgh, Pennsylvania 15258
Telecopy: 412-234-8087
-18-
<PAGE> 19
9. FURTHER ASSURANCES. Each of the parties hereto agrees to execute and
deliver all such further documents and instruments and to use its best efforts
to take all such further action as may be reasonably necessary or advisable to
implement and give effect to the transactions contemplated hereby.
10. MISCELLANEOUS.
(a) This Agreement shall be binding upon the parties and the holders from
time to time of any Senior Obligations and shall inure to the benefit of and be
enforceable by the successors and assigns of the parties hereto. The rights and
obligations of any Bank or Senior Noteholder under this Agreement shall be
assigned automatically, without the need for the execution of any document or
any other action, to (and the term "Bank" or "Senior Noteholder" as used in this
Agreement shall include) any assignee, transferee or successor of such Bank or
Senior Noteholder under the Credit Agreement or the Note Agreement, as the case
may be, in accordance with the terms of and upon the effectiveness of an
assignment pursuant to the Credit Agreement or a transfer of Notes pursuant to
Section 12.2 of the Note Agreement, as the case may be, and any such assignee,
transferee or successor shall automatically become a party to this Agreement. If
required by any party to this Agreement, such assignee, transferee or successor
shall execute and deliver to the other parties to this Agreement a written
confirmation of its assumption of the obligations of the assignor or transferor
hereunder. Each of the Banks and the Senior Noteholder listed on the Signature
Pages hereof agrees that it shall deliver a complete copy of this Agreement to
any potential assignee, transferee or successor of such Bank or Senior
Noteholder prior to the execution of any such assignment or transfer.
(b) The headings in this Agreement are for purposes of reference only and
shall not limit or expand the meaning hereof.
(c) The provisions of this Agreement are intended solely for the purposes of
defining the rights of the holders of Senior Obligations relative to one
another. Nothing contained in this Agreement is intended to or shall impair, as
between the Guarantors and their respective creditors, the unconditional and
absolute obligations of the Guarantors under the Senior Note Guarantees and the
Credit Agreement Guarantees as and when the same shall become due and payable;
nor shall anything herein prevent any holder of Senior Obligations from
accepting any payment with respect to such Senior Obligations or exercising all
remedies permitted by applicable law upon any event of default in respect
thereof.
(d) Agreement shall be interpreted in such a way as to be fully effective
and valid under applicable law. If any provision of this Agreement shall be held
or deemed to be or shall in fact be inoperative or unenforceable as applied in
any particular case in any jurisdiction or jurisdictions, or in all cases
because it conflicts with any other provision or provisions hereof or any
constitution or statute or rule of public policy, or
-19-
<PAGE> 20
for any other reason, such circumstance shall not have the effect of rendering
the provision in question inoperative or unenforceable in any other case or
circumstance, or of rendering any other provision or provisions herein contained
invalid, inoperative, or unenforceable to any extent whatever. Upon the
determination that any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the maximum extent possible.
11. COUNTERPARTS. This Agreement may be executed in as many counterparts as
the parties hereto may deem necessary or convenient and by different parties on
separate counterparts, and each of which, when so executed, shall be deemed to
be an original, but all such counterparts shall constitute but one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
SENIOR NOTEHOLDER:
THE TRAVELERS INSURANCE COMPANY
By:
------------------------------------
Title:
BANKS:
BANKBOSTON, N.A.
By:
------------------------------------
Title:
THE BANK OF NEW YORK
By:
------------------------------------
Title:
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<PAGE> 21
SOCIETE GENERALE
By:
------------------------------------
Title:
STATE STREET BANK & TRUST COMPANY
By:
------------------------------------
Title:
BANQUE NATIONALE DE PARIS
By:
------------------------------------
Title:
MELLON BANK, N.A.
By:
------------------------------------
Title:
ACKNOWLEDGED:
THE PIONEER GROUP, INC.
By:_________________________
Title:
gratm/barri/719.78.100/credit.wpf
-21-
<PAGE> 1
Exhibit 10.62
INVESTMENT AGREEMENT
City of Moscow February 11, 1998
This Investment Agreement (hereinafter, "Agreement") is entered into by and
between:
AS EESTI FOREKSPANK, a credit institution organized under the laws of
Estonia (hereinafter, "Investor"), with its legal address at Narva
maantee 9A, Tallinn, Estonia, represented by its Chairman of the
Board, Ivar Lukk, acting as a legal representative on the basis of
applicable law and its Charter; and
ZAO PIONEER BANK, a closed stock company organized under the laws of
the Russian Federation (hereinafter, "Bank"), with its legal address
at 2nd Krasnoprudny per., 7, Moscow 107140, Russian Federation,
represented by Mikhail Rubinchik, its Chairman, acting on the basis of
its Charter.
Investor and Bank are collectively referred to below as the "Parties", and each
of them is individually referred to below as a "Party".
RECITALS
The Parties hereby acknowledge that:
1. Investor wishes to subscribe for and purchase a new emission of the
common stock of Bank, equal to 35% of the total common stock of Bank
after the subscription;
2. Bank wishes to issue such new emission to Investor. Bank's General
Assembly of Shareholders has approved such emission and subscription
by Investor, and this Agreement, in Protocol No. 24, dated February 5,
1998; and
3. Prior to Investor's purchase of the shares, the Parties wish to
cooperate to obtain the necessary governmental and regulatory
approvals and complete certain legal procedures as described below.
NOW THEREFORE, the Parties have agreed as follows:
1. SUBJECT OF AGREEMENT
1.1 In accordance with this Agreement, Investor hereby agrees to subscribe for
and purchase from Bank, and Bank hereby agrees to issue and sell to
Investor, 80,769 common registered shares of Bank (the "Shares") in Bank's
sixth emission of shares,
<PAGE> 2
which shall amount to 35% of the total number of common voting shares
issued by Bank after completion of such emission. Upon such purchase,
Investor shall own 35% of the total voting shares issued by Bank.
1.2 At the Closing (as defined in Article 3 below), the Parties shall execute a
separate Agreement on Purchase and Sale of Additional Shares (the
"Principal Contract") to document the issuance and sale of the Shares to
Investor.
1.3 The Principal Contract shall include the following terms, and such other
terms as may be required by law to implement the issuance and sale of the
Shares to Investor:
1.3.1 The number of Shares -- 80,769 shares.
1.3.2 The type of Shares -- common registered shares.
1.3.3 The form of Shares-- non-documentary.
1.3.4 The nominal value of a Share shall be one hundred (100) Russian
Rubles ("RUR"). (All Ruble amounts in this Agreement are set forth in
redenominated "new" Rubles. The Parties anticipate that Bank's
Charter will be amended accordingly.)
1.3.5 The price per share, and the aggregate price of all Shares to be sold
under the Principal Contract, shall be as stated in Article 1.4
below.
1.3.6 Settlements between the Parties shall be made in RUR in accordance
with the exchange rate established by the Central Bank of the Russian
Federation and effective on the date of payment.
1.4 The aggregate purchase price for the Shares shall be equal to the product
of 1.20 multiplied by the Final Adjusted Book Value (as defined below) per
common share of Bank, multiplied by the number of Shares purchased,
calculated in the manner and at the time hereinafter described (the
"Purchase Price").
1.4.1 The preliminary Purchase Price is US$5,085,862.39, based on the
adjusted book value of Bank as at November 30, 1997 ("Preliminary
Adjusted Book Value"), calculated in U.S. Dollars under United States
Generally Accepted Accounting Principles ("GAAP").
1.4.2 The final Purchase Price shall be calculated and agreed upon using
the Final Adjusted Book Value. "Final Adjusted Book Value" shall mean
Preliminary Adjusted Book Value adjusted for:
(a) changes during the period from November 30, 1997, through the
last day of the month immediately prior to the Closing (or such
other date as may be agreed by the Parties);
-2-
<PAGE> 3
(b) resolution of any differences of opinion between the Parties
concerning any assets or liabilities of Bank; and
(c) any discrepancies due to technical differences between the
methodologies used by the Parties, Arthur Andersen and/or Price
Waterhouse pursuant to their activities under Article 1.4.3.
1.4.3 To determine Final Adjusted Book Value, prior to the Closing, Bank
shall cause its outside auditor, Arthur Andersen, to prepare an
analysis and calculate book value through the last day of the month
immediately prior to the Closing (or such other date as may be agreed
by the Parties) in U.S. Dollars under GAAP. Bank shall report the
results of such calculation to Investor, including the analysis of
Arthur Andersen, and any other data on which such results are based.
Such calculation shall be subject to review and reasonable approval
by Investor (who may be assisted for this purpose by Price
Waterhouse, which will conduct its review on the basis of
International Accounting Standards ("IAS")). If Investor does not
agree with Arthur Andersen's calculation, then the Parties shall
discuss and endeavor in good faith to resolve any differences of
opinion.
1.5 In addition to paying the Purchase Price for the Shares, as a separate and
essential condition of the purchase, Investor shall be required to provide
certain license rights to software and management services to Bank, in a
manner to be agreed.
1.6 The other terms of such purchase, sale and issuance shall be as set forth
in this Agreement.
2. OBLIGATIONS OF THE PARTIES
2.1 Investor shall:
2.1.1 Subscribe for the Shares by executing the Principal Contract, and
such other documents as may be required by applicable Russian
legislation.
2.1.2 At the Closing, make payment for the Shares by paying the Purchase
Price to Bank in the manner required by applicable legislation.
2.1.3 Prior to the Closing, refrain from entertaining, soliciting, or
discussing with any prospective sellers, or agreeing to participate
in, any sale or offer to sell to Investor, directly or indirectly,
another Russian bank or any part thereof or interest therein.
-3-
<PAGE> 4
2.2 Bank shall:
2.2.1 At the Closing, execute the Principal Contract, and in accordance
therewith issue and sell the Shares to Investor. Bank shall register
Investor in the share register of Bank as a shareholder, immediately
after Investor has duly paid the Purchase Price for the Shares. Bank
shall deliver to Investor an extract from the share register of Bank
immediately after the aforementioned registration, confirming the
transfer of ownership of and shareholder rights connected with the
Shares to Investor.
2.2.2 Prior to the Closing, refrain from:
(a) issuing any common or preferred shares, or securities convertible
into such shares, to any third party or parties, without the
prior written consent of Investor; or
(b) entertaining, soliciting, or discussing with any prospective
purchasers, or agreeing to participate in, any purchase or offer
to purchase, directly or indirectly, any shares of Bank.
2.2.3 Pay all Russian Federation taxes which may be assessed in connection
with Investor's purchase of the Shares under this Agreement,
including any securities taxes.
2.3 Both Parties shall:
2.3.1 Promptly upon execution of this Agreement, cooperate in good faith to
undertake all necessary steps to obtain the following approvals (the
"Approvals") for the transaction contemplated by this Agreement (the
"Transaction"):
(a) A decision of Investor's Supervisory Board of Directors,
approving this Agreement and Investor's performance of its
obligations hereunder;
(b) Approval of the State Anti-Monopoly Committee of the Russian
Federation;
(c) Approval of the Central Bank of Estonia;
(d) Approval of the Central Bank of the Russian Federation for
Investor's purchase of the Shares as contemplated by this
Agreement;
(e) Approval of the Central Bank of the Russian Federation for the
increase of share capital and adoption of a restated Charter of
Bank, as set forth in EXHIBIT 1 to this Agreement (with such
modifications to the text of the Charter as may be requested by
the Central Bank and agreed by the Parties); and
-4-
<PAGE> 5
(f) Registration of an appropriate Emission Prospectus and the Shares
by the Central Bank of the Russian Federation.
2.3.2 Promptly upon execution of this Agreement, cooperate in good faith to
effect the re-registration of the Charter of Bank to permit the
issuance and sale of the Shares, and otherwise as needed to implement
the provisions of this Agreement.
3. CLOSING; CONDITIONS TO CLOSING
3.1 The funding of the purchase and sale of the Shares (the "Closing") shall
occur as follows.
3.2 Neither Party shall be obliged to complete the Closing until all of the
following conditions precedent have been satisfied (or waived by written
agreement, in the discretion of both Parties):
3.2.1 Both Parties shall have completed all due diligence regarding each
other and the Transaction, to their satisfaction, as described in
Article 4.
3.2.2 Both Parties shall have agreed on any adjustments to the Purchase
Price pursuant to Article 1.4.
3.2.3 All Approvals shall have been obtained and remain in effect.
3.2.4 There shall not have been a material, adverse change of circumstances
with respect to Bank and to which Investor objects; nor with respect
to Investor and to which Bank objects.
3.2.5 Investor shall have demonstrated to the satisfaction of Bank the
availability of funds necessary to pay the Purchase Price to Bank, in
a manner reasonably acceptable to Bank, not later than April 15,
1998.
3.2.6 Investor and Bank shall have agreed upon Bank's warranties pursuant
to Article 5.1 below, and any qualifications or modifications
thereto, or deletions therefrom.
3.3 At the Closing:
3.3.1 The Parties shall execute the Principal Contract as described in
Articles 2.1.1 and 2.2.1.
3.3.2 Investor shall pay the Purchase Price as described in Article 2.12.
3.3.3 Bank shall issue the Shares to Investor as described in
Article 2.2.1.
-5-
<PAGE> 6
3.4 The Parties shall complete the Closing as promptly as possible, and in any
event within ten (10) business days after obtaining all of the Approvals.
3.5 If the Closing has not occurred by July 31, 1998, then this Agreement shall
terminate automatically pursuant to Article 6.2, unless the Parties have
first agreed in writing to extend such deadline.
4. DUE DILIGENCE
4.1 Each Party shall cooperate in good faith, and shall cause its respective
management, employees and key shareholders to cooperate in good faith, to
facilitate the other Party's due diligence efforts as described below.
4.2 Promptly upon obtaining all of the Approvals, each Party shall be
entitled to conduct due diligence regarding the other Party for the
following period of ten (10) business days. The purpose shall be for each
Party to determine whether there has been a material, adverse change of
circumstances with respect to the other Party (including, without
limitation, any legal proceedings or other events materially and adversely
affecting such Party's ability to perform its obligations under this
Agreement, or such Party's reputation) during the period between the date
of this Agreement and the date that all of the Approvals were obtained.
5. WARRANTIES OF PARTIES
5.1 Bank hereby makes the warranties set forth in Articles 5.1.1 through 5.1.11
below to Investor; SUBJECT, HOWEVER, to (a) information that Bank has
shared with Investor prior to the date of this Agreement, and (b) such
further qualifications, modifications and/or deletions regarding any matter
described in Articles 5.1.5 through 5.1.11 as Bank deems necessary and
shall have notified to Investor at least thirty (30) days prior to the
Closing.
5.1.1 Bank is a legal entity duly formed and legally existing under the
laws of the Russian Federation. Bank holds License No. 3108 for the
conduct of banking operations, issued by the Central Bank of the
Russian Federation on October 5, 1994.
5.1.2 The authorized capital stock of Bank consists of 610,000 shares of
common stock, 100 RUR par value; 150,000 of such shares are issued
and outstanding. There is no other capital stock authorized for
issuance, except as otherwise stated in this Agreement. No shares of
common stock are held in Bank treasury, and no shares are reserved
for issuance, nor are there outstanding any options, warrants,
convertible instruments or other rights, agreements or commitments
to acquire common stock of Bank, except for the rights of Investor
as set forth in this Agreement.
-6-
<PAGE> 7
5.1.3 This Agreement has been duly and validly executed and delivered by
Bank and constitutes a valid and binding Agreement of Bank
enforceable in accordance with its terms. Bank's General Assembly of
Shareholders has approved the Transaction contemplated by this
Agreement in Protocol No. 24, dated February 5, 1998. Bank has all
requisite corporate power and authority to enter into this Agreement
and to carry out the Transaction contemplated hereby, and its doing
so has been duly and sufficiently authorized, subject only to the
Approvals.
5.1.4 The execution, delivery and performance of this Agreement, and the
performance by Bank of its obligations hereunder do not (1) conflict
with or result in a breach of any of the provisions of the Charter of
Bank; (2) contravene any law, ordinance, rule or regulation of the
Russian Federation or any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having
jurisdiction, or cause the suspension or revocation of any
authorization, consent, approval, or license, presently in effect,
which affects or binds, Bank, and will not have a material adverse
effect on the validity of this Agreement; (3) conflict with or result
in a material breach of or default under any material indenture or
loan or credit agreement or any other material agreement or
instrument to which Bank is a party; or (4) constitute grounds for
the loss or suspension of any material permits, licenses or other
authorizations used in the business of Bank.
5.1.5 Bank has no liabilities which are not adequately reflected or
reserved against on Bank's most recent balance sheet furnished to
Investor, except liabilities incurred since the date of such balance
sheet in the ordinary course of business. Without limiting the
foregoing, (a) there are no material unpaid leasehold improvements at
any of Bank's facilities or locations for which Bank is or will be
responsible, and Co) there are no material deferred rents due to
lessors at or with respect to any of such facilities or locations.
5.1.6 Since the date of Bank's most recent balance sheet furnished to
Investor, except in the ordinary course of business there has not
been (a) any material adverse change in the business, condition
(financial or otherwise), operations, or prospects of Bank; (b) any
material damage, destruction, or loss, whether covered by insurance
or not, having a material adverse effect on the business, condition
(financial or otherwise), operations, or prospects of Bank; (c) any
entry into or termination of any material commitment, contract,
agreement, or transaction (including, without limitation, any
material borrowing or capital expenditure or sale or other
disposition of any material asset or assets) of or involving Bank
other than this Agreement; (d) any redemption, repurchase, or other
acquisition for value of its capital stock by Bank, or any issuance
of capital stock of Bank or of securities convertible into or rights
to acquire any such capital stock or any dividend or distribution
declared, set aside, or paid on capital stock of Bank; (e) any
transfer of or right granted under any material lease, license,
agreement, patent, trademark, trade name, or copyright of Bank;
(f) any sale or other disposition of any material asset of Bank, or
any mortgage,
-7-
<PAGE> 8
pledge, or imposition of any material lien or other encumbrance on
any asset of Bank, or any agreement relating to any of the
foregoing; or (g) any default or breach by Bank in any material
respect under any material contract, license or permit. Since the
date of such balance sheet, Bank has conducted its business in the
ordinary and usual course, and, without limiting the foregoing, no
material changes have been made in (a) executive compensation
levels, (b) the manner in which other employees of Bank are
compensated, or (c) supplemental benefits provided to any such
executives or other employees.
5.1.7 Bank has properly filed or caused to be filed all federal, local,
and foreign income and other tax returns, material reports and
declarations that are required by applicable law to be filed by it,
and has paid, or made full and adequate provision for the payment
of, all federal, local, and foreign income and other taxes properly
and finally due.
5.1.8 To the best knowledge of Bank, no material investigation or review
by any governmental entity with respect to Bank is pending or
threatened, nor has any governmental entity indicated in writing to
Bank an intention to conduct the same, and there is no material
action, suit, or proceeding pending or, to the best of the knowledge
of Bank, threatened against Bank.
5.1.9 There are no collective bargaining, bonus, profit sharing, special
compensation, or other trusts, funds, or special arrangements
maintained by Bank for the benefit of its directors, officers, or
employees, except for normal salary adjustments and bonuses
determined in the ordinary course of business.
5.1.10 Bank has good title, or effective and continuing leasehold rights in
the case of leased property, to all real property and all personal
property owned or leased by it or used by it in the conduct of its
business in such a manner as to create the appearance or reasonable
expectation that the same is owned or leased by it, free and clear
of all material liens, claims, encumbrances and charges which could
materially impair the use thereof.
5.1.11 Bank is in substantial compliance with all, and has received no
written notice of any substantial violation of any, laws or
regulations applicable to its operations.
5.2 Investor hereby warrants to Bank that:
5.2.1 Investor is a legal entity duly formed and legally existing under the
laws of Estonia.
5.2.2 This Agreement has been duly and validly executed and delivered by
Investor and constitutes a valid and binding agreement of Investor
enforceable in accordance with its terms. Investor's Supervisory
Board has authorized Investor to enter into the Transaction and this
Agreement by Resolution No. 4/97 on November 17, 1997. Investor has
all requisite corporate power and authority to enter into this
Agreement and to carry out the Transaction
-8-
<PAGE> 9
contemplated hereby, and its doing so has been duly and sufficiently
authorized, subject only to the Approvals.
5.2.3 The execution, delivery and performance of this Agreement, and the
performance by Investor of its obligations hereunder do not, (1)
conflict with or result in a breach of any of the provisions of the
Articles of Association of Investor; (2) contravene any law,
ordinance, rule or regulation of Estonia or any order, writ,
judgment, injunction, decree, determination, or award of any court or
other authority having jurisdiction, or cause the suspension or
revocation of any authorization, consent, approval, or license,
presently in effect, which affects or binds, Investor, and will not
have a material adverse effect on the validity of this Agreement; (3)
conflict with or result in a material breach of or default under any
material indenture or loan or credit agreement or any other material
agreement or instrument to which Investor is a party; or (4)
constitute grounds for the loss or suspension of any material
permits, licenses or other authorizations used in the business of
Investor.
5.2.4 There is no ongoing, pending or threatened legal action or proceeding
before any court, governmental agency or arbitrator, which may
materially and adversely affect Bank's rights under this Agreement or
Investor's performance of its obligations under this Agreement.
5.2.5 Investor has complied with all applicable laws and regulations in
entering into this Agreement and acquiring the Shares.
5.2.6 Prior to the Closing, Investor shall have obtained sufficient funds
necessary for payment of the Purchase Price.
5.3 Each Party shall bear civil liability to the other Party for any errors or
inaccuracies in its warranties as set forth above, and shall indemnify the
other Party for any damages or losses caused by such errors or
inaccuracies, including due to any failure to complete the Transaction or
the Closing directly caused thereby.
6. TERM AND TERMINATION
6.1 The term of this Agreement shall commence on the date hereof and shall
expire upon the full performance by the Parties of their obligations
hereunder.
6.2 Notwithstanding Article 6.1 above:
6.2.1 This Agreement shall terminate automatically as described in
Article 3.5 above.
6.2.2 This Agreement may be terminated by a Party as described in
Article 8.2 below.
6.2.3 At the option of Investor, this Agreement may be terminated if the
Parties are
-9-
<PAGE> 10
unable to agree on Bank's qualifications, modifications and/or
deletions to its warranties in Article 5. l, within thirty (30) days
after notice thereof as described in Article 5.l(b).
6.2.4 At the option of Investor, this Agreement may be terminated if
Investor has duly paid the Purchase Price for the Shares as described
in this Agreement and the Principal Contract, but within 180 days
thereafter the Central Bank of the Russian Federation has failed to
register the Shares or the Report on the Results of the Emission, and
as a result of such failure the emission of the Shares is deemed
invalid under Russian law; PROVIDED, that prior to such termination,
Bank shall have an additional 180 days after notice from Investor in
which to cure any such failure.
In case of any early termination as listed above, neither Party shall have
any liability to the other in respect of this Agreement or such
termination; PROVIDED, that in the case of termination under Article 6.2.4,
promptly after termination Investor shall return the Shares to Bank, and
Bank shall refund the Purchase Price to Investor.
6.3 The obligations of the Parties under Articles 6.2, 7, 9 and 10 shall
survive the expiration or earlier termination of this Agreement.
7. CONFIDENTIALITY; DISCLOSURES
7.1 The Parties agree that their due diligence activities under Article 4,
negotiation and execution of this Agreement and completion of the Closing
as described herein may involve the exchange of oral or written information
between the Parties that is deemed confidential and proprietary by the
disclosing Party ("confidential information"), including (for example)
written materials that are clearly marked as confidential. Any Party who
receives such confidential information will refrain from disclosing it to
any third party without the advance written consent of the Party who
disclosed such information; PROVIDED, that each Party may share such
information with its professional advisors (upon written agreement by such
advisors, in form reasonably acceptable to the other Party, to comply with
the provisions of this Article).
7.2 Each Party that receives confidential information will use it for the sole
purpose of pursuing the due diligence activities, negotiation and execution
of Agreements, and completion of the Closing and the Transaction as
described herein.
7.3 Each Party will also cause its employees, agents, representatives and
professional advisors to comply with the provisions of this Article.
7.4 Upon the earlier of (a) termination of this Agreement, or (b) the Closing,
each Party shall destroy or return to the other Party all documents or
tangible materials containing confidential information of the other Party
which is covered by this Article, and shall retain no copies thereof.
-10-
<PAGE> 11
7.5 In its discretion, a disclosing Party may elect to disclose certain
information under this Article by allowing the receiving Party to review
such information in a secure location on the disclosing Party's premises.
The receiving Party may make notes regarding such information, but shall
not make or retain any copies thereof.
7.6 If disclosure of any confidential information obtained by a receiving Party
is sought by any governmental authority, then such receiving Party shall
promptly notify the disclosing Party, and shall use its best efforts to
cooperate fully with the disclosing party's pursuit of any or all available
legal remedies that may be selected by the disclosing Party to maintain the
confidentiality of the information, prior to any disclosure to such
governmental authority. However, notwithstanding the foregoing, after
reasonable consultation with the disclosing Party, the receiving Party
shall be entitled to undertake any disclosure to a governmental authority
that is mandatory under applicable law.
7.7 The preceding paragraphs of this Article 7 are not applicable to any
information that:
7.7.1 Was already known to a receiving Party at the time of receipt, and
such Party can provide written confirmation that this information was
at its disposal on the date of receipt;
7.7.2 Is or becomes public not through any act or failure to act of the
Party who received it; or
7.7.3 Later is disclosed without restriction to the receiving Party by a
third party fully authorized to do so.
7.8 Neither Party shall make any public announcements or statements regarding
this Agreement, the Transaction or any matters relating directly thereto
without the prior, written consent of the other, which shall not be
unreasonably withheld where a Party has a legal obligation to make such
announcement or statement under its national securities or banking laws or
the regulations of any applicable public stock exchange (subject to
necessary precautions being taken to protect confidential information as
described under Article 7.6 and otherwise above). All such announcements,
statements, press releases or the like shall be discussed and their texts
agreed upon by both Parties, in advance.
8. FORCE MAJEURE
8.1 In the event of any occurrence of Force Majeure circumstances making it
impossible for a Party to perform completely or in material part its
obligations under this Agreement, including, without limitation: fire,
natural calamity, military actions, decrees of state power or other
unforeseen circumstances, which do not depend on the action of the Parties,
then the required time for performance of such Party's obligations under
this Agreement shall be postponed for the period during which such
circumstances continue.
-11-
<PAGE> 12
8.2 In the event that such circumstances continue for a period of time
exceeding six (6) months, then each of the Parties shall be entitled to
terminate this Agreement by written notice to the other. In such case,
neither Party shall be held liable to the other Party for any damage
inflicted as a result of the occurrence of the Force Majeure circumstances.
8.3 A Party that by virtue of any Force Majeure circumstances becomes unable to
fulfill obligations as described above, shall promptly notify the other
Party in writing about the occurrence of such circumstances.
9. FINAL PROVISIONS
9.1 This Agreement may be amended or modified only upon written consent of the
Parties.
9.2 Each Party shall pay its own fees and expenses incurred in connection with
this Agreement and the Transaction. Each Party shall bear the cost of any
brokers, advisors or finders retained by it in connection with the
Transaction.
9.3 For purposes of coordination between the Parties in performing their
obligations hereunder, the authorized representative of Investor shall be
Raivo Erik, and the authorized representative of Bank shall be John
Tierney. A Party may change such designated person by written notice to the
other Party.
9.4 Notices or responses required by this Agreement shall be given in writing,
and shall be deemed delivered upon the earlier of (a) the date actually
received, or (b) the date ten (10) days after dispatch by overnight courier
(DHL or Federal Express). Notices or responses shall be addressed and sent
by personal delivery, registered mail or fax (with a copy by registered
airmail) to the address of the intended recipient set forth below. The
addresses and bank accounts of the Parties are:
To Investor: AS Eesti Forekspank
Narva maantee 11
Tallinn, EE0001
Estonia
Attn: Mr. Ivar Lukk, Chairman of the Board
Facsimile: +372-630-2506
Bank Account: Mezhcombank, Moscow
Account No.: 40805810100000000025
Corr. Account No. :30101810100000000143
with a copy to: ZAO Pioneer Bank
2nd Krasnoprudny per., 7
Moscow 107140
Russian Federation
Attn: Mr. Raivo Erik
Facsimile: +7 (095) 975-2964
-12-
<PAGE> 13
To Bank: ZAO Pioneer Bank
2nd Krasnoprudny per., 7
Moscow 107140
Russian Federation
Attn: Mr. Mikhail Rubinchik, Chairman
Facsimile: +7 (095) 975-2964
Bank Account: Corr. Account No.: 30101810400000000231
BIC 044579231
OKPO 29307376
OKONH 96120
with a copy to: Pioneer First Investment Group
Gazetny 5, Room 255
Moscow 103918
Russian Federation
Attn: Mr. John L. Tierney
Facsimile: +7 (095) 234-1608
9.5 This Agreement sets forth the entire agreement between the Parties relating
to the subject matter contained herein and replaces all other prior
agreements or understandings, whether written or oral (including without
limitation the Term Sheet dated December 5, 1997).
10. ARBITRATION AND APPLICABLE LAW
10.1 The Parties will use their best efforts to resolve any disputes or
controversies arising out of this Agreement by negotiations in good faith.
10.2 If such a dispute or controversy has not been settled by negotiations
within thirty (30) days, then the Parties hereby agree to resolve the
dispute by binding arbitration, under the auspices of and pursuant to the
Rules of Conciliation and Arbitration of the International Chamber of
Commerce. The arbitration proceedings will be conducted in London, England.
The language of the arbitration will be English. The arbitration tribunal
will consist of three (3) arbitrators. Investor will be entitled to
appoint one arbitrator and Bank will be entitled to appoint one arbitrator.
The two arbitrators so appointed will choose the third arbitrator. The
decision and award of the arbitrators may, in their discretion, require the
losing Party to pay the legal fees and expenses of the prevailing Party.
The decisions of such arbitral tribunal will be final and binding on both
Parties, and enforceable by all courts with jurisdiction.
10.3 This Agreement shall be construed in accordance with the laws of the
Russian Federation.
-13-
<PAGE> 14
This Agreement has been signed on February 11, 1998, in the City of Moscow, in
four(4) originals, two (2) in English and two (2) in Russian, each equally
binding and valid, with both language versions intended to be identical in
meaning.
ON BEHALF OF BANK ON BEHALF OF INVESTOR
/s/ Mikhail Rubinchik /s/ Ivar Lukk
- ----------------------------- -------------------------------
Mikhail Rubinchik Ivar Lukk
Chairman Chairman of the Board
Pioneer Bank AS Eesti Forekspank
[SEAL] [SEAL]
-14-
<PAGE> 15
EXHIBIT 1
RESTATED CHARTER
[to follow]
-15-
<PAGE> 1
Exhibit 10.63
FOURTH AMENDMENT TO LEASE
This FOURTH AMENDMENT TO LEASE ("Fourth Amendment") is made as of September
11, 1997 by and between the TRUSTEES OF 60 STATE STREET TRUST under Declaration
of Trust dated September 10, 1970, recorded with Suffolk Deeds, Book 8389, Page
286, as amended, with an address of c/o Koll Management Services, 60 State
Street, Boston, Massachusetts 02109 ("Landlord"), and THE PIONEER GROUP, INC.,
having a mailing address of 60 State Street, Boston, Massachusetts 02109
("Tenant").
RECITALS
WHEREAS, Landlord and Tenant entered into a lease dated as of July 3, 1991,
as amended by a certain First Amendment to Lease dated as of January 31, 1994,
as further amended by a certain Second Amendment to Lease dated September 30,
1996, and as further amended by a certain Third Amendment to Lease dated
November 15, 1996 (collectively, the "Lease"), for certain space ("Premises")
on the 3rd, 4th, 5th, 6th, 17th, 18th and 19th floors of the building commonly
known as 60 State Street, Boston, Massachusetts (the "Building");
WHEREAS, by Memorandum of Understanding dated as of August 28, 1997,
Landlord and Tenant have agreed that Tenant shall lease certain additional space
consisting of approximately 11,850 rentable square feet of space on the 14th
Floor of the Building, shown as the "Floor 14 Premises" on the floor plan
attached hereto as Fourth Amendment Exhibit A and incorporated herein; and
WHEREAS, Landlord and Tenant desire to amend the Lease to include the Floor
14 Premises within the Premises and to amend certain terms and conditions of the
Lease as described below.
AGREEMENT
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged
and agreed, Landlord and Tenant hereby agree that Landlord shall lease to
Tenant, and Tenant shall lease from Landlord, the Floor 14 Premises on the
following terms and conditions:
1. TERM: The Term for the Floor 14 Premises shall commence on January 1,
1998 and shall expire on December 30, 2003, unless earlier terminated
as set forth in the Lease. Tenant shall have no option to renew the
Lease with respect to the Floor 14 Premises.
2. ANNUAL FIXED RENT FOR INITIAL TERM AND ADDITIONAL RENT. Annual Fixed
Rent for the Floor 14 Premises shall be $22.65 per rentable square
foot. Tenant shall pay additional rent for the Floor 14 Premises on
the same terms and conditions as provided in the Lease for the initial
Premises, which additional rent is currently estimated at $12.35 per
rentable square foot.
3. LANDLORD'S WORK ON THE FLOOR 14 PREMISES. Notwithstanding any
provisions of the Lease to the contrary, without limitation, Sections
3.1 and 3.6, the Floor 14 Premises shall be delivered to Tenant
broom-clean and in their then "AS IS" condition.
1
<PAGE> 2
4. TENANT'S WORK ON THE FLOOR 14 PREMISES. Commencing on January 1, 1998,
Tenant shall have the right to construct improvements to the Floor 14
Premises, either on its behalf or on behalf of a subtenant as set
forth below, subject to Landlord's approval of Tenant's plans and
specifications, which approval shall not be unreasonably withheld or
delayed, and subject to the other terms and conditions of the Lease
including Section 3.5. All Tenant improvements to the Floor 14
Premises shall be performed at Tenant's sole cost and expense, and
Landlord shall not be obligated to reimburse or othrewise compensate
Tenant for such improvements.
5. ADDITIONAL PARKING SPACES. Commencing on January 1, 1998, Tenant shall
be entitled to occupy three (3) additional non-reserved parking spaces
in the Building garage at the then current market rates charged by the
garage operator. Tenant shall enter into a separate parking agreement
with the garage operator with respect to the foregoing three
additional parking spaces.
6. SUBLETTING THE FLOOR 14 PREMISES. Subject to the terms and conditions
herein set forth and set forth in the Lease, Tenant shall have the
right to sublet all or a portion of the Floor 14 Premises, provided
(i) the proposed subtenant and the proposed use of the Floor 14
Premises is not inconsistent with the first-class character and
quality of the Building, and (ii) Tenant gives Landlord written notice
of the name of the proposed subtenant, the term of the proposed
subletting and any leasehold improvements to be made in connection
therewith. Notwithstanding any such subletting, Tenant shall remain
primarily liable under the Lease with respect to the Floor 14
Premises.
7. NO EFFECT ON PRIORITY OF TENANT'S RIGHTS. It is hereby understood and
agreed that the leasing of the Floor 14 Premises by Tenant shall in no
way affect the priority of Tenant's rights with respect to any other
space in the Building set forth in the Lease.
8. CAPITALIZED TERMS. Capitalized terms used herein but not defined shall
have the meanings ascribed to them in the Lease.
9. RATIFICATION. Except as amended hereby, the terms and conditions of
the Lease shall remain unaffected and the Lease shall remain in full
force and effect.
10. CONTINGENCIES. This Fourth Amendment to Lease is specifically
contingent upon (i) the receipt by Landlord of a written waiver by
Hale and Dorr of its superior rights to the Floor 14 Premises, and
(ii) the delivery of the Floor 14 Premises from ITT/Sheraton
Corporation to Landlord on or before January 1, 1998.
[SIGNATURES ON FOLLOWING PAGE]
2
<PAGE> 3
EXECUTED under seal as of the date first set forth above.
LANDLORD: TRUSTEES OF 60 STATE STREET TRUST
By: /s/ John A. Pirovano
----------------------------------------
John A. Pirovano, as Trustee of 60 State
Street Trust, for self and co-Trustees
but not individually
TENANT: THE PIONEER GROUP, INC.
By: /s/
----------------------------------------
its VICE PRESIDENT
hereunto duly authorized
3
<PAGE> 4
FOURTH AMENDMENT EXHIBIT A
Plan of Floor 14 Premises
[FLOOR LAYOUT]
<PAGE> 5
CONSENT OF LENDERS
The undersigned hereby acknowledge notice of the Fourth Amendment to Lease
between the Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated
as of September __, 1997 and consent thereto.
TRUST COMPANY OF THE WEST, a
California corporation, as trustee for
TCW REALTY FUND VA, as tenant in common
By /s/
-------------------------------------------
Authorized Signatory
By: /s/
-------------------------------------------
Authorized Signatory
TCW REALTY FUND VB, a California
limited partnership, as tenant in common
By: TCW ASSET MANAGEMENT COMPANY,
a California corporation, as General
Partner
BY: /s/
--------------------------------------
Authorized Signatory
BY: /s/
--------------------------------------
Authorized Signatory
By: WESTMARK REALTY ADVISORS L.L.C.,
a Delaware limited liability company,
as General Partner
BY: /s/
--------------------------------------
Authorized Signatory
BY: /s/
--------------------------------------
Authorized Signatory
5
<PAGE> 6
TEACHERS INSURANCE AND ANNUITY ASSOCIATION JOAN HERMAN
COLLEGE RETIREMENT EQUITIES FUND Sr. Investment Analyst
730 Third Avenue Telephone: (212) 916-4474
New York, NY 10017 Fax: (212) 916-6102
December 4, 1997
Brenda Y. Sheridan
Koll Real Estate Service
60 State Street
Suite 3600
Boston, Massachusetts 02109
Re: TIAA Appl. #MA-438
Mortgage #000386700,01
Sixty State Street
Boston, Massachusetts
Dear Brenda:
Please be advised that TIAA hereby approves the following lease amendment
for the captioned property:
FOURTH AMENDMENT TO LEASE, DATED SEPTEMBER 11, 1997, BETWEEN THE
TRUSTEES OF 60 STATE STREET TRUST AND THE PIONEER GROUP.
Please feel free to call if you have any questions.
Sincerely,
/s/ Joan Herman
Joan Herman
<PAGE> 1
Exhibit 11
THE PIONEER GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPUTATION FOR
CONSOLIDATED
STATEMENT OF INCOME YEAR ENDED DECEMBER 31,
- ------------------- --------------------------------------
1997 1996 1995
---- ----- ----
<S> <C> <C> <C> <C>
NET INCOME (1) $ 29,166 $ 18,837 $ 22,811
=========== =========== ===========
BASIC EARNINGS PER SHARE CALCULATION:
Weighted average number of common
shares outstanding 24,873,000 24,620,000 24,407,000
BASIC EARNINGS PER SHARE $1.17 $0.77 $0.93
=========== =========== ===========
DILUTED EARNINGS PER SHARE CALCULATION:
Weighted average number of common
shares outstanding 24,873,000 24,620,000 24,407,000
Dilutive effect of stock options as
common stock equivalents 692,000 745,000 750,000
Dilutive effect of restricted stock
proceeds as common stock equivalents 65,000 95,000 154,000
Weighted average number of shares
outstanding as adjusted 25,630,000 25,460,000 25,311,000
----------- ----------- -----------
DILUTED EARNINGS PER SHARE $1.14 $0.74 $0.90
=========== =========== ===========
</TABLE>
(1) These amounts agree with the related amounts in the Consolidated Statement
of Income.
<PAGE> 1
Exhibit 13
[back cover]
[Pioneer Logo]
The Pioneer Group, Inc.
60 State Street 0398-4750
Boston, MA 02109 (C) The Pioneer Group, Inc.
[front cover]
[Photo: ship lantern]
[Photo: elaborate globe]
[Photo: compass]
THE PIONEER GROUP, INC.
'97
ANNUAL REPORT
<PAGE> 2
THE COMPANY
The Pioneer Group, Inc., and its subsidiaries (collectively, the "Company"), are
engaged in financial services businesses in both the United States and in many
foreign countries and in a number of natural resource development projects in
locales as diverse as the Republic of Ghana and the Russian Far East.
In the United States, the Company conducts four lines of financial services
businesses: (i) investment manager to the U.S. registered investment companies
comprising the Pioneer Family of Mutual Funds, and institutional accounts, (ii)
distributor of shares of the Pioneer Family of Mutual Funds, (iii) venture
capital investor and manager, and (iv) shareholder servicing agent for the
Pioneer Family of Mutual Funds.
The Company's international financial services businesses include investment
operations in: (i) Warsaw, Poland, where the Company manages and distributes
units of four mutual funds, owns 50% of a unitholder servicing agent, manages an
institutional venture capital fund and owns a majority interest in a brokerage
operation, (ii) Dublin, Ireland, where the Company distributes shares of,
manages and services six offshore investment funds, sold primarily in Western
Europe, and (iii) Moscow, Russia, where the Company provides financial services,
including investment advisory, investment banking, brokerage and transfer agency
services, distributes shares of, manages, and services, Pioneer First, one of
the first open-end mutual funds available to Russian citizens, and owns 51% of
the First Voucher Fund, the largest Russian voucher investment fund. In
addition, the Company has investment operations in the Czech Republic and has
invested in investment management operations in India and Taiwan.
The Company's subsidiary, Pioneer Goldfields Limited (PGL), conducts mining and
exploration activities in the Republic of Ghana and exploration activities
elsewhere in Africa. PGL's principal asset is its ownership of 90% of the
outstanding shares of Teberebie Goldfields Limited, which operates a gold mine
in the western region of the Republic of Ghana.
The Company's subsidiary, Pioneer Forest, Inc. (Pioneer Forest), conducts timber
harvesting and timber development activities in the Russian Far East. Pioneer
Forest's principal asset is its ownership of 95% of the outstanding shares of
Closed Joint-Stock Company "Forest-Starma," which harvests timber in the Russian
Far East and which commenced commercial production on January 1, 1997.
Wholly and Majority Owned Subsidiaries
Pioneering Management Corporation, Pioneer Funds Distributor, Inc., Pioneering
Services Corporation, Pioneer Capital Corporation, Pioneer SBIC Corp., Pioneer
Associates, Inc., Pioneer Fonds Marketing GmbH, Pioneer International
Corporation, Pioneer First Polish Investment Fund Joint Stock Company S.A.,
Pioneer Polski Dom Maklerski, S.A. Pioneer Investment Poland Ltd., Pioneer
Management (Ireland) Limited, Pioneer Omega, Inc., Pioneer First Russia, Inc.,
"First Voucher Fund," "Pioneer Bank" (Joint Stock Company), Closed Joint Stock
Company "Pioneer Securities," UKS Securities Limited, Closed Joint Stock Company
"Pioneer Services," Closed Joint Stock Company "Pioneer First," "Pioneer
Investments," Pioneer Czech Investment Company, A.S., Pioneer Goldfields
Holdings, Inc., Pioneer Goldfields Limited, Teberebie Goldfields Limited,
Pioneer Forest, Inc., Closed Joint-Stock Company "Forest-Starma," Closed
Joint-Stock Company "Amgun-Forest," Closed Joint-Stock Company "Udinskoye,"
Closed Joint-Stock Company "Pioneer Starma Equipment," Pioneer Metals and
Technology, Inc., Closed Joint-Stock Company "Pioneer Metals International,"
PIOGlobal Corporation, Pioneer Real Estate Advisors, Inc., Pioneer Investments
Corporation, PIOGlobal Insurance Company Ltd., Pioneer Explorer, Inc., Pioneer
Real Estate Advisors, sp Z.O.O.
Joint Ventures
Financial Services Limited, Kothari Pioneer AMC Ltd., Core Pacific Securities
Investment Trust Co., Ltd., International Joint-Stock Company "Starma Holding,"
Closed Joint-Stock Company "Tas-Yurjah Mining Company."
Legal Counsel
Hale and Dorr LLP
Boston, Massachusetts
Transfer Agent
State Street Bank and Trust Company
Boston, Massachusetts
Independent Public Accountants
Arthur Andersen LLP
Boston, Massachusetts
The Company has filed an Annual Report on Form 10-K with the Securities and
Exchange Commission for the year ended December 31, 1997. A copy of that Report
is available, free of charge, to stockholders of the Company, upon request to
William H. Keough, Senior Vice President and Chief Financial Officer, 60 State
Street, Boston, MA 02109.
<PAGE> 3
[Photo: compass]
Pioneer's commitment to expanding and improving our financial services
businesses, both in the U.S. and abroad, served us well in 1997: It was the
second-most profitable year ever, despite disappointing results from our natural
resource businesses.
New ventures are important, but the further development of our core investment
management business must continue apace -- both are crucial if we are to succeed
in the next century.
John F. Cogan, Jr.
President
Table of Contents
Chairman's Letter 2
Pioneer at a Glance 4
U.S. Investment Management 6
International Investment
Management 8
Natural Resource Development 10
Financial Snapshot 12
Management's
Discussion & Analysis 14
1
<PAGE> 4
[photo: John F. Cogan, Jr.]
FELLOW STOCKHOLDERS:
The major earnings trends reported in our 1996 annual report continued through
1997, as our U.S. investment management business again nearly doubled its
earnings while declining earnings from our natural resource operations turned
into losses. Reflected in our results is the positive contribution of our more
mature businesses, such as the U.S. mutual fund and venture capital businesses,
both of which required significant investments in prior years, contrasted with
the struggles experienced by our more recent ventures in emerging markets
overseas.
The favorable trends carried far more weight than the difficulties,
however, resulting in earnings of $1.14 per share, compared to 74 cents per
share in 1996.
Overall revenues grew 43% to $342.8 million, including a 50% gain from financial
services revenues to $241.5 million.
1997 Overview
Here are the main components of Pioneer's earnings picture in 1997:
Earnings from the domestic investment management business were $1.25 per share,
compared to 68 cents in 1996. These earnings stemmed principally from a 24%
increase in assets under management to $21 billion as of December 31, 1997.
Asset growth was buoyed by another strong year on Wall Street and a 10% increase
in sales of U.S. mutual funds. Assets continued to grow in early 1998 and were
over $23 billion at this writing.
Our U.S. venture capital unit, Pioneer Capital Corp. (PCC), earned 25 cents
per share, up from 18 cents in 1996. Pioneer's other venture capital operations
in Central and Eastern Europe lost 5 cents per share. Unlike PCC, which has been
enjoying profits from maturing investments, these are relatively new operations
whose start-up and infrastructure costs weigh more heavily on results.
Our financial services operations in Russia and Central Europe, for the most
part, showed favorable trends. Russian financial services earned 21 cents per
share, compared to 5 cents in 1996, principally from our brokerage operations
there. In Poland, financial services posted profits of 4 cents per share,
compared to a loss of 3 cents per share in 1996. Operations in the
2
<PAGE> 5
Czech Republic lost 5 cents per share, improving significantly from an 11 cents
loss in 1996. Lastly, our relatively young real estate management arm, which
operates in Warsaw, St. Petersburg, and Moscow, lost 7 cents per share, compared
to a loss of 1 cent in 1996.
Gold mining lost 11 cents per share in 1997, compared to earnings of 10 cents in
1996. Gold mining operations at Teberebie Goldfields Ltd. ("TGL") were
break-even (versus earnings of 13 cents in 1996), as the 1997 losses represented
exploration costs. In 1997 the prior mine expansion began to produce results:
production was boosted by 29% to 263,000 ounces, cash production costs per ounce
were cut by more than 13%, to $230 per ounce, and revenues increased by 14% to
$89.5 million. Unfortunately, increased production could not make up for the
impact of materially lower gold prices.
One of 1997's biggest disappointments came from Forest-Starma, our timber
operation in the Russian Far East. This operation, which completed its first
full year of commercial production, was hindered by economic weakness in Japan,
our primary market. Severely depressed timber prices in Japan, combined with
lower-than-anticipated productivity, led to a loss for Forest-Starma of 26 cents
per share, compared to a loss of 2 cents in 1996.
A Look Ahead
Our focus in 1998 will be to maintain the momentum of our investment management
businesses, continue to improve the results from our emerging markets financial
services operations and do all we can to return the natural resource operations
to profitability.
New projects will be focused primarily on leveraging resources and opportunities
related to existing operations. For example, this year we expect to move forward
with plans developed in 1997 for increased institutional activity in Central and
Eastern Europe, including venture capital and real estate funds.
Closer to home, in 1998 we are devoting significant efforts to building our
presence in the institutional marketplace, and to "re-launching" Pioneer Fund,
which celebrates its 70th birthday this year, having achieved exceptional
performance over the last several years. We also expect to introduce our
offshore fund family to new markets.
New ventures are important, but the further development of our core investment
management business must continue apace -- both are crucial if we are to succeed
in the next century. We are optimistic that the combination of established and
emerging businesses we have developed will produce continued growth in
stockholder value. The pages that follow describe in more detail the results of
various business segments.
Sincerely,
/s/ John F. Cogan, Jr.
John F. Cogan, Jr.
President
March 25, 1998
3
<PAGE> 6
PIONEER AT A GLANCE
The profit potential of The Pioneer Group, Inc., can be gauged by any number of
measures. We are pleased to report steadily upward trends in sales, revenues,
assets under management and stockholders' equity.
The charts also show significant resumption of earnings growth in 1997. It's
worth noting that the sharp earnings peak of 1994 was due, in part, to a
one-time tax gain of 16 cents a share.
- ------------------------------[BAR CHARTS]--------------------------------------
<TABLE>
<CAPTION>
U.S. Mutual Fund Sales
Dollars in Millions
<S> <C>
1993 $1,076
1994 $1,499
1995 $1,752
1996 $2,602
1997 $2,866
</TABLE>
<TABLE>
<CAPTION>
Assets Under Management
Dollars in Millions
<S> <C>
1993 $10,766
1994 $11,103
1995 $13,745
1996 $16,981
1997 $21,041
</TABLE>
4
<PAGE> 7
- ------------------------------[BAR CHARTS]--------------------------------------
<TABLE>
<CAPTION>
Gold Production
Ounces
<S> <C>
1993 164,900
1994 176,400
1995 235,500
1996 203,100
1997 263,000
</TABLE>
<TABLE>
Earnings Per Share
Dollars
<S> <C>
1993 0.72
1994 1.32
1995 0.90
1996 0.74
1997 1.14
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
Dollars in Thousands
<S> <C>
1993 $107,174
1994 $134,422
1995 $150,343
1996 $162,473
1997 $183,687
</TABLE>
<TABLE>
<CAPTION>
Cash Dividends
Dollars
<S> <C>
1993 0.225
1994 0.315
1995 0.40
1996 0.40
1997 0.40
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE> 8
[Photo: ship lantern]
Pioneer's core U.S. operations involve managing more than $21 billion for more
than a million investors through 24 mutual funds, 10 variable annuity
portfolios, and institutional accounts.
Mutual fund sales grew by 10% to a record $2.9 billion, while redemptions edged
up 2 percentage points to 12% of assets, substantially below the industry
average of about 15%.
6
<PAGE> 9
U.S. INVESTMENT MANAGEMENT
1997 Overview:
In 1997, Pioneer began or built upon several initiatives that contributed to the
year's record mutual fund sales levels and strong profitability. These
initiatives include:
Investment Management Depth. For 70 years, proprietary fundamental research has
been a Pioneer hallmark. In 1997, we continued to add depth and expertise to our
investment staff, bringing our global total to more than 75 professionals.
As Pioneer has grown, we have also reconfigured the professional staff to ensure
that maximum resources are brought to bear on every portfolio we manage. Our
investment professionals perform in teams, composed of analysts and portfolio
managers, which support the manager of each portfolio. We currently have four
teams covering the U.S. equity markets -- core value, aggressive value, core
growth and a specialized funds group -- along with international equity and
global fixed income teams.
An excellent example of the team approach is Pioneer Micro-Cap Fund, which
joined Pioneer's line-up of "aggressive value" funds in 1997. Micro- and
small-capitalization stocks represent the most research-intensive sector of the
U.S. capital markets. Pioneer Micro-Cap Fund and Pioneer Small Company Fund are
backed by a dedicated team of analysts and portfolio managers experienced at
working with smaller companies. Both funds contribute to Pioneer's stature as a
premier value manager.
Technology. The intelligent use of technology is critical to all of our
investment operations, from analysis, to decision-making, to implementation. In
1997, we made considerable progress in introducing technology across the
investment landscape.
We are developing a state of the art internal management system to deliver
global information rapidly to our professional teams and to provide advanced
tools for stock analysis and portfolio management. We are installing an
electronic trading system that will link portfolio managers, traders and fund
accountants to help us lower costs, eliminate errors and trade more effectively.
Pioneer's investments in staffing and technological resources contributed to
excellent performance in 1997 of five Pioneer funds, which finished within the
top 20% of their fund categories.
Institutional Investment Management. Pension fund assets in the U.S. total in
excess of $6 trillion, with another $7 trillion in assets outside this country.
In 1997, we sharpened our focus on this growing, worldwide market with the
formation of Pioneer Global Institutional Advisors (PGIA).
Pioneer's investment resources are dedicated to serving a range of institutional
investors, including pension funds, municipalities, endowments and corporations.
PGIA is expanding Pioneer's sales force, coordinating investment management
responsibilities, and identifying areas of opportunity within the institutional
marketplace. We believe that Pioneer's strengths as an investment manager -- our
reputation for integrity, consistent style, value orientation, and team approach
- -- are in great demand in this marketplace.
Venture Capital. Pioneer Capital Corp., our venture capital arm, has
successfully built a portfolio of New England-based companies, several of which
have recently had initial public offerings. In 1997, PCC invested $15 million in
its portfolio of companies.
[Photo: ship's charts]
Mutual Fund Distribution. A major initiative in recent years has been to
broaden mutual fund distribution among brokers, banks, financial planners and
insurance companies -- particularly those with a national distribution base. In
1997, for the fourth year in a row, sales among national brokers and banks
increased, as did the number of dealers selling $1 million or more. One benefit
of our wider sales base was that our record mutual fund sales in 1997 were much
more evenly distributed than in previous years.
Retirement plans. Pioneer offers a range of retirement services, including
401(k), SIMPLE, and age-weighted profit sharing plans, principally to small- and
mid-size companies. Pioneer provides our corporate clients the highest levels of
expertise and support. Assets held in 401(k) and similar retirement accounts
grew by 25% in 1997.
Pioneer Vision Variable Annuity. Pioneer Vision offers individuals more than a
tax-advantaged way to invest for retirement -- it allows them to do so through
10 investment portfolios that are patterned after Pioneer funds with which they
may already be comfortable. In 1997, two new investment portfolios were added.
Assets in Pioneer Vision's portfolios more than doubled in 1997.
Roth IRA. Created by Congress in August 1997, Roth IRAs offer another attractive
way to save for retirement on a tax-advantaged basis. After enactment, Pioneer
moved quickly to present the merits of Roth, Traditional, and Education IRAs to
our investment professional clients. Roth IRAs proved to be extremely popular,
and they will remain a significant focus for Pioneer in 1998.
7
<PAGE> 10
Pioneer's international financial services continue to play a growing role in
the success of our business. In 1997, we increased both the volume of business
conducted internationally and variety of products and services offered at both
the retail and institutional level.
[Photo: elaborate globe]
8
<PAGE> 11
INTERNATIONAL INVESTMENT MANAGEMENT
1997 Overview:
Institutional Investment Management. Pioneer's global institutional offerings
include a direct equity fund in Russia and a real estate fund in Poland. In
1998, we will continue our focus on new opportunities in Central and Eastern
Europe.
Pioneer Real Estate Advisors (PREA) was formed in 1996 to manage properties and
real estate investment portfolios for institutional and corporate clients
worldwide. In addition to Pioneer's home office in Boston, PREA currently has
offices in Moscow, St. Petersburg and Warsaw. Pioneer's Meridian office building
in Moscow, discussed in more detail below, is an example of the kinds of
properties PREA will develop and manage.
Western Europe. Pioneer introduced three new offshore funds in 1997, bringing
to six the number of Dublin-based funds. Dublin is the site of Pioneer's
international processing facility that began operations in 1995. Our offshore
funds provide excellent examples of how we seek to leverage our investment
management expertise on a global scale. Along with these offshore products,
Western Europe remains an important sales channel for our U.S.-registered mutual
funds.
Central Europe. Pioneer established the first mutual fund in Poland in 1992,
and we have steadily increased our presence as Poland's capital markets have
grown and matured, offering financial services for individuals, institutions and
corporations. In 1997, we expanded our offerings to include a wider range of
equity and fixed-income funds, and a cash management program. Pioneer also
manages a local mutual fund in the Czech Republic.
Russia. Pioneer made history in 1996 with Pioneer First Fund, Russia's first
open-end mutual fund, which invests principally in government bonds. We began
work on another mutual fund in 1997, focusing on blue-chip Russian companies.
This product joins Pioneer's First Voucher Fund (FVF), Russia's largest
privatization fund with 2.1 million shareowners. Pioneer, through a subsidiary,
is majority owner of FVF, and our Russian investment management company serves
as FVF's adviser.
FVF is a unique business venture in several respects. For example, Pioneer is
represented on the boards of about 30 of the 125 companies held by FVF. This
role affords Pioneer an invaluable position from which to expand our expertise
about the dynamics of the emerging capitalist Russian economy.
Pioneer believes that there is significant unrealized value in the assets
included in FVF's portfolio, based on available market quotations. Although
FVF's assets are carried on our books at cost, we believe that as of the end of
1997, our stake was worth approximately four times the price we purchased it for
in 1995.
Through FVF, Pioneer also acquired the Meridian office building in Moscow, a
220,000 square-foot structure that was partially complete when purchased in
1995. At the end of 1997, the building was completed and approaching fully
leased status, with a roster of tenants that include Lucent, Halliburton, and
Mary Kay Cosmetics.
Pioneer's Russian financial services companies also include a bank and a
securities brokerage house. Securities trading proved to be very active and
profitable in 1997, buoyed by strong increases in the Russian market throughout
most of the year.
9
<PAGE> 12
Pioneer's Ghanaian gold mine produced 263,000 ounces in 1997, and achieved a
significant milestone with production of its one-millionth ounce -- a threshold
achieved in January 1997. Our timber operation in the Russian Far East completed
its first full year of commercial operations, with shipment of 194,000 cubic
meters of timber.
[Photo: ship bell]
10
<PAGE> 13
NATURAL RESOURCE DEVELOPMENT
1997 Overview:
Pioneer Goldfields Limited. Pioneer Goldfields Limited (PGL) owns 90% of
Teberebie Goldfields Limited (TGL), our gold mine located in Tarkwa, Ghana, and
is carrying out exploration in West Africa and Russia.
The TGL Phase III mine expansion reached operating capacity, with the first gold
pour in April 1997. The expansion included a further heap leach operation, a new
near-pit gyratory crusher that serves both the West Plant and the new South
Plant, modifications to the West Plant conveyer systems, and a new and larger
mining fleet.
We are pleased to report that the Phase III mine expansion, along with increases
in operating efficiency, helped boost production by 29% to 263,000 ounces. Cash
production costs per ounce were cut by more than 14% to $230 per ounce and
revenues were increased by 14% to $89.5 million. As a result, TGL broke even
(compared to a 13 cent gain in 1996) despite last year's major decline in gold
prices. TGL's increases in production were partially offset by a 12% decrease in
average realized gold prices to $340 per ounce.
Overall, gold mining lost 11 cents a share in 1997, compared to a gain of 10
cents in 1996. Although TGL broke even in 1997, gold mining had losses due to
exploration costs in West Africa and Russia.
[Photo: old flying goggles]
In 1997, TGL began implementing a new mine plan, utilizing a more sophisticated
operating model based on historical production data. This plan implements a
change in fundamental mining method from selective mining to bulk mining. As a
result of the new mine plan, combined with lower gold prices, and the normal
reduction for gold produced in the last two years, TGL's proven and probable
reserve estimates have been reduced to 6.1 million ounces. Please refer to the
detailed explanation in the Management's Discussion and Analysis section of this
report.
Pioneer recognizes the variable nature of gold prices, and believes
firmly in the long-term profit potential of a world-class gold mine like TGL.
Pioneer Forest, Inc. Pioneer Forest was established to hold majority interests
in three companies in the Russian Far East's Khabarovsk Territory:
Forest-Starma, Amgun-Forest, and Udinskoye, which were formed to develop timber
production. Forest-Starma, in its first full year of commercial production,
shipped FOB Siziman 194,000 cubic meters of timber, at an average realized price
of $61 per cubic meter. Results for Forest-Starma were disappointing for two
reasons: economic weakness in Japan, our principal market for timber, which led
to very weak log prices, particularly in the fourth quarter of 1997, and
lower-than-anticipated productivity.
The three timber companies, in the aggregate, hold long-term leaseholds
to 926,400 hectares (2.3 million acres) and annual cutting rights of 1,011,000
cubic meters. Feasibility studies are underway for both Amgun-Forest and
Udinskoye, which are still in their development stage. For a number of reasons,
but principally due to current depressed market prices for the larch species of
timber that predominates these two concessions, we are not likely to commence
full-scale development of them in the near term.
Increasing productivity is Pioneer's key goal for Forest-Starma in 1998. We are
optimistic about the long-term potential of this operation.
Pioneer Metals International. High technology metal alloys and powders are one
of the strengths of Russian industry. Pioneer Metals International collaborates
with Russian metallurgical concerns, providing them with marketing skills and
financing necessary to compete in Western markets.
Pioneer continues to look for the opportunities served by a growing global
economy, building on a diverse array of financial services and natural resource
ventures.
11
<PAGE> 14
FINANCIAL SNAPSHOT
- -----------------------------[BAR CHART]----------------------------------------
<TABLE>
<CAPTION>
Assets Under Management
Dollars in millions
<S> <C>
1993 $10,766
1994 $11,103
1995 $13,745
1996 $16,981
1997 $21,041
</TABLE>
- --------------------------------------------------------------------------------
Assets Under Management at December 31:
Dollars in Millions
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. Registered Mutual Funds .............. $19,635 $15,704 $12,701 $ 9,925 $ 9,854
Non-U.S. Registered Mutual Funds .......... 715 502 280 589 388
------- ------- ------- ------- -------
Total Registered Mutual Funds ............. 20,350 16,206 12,981 10,514 10,242
Closed-end and subadvised funds
and private institutional accounts* 691 775 764 589 524
------- ------- ------- ------- -------
Total ..................................... $21,041 $16,981 $13,745 $11,103 $10,766
======= ======= ======= ======= =======
</TABLE>
* Excludes assets of funds managed by foreign joint ventures and venture
capital pools.
Sales of Mutual Fund Shares:
Dollars in Millions
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
U.S. Registered Mutual Funds:
Sales* ..................................... $2,866 $2,602 $1,752 $1,499 $1,076
Redemption of shares ....................... 2,106 1,431 1,050 860 714
------ ------ ------ ------ ------
Net sales of shares ....................... $ 760 $1,171 $ 702 $ 639 $ 362
====== ====== ====== ====== ======
Year Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Non-U.S. Registered Mutual Funds:
Sales* ..................................... $ 410 $ 217 $ 25 $ 734 $ 429
Redemption of shares ....................... 147 81 381 584 34
------ ------ ------ ------ ------
Net sales (redemptions) of shares ......... $ 263 $ 136 $ (356) $ 150 $ 395
====== ====== ====== ====== ======
</TABLE>
* Includes reinvestment of dividends, but excludes money market funds and
funds managed by foreign joint ventures.
- -----------------------------[BAR CHART]----------------------------------------
<TABLE>
<CAPTION>
Sales of U.S. Registered
Mutual Fund Shares
Dollars in Millions
<S> <C>
1993 $1,076
1994 $1,499
1995 $1,752
1996 $2,602
1997 $2,866
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE> 15
- -----------------------------[BAR CHART]----------------------------------------
<TABLE>
<CAPTION>
Gross Revenues and Sales
Dollars in Thousands
<S> <C>
1993 $129,403
1994 $171,702
1995 $198,717
1996 $239,112
1997 $342,840
</TABLE>
- --------------------------------------------------------------------------------
Quarterly Results:
<TABLE>
<CAPTION>
Dollars in Thousands Except Per Share Amounts
Total
and Sales Net Earnings
Revenues Income Per Share
<S> <C> <C> <C>
1997 by Quarter
March 31 ............ $ 70,111 $ 7,309 $0.29
June 30 ............. 80,030 4,975 0.19
September 30 ........ 98,820 9,522 0.37
December 31 ......... 93,879 7,360 0.29
-------- ------- -----
$342,840 $29,166 $1.14
======== ======= =====
1996 by Quarter
March 31 ............ $ 56,475 $ 5,114 $0.20
June 30 ............. 56,911 3,520 0.14
September 30 ........ 62,500 5,091 0.20
December 31 ......... 63,226 5,112 0.20
-------- ------- -----
$239,112 $18,837 $0.74
======== ======= =====
</TABLE>
- ---------------------------[BAR CHART]------------------------------------------
<TABLE>
<CAPTION>
Cash Dividends Per Share
<S> <C>
1993 $0.225
1994 $0.315
1995 $0.40
1996 $0.40
1997 $0.40
</TABLE>
- --------------------------------------------------------------------------------
Five Year Summary of Selected Financial Data:
Dollars in Thousands Except Per Share Amounts
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Results of Operations
Revenues and sales ........................ $ 342,840 $ 239,112 $ 198,717 $ 171,702 $ 129,403
Costs and expenses ........................ 296,489 212,692 158,908 119,568 94,142
Unrealized and realized (gains) losses
on venture capital and marketable
securities investments, net ............. (27,460) (12,279) (9,345) 946 (3,468)
Interest expense .......................... 11,395 3,318 1,024 1,305 2,388
Public offering costs ..................... -- -- 4,863 -- --
Other, net ................................ 606 1,716 735 112 480
---------- ---------- ---------- ---------- ----------
Income before provision for federal,
state and foreign income
taxes and minority interest ............. 61,810 33,665 42,532 49,771 35,861
Net provision for federal, state and
foreign income taxes ................... 27,547 11,548 16,598 14,182 16,322
---------- ---------- ---------- ---------- ----------
Income before minority interest ........... 34,263 22,117 25,934 35,589 19,539
Minority interest ......................... 5,097 3,280 3,123 2,129 1,409
---------- ---------- ---------- ---------- ----------
Net income ................................ $ 29,166 $ 18,837 $ 22,811 $ 33,460 $ 18,130
========== ========== ========== ========== ==========
Diluted earnings per share* ............... $ 1.14 $ 0.74 $ 0.90 $ 1.32 $ 0.72
========== ========== ========== ========== ==========
Cash dividends per share* ................. $ 0.40 $ 0.40 $ 0.40 $ 0.315 $ 0.225
========== ========== ========== ========== ==========
Diluted shares outstanding* ............... 25,630,000 25,460,000 25,311,000 25,354,000 24,976,000
Long-term notes payable ................... $ 168,424 $ 149,500 $ 11,048 $ 9,101 $ 13,306
Total assets .............................. $ 603,793 $ 490,712 $ 319,069 $ 202,085 $ 172,295
Stockholders' equity ...................... $ 183,687 $ 162,473 $ 150,343 $ 134,422 $ 107,174
Stockholders' equity per share* ........... $ 7.28 $ 6.50 $ 6.05 $ 5.45 $ 4.36
Return on average stockholders' equity .... 17% 12% 16% 28% 18%
Return on revenues ........................ 9% 8% 11% 19% 14%
</TABLE>
* Adjusted for December 1, 1994, and September 1, 1993, 2-for-1 stock splits
effected in the form of 100% stock dividends.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
- -----------------------------[BAR CHART]----------------------------------------
<TABLE>
<CAPTION>
Earnings Per Share
Dollars
<S> <C>
1993 0.72
1994 1.32
1995 0.90
1996 0.74
1997 1.14
</TABLE>
- --------------------------------------------------------------------------------
Overview
The consolidated financial statements of The Pioneer Group, Inc. (the "Company")
include the Company's worldwide financial services businesses and natural
resource development businesses. Management's Discussion and Analysis of
Financial Condition and Results of Operations is presented in three sections:
Results of Operations, Liquidity and Capital Resources-General, and Future
Operating Results.
Results of Operations
Consolidated Operations
The Company achieved record revenues and its second highest earnings in 1997.
The year's performance reflected significant gains from the Company's worldwide
financial services operations, which more than offset losses suffered in its
natural resources operations.
Revenues rose to $342.8 million in 1997, up 43% over 1996 and 73% over 1995.
This growth resulted from increases in both the domestic investment management
business and the Russian financial services operations together with timber
revenues, which were included in the Company's results for the first time in
1997 as the timber project went into commercial production.
Net income in 1997 was $29.2 million. Earnings per share of $1.14 in 1997
increased by 40 cents over 1996 and by 24 cents over 1995. The earnings in both
1997 and 1996 reflected significantly higher earnings from worldwide financial
services operations. In both years, the higher worldwide financial services
earnings were partially offset by declining earnings and/or losses in the
Company's natural resources operations: (i) gold mining operations earned 56
cents per share in 1995, 10 cents in 1996 and lost 11 cents in 1997; and (ii)
Russian timber operations incurred significant losses in 1997.
Table 1 details earnings per share by business segment for 1997 versus 1996 and
for 1996 versus 1995.
Worldwide Financial Services Businesses
1997 Compared to 1996
The Company's worldwide financial services businesses have three principal
sources of revenues: fees from managing the 34 U. S. registered investment
companies (mutual funds) in the Pioneer Family of Mutual Funds and institutional
accounts, fees from underwriting and distributing mutual fund shares, and fees
from acting as mutual fund shareholder servicing agent. The Company earns
similar revenues from its international investment operations in Poland, Russia,
Ireland, and the Czech Republic, and from its joint venture in India. The
Company also earns revenues from its Russian and Polish brokerage operations and
from Pioneer Bank in Russia, in which the Company had a 57.7% interest at
December 31, 1997.
Table 1 - Total Year Earnings Per Share
<TABLE>
<CAPTION>
Business Segment 1997 1996 1995 1997 vs 1996 1996 vs 1995
---- ---- ---- ------------ ------------
Inc./(Dec.) Inc./(Dec.)
----------- -----------
<S> <C> <C> <C> <C> <C>
Domestic investment management ....... $1.25 $0.68 $0.35 $0.57 $0.33
Venture capital:
U.S. ............................... 0.25 0.18 0.09 0.07 0.09
Central and Eastern Europe ......... (0.05) (0.05) (0.03) -- (0.02)
Financial services:
Russia ............................. 0.21 0.05 0.06 0.16 (0.01)
Poland ............................. 0.04 (0.03) 0.01 0.07 (0.04)
Czech Republic ..................... (0.05) (0.11) -- 0.06 (0.11)
Real estate services ................. (0.07) (0.01) -- (0.06) (0.01)
----- ----- ----- ----- ------
Worldwide financial services ....... 1.58 0.71 0.48 0.87 0.23
----- ----- ----- ----- ------
Gold mining .......................... (0.11) 0.10 0.56 (0.21) (0.46)
Russian timber ....................... (0.26) (0.02) -- (0.24) (0.02)
Miscellaneous-other .................. (0.07) (0.05) (0.14) (0.02) 0.09
----- ----- ----- ----- ------
Total .............................. $1.14 $0.74 $0.90 $0.40 $(0.16)
===== ===== ===== ===== ======
</TABLE>
14
<PAGE> 17
In 1997, the Company's worldwide financial services businesses had revenues of
$241.5 million, $80.7 million, or 50%, higher than revenues of $160.8 million in
1996. Net income of $40.5 million in 1997, or $1.58 per share, was more than
double 1996 net income and earnings per share of $18.0 million and 71 cents,
respectively.
Worldwide assets under management were $21.0 billion at December 31, 1997,
compared to $17.0 billion at December 31, 1996. The increase in assets under
management was principally attributable to a higher U.S. stock market. Assets
under management have further increased to approximately $23.2 billion at March
15, 1998.
Table 2 details revenues and net income in 1997 and 1996 for the various
segments of the Company's worldwide financial services businesses.
Table 2 - Revenues and Net Income
(Dollars in Millions)
<TABLE>
<CAPTION>
Business Segment Revenues Net income
-------- ----------
1997 1996 1997 1996
------ ------ ----- -----
<S> <C> <C> <C> <C>
Domestic investment management ....... $168.5 $126.4 $32.1 $17.4
Venture capital:
U.S ................................ 1.8 2.0 6.3 4.5
Central and Eastern Europe ......... 0.5 0.6 (1.4) (1.4)
Financial services:
Russia ............................. 54.5 21.1 5.3 1.3
Poland ............................. 14.5 10.4 1.3 (0.7)
Czech Republic ..................... 1.0 0.2 (1.2) (2.9)
Real estate services ................. 0.5 0.1 (1.9) (0.2)
Other ................................ 0.2 -- -- --
------ ------ ----- -----
Total worldwide financial services .... $241.5 $160.8 $40.5 $18.0
====== ====== ===== =====
</TABLE>
Domestic Investment Management
Revenues from the Company's domestic investment management business of $168.5
million in 1997 increased by $42.1 million. Net income nearly doubled in 1997
versus 1996, increasing by $14.7 million, or 57 cents per share, to $32.1
million, or $1.25 per share.
Management fee revenues of $110.9 million increased by $31.4 million,
principally reflecting higher assets under management resulting from strong U.S.
stock market performance. For 1997, distribution fees and underwriting
commissions of $20.8 million were $6.0 million, or 40%, higher than comparable
fees and commissions earned in 1996. A significant majority of the increase
related to distribution fees which increased by $5.3 million as a result of the
increase in average assets under management of mutual funds which offer back-end
load shares. In 1997, the Company had U.S. registered mutual fund sales
(including reinvested dividends) of $2.9 billion (up 10%), and net sales of $0.8
billion compared to net sales of $1.2 billion in 1996.
Shareholder services fee revenues of $27.3 million in 1997 increased by $2.0
million, as a result of an increase in the number of shareholder accounts.
Trustee fee revenues increased by $0.5 million to $4.3 million in 1997, as a
result of an increase in the number of qualified plan shareholder accounts.
Costs and expenses increased by $20.0 million in 1997 to $116.3 million. Nearly
half of the increase in expenses, or $9.9 million, resulted from higher payroll
costs, part of which related to the Company's efforts to strengthen its
investment management staff. An additional 15% of the increase in expenses, or
$3.1 million, resulted from higher expenses associated with the amortization of
dealer advances resulting from sales of back-end load mutual fund shares. These
amortization expenses were more than offset by the increase in distribution fees
of $5.3 million. Another 5% of the increase in expenses, or $1.1 million,
resulted from higher office space costs.
The domestic investment management business segment includes net gains from the
Company's investments in its own mutual funds, principally during start-up,
which were $0.5 million in 1997 versus $0.2 million in 1996.
Venture Capital
Net income from the Company's U.S. venture capital operations increased by $1.8
million, or 7 cents per share, to $6.3 million, or 25 cents per share, in 1997
versus 1996, resulting from significant gains
15
<PAGE> 18
MANAGEMENT'S DISCUSSION (CONTINUED)
recorded from two of the Company's portfolio companies, one of which conducted a
public offering in late 1996 and one in late 1997. The Company had net venture
capital investment portfolio gains (excluding operating expenses) of $16.3
million in 1997 compared to net gains of $11.4 million in 1996. The Company's
Central and Eastern Europe venture capital operations lost $1.4 million, or 5
cents per share, in each of 1997 and 1996, principally associated with
development costs of the Company's venture capital funds.
Russian Financial Services
Revenues from the Company's Russian financial services operations of $54.5
million in 1997 increased by $33.4 million. These operations reported net income
of $5.3 million, or 21 cents per share, in 1997, principally from brokerage
operations. In 1996, the Company earned $1.3 million, or 5 cents per share, in
the same segment, primarily from banking activities.
In 1997, the Company's Russian brokerage activities had revenues of $34.2
million, principally derived from trading activities, compared to $1.6 million
in 1996. Over the course of the year, the Company benefited from the record
volume experienced in the Russian stock market. Costs and expenses associated
with the Russian brokerage business were $19.1 million in 1997, compared to $1.3
million in 1996. Approximately two-thirds of the increased expenses, or $11.2
million, represented commissions paid to traders.
The Company reported revenues from Pioneer Bank of approximately $12.3 million
in 1997, compared to nearly $15.0 million in 1996. These revenues are derived
from (i) interest earned on Russian government and corporate debt securities,
(ii) realized and unrealized gains and losses on debt and equity securities and
(iii) interest income from loans. Decreases in revenues principally reflect the
impact of less favorable interest rates which affect the realized and unrealized
gains earned on the Russian government securities. In the second quarter of
1997, Pioneer Bank did not renew its license with the Russian Central Bank to
deal in these government securities. Interest expenses of $7.7 million in 1997
increased by $1.6 million.
The Company reported net realized gains of $9.5 million in 1997 and $0.9 million
in 1996, respectively, from investments sold by the First Voucher Fund (the
"Voucher Fund"), the Russian voucher investment fund in which the Company has a
51% interest.
Polish Financial Services
Revenues from the Company's Polish financial services operations of $14.5
million in 1997 increased by $4.1 million. These operations had net income of
$1.3 million, or 4 cents per share, in 1997, compared to losses of $0.7 million,
or 3 cents, in 1996.
Management fee revenues increased by $2.5 million to $10.0 million, as a result
of higher average assets under management. Losses from the brokerage business
increased as a result of a $1.3 million increase in expenses offset partially by
a $1.0 million increase in revenues.
At December 31, 1997, assets under management in the Company's four Polish
mutual funds were $446 million, virtually unchanged from the December 31, 1996
level. Although Polish mutual fund sales increased from $169 million in 1996 to
$203 million in 1997, net sales were $74 million in 1997 compared to $90 million
in 1996.
Czech Republic Financial Services
The Company's Czech Republic financial services operations reported losses of
$1.2 million, or 5 cents per share, in 1997, compared to losses of $2.9 million,
or 11 cents per share, in 1996. Revenues from management fees and underwriting
commissions increased by $0.8 million in 1997 and costs and
16
<PAGE> 19
expenses decreased by $1.0 million. The Company incurred significant start-up
costs in 1996 associated with this operation. The Czech Republic mutual fund had
$43 million of assets under management at December 31, 1997, an increase of $36
million over the 1996 year-end level. The Company believes that this operation
will reach break-even status in the second half of 1998.
Real Estate Services
The Company's real estate services operations reported losses of $1.9 million,
or 7 cents per share, in 1997, compared to losses of $0.2 million or 1 cent in
1996. Most of the losses were attributable to costs associated with the
development of the Company's Polish and Russian real estate investment, and
property and facilities management operations.
Taxes
The Company's effective tax rate for 1997 for the worldwide financial services
businesses was 40% compared to 34% in 1996. The 1996 results included
significant tax exempt income associated with Pioneer Bank in Russia.
1996 Compared to 1995
In 1996, the Company's worldwide financial services businesses had revenues of
$160.8 million, $52.3 million, or 48%, higher than revenues of $108.5 million in
1995. Net income was $18 million in 1996, or 71 cents per share, compared to
$12.2 million, or 48 cents in 1995.
Worldwide assets under management of just under $17.0 billion at December 31,
1996, increased by $3.2 billion over the 1995 year-end level. The increase in
assets under management was principally attributable to a higher stock market
and strong U.S. mutual fund net sales.
Table 3 details revenues and net income in 1996 and 1995 for the various
segments of the Company's worldwide financial services businesses.
Table 3 - Revenues and Net Income
(Dollars in Millions)
<TABLE>
<CAPTION>
Business Segment Revenues Net income
-------- ----------
1996 1995 1996 1995
------ ------ ----- -----
<S> <C> <C> <C> <C>
Domestic investment management $126.4 $92.2 $17.4 $8.9
Venture capital:
U.S 2.0 1.0 4.5 2.3
Central and Eastern Europe 0.6 0.8 (1.4) (0.6)
Financial services:
Russia 21.1 5.8 1.3 1.4
Poland 10.4 8.7 (0.7) 0.2
Czech Republic 0.2 -- (2.9) --
Real estate services 0.1 -- (0.2) --
------ ------ ----- -----
Total worldwide financial services $160.8 $108.5 $18.0 $12.2
====== ====== ===== =====
</TABLE>
Domestic Investment Management
Revenues from the Company's domestic investment management business of $126.4
million in 1996 increased by $34.2 million. Net income nearly doubled in 1996
versus 1995, increasing by $8.5 million, or 33 cents per share, to $17.4
million, or 68 cents.
Management fee revenues increased by $23.1 million to $79.5 million. The
increase in management fees earned from the U.S. registered mutual funds
resulted from an increase in assets under management and a management fee rate
increase for the Company's two largest mutual funds. The shareholders of the
Company's two largest U.S. registered mutual funds approved management fee rate
increases effective May 1, 1996. As a result, the Company earned an additional
$5.9 million of management fees.
For 1996, distribution fees and underwriting commissions of $14.8 million were
$6.4 million, or 76%, higher than comparable fees and commissions earned in
1995. Distribution fees increased by $5.2 million as a result of the increase in
average assets under management of the Company's mutual funds which offer
back-end load shares. In 1996, the Company had U.S. registered mutual fund sales
(including reinvested dividends) of $2.6 billion (up 50%), and net sales of $1.2
billion compared to net sales of $0.7 billion in 1995.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION (CONTINUED)
Shareholder services fee revenues of $25.3 million in 1996 increased by $2.9
million, as a result of an increase in the number of shareholder accounts and a
cost-of-living service fee increase for certain U.S. registered mutual funds
effective January 1, 1996. Trustee fee revenues increased by $0.2 million to
$3.9 million in 1996, as a result of an increase in the number of qualified plan
shareholder accounts.
Costs and expenses increased by $19.1 million in 1996 to $96.3 million.
Approximately 30% of the increase in expenses, or $5.9 million, resulted from
higher payroll costs. In addition, approximately 10% of the increase in
expenses, or $2.4 million, resulted from higher costs related to mutual fund
distribution (including printing and mailing of sales literature, paying
commissions earned by the sales force, mutual fund advertising, and public
relations). Approximately 20%, or $4.1 million, of the increase resulted from
higher expenses associated with the amortization of dealer advances resulting
from sales of back-end load mutual fund shares. These amortization expenses were
more than offset by the increase in distribution fees of $5.2 million. Another
approximately 5% of the increase in expenses, or $0.9 million, resulted from
higher office space costs.
Net gains from the Company's investments in its own mutual funds, were $0.2
million in 1996 versus $0.7 million in 1995.
Venture Capital
Net income from the Company's U.S. venture capital operations increased by $2.2
million, or 9 cents per share, to $4.5 million, or 18 cents per share, in 1996
versus 1995. The Company reported net venture capital investment portfolio gains
of $11.4 million (excluding operating expenses) in 1996 compared to net gains of
$5.1 million in 1995.
The Company's Central and Eastern Europe venture capital operations lost $1.4
million, or 5 cents per share, in 1996, and $0.6 million, or 2 cents, in 1995,
principally associated with infrastructure development costs of the Company's
venture capital funds.
Russian Financial Services
Revenues from the Company's Russian financial services operations of $21.1
million in 1996 increased by $15.3 million. These operations reported net income
of $1.3 million, or 5 cents per share, in 1996, principally from its banking
activities. In 1995, the Company earned $1.4 million, or 6 cents per share.
The Company reported revenues from Pioneer Bank of approximately $15.0 million
in 1996 as a result of the acquisition and subsequent sale of Russian government
securities and interest income from loans. Revenues from Pioneer Bank in 1995
were $2.4 million and were included in other income. The Company also had
interest expense on deposits and short-term debt of $6.1 million in 1996 related
to Pioneer Bank.
The Company reported net realized gains of $0.9 million in 1996 and $3.5 million
in 1995 from investments sold by the Voucher Fund.
Polish Financial Services
Revenues from the Company's Polish financial services operations of $10.4
million in 1996 increased by $1.7 million. These operations had losses of $0.7
million, or 3 cents per share, in 1996, compared to net income of $0.2 million
or 1 cent in 1995.
Sales of the Company's Polish mutual funds were $169 million in 1996 versus $21
million in 1995. As a result of the increase in Polish mutual fund sales,
underwriting commissions increased by $1.6 million.
18
<PAGE> 21
Czech Republic Financial Services
The Company's Czech Republic financial services operations, which commenced
commercial operations in January 1996, reported losses of $2.9 million, or 11
cents per share, in 1996, principally from start-up costs.
Taxes
The Company's effective tax rate for 1996 for the worldwide financial services
businesses was 34% compared to 43% in 1995. The 1996 results included
significant tax exempt income associated with Pioneer Bank in Russia.
- -----------------------------[BAR CHART]----------------------------------------
<TABLE>
<CAPTION>
Stockholders' Equity
Dollars in Thousands
<S> <C>
1993 $107,174
1994 $134,422
1995 $150,343
1996 $162,473
1997 $183,687
</TABLE>
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
IRS regulations require that, in order to serve as trustee, the Company must
maintain a net worth of at least 2% of the assets of Individual Retirement
Accounts and other qualified retirement plan accounts at year end. At December
31, 1997, the Company served as trustee for $6.3 billion of qualified plan
assets and the ratio of net worth to qualified assets was 2.9%. The Company's
stockholders' equity of $183.7 million at December 31, 1997, would permit it to
serve as trustee for up to $9.2 billion of qualified plan assets.
The Company has established a multi-class share structure for the Pioneer Family
of Mutual Funds. Under this arrangement, the funds offer both traditional
front-end load shares (Class A shares) and back-end load shares (Class B and C
shares). On back-end load shares, the investor does not pay any sales charge
unless there is a redemption before the expiration of the minimum holding period
(which ranges from three to six years in the case of Class B shares and is one
year in the case of Class C shares), in which case the shareholder would pay a
contingent deferred sales charge ("CDSC"). The Company, however, pays "up-front"
commissions to broker-dealers ("Dealer Advances") related to sales and service
of the back-end load shares ranging from 2% to 4% of the sales transaction
amount on Class B shares and of 1% on Class C shares. The funds pay the Company
distribution fees of 0.75%, and service fees of 0.25%, per annum of their
respective net assets invested in Class B and Class C shares, subject to annual
renewal by the trustees of the funds. Class B shares were introduced in April
1994 and Class C shares were introduced in January 1996. Sales of back-end load
shares were $699 million in 1997 versus $763 million in 1996. Dealer Advances
totaled $17.2 million in 1997 versus $23.9 million in 1996. Dealer Advances
related to Class B shares (which are amortized to operations over the life of
the CDSC period) were $41.9 million at December 31, 1997. The Company intends to
continue to finance this program, in part, through the credit facilities
described in the section entitled "Liquidity and Capital Resources - General."
In April 1995, the Company acquired approximately 51% of the shares of Voucher
Fund, the largest voucher investment fund established in Russia in connection
with that country's privatization program. The shares were issued by the Voucher
Fund to two newly-formed subsidiaries of Pioneer Omega, Inc. ("Pioneer Omega"),
a subsidiary of the Company. In addition to acquiring shares in the Voucher
Fund, Pioneer Omega, acting through a subsidiary, Pioneer First Russia, Inc.
("PFR"), acquired a Russian company that holds the right to manage the Voucher
Fund's investments. Pioneer Omega paid $2 million in cash and issued preferred
shares (the "Omega shares") valued at $6 million as consideration for the
acquisition of the management company and related rights. The holder of the
Omega shares has the right to cause the Company to purchase such shares (the
"put option") and the Company has a corresponding right to purchase such shares
from the holder (the "call option"). The put and call options are each
exercisable with respect to one-third of the Omega shares on the first, second
and
19
<PAGE> 22
MANAGEMENT'S DISCUSSION (CONTINUED)
third anniversaries of the closing of the transaction. The put and call option
exercise price is $2 million per tranche, plus a 5% per annum premium on the
option exercise price. The Company will pay a total of $6.6 million for the
Omega shares over a three-year period as the put and/or call options are
exercised. The Company has exercised its options and purchased the first two
tranches of Omega shares for $4.3 million and intends to exercise the final
option in April 1998.
The Company, through Pioneer Omega, has secured Overseas Private Investment
Corporation ("OPIC") "political risk" insurance covering the Voucher Fund and
PFR's subsidiaries subject to annual elections up to a ceiling amount of $75
million which would protect 90% of the Company's equity investment and a
proportionate share of cumulative retained earnings.
Recent Developments
The Company believes that there is significant unrealized value in the assets
included in the Voucher Fund's securities portfolio. In accordance with
Generally Accepted Accounting Principles (FAS 115 -- Accounting for Certain
Investments in Debt and Equity Securities), the securities in the Voucher Fund
reflect the cost rather than "fair value" until such time as the breadth and
scope of the Russian securities markets develop to certain quantifiable levels.
The Company believes that these markets are rapidly approaching this point, at
which time the "fair value" of securities held by the Voucher Fund would be
reflected in the Company's financial statements.
The Voucher Fund's assets consist of cash and cash equivalents, securities (both
liquid and illiquid), real estate holdings and other miscellaneous assets. The
cost of the securities portion of the portfolio on the Company's balance sheet
at December 31, 1997, was approximately $16 million. At January 29, 1998, the
value of these securities (based on market quotations if available) was
approximately $67 million, which represents an increase of approximately $51
million. The Company's pre-tax interest in this increase, at 51%, would be
approximately $26 million. The cost of the cash and cash equivalents, real
estate and miscellaneous assets of the Voucher Fund on the Company's balance
sheet at December 31, 1997, was approximately $2 million, $24 million and $3
million, respectively.
Currently, the Company recognizes realized gains or losses on its income
statement only when Voucher Fund securities are sold. Once the Russian
securities market develops to the requisite level, unrealized gains and losses
(such as the $51 million described above) would be reflected in long-term
investments in the Company's balance sheet with a corresponding after-tax
increase or decrease in stockholders' equity for the Company's 51% interest with
the remainder recorded as minority interest. The Company will continue to
recognize realized gains and losses in income upon the sale of such securities.
The Russian securities markets are significantly smaller and less liquid than
the securities markets in the United States. Liquidity and volumes fluctuate
significantly and are strongly influenced by global market trends. In 1997, the
number of issues actively traded on the Russian Trading System increased
substantially until the end of October when, after the Asian crisis, meaningful
trading was confined to four to five blue chip stocks. The market in 1998 has
been volatile. The relative lack of liquidity may result in the Voucher Fund
selling a portfolio security at a price that does not reflect its underlying
value. Accordingly, fair values are not necessarily indicative of the amount
that could be realized in a short period of time on large volumes of
transactions. In addition, the securities investments in the Voucher Fund may be
negatively affected by adverse economic, political and social developments in
Russia including changes in government and government policies, taxation,
currency instability, interest rates and inflation levels and developments in
law and regulations affecting securities issuers and their shareholders and
securities markets. As a result of the foregoing, there can be no assurance that
the Company will be able to realize the values described above.
20
<PAGE> 23
Natural Resource Development Businesses
- -----------------------------[BAR CHART]----------------------------------------
<TABLE>
<CAPTION>
Gold production
Ounces
<S> <C>
1993 164,900
1994 176,400
1995 235,500
1996 203,100
1997 263,000
</TABLE>
- --------------------------------------------------------------------------------
Gold Mining Business
The results of the gold mining business are substantially attributable to the
operations of Teberebie Goldfields Limited ("TGL"), the principal operating
subsidiary of the Company's wholly owned subsidiary, Pioneer Goldfields Limited
("PGL"). The Company's reported earnings give effect to the 10% minority
interest in TGL held by the Government of Ghana. Gold mining results are also
affected by PGL's exploration activity in Africa and by the exploration
activities in the Russian Far East of Closed Joint-Stock Company, "Tas-Yurjah
Mining Company" ("Tas-Yurjah"), the Company's majority owned (52.5%) Russian
subsidiary. Exploration costs are charged to operations as incurred.
Financial Results
In 1997, the gold mining segment lost $2.9 million, or 11 cents per share, a
decrease of 21 cents compared with 1996 earnings of 10 cents. In 1995, the gold
mining business earned 56 cents per share. The effective tax rates for the
segment in 1997, 1996 and 1995 were a 15% benefit, a 32% provision and a 35%
provision, respectively.
Table 4 details the earnings per share for the gold mining segment for 1997
versus 1996 and for 1996 versus 1995.
TGL earns all of its revenues in U. S. dollars and the majority of its
transactions and costs are denominated in U. S. dollars or are based in U. S.
dollars. Consequently, Ghanaian inflation has not had a material effect on TGL's
operations. Ghanaian cedi denominated costs such as fuel, wages, power and local
purchases are affected, in dollar terms, when currency devaluation does not
offset changes in the relative inflation rates in the U.S. and Ghana. Since
Ghana has experienced significant inflation over the last three years, the cedi
has devalued continuously against the dollar.
Table 4
<TABLE>
<CAPTION>
Twelve months ended December 31
-------------------------------
1997 vs 1996 1996 vs 1995
1997 1996 1995 Incr./(Decr.) Incr./(Decr.)
---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C>
African Operations (TGL). $-- $0.13 $0.57 $(0.13) $(0.44)
African Exploration ..... (0.04) (0.03) (0.01) (0.01) (0.02)
----- ---- ---- ----- -----
PGL Total ............... (0.04) 0.10 0.56 (0.14) (0.46)
----- ---- ---- ----- -----
Russian Exploration ..... (0.07) -- -- (0.07) --
----- ---- ---- ----- -----
Total ............... $(0.11) $0.10 $0.56 $(0.21) $(0.46)
</TABLE>
TGL - 1997 Compared to 1996
Gold Sales. Revenues increased by $11 million to $89.5 million as gold shipments
increased by 59,900, or 29%, to 263,000 ounces. The average realized price of
gold decreased by $45 to $340 per ounce. In 1997, the average realized price of
gold includes proceeds of $4.0 million, or $15 per ounce, from the sale of floor
program options.
During 1997, TGL experienced several negative factors which caused production to
fall short of the forecasted level. The most significant was the delay in
commissioning the Phase III expansion and achieving design throughputs at the
new South and modified West crushing plants. These delays added to the time lag
inherent in bringing new heaps into full production. Other contributing items
include a shortage of diesel fuel early in the year and heavy rains in June.
Issues which adversely affected TGL's 1996 production are described in detail
below in the section entitled "TGL -- 1996 compared to 1995."
21
<PAGE> 24
MANAGEMENT'S DISCUSSION (CONTINUED)
Table 5 provides production results and compares TGL's cash cost and total cost
per ounce for 1997 with the prior year.
Table 5
<TABLE>
<CAPTION>
Twelve months ended
-------------------
December 31
-----------
1997 1996 Increase/(Decrease)
---- ---- -------------------
<S> <C> <C> <C>
Production (ounces) ............... 263,000 203,100 59,900
======= ======= ======
Cash costs:
Production costs ................ $189 $218 ($29)
Royalties ....................... 10 12 (2)
General and administrative ...... 31 36 (5)
------- ------- ------
Cash costs per ounce ......... 230 266 (36)
------- ------- ------
Non-cash costs:
Depreciation and amortization 87 81 6
Other .......................... 5 4 1
------- ------- ------
Cost of production per ounce 322 351 (29)
------- ------- ------
Interest and other costs .......... 15 10 5
------- ------- ------
Total costs per ounce ........ $337 $361 ($24)
======= ======= ======
</TABLE>
Production Costs. Production costs represent costs attributable to mining ore
and waste and processing the ore through crushing and processing facilities.
TGL's costs of production are affected by ore grade, gold recovery rates, the
waste to ore ("stripping") ratio, the age and availability of equipment, weather
conditions, availability and cost of labor, haul distances, foreign exchange
fluctuations and the inherent lag in gold production from heap leaching
operations. In 1997, production costs decreased by $29 to $189 per ounce
compared with 1996, principally because of the economies of scale realized upon
completion of the Phase III mine expansion, coupled with the decision to
decrease the stripping ratio to ensure a sufficient ore feed to the crushing
plants. The introduction of bulk zone mining and the elimination of run-of-mine
dump leaching also contributed to a reduction in the stripping ratio and the
elimination of run-of-mine processing costs. In response to lower gold prices,
significant emphasis was placed on mining in the South pit where ore grades are
marginally higher. This emphasis favorably affected costs on a
unit-of-production basis. During 1997, TGL also experienced a decrease in the
cost per tonne hauled because of lower explosives costs.
A comparison of key production statistics for the twelve months ended December
31, 1997 and 1996 is shown on Table 6.
<TABLE>
<CAPTION>
Table 6 Twelve months ended
-------------------
December 31
-----------
1997 1996
---- ----
<S> <C> <C>
Tonnes mined (in thousands):
Waste ............................................. 27,824 21,068
Run-of-mine ....................................... 610 6,209
------ ------
Tonnes Waste and Run-of-Mine .................... 28,434 27,277
Ore ............................................... 9,096 7,036
------ ------
Total Tonnes Mined .............................. 37,530 34,313
====== ======
Stripping Ratio
((waste+run-of-mine)/ore) ......................... 3.13:1 3.88:1
Ore Processed ..................................... 9,072 6,540
Process Grade (grams/tonne) ....................... 1.29 1.26
====== ======
</TABLE>
Royalties. Under the Ghanaian Minerals and Mining Law, royalties are levied at
rates ranging from 3% to 12% of operating revenues as determined by reference to
an operating ratio. Such operating ratio represents the percentage that the
operating profits, after giving effect to capital allowances and interest
expense (as permitted by TGL's Deed of Warranty), bears to gold sales. In 1997
and 1996, the royalty rate payable by TGL remained at 3% of operating revenues,
the minimum permitted by law, principally because of a sustained level of
capital expenditures, and associated capital allowances, since the inception of
the project.
General and Administrative Costs. General and administrative costs consist
principally of administrative salaries and related benefits, travel expenses,
insurance, utilities, legal costs, employee meals, rents and vehicle
expenditures. Since these costs are primarily fixed and unrelated to production
levels, the decrease in the cost per ounce was attributable principally to a 29%
increase in gold production. Actual 1997 costs, however, increased by
approximately $3 per ounce because of higher benefits costs associated with
TGL's collective bargaining agreement with the Ghana Mineworkers' Union ("GMU"),
consulting costs, and personnel-driven infrastructure costs associated with the
Phase III mine expansion, such as employee meals, personal safety supplies, and
local transportation costs.
Depreciation and Amortization.
Depreciation and amortization is calculated using units-of-production and
straight-line methods designed to fully depreciate property, plant, and
equipment over the lesser of their estimated useful lives or ten years. In 1997,
these costs increased by $6 per ounce prin-
22
<PAGE> 25
cipally because of mining and crushing equipment additions associated with the
Phase III mine expansion. Increases were also experienced in run-of-mine leach
pad depreciation and capitalized rebuilds, however, such increases were largely
offset by lower development cost amortization.
Other. Other costs represent a provision for future reclamation costs and
supplies inventory obsolescence and costs related to exploration activities
conducted by TGL at the Teberebie concession and elsewhere in Ghana. The
increase of $1 per ounce in 1997 compared with 1996 was attributable to an
increase in exploration costs.
Interest and Other Costs. Interest and other costs include interest expense,
foreign exchange gains and losses, political risk insurance premiums, floor
program option sales which are unrelated to shipments, and goodwill
amortization. The $5 per ounce increase in interest and other costs in 1997
compared with 1996 was attributable to interest expense associated with the
Phase III expansion ($10 per ounce). These increases were offset partially by a
decrease associated with relatively fixed costs such as political risk insurance
premiums and goodwill amortization ($3 per ounce), and proceeds from floor
program sales and foreign exchange gains ($2 per ounce).
Income Taxes. The statutory tax rate for mining companies in Ghana in 1997 and
1996 was 35%.
TGL - 1996 Compared to 1995
Gold Sales. TGL's gold shipments decreased by 32,400 to 203,100 ounces resulting
in a decrease in revenues of approximately $12 million to $78.3 million. The
average realized price of gold increased by $2 to $385 per ounce.
During 1996, TGL experienced several negative factors which caused actual
production to be substantially below forecasted production, including: (i)
abnormally heavy rainfall resulting in excessive dilution in the gold production
process, (ii) equipment availability problems resulting primarily from
breakdowns and maintenance problems with the older equipment, and (iii)
difficulty in hiring and training experienced supervisors for mining operations.
The excessive dilution contributed to a decrease in the gold recovery rate from
78% to 69%. In addition, the amount of ore TGL processed decreased by 0.5
million tonnes and TGL experienced a decrease in the ore grade from 1.28 to 1.26
grams per tonne. An 11,400 ounce increase in run-of-mine production partially
offset these production declines.
Table 7 provides production results and compares TGL's cash cost and total cost
per ounce for 1996 with the prior year.
<TABLE>
<CAPTION>
Table 7
Twelve months ended
-------------------
December 31
-----------
1996 1995 Increase/(Decrease)
---- ---- -------------------
<S> <C> <C> <C>
Production (ounces) ............... 203,100 235,500 (32,400)
======= ======= ========
Cash costs:
Production costs ............. $218 $160 $58
Royalties .................... 12 11 1
General and administrative ... 36 27 9
------- ------- --------
Cash costs per ounce ....... 266 198 68
------- ------- --------
Non-cash costs:
Depreciation and amortization 81 67 14
Other ........................ 4 3 1
------- ------- --------
Cost of production per ounce 351 268 83
------- ------- --------
Interest and other costs .......... 10 9 1
------- ------- --------
Total costs per ounce ...... $361 $277 $84
======= ======= ========
</TABLE>
Production Costs. In 1996, production costs increased by $58 per ounce to $218
per ounce compared with 1995, principally because of a 14% decrease in gold
production and the anticipated increase in the stripping ratio from 2.75:1 to
3.88:1. The relatively high level of fixed costs tends to result in an increase
in the cost per ounce when gold production declines. TGL also experienced
unexpected increases in equipment maintenance costs and labor costs associated
with TGL's collective bargaining agreement with the GMU.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION (CONTINUED)
A comparison of key production statistics for the twelve months ended December
31, 1996 and 1995 is shown in Table 8.
<TABLE>
<CAPTION>
Table 8 Twelve months ended
-------------------
December 31
-----------
1996 1995
---- ----
<S> <C> <C>
Tonnes mined (in thousands):
Waste ........................................... 21,068 14,174
Run-of-mine ..................................... 6,209 5,223
------ ------
Tonnes Waste and Run-of-Mine ................. 27,277 19,397
Ore ............................................. 7,036 7,061
------ ------
Total Tonnes Mined ........................... 34,313 26,458
====== ======
Stripping Ratio
((waste+run-of-mine)/ore) ....................... 3.88:1 2.75:1
Ore Processed ................................... 6,540 7,068
Processed Grade (grams/tonne) ................... 1.26 1.28
</TABLE>
Royalties. In 1996 and 1995, the royalty rate payable by TGL remained at 3% of
revenues, the minimum permitted by law, principally because of a sustained level
of capital expenditures, and associated capital allowances, since the inception
of the project.
General and Administrative Costs. Since these costs are primarily fixed and
unrelated to production levels, the increase in the cost per ounce was
attributable, in part, to a 14% decrease in gold production. In addition, costs
increased by approximately $4 per ounce because of higher labor and benefits
costs associated with TGL's collective bargaining agreement with the GMU and
increases in commercial insurance premiums, employee meals, and employee
transportation costs.
Depreciation and Amortization. Depreciation and amortization increased by $14
per ounce principally because of mining equipment additions and higher
capitalized rebuild expenditures which increased depreciation expense by
approximately $6 per ounce and $2 per ounce, respectively. In addition,
increases in run-of-mine leach pad depreciation associated with the start-up of
the West Plant run-of-mine pad in 1996 and leach pad and pond depreciation
aggregated approximately $4 per ounce.
Other. Other costs increased by $1 per ounce in 1996 compared with 1995
principally because of the establishment of an inventory obsolescence provision.
Interest and Other Costs. The $1 per ounce increase in interest and other costs
in 1996 compared with 1995 was attributable to lower production levels and an
increase in political risk insurance premiums.
Income Taxes. The statutory tax rate for mining companies in Ghana in 1996 and
1995 was 35%.
Exploration Activities
Since the end of 1993, in addition to continuing to develop the Teberebie mine,
PGL has increased its exploration activities in the Republic of Ghana and other
African countries. These activities are currently conducted by TGL in Ghana and
by PGL or its local subsidiary in countries outside of Ghana. In 1997, PGL
incurred exploration costs of approximately $1.9 million, approximately $1.8
million of which related to exploration activities outside of Ghana.
In 1994, the Company entered into a joint venture, Tas-Yurjah, to explore
potential gold mining properties in the Khabarovsk Territory of Russia. In 1995,
Tas-Yurjah secured a license to conduct exploration activities over a 240 square
kilometer area (the "licensed area"). During 1997, Tas-Yurjah conducted
exploration drilling and geochemical and geological surveys to further examine
anomalies located in the licensed area. In 1997, the Company expended
approximately $1.7 million for exploration work related to Tas-Yurjah.
Liquidity and Capital Resources
Cash Flow. The cash balances of the gold mining segment increased by $6.6
million to $7.6 million during 1997. Thirty-two percent, or $2.4 million, of
TGL's cash balances remain in escrow and are unavailable to pay short-term
obligations. Cash generated from operating activities aggregated $20.6
24
<PAGE> 27
million while capital expenditures and loan principal payments were $20.8
million and $6.7 million, respectively. Major capital expenditures during the
year included $8.3 million for processing equipment and pad and pond
development, including $3.6 million for crushing, electrical, and other
processing equipment expenditures associated with the Phase III mine expansion;
$7.4 million for mining equipment; capitalized rebuilds of $1.7 million and
capitalized interest and financing costs associated with the Phase III mine
expansion of $1.6 million. During 1997, TGL secured approximately $5.8 million
in third-party financing for the purchase of replacement mining equipment. In
addition, the Company provided financing of approximately $7.7 million,
comprised of $4.2 million to satisfy TGL's short-term liquidity needs and $3.5
million to fund the exploration activities of PGL and Tas-Yurjah.
Third-Party Debt. At the end of 1997, third-party debt aggregated $53.5 million,
including $19 million from OPIC for which the Company is subject to limited
recourse (described in the "Financing Facilities" section of this report) and
$0.9 million from other sources which is guaranteed by the Company. Scheduled
third-party debt service for 1998 is expected to aggregate $15.4 million.
Phase III Mine Expansion. In July 1995, the Board of Directors of TGL approved
the Phase III expansion of the Teberebie mine. Phase III included a further heap
leach operation and a near-pit gyratory crushing facility which acts as the
primary crushing facility for both the existing West Plant and the new South
Plant. The Phase III expansion is expected to increase annual crushing capacity
to 12 million tonnes of ore. Construction work on the project has been completed
and the first gold bar at the South Plant was poured in April 1997. The cost of
the expansion aggregated approximately $56 million, including 1997, 1996, and
1995 capital expenditures of $5.4 million, $48.1 million, and $2.6 million,
respectively.
Financing Facilities. At inception, financing requirements for the Phase III
mine expansion were estimated at $54 million. By December 31, 1996, third-party
financing of approximately $54.2 million had been secured, of which $53.6
million was drawn down, and $46.9 million remained outstanding at December 31,
1997. In December 1997, TGL secured $5.8 million of additional financing for
replacement mining equipment.
Skandinaviska Enskilda Banken/Swedish Export Credits Board. In March 1996, TGL
executed a loan agreement with Enskilda, a division of Skandinaviska Enskilda
Banken, pursuant to which Enskilda agreed to provide a direct loan of SEK 94.5
million (approximately $14.2 million) bearing interest at a fixed rate of 6.42%
to finance the gyratory crusher and related equipment procured from Svedala
Crushing and Screening AB. The loan is guaranteed by the Swedish Export Credits
Board. As of December 31, 1997, $12.7 million of this facility remained
outstanding.
In connection with the purchase of TGL's Phase I crusher plant, a loan of $0.9
million, secured in 1989, remained outstanding at December 31, 1997, bearing an
interest rate of 0%, which is guaranteed by the Company.
Caterpillar Financial Services Corporation. In April 1996, TGL obtained credit
approval from Caterpillar Financial Services Corporation ("Caterpillar"),
pursuant to which Caterpillar agreed to provide a revolving credit facility of
up to $21 million, subsequently increased to $23 million in September 1997, to
finance the purchase of replacement mining equipment. The revolving credit
facility is subject to renewal in May 1998. In the event that the credit
facility is not renewed, 85% of the outstanding loan balances (approximately $20
million) will continue to be repaid over a five year term, while the remainder
will be repaid over a three year term. At December 31, 1997, Caterpillar had
issued disbursements, at TGL's request, for $26.3 million of such facility,
bearing interest at fixed rates ranging from 7.85% to 8.30%, of which $5.4
million had been repaid.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION (CONTINUED)
Overseas Private Investment Corporation. In October 1996, TGL and the Company
executed definitive loan agreements with OPIC pursuant to which OPIC agreed to
provide financing of up to $19 million with respect to the Phase III expansion.
Disbursements under this facility occurred in November 1996. The underlying note
is payable in twelve equal semiannual installments from March 15, 1998 through
September 15, 2003, and bears a fixed interest rate of 6.37% In addition, a
spread of 2.65% on outstanding borrowings is payable to OPIC. As a condition to
the financing, the Company was required to execute a Project Completion
Agreement pursuant to which the Company would advance funds, as necessary (to
the extent of dividends received during the construction stage of the Phase III
expansion), to permit TGL to fulfill all of its financial obligations, including
cost overruns related to project development. Under the Project Completion
Agreement, the Company is also obligated to advance the lesser of $9 million and
any deficit with respect to a defined cash flow ratio in the event of a payment
default. The foregoing obligations of the Company continue to exist until such
time as TGL satisfies a production test and certain financial and project
development benchmarks. In addition, the Company has agreed that if the
percentage of gold proceeds that TGL must convert to Ghanaian Cedis increases
above a certain threshold and, as a result of regulatory and other restrictions,
TGL is unable to convert such proceeds to satisfy its debt service obligations
to OPIC, it shall cover up to $10 million of such obligations. The Company has
secured insurance for 90% of this obligation.
Subordinated Debt. In addition to third-party financing facilities, the Company
provided $4.2 million in bridge financing to TGL during 1997 to satisfy its
short-term liquidity needs.
Risk Management. In the fourth quarter of 1996, TGL purchased a series of put
options which secured a minimum selling price of $340 per ounce to cover 1997
estimated production. When the market price of gold declined below $340 per
ounce between February and December 1997, the Company continued to ship gold to
refineries and sold the put options, receiving payment for the difference
between the market price of gold and approximately $340 per ounce. In May 1997,
TGL purchased additional options at an exercise price of $320 per ounce to cover
estimated production for the first four months of 1998.
The Company maintains $65.5 million of "political risk" insurance principally
from OPIC covering 90% of its equity and loan guarantees. The insurance also
covers 90% of the Company's proportionate share of TGL's cumulative retained
earnings. The OPIC equity and retained earnings coverage is presently limited to
a ceiling of $63.1 million; however, the Company will apply to increase the
ceiling in 1998. There can be no assurance that such OPIC insurance will become
available in 1998. The Company has also secured $9 million of foreign exchange
exposure insurance from another source to hedge 90% of its exposure to a limited
recourse provision contained in the OPIC Phase III expansion financing
(discussed in more detail above). In addition to other commercial insurance
policies, TGL has secured business interruption coverage of up to $19 million
for losses associated with machinery breakdown and property damage and to defray
continuing infrastructure and interest costs.
Recent Developments
Reserves
Table 9 sets forth the proven and probable gold reserves of TGL as of December
31, 1997 which have been audited by an independent mining consultant. The design
cut-off grade used to delineate the reserves is 0.58 grams per tonne of ore at a
gold price of $340 per ounce.
<TABLE>
<CAPTION>
Table 9
Proven and Probable Reserves($340/oz)
-------------------------------------
Tonnes, ore Grade, g/t Contained Gold, Ounces
----------- ---------- ----------------------
<S> <C> <C> <C>
Total Reserves 159,180,000 1.19 6,090,000
</TABLE>
TGL's last reported proven and probable reserve estimate was 9.1 million ounces
as of December 31, 1995. Approximately 1.7 million ounces of the decrease is
attributable primarily to the use in the mine model of a lower gold price ($340
per ounce versus $385 per ounce) and the normal reduction for
26
<PAGE> 29
gold production during 1996 and 1997. The balance of the difference is
attributable to allowances for previously reported slope instability issues,
haul road refinements and physical mine design parameters, and miscellaneous
refinements associated with the transition to more comprehensive mine modeling
software. Based on current mining methods (bulk mining and heap leaching), it is
estimated that recoverable gold from these open pit reserves will aggregate
approximately 4.9 million ounces.
In early 1998, the Republic of Ghana experienced power shortages which adversely
affected TGL's ability to crush and process ore. Presently, certain processes at
the mine are supported by back-up power generation equipment. TGL is in the
process of leasing additional equipment to support all of its power generation
requirements. The use of such equipment will increase the power costs per tonne
processed.
TGL estimates 1998 gold production at approximately 340,000 ounces. The estimate
has been decreased by 20,000 ounces from TGL's previously reported target of
360,000 ounces reflecting lower than expected crushing equipment availability in
the first quarter of 1998. TGL's gold production is dependent upon a number of
factors that could cause actual gold production to differ materially from
projections, including obtaining and maintaining necessary equipment, accessing
key supplies, including electrical power and fuel, and hiring and training
supervisory personnel and skilled workers. Gold production is also affected by
the time lag inherent in heap leaching technology, subject to changing weather
conditions, dependent on the continued political stability in the Republic of
Ghana and subject to the additional risk factors detailed below in the section
entitled "Future Operating Results."
Timber Business
The Company's Russian venture, Closed Joint-Stock Company "Forest-Starma", in
which Pioneer Forest, Inc. (a wholly owned subsidiary of the Company) has a 95%
direct interest is pursuing the development of timber production under a
long-term lease comprising 240,000 hectares (approximately 593,000 acres) in the
aggregate with annual cutting rights of 361,000 cubic meters awarded to the
venture in the Khabarovsk Territory of Russia. Forest-Starma is in the process
of finalizing lease agreements for additional leasehold rights that will give
Forest-Starma total cutting rights of approximately 555,000 cubic meters over a
territory of 390,100 hectares (approximately 964,000 acres). Forest-Starma has
developed a modern logging camp, including a harbor facility, from which it
exports timber for markets in the Pacific Rim, primarily Japan. Forest-Starma is
expected to produce approximately 360,000 cubic meters of timber in 1998.
In the first quarter of 1995, Forest-Starma commenced the harvesting of timber
which was acquired in the development phase. Forest-Starma's first shipments of
timber, totaling approximately 30,000 cubic meters, occurred in the second half
of that year. In 1996, Forest-Starma shipped approximately 133,000 cubic meters
of timber. Since Forest-Starma remained in the development stage through the end
of 1996, timber proceeds aggregating $10.1 million were used to offset
capitalized interest and development costs.
1997 Compared to 1996
Forest-Starma recorded losses of $6.6 million, or 26 cents per share, on
revenues of $11.9 million in 1997. This represents a decline of $6.1 million, or
24 cents per share, compared to 1996 losses of 2 cents per share. The losses
were attributable to lower than expected timber prices in the Japanese market
and lower than expected operating productivity and shipments. In January 1997,
Forest-Starma
27
<PAGE> 30
MANAGEMENT'S DISCUSSION (CONTINUED)
commenced commercial operations, producing approximately 257,000 cubic meters of
timber during the year. Timber shipments for the twelve months ended December
31, 1997 aggregated 194,000 cubic meters.
Forest-Starma values its inventory at the lower of cost or market using the full
absorption accounting method. Accordingly, costs of goods sold of $13.2 million
in 1997 included all operating costs such as payroll, fuel, spare parts, site
related general and administrative expenses, amortization, depreciation and
other taxes. During 1997, the average realized selling price was $61 per cubic
meter, roughly equivalent to the average production cost of $60 per cubic meter.
Average realized timber prices dropped steadily throughout most of 1997;
however, as a result of a significant price decline at the end of 1997, finished
goods inventory was restated to market value at $50 per cubic meter. Inventory
market adjustments throughout 1997 aggregated approximately $1 million and were
recorded in cost of goods sold. Approximately 73,000 cubic meters of timber
remained in inventory at the end of 1997.
Marketing, sales and related expenses of approximately $0.6 million in 1997 were
attributable largely to sales commissions. Other expenses of $4.7 million for
the twelve months ended December 31, 1997 included interest, management fees,
foreign exchange losses and bad debt expense. The statutory tax rate in Russia
is 35%.
Liquidity and Capital Resources
Project Financing. Capital required by this venture is now projected at
approximately $59.9 million through the end of 1998. At December 31, 1997,
project financing aggregated $54.3 million including $38.2 million in
subordinated debt and accrued interest provided by the Company, $8.7 million in
unpaid liabilities to the Company for ongoing operating expenses and $7.4
million in outstanding third party financing. The Company expects to convert
approximately $15 million of subordinated debt to equity in 1998. Forest-Starma
completed a $9.3 million project financing with OPIC in July 1996, of which $7.4
million remained outstanding at December 31, 1997. The underlying note is
payable in thirteen remaining semiannual installments through December 15, 2003,
and bears interest at a fixed rate of 7.20%. In addition, a spread of 2.75% on
outstanding borrowings is payable to OPIC prior to project completion,
increasing to 5.125% after project completion when the Company ceases to be an
obligor in the transaction. As a condition to the OPIC financing, the Company
was required to execute a Project Completion Agreement pursuant to which the
Company would advance funds to Forest-Starma, as necessary, to permit
Forest-Starma to fulfill all of its financial obligations, including cost
overruns related to project development, until such time as Forest-Starma
satisfies a production test and certain financial and project development
benchmarks. Scheduled third-party debt service for 1998 is expected to aggregate
$2 million.
Direct Investment and Risk Management. Direct investment in Forest-Starma by the
Company aggregated $38.3 million at December 31, 1997. In connection with its
investment in Forest-Starma, the Company has secured OPIC political risk
insurance in an amount of up to $47 million which would protect 90% of the
Company's equity investment and loans and a proportionate share of cumulative
retained earnings. In addition, the Company has secured OPIC business income
loss insurance of up to $5 million for Forest-Starma.
Other Ventures. In 1995, Closed Joint-Stock Company "Amgun-Forest" and Closed
Joint-Stock Company "Udinskoye," the Company's other Russian timber ventures,
each executed a long-term lease (50 years) relating to timber harvesting. The
Amgun-Forest lease covers 485,400 hectares (approximately 1,200,000 acres) with
annual cutting rights of 350,000 cubic meters while the Udinskoye lease covers
201,000 hectares (approximately 497,000 acres) with annual cutting rights of
300,000 cubic meters. Pioneer Forest, Inc. has an 80.6% direct interest and 7.1%
indirect interest in Amgun-Forest and a 72% direct
28
<PAGE> 31
interest and 4.2% indirect interest in Udinskoye. The feasibility study on
Amgun-Forest is being reviewed, and the Udinskoye feasibility study is in the
early stages of development. The studies will form the basis for estimating
capital requirements for these projects. Depending upon factors such as capital
availability, management resources, market demand and the stabilization of larch
prices, the predominant timber species in both concessions, the Company may
elect to develop these projects in the future. Since inception, the Company
provided funding and services to these projects aggregating $3.8 million,
including $1 million in 1997.
Miscellaneous -- Other Operations
The Company reported losses of 7 cents per share as "other" in 1997, principally
from $2.1 million of unallocated interest expense, or 5 cents, and $0.5 million,
or 2 cents, of losses from its Russian powdered metals business. Other losses
were 5 cents per share in 1996, half of which resulted from losses from the
Russian powdered metals business. Other losses were 14 cents per share in 1995,
and included a loss of 12 cents per share related to expenses the Company
incurred in connection with its unsuccessful effort to sell, in a global
offering, approximately 20% of its shares of PGL.
Liquidity and Capital Resources -- General
The Company's liquid assets consisting of cash and marketable securities
(exclusive of gold mining and timber operations) increased by $38.5 million in
1997 to $95.9 million principally from increased cash and investments held by
the Russian investment operations.
The Company entered into an agreement in June 1996 with a syndicate of
commercial banks for a senior credit facility (the "Credit Facility"). Under the
Credit Facility, the Company may borrow up to $60 million (the "B-share
Revolver") to finance Dealer Advances relating to sales of back-end load shares
of the Company's domestic mutual funds. The B-share Revolver is subject to
annual renewal by the Company and the commercial banks. In the event the B-share
Revolver is not renewed at maturity, it will automatically convert into a
five-year term loan. Advances under the B-share Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus 1.25%. The Credit Facility also
provides that the Company may borrow up to $80 million for general corporate
purposes (the "Corporate Revolver"). The Corporate Revolver is payable in full
on June 11, 2001. Advances under the Corporate Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus the applicable margin, tied to
the Company's financial performance, of either 0.75%, 1.25%, 1.50% or 1.75%. The
Credit Facility provides that the Company must pay additional interest at the
rate of 0.375% per annum of the unused portion of the facility and an annual
arrangement fee of $35,000. At December 31, 1997, the Company had borrowed $41
million under the B-share Revolver and $55 million under the Corporate Revolver.
The Credit Facility contains restrictions that limit, among other things,
encumbrances on the assets of the Company's domestic mutual fund subsidiaries
and certain mergers and sales of assets. Additionally, the Credit Facility
requires that the Company meet certain financial covenants including covenants
that require the Company to maintain certain minimum ratios with respect to debt
to cash flow and interest payments to cash flow and a minimum tangible net
worth, all as defined in the Credit Facility. As of December 31, 1997, the
Company was in compliance with all applicable covenants.
Under the Credit Facility, the Company is required to maintain interest rate
protection agreements covering at least 60% of the outstanding indebtedness
under the B-share Revolver. As of December 31, 1997, the Company had entered
into six five-year interest rate swap agreements with a member of the Company's
banking syndicate which has effectively fixed the interest rate on notional
amounts totaling $100 million. Under these agreements, the Company will pay the
bank a weighted average fixed rate
29
<PAGE> 32
MANAGEMENT'S DISCUSSION (CONTINUED)
of 6.76%, plus the applicable margin (ranging from 0.75% to 1.75%), on the
notional principal. The bank will pay the Company interest on the notional
principal at the current variable rate stated under the B-share Revolver. The
fair value of these swap agreements was approximately $2.6 million at December
31, 1997, which amount represents the estimated amount the Company would be
obligated to pay to terminate the agreements.
In August 1997, the Company entered into an agreement (the "Note Agreement")
with a commercial lender pursuant to which the Company issued to the lender
Senior Notes in the aggregate principal amount of $20 million. The Senior Notes,
which bear interest at the rate of 7.95% per annum, have a maturity of seven
years. The restrictions and financial covenants under the Note Agreement are
substantially similar to the restrictions and financial covenants in the Credit
Facility. The Company used the proceeds of this financing to reduce the amount
outstanding under the Corporate Revolver.
Future Operating Results
Certain of the information contained in this Annual Report, including
information with respect to the Company's plans and strategies for its worldwide
financial services and natural resource development businesses, consists of
forward-looking statements. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "projects," "estimates" and similar expressions are intended
to identify forward-looking statements. Important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements include, but are not limited to, the following:
The Company is presently in the process of evaluating its information technology
infrastructure for Year 2000 compliance at all of its worldwide operations. The
Company does not anticipate that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not expect any material
disruption in its operations as a result of any failure by the Company to be
Year 2000 compliant. The Company is currently evaluating the Year 2000
compliance of its vendors and financial institutions with which it conducts
business to ensure that the Company's continued operations will not be adversely
affected. There can be no assurance that the Company's Year 2000 compliance
efforts will be successful or that cost estimates will not change as the
evaluation process continues.
The Company derives a significant portion of its revenues from investment
management fees, underwriting and distribution fees and shareholder services
fees. Success in the investment management and mutual fund share distribution
businesses is substantially dependent on investment performance. Good
performance stimulates sales of shares and tends to keep redemptions low. Sales
of shares result in increased assets under management, which, in turn, generate
higher management fees and distribution fees. Good performance also attracts
institutional accounts. Conversely, relatively poor performance results in
decreased sales and increased redemptions and the loss of institutional
accounts, with corresponding decreases in revenues to the Company. Investment
performance may also be affected by economic or market conditions which are
beyond the control of the Company. In addition, three of the Company's mutual
funds (including the two largest funds) have management fees which are adjusted
based upon the funds' performance relative to the performance of an established
index. As a result, management fee revenues may be subject to unexpected
volatility.
The mutual fund industry is intensely competitive. Many organizations in this
industry are attempting to sell and service the same clients and customers, not
only with mutual fund investments but with other financial services products.
Some of the Company's competitors have more products and product
30
<PAGE> 33
lines and substantially greater assets under management and financial resources.
As described above, the Company offers a multi-class share structure on its
domestic mutual funds. Under such structure, the Company pays to dealers a
commission on the sale of back-end load shares but the investor does not pay any
sales charge unless it redeems before the expiration of the minimum holding
period, which ranges from three to six years in the case of Class B Shares and
which is one year in the case of Class C Shares. The Company's cash flow and
results of operations may be adversely affected by vigorous sales of back-end
load shares because its recovery of the cost of commissions paid up front to
dealers is spread over a period of years. During this period, the Company bears
the costs of financing and the risk of market decline.
The businesses of the Company and its domestic financial services subsidiaries
are primarily dependent upon their associations with the Pioneer Family of
Mutual Funds with which they have contractual relationships. In the event any of
the management contracts, underwriting contracts or service agreements was
canceled or not renewed pursuant to the terms thereof, the Company may be
substantially adversely affected.
The Securities and Exchange Commission has jurisdiction over registered
investment companies, registered investment advisers, broker-dealers and
transfer agents and, in the event of a violation of applicable rules or
regulations by the Company or its subsidiaries, may take action which could have
a serious negative effect on the Company and its financial performance.
Because a significant portion of the Company's revenues are derived from the
mining and sale of gold by TGL, the Company's earnings are directly related to
gold production, the cost of such production, and the price of gold. TGL's gold
production is dependent upon a number of factors that could cause actual gold
production to differ materially from projections, including obtaining and
maintaining necessary equipment, accessing key supplies, and hiring and training
supervisory personnel and skilled workers. Gold production is also affected by
the time lag inherent in heap leaching technology, subject to weather conditions
and dependent on the continued political stability in the Republic of Ghana.
Gold prices have historically fluctuated significantly and are affected by
numerous factors, including expectations for inflation, the strength of the U.S.
dollar, global and regional demand, central bank gold supplies and political and
economic conditions. If, as a result of a decline in gold prices, TGL's revenues
from gold sales were to fall below cash costs of production, and to remain below
cash costs of production for any substantial period, the Company could determine
that it is not economically feasible for TGL to continue commercial production.
TGL is dependent upon a number of key supplies for its mining operations,
including cement, diesel fuel, electricity, explosives, lubricants, tires and
sodium cyanide. There can be no assurance that a disruption in the supplies to
TGL of these key materials will not occur and adversely affect the Company's
operations.
The operations at TGL depend on its ability to recruit, train and retain
employees with the requisite skills to operate large-scale mining equipment.
Although TGL offers its employees an attractive compensation package,
competition for skilled labor is strong among the various mines in Ghana. There
can be no assurance that the Company's operations will not be adversely affected
by a shortage of skilled laborers or by an increase in the time required to
fully train new employees.
During 1997, the Company derived significant revenues and net income from its
Russian financial services operations. Given the volatility of the Russian
financial markets, and the effect such volatility may have on the Company's
Russian businesses, there can be no assurance that these sources of revenue and
net income will continue or that they will continue at current levels.
31
<PAGE> 34
MANAGEMENT'S DISCUSSION (CONTINUED)
The Company has incurred considerable expenses in connection with the
Forest-Starma timber project located in the Russian Far East. Forest-Starma has
commenced harvesting and has made shipments of timber. The commercial
feasibility of Forest-Starma is, however, dependent upon a number of factors
which are not within the control of the Company including the price of timber,
the weather, political stability in Russia and the strength of the Japanese
economy, the primary market for Forest-Starma's timber. While the Company
continues to believe that the project will achieve commercial feasibility, there
can be no assurance that it will do so.
The Company has a significant number of operations and investments located
outside of the U. S., including the gold mining operation at TGL and the timber
and investment management operations in Russia. Foreign operations and
investments may be adversely affected by exchange controls, currency
fluctuations, taxation, political instability and laws or policies of the
particular countries in which the Company may have operations. There is no
assurance that permits, authorizations and agreements to implement plans at the
Company's projects can be obtained under conditions or within time frames that
make such plans economically feasible, that applicable laws or the governing
political authorities will not change or that such changes will not result in
the Company's having to incur material additional expenditures.
The Company believes that it is in sound financial condition, that it has
sufficient liquidity from operations and financing facilities to cover
short-term commitments and contingencies and that it has adequate capital
resources to provide for long-term commitments.
32
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of The Pioneer Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Pioneer
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Pioneer Group, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 3, 1998
33
<PAGE> 36
Consolidated Statements of Income
Dollars in Thousands Except Per Share Amounts
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues and sales:
Investment management fees ......................... $121,372 $87,843 $64,604
Underwriting commissions and distribution fees ..... 23,322 16,636 8,515
Shareholder services fees .......................... 28,002 25,340 22,447
Revenues from brokerage activities ................. 35,570 2,232 --
Revenues from banking activities ................... 12,324 14,966 --
Trustee fees and other income ...................... 20,884 13,816 12,909
------------ ------------ ------------
Revenues from financial services businesses ....... 241,474 160,833 108,475
Gold sales ......................................... 89,487 78,279 90,242
Timber sales ....................................... 11,879 -- --
------------ ------------ ------------
Total revenues and sales .......................... 342,840 239,112 198,717
------------ ------------ ------------
Costs and expenses:
Management, distribution, shareholder service
and administrative expenses ...................... 184,419 133,331 94,003
Interest expense--banking activities ............... 7,676 6,068 --
Gold mining operating costs and expenses ........... 88,915 72,563 64,905
Timber operating costs and expenses ................ 15,479 730 --
------------ ------------ ------------
Total costs and expenses .......................... 296,489 212,692 158,908
------------ ------------ ------------
Other (income) expense:
Unrealized and realized gains on venture capital and
marketable securities investments, net ............ (27,460) (12,279) (9,345)
Interest expense ................................... 11,395 3,318 1,024
Public offering costs .............................. -- -- 4,863
Other, net ......................................... 606 1,716 735
------------ ------------ ------------
Total other (income) expense ...................... (15,459) (7,245) (2,723)
------------ ------------ ------------
Income before provision for federal, state and
foreign income taxes and minority interest ........ 61,810 33,665 42,532
Provision for federal, state and foreign income taxes 27,547 11,548 16,598
------------ ------------ ------------
Income before minority interest ..................... 34,263 22,117 25,934
------------ ------------ ------------
Minority interest ................................... 5,097 3,280 3,123
------------ ------------ ------------
Net income .......................................... $29,166 $18,837 $22,811
============ ============ ============
Basic earnings per share ............................ $1.17 $0.77 $0.93
============ ============ ============
Diluted earnings per share .......................... $1.14 $0.74 $0.90
============ ============ ============
Basic shares outstanding ............................ 24,873,000 24,620,000 24,407,000
============ ============ ============
Diluted shares outstanding .......................... 25,630,000 25,460,000 25,311,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
34
<PAGE> 37
Consolidated Balance Sheets
Dollars in Thousands Except Per Share Amount
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents, at cost which approximates fair value ......................... $ 58,802 $ 30,813
Restricted cash .......................................................................... 8,431 1,664
Investment in marketable securities, at fair value ....................................... 38,341 27,542
Receivables:
From securities brokers and dealers for sales of mutual fund shares ..................... 11,752 9,010
From Pioneer Family of Mutual Funds ..................................................... 17,428 13,978
For securities sold ..................................................................... 11,466 2,600
For gold shipments ...................................................................... 3,451 2,686
Other ................................................................................... 12,695 14,912
Mining inventory ......................................................................... 22,032 23,502
Timber inventory ......................................................................... 5,897 1,406
Other current assets ..................................................................... 11,957 12,607
-------- --------
Total current assets .................................................................. 202,252 140,720
-------- --------
Noncurrent assets:
Mining operations:
Mining equipment and facilities (net of accumulated depreciation
of $76,060 in 1997 and $56,143 in 1996) ................................................ 99,164 107,807
Deferred mining development costs (net of accumulated amortization
of $16,177 in 1997 and $13,455 in 1996) ................................................ 17,521 10,675
Cost of acquisitions in excess of net assets acquired (net of accumulated
amortization of $12,083 in 1997 and $9,268 in 1996) .................................... 20,216 22,945
Long-term venture capital investments, at fair value (cost $71,754 in 1997
and $46,651 in 1996) ................................................................... 95,382 59,872
Long-term investments, at cost ........................................................... 15,671 15,996
Timber operations:
Timber equipment and facilities (net of accumulated depreciation of $1,260 in 1997) ..... 17,898 13,952
Deferred timber development costs (net of accumulated amortization of $1,611 in 1997) ... 21,264 22,897
Building (net of accumulated depreciation of $598 in 1997) ............................... 25,087 22,777
Furniture, equipment and leasehold improvements (net of accumulated depreciation and
amortization of $8,565 in 1997 and $13,293 in 1996) ..................................... 17,030 13,931
Loans to bank customers .................................................................. 9,152 6,632
Dealer advances (net of accumulated amortization of $17,366 in 1997 and $8,613 in 1996) .. 41,871 34,293
Other noncurrent assets .................................................................. 21,285 18,215
-------- --------
Total noncurrent assets ............................................................... 401,541 349,992
-------- --------
$603,793 $490,712
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Payable to funds for shares sold ......................................................... $ 11,766 $ 8,996
Accounts payable ......................................................................... 18,724 25,633
Accrued expenses ......................................................................... 29,760 22,251
Customer deposits ........................................................................ 23,584 15,328
Brokerage liabilities .................................................................... 14,702 2,040
Short-term borrowings--banking activities ................................................ 12,083 5,573
Accrued income taxes ..................................................................... 7,641 1,690
Current portion of notes payable ......................................................... 17,411 10,002
-------- --------
Total current liabilities ............................................................. 135,671 91,513
-------- --------
Noncurrent liabilities:
Notes payable, net of current portion .................................................... 168,424 149,500
Deferred income taxes, net ............................................................... 29,334 25,569
-------- --------
Total noncurrent liabilities .......................................................... 197,758 175,069
-------- --------
Total liabilities ..................................................................... 333,429 266,582
-------- --------
Minority Interest ........................................................................ 86,677 61,657
-------- --------
Commitments and Contingencies (Note 10)
Stockholders' Equity:
Common stock, $0.10 par value; authorized 60,000,000 shares;
issued 25,219,567 shares in 1997 and 25,013,763 in 1996 ................................ 2,522 2,501
Paid-in capital ......................................................................... 15,912 11,450
Retained earnings ....................................................................... 171,558 152,457
Treasury stock at cost, 2,670 shares in 1997 and 910 shares in 1996 ..................... (65) (16)
Cumulative translation adjustment ....................................................... (1,277) --
-------- --------
188,650 166,392
Less--Deferred cost of restricted common stock issued ................................... (4,963) (3,919)
-------- --------
Total stockholders' equity ........................................................... 183,687 162,473
-------- --------
$603,793 $490,712
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements. 35
<PAGE> 38
Consolidated Statements of Changes in Stockholders' Equity
Dollars in Thousands Except Per Share Amounts
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Shares Paid-in Retained
Issued Amount Capital Earnings
------------ -------- --------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ......................................... 24,697,960 $2,470 $ 3,599 $ 130,715
---------- ------ ------- ---------
Add (Deduct):
Net income ........................................................ -- -- -- 22,811
Dividends paid--$0.40 per share ................................... -- -- -- (9,923)
Shares awarded under the 1990 and 1995 restricted stock plans,
(127,337 shares) ................................................. 94,003 9 2,468 --
Shares purchased under the 1995 employee stock purchase plan
(18,228 shares) .................................................. 16,880 1 398 --
Amortization of deferred cost of restricted common stock issued ... -- -- -- --
Additional tax benefits from stock plans .......................... -- -- 1,049 --
Forfeitures of shares awarded under the 1990 restricted stock
plan (6,245 shares) .............................................. -- -- -- --
Exercise of stock options awarded under the 1988 stock option
plan (25,000 shares) ............................................. 24,665 3 146 --
---------- ------ ------- ---------
Balance, December 31, 1995 ......................................... 24,833,508 $2,483 $ 7,660 $ 143,603
---------- ------ ------- ---------
Add (Deduct)
Net income ........................................................ -- -- -- 18,837
Dividends paid--$0.40 per share ................................... -- -- -- (9,983)
Shares awarded under the 1995 restricted stock plan (78,137
shares) .......................................................... 74,667 8 2,041 --
Shares purchased under the 1995 employee stock purchase plan
(33,433 shares) .................................................. 17,368 2 351 --
Amortization of deferred cost of restricted common stock issued ... -- -- -- --
Additional tax benefits from stock plans .......................... -- -- 664 --
Forfeiture of shares awarded under the 1990 and 1995 restricted
stock plans (12,225 shares) ...................................... -- -- -- --
Shares issued and returned to treasury ............................ 10,070 -- 273 --
Exercise of stock options awarded under the 1988 stock option
plan (80,000 shares) ............................................. 78,150 8 461 --
---------- ------ ------- ---------
Balance, December 31, 1996 ......................................... 25,013,763 $2,501 $11,450 $ 152,457
---------- ------ ------- ---------
Add (Deduct)
Net income ........................................................ -- -- -- 29,166
Dividends paid--$0.40 per share ................................... -- -- -- (10,065)
Shares awarded under restricted stock plans (162,207 shares) ...... 156,945 16 3,679 --
Shares purchased under the 1995 employee stock purchase plan
(34,527 shares) .................................................. 17,682 2 330 --
Amortization of deferred cost of restricted common stock issued ... -- -- -- --
Additional tax benefits from stock plans .......................... -- -- 306 --
Forfeiture of shares awarded under restricted stock plans (38,690
shares) .......................................................... -- -- -- --
Exercise of stock options awarded under the 1988 stock option
plan (46,000 shares) ............................................. 31,177 3 147 --
Cumulative translation adjustment ................................. -- -- -- --
---------- ------ ------- ---------
Balance, December 31, 1997 ......................................... 25,219,567 $2,522 $15,912 $ 171,558
========== ====== ======= =========
</TABLE>
<TABLE>
<CAPTION>
Deferred
Cost Total
Cumulative of Stock-
Treasury Translation Restricted holders'
Stock Adjustment Stock Equity
---------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ......................................... $ (167) $ -- $ (2,195) $ 134,422
------ -------- -------- ---------
Add (Deduct):
Net income ........................................................ -- -- -- 22,811
Dividends paid--$0.40 per share ................................... -- -- -- (9,923)
Shares awarded under the 1990 and 1995 restricted stock plans,
(127,337 shares) ................................................. 220 -- (2,609) 88
Shares purchased under the 1995 employee stock purchase plan
(18,228 shares) .................................................. 17 -- -- 416
Amortization of deferred cost of restricted common stock issued ... -- -- 1,329 1,329
Additional tax benefits from stock plans .......................... -- -- -- 1,049
Forfeitures of shares awarded under the 1990 restricted stock
plan (6,245 shares) .............................................. (72) -- 72 --
Exercise of stock options awarded under the 1988 stock option
plan (25,000 shares) ............................................. 2 -- -- 151
------ -------- -------- ---------
Balance, December 31, 1995 ......................................... $ -- $ -- $ (3,403) $ 150,343
------ -------- -------- ---------
Add (Deduct)
Net income ........................................................ -- -- -- 18,837
Dividends paid--$0.40 per share ................................... -- -- -- (9,983)
Shares awarded under the 1995 restricted stock plan (78,137
shares) .......................................................... 66 -- (1,951) 164
Shares purchased under the 1995 employee stock purchase plan
(33,433 shares) .................................................. 365 -- -- 718
Amortization of deferred cost of restricted common stock issued ... -- -- 1,221 1,221
Additional tax benefits from stock plans .......................... -- -- -- 664
Forfeiture of shares awarded under the 1990 and 1995 restricted
stock plans (12,225 shares) ...................................... (214) -- 214 --
Shares issued and returned to treasury ............................ (273) -- -- --
Exercise of stock options awarded under the 1988 stock option
plan (80,000 shares) ............................................. 40 -- -- 509
------ -------- -------- ---------
Balance, December 31, 1996 ......................................... $ (16) $ -- $ (3,919) $ 162,473
------ -------- -------- ---------
Add (Deduct)
Net income ........................................................ -- -- -- 29,166
Dividends paid--$0.40 per share ................................... -- -- -- (10,065)
Shares awarded under restricted stock plans (162,207 shares) ...... 103 -- (3,673) 125
Shares purchased under the 1995 employee stock purchase plan
(34,527 shares) .................................................. 350 -- -- 682
Amortization of deferred cost of restricted common stock issued ... -- -- 1,821 1,821
Additional tax benefits from stock plans .......................... -- -- -- 306
Forfeiture of shares awarded under restricted stock plans
(38,690 shares) .................................................. (808) -- 808 --
Exercise of stock options awarded under the 1988 stock option
plan (46,000 shares) ............................................. 306 -- -- 456
Cumulative translation adjustment ................................. -- (1,277) -- (1,277)
------ -------- -------- ---------
Balance, December 31, 1997 ......................................... $ (65) $ (1,277) $ (4,963) $ 183,687
====== ======== ======== =========
</TABLE>
36 The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> 39
Consolidated Statements of Cash Flows
Dollars in Thousands
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 29,166 $ 18,837 $ 22,811
--------- ---------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .......................................................... 45,090 29,952 23,667
Unrealized and realized gains on venture capital and marketable securities
investments, net ....................................................................... (27,460) (12,279) (9,345)
(Equity in earnings of) provision on other investments ................................. 2,710 107 (438)
Restricted stock plan expense .......................................................... 1,821 1,221 1,329
(Prepaid) deferred income taxes ........................................................ 3,765 11,066 (2,404)
Minority interest ...................................................................... 5,097 3,280 3,123
Changes in operating assets and liabilities:
Investments in marketable securities, net .............................................. (10,266) (19,216) (422)
Receivable from securities brokers and dealers for sales of mutual fund shares ......... (2,742) 3,375 (4,979)
Receivables for securities sold ........................................................ (8,866) (2,600) --
Receivables for gold shipments ......................................................... (765) 2,724 (1,017)
Receivables from Pioneer Family of Mutual Funds and other .............................. (1,514) (14,805) (2,547)
Mining inventory ....................................................................... 1,470 (7,897) (3,724)
Timber inventory ....................................................................... (4,491) 81 (1,487)
Other current assets ................................................................... (110) (4,626) (2,163)
Other noncurrent assets ................................................................ (895) (3,858) (898)
Payable to funds for shares sold ....................................................... 2,770 (3,373) 5,294
Accrued expenses and accounts payable .................................................. 600 18,937 6,853
Brokerage liabilities .................................................................. 13,232 2,040 --
Accrued income taxes ................................................................... 6,257 1,185 1,470
--------- ---------- ---------
Total adjustments ..................................................................... 25,703 5,314 12,312
--------- ---------- ---------
Net cash provided by operating activities ............................................. 54,869 24,151 35,123
--------- ---------- ---------
Cash flows from investing activities:
Purchase of mining equipment and facilities ............................................. (11,520) (74,789) (15,601)
Deferred mining development costs ....................................................... (9,568) (3,088) (959)
Additions to furniture, equipment and leasehold improvements ............................ (9,053) (5,309) (6,592)
Building ................................................................................ (2,865) (10,101) (7,909)
Long-term venture capital investments ................................................... (26,945) (14,256) (26,564)
Proceeds from sale of long-term venture capital investments ............................. 6,688 9,576 6,985
Loans to bank customers ................................................................. (2,520) (6,632) --
Deferred timber development costs ....................................................... (354) (6,716) (8,633)
Timber equipment and facilities ......................................................... (5,206) (2,466) (7,001)
Other investments ....................................................................... (5,871) (1,824) (4,086)
Proceeds from sales of other investments ................................................ 1,732 -- --
Cost of acquisition in excess of net assets acquired .................................... (87) (928) (96)
Acquisition of Russian investment operations, net of cash acquired ...................... -- -- 4,180
Long-term investments ................................................................... (4,026) (5,353) (7,791)
Proceeds from sale of long-term investments ............................................. 13,884 7,200 8,935
--------- ---------- ---------
Net cash used in investing activities ................................................. (55,711) (114,686) (65,132)
--------- ---------- ---------
Cash flows from financing activities:
Dividends paid .......................................................................... (10,065) (9,983) (9,923)
Distributions to minority interestholders subsidiary .................................... -- (354) (350)
Distributions to limited partners of venture capital subsidiary ......................... (94) (23) (11)
Amounts raised by venture capital investment partnerships ............................... 21,024 7,848 20,839
Additional minority interest capital raised by foreign subsidiaries ..................... -- 6,269 --
Employee stock purchase plan ............................................................ 682 718 416
Exercise of stock options ............................................................... 456 509 151
Restricted stock plan award ............................................................. 125 164 88
Dealer advances ......................................................................... (16,331) (23,247) (14,913)
Customer deposits ....................................................................... 7,686 15,328 --
Short-term borrowings--banking activities ............................................... 6,510 5,573 --
Revolving credit agreement borrowings, net .............................................. 8,500 35,500 42,000
Borrowings of notes payable ............................................................. 28,420 62,960 --
Repayments of notes payable ............................................................. (10,587) (6,059) (3,597)
Reclassification of restricted cash ..................................................... (6,767) (1,664) --
--------- ---------- ---------
Net cash provided by financing activities ............................................. 29,559 93,539 34,700
--------- ---------- ---------
Effect of foreign currency exchange rate changes on cash and cash equivalents ............ (728) -- --
Net increase in cash and cash equivalents ................................................ 27,989 3,004 4,691
Cash and cash equivalents at beginning of year ........................................... 30,813 27,809 23,118
--------- ---------- ---------
Cash and cash equivalents at end of year ................................................. $ 58,802 $ 30,813 $ 27,809
========= ========== =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements. 37
<PAGE> 40
Notes to Consolidated Financial Statements
December 31, 1997
Note 1-- Nature of Operations and Organization
The Pioneer Group, Inc., and its subsidiaries (collectively, the "Company"),
are engaged in financial services businesses in the United States and several
foreign countries and in a number of natural resource development projects,
including a gold mining venture in the Republic of Ghana and three timber
ventures in the Russian Far East.
In the United States, the Company conducts four lines of financial
services businesses: (i) Pioneering Management Corporation ("PMC") serves as
investment manager to the 34 U.S. registered investment companies in the
Pioneer Family of Mutual Funds and several institutional accounts, (ii) Pioneer
Funds Distributor, Inc. ("PFD") serves as distributor of shares of the Pioneer
Family of Mutual Funds, (iii) Pioneer Capital Corporation ("PCC"), and its
subsidiaries, engage in venture capital investing and management activities,
and (iv) Pioneering Services Corporation serves as shareholder servicing agent
for the Pioneer Family of Mutual Funds.
The Company's international financial services businesses include
investment operations in: (i) Warsaw, Poland, where the Company manages and
distributes units of four mutual funds, owns 50% of a unitholder servicing
agent, manages an institutional venture capital fund and owns a majority
interest in a brokerage operation, (ii) Dublin, Ireland, where the Company
distributes shares of, manages and services six offshore investment funds, sold
primarily in Western Europe, and (iii) Moscow, Russia, where the Company
provides financial services, including banking, investment advisory, investment
banking and brokerage and transfer agency services, distributes shares of,
manages, and services, Pioneer First, one of the first open-end mutual funds
available to Russian citizens, and where the Company owns 51% of the First
Voucher Fund, the largest Russian voucher investment fund. In addition, the
Company has investment operations in the Czech Republic and has invested in
investment management operations in India and Taiwan.
The Company's Russian investment operations are consolidated under
Pioneer First Russia, Inc. ("PFR"). In 1996, PFR entered into a subscription
agreement with the International Finance Corporation ("IFC") for the sale of up
to $4 million of its common stock. Simultaneously, the Company also entered
into a put and call agreement for this common stock. The put allows the holder
of the shares to put them to PFR for the greater of the IFC shares net asset
value, as defined in the agreement, or twelve times PFR's average earnings, as
defined in the agreement, during the period from four years to eight years from
the date of the initial closing. The call feature allows the Company to call
the shares for the same amount, beginning eight years and ending ten years from
the date of the initial closing.
In 1996, the IFC advanced $2 million to PFR, pursuant to the subscription
agreement. The balance of the commitment was received by PFR in 1997. The
entire commitment is included in minority interest liability. Adjustments are
made to the carrying amount of this liability to reflect the IFC's interest
under the put and call agreement.
The Company's wholly owned subsidiary, Pioneer Goldfields Limited
("PGL"), conducts mining and exploration activities in the Republic of Ghana
and exploration activities elsewhere in Africa. PGL's principal asset is its
ownership of 90% of the outstanding shares of Teberebie Goldfields Limited
("TGL"), which operates a gold mine in the western region of the Republic of
Ghana. The Republic of Ghana owns the remaining 10% of TGL. In addition, the
Company's majority-owned subsidiary Closed Joint-Stock Company "Tas-Yurjah
Mining Company" conducts mining exploration activities in the Russian Far East.
The Company's wholly owned subsidiary, Pioneer Forest, Inc. ("Pioneer
Forest"), conducts timber harvesting and timber development activities in the
Russian Far East. Pioneer Forest's principal asset is its ownership of 95% of
the outstanding shares of Closed Joint-Stock Company "Forest-Starma", which
harvests timber in the Russian Far East and which commenced commercial
production on January 1, 1997.
Note 2-- Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company, its wholly owned and majority-owned subsidiaries and certain
partnerships that the Company controls. The Company has consolidated the
Pioneer Ventures Limited Partnership II, Pioneer Poland U.S. L.P. and Pioneer
Poland U.K. L.P. in which the Company's ownership interest is 14.0%, 7.2% and
9.2%, respectively. Control is defined by several factors, including, but not
limited to, the fact that the Company is the general partner, the general
partner has absolute and unilateral authority to make investment decisions, the
limited partners may not remove the general partner and the general partner has
absolute and unilateral authority to declare, or not declare, distributions of
partnership income to the partners. All material intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to these consolidated financial statements
relates to the valuation of venture capital investments, other investments and
the estimated future cash flows of the Company's natural resource operations,
as discussed herein.
Certain reclassifications have been made to 1996 and 1995 amounts to
conform with the 1997 presentation.
Consolidated Statements of Cash Flows
Cash and cash equivalents consist primarily of cash on deposit in banks and
amounts invested in commercial paper, Pioneer money market mutual funds and
U.S. Treasury bills with original maturities of three months or less.
Restricted cash consists of cash on deposit in banks, use of which is
restricted by certain loan covenants, cash reserved for the exclusive benefit
of brokerage customers and cash on deposit with the Central Bank of Russia.
Income taxes paid were approximately $18,719,000, $1,149,000 and
$16,617,000 in 1997, 1996 and 1995,
38
<PAGE> 41
Notes to Consolidated Financial Statements
(Continued)
respectively. In addition, $13,146,000, $7,263,000 and $2,587,000 of interest
was paid in 1997, 1996 and 1995, respectively. The amounts paid in 1997, 1996
and 1995 include approximately $1,353,000, $4,800,000 and $1,800,000,
respectively, of interest that was capitalized related to the development of
the Company's building, Russian timber operations and the mining Phase III
expansion operations.
The Company purchased 51% of the First Voucher Fund and certain Russian
investment operating entities in 1995 for approximately $20 million. In
conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired .......... $42,899
Cash paid .............................. (14,004)
-------
Liabilities assumed .................... $28,895
</TABLE>
=======
Marketable Securities, at Fair Value
Included in marketable securities, at fair value, are principally investments
in certain Russian government securities, including GKO and OFZ bonds, and
certain equity and debt securities of companies based in Russia. The Russian
securities, except for those securities issued by the Russian government, are
carried at cost, adjusted for impairment losses. In accordance with the
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities", these securities are
carried at cost, adjusted for impairment losses, rather than fair value until
such time as the breadth and scope of the Russian securities markets develop to
certain quantifiable levels. These securities are held for trading purposes,
and accordingly all realized and unrealized gains and losses are included in
the accompanying consolidated statements of income under income from banking
and income from brokerage activities. Additionally, the Company's investments
in the Pioneer Family of Mutual Funds are included in this amount.
Recognition of Revenues
Investment management, shareholder services, trustee and other fees are
recorded as income during the period in which services are performed.
Agreements with certain of the Pioneer Family of Mutual Funds provide for fee
reductions, which are based on the excess of annual expenses of each mutual
fund over certain limits. Fee reductions are recorded on an accrual basis.
Underwriting commissions earned from the distribution of the Pioneer
Family of Mutual Fund shares and the systematic investment plan are recorded as
income on the trade (execution) dates.
Distribution fees are earned based on 0.75% of certain Pioneer Family of
Mutual Fund net assets.
Revenues from brokerage activities are derived from net realized and
unrealized gains and losses from securities trading activities. The Company's
principal brokerage activities relate to the purchase and sale of Russian
securities, including Russian government debt securities and the equity and
debt securities of companies based in Russia.
Revenues from banking activities are related to the Bank's securities
trading and lending activities. The Bank trades in certain Russian government
securities including GKO and OFZ bonds as well as Russian equity and debt
securities, and also conducts a modest amount of commercial lending. Income
includes interest earned on the bonds while they are held, net realized gains
and losses on the sale of the bonds and equity securities to third parties, net
unrealized gains and losses associated with marking the portfolio to market at
the end of the period, and interest income on loans. Interest expense on the
Bank's customer deposits and short-term borrowings is recorded on the accrual
basis.
The Company records sales of gold at sales value net of refining costs
when gold is shipped to a refinery.
The Company has purchased put options as "insurance" against significant
declines in the market price of gold below $320 per ounce. The put options have
been purchased from a bank, and the premium paid is amortized monthly.
Unamortized premiums are included in other current assets in the accompanying
consolidated balance sheets. The put options are in place for estimated monthly
planned production aggregating 120,000 ounces through the four months ending
April 30, 1998. No put options have been purchased to cover production after
April 30, 1998. The put options only require an initial cash outlay (the
premium amount), which amounted to approximately $252,000, $255,000 and
$150,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Put options represent a right and not an obligation. As such, the Company has
neither ongoing exposure (other than credit exposure) nor upside potential with
respect to the put options. When the market price of gold declines below $320
per ounce, the Company continues to ship gold to refineries and exercises the
put options, receiving payment for the difference between the market price of
gold and $320. These receipts are included as gold sales in the accompanying
consolidated statements of income. During 1997, put option proceeds of
approximately $4 million were received.
The Company records timber sales when timber is shipped.
Public Offering Costs
Public offering costs consists of expenses incurred in connection with the
Company's unsuccessful effort to sell, in a global offering, approximately 20%
of the shares of its gold mining subsidiary PGL. The expenses relate primarily
to marketing expenses and the fees of professional advisers.
Building
The building represents the Meridian Commercial Tower in Russia. The Meridian
Commercial Tower is an office building which is wholly owned by the First
Voucher Fund. The Company owns a 51% interest in the First Voucher Fund.
Furniture, Equipment and Leasehold Improvements
Depreciation and amortization are provided for financial reporting purposes on
a straight-line basis over the following estimated useful lives: furniture and
equipment, 3-5 years, and leasehold improvements, over the term of the lease.
In the event of retirement or other disposition of furniture and equipment, the
cost of the assets and the related accumulated depreciation and amortization
amounts are removed from the accounts, and any resulting gains or losses are
reflected in earnings.
39
<PAGE> 42
Notes to Consolidated Financial Statements
(Continued)
Mining Inventory
Gold bullion inventory and gold-in-process contained in the processing plant
are valued at the lower of cost or market.
Material and supplies are valued at the lower of average cost or
replacement cost.
Mining Equipment and Facilities
Processing plant and equipment is recorded at cost and is depreciated on a
units-of-production basis, which anticipates recovery over ten years or less.
Mining equipment (rolling stock) is recorded at cost and is depreciated
on a units-of-production basis which anticipates recovery over seven years or
less.
Buildings and housing units are recorded at cost and are depreciated on a
straight-line basis over ten years.
Leach pads are recorded at cost and are depreciated on a
units-of-production basis.
All other equipment and facilities are recorded at cost and are
depreciated over their estimated useful lives on a straight-line basis ranging
from three to ten years. Depreciation begins at the time construction is
completed and the assets are placed into service.
Deferred Mining Development Costs
Deferred mining development costs, which include the cost of site development,
capitalized interest and infrastructure costs during the development and
construction phases of the project, are recorded at cost and amortized on a
units-of-production basis, which anticipates recovery over ten years or less.
Costs incurred to develop economically viable ore bodies, to further define
mineralization in existing ore bodies, or to secure rights to proven reserves
are capitalized as development costs.
Exploration costs associated with the initial identification of ore
reserves are expensed. Property and lease acquisition costs incurred in the
process of acquiring exploration mineral rights are expensed as incurred.
Mining Reclamation Costs
Estimated future reclamation costs are based principally on anticipated
environmental and regulatory requirements and are accrued and charged to
expense over the expected operating life of the mine on a units-of-production
basis. The accrual is maintained on an undiscounted basis.
Deferred Timber Development Costs
Deferred timber development costs principally consist of construction and
engineering expenditures and infrastructure costs incurred in developing the
site, the roads, capitalized interest, legal, timber rights and organizational
costs. In the first quarter of 1997, the Company commenced commercial
production of timber and amortization of these development costs. These costs
are amortized on a units-of-production basis which anticipates recovery
principally over ten years.
Timber Equipment and Facilities
Timber equipment and facilities consist of logging machinery and building and
housing units. These costs are principally depreciated on a units-of-production
basis which anticipates recovery over five to twenty years.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is amortized on a straight-line basis
over five to fifteen years.
In connection with the purchase of the Russian investment operations in
1995 (see Note 14), the Company allocated cost in excess of net assets acquired
in the amount of $2,858,000.
Cost in excess of net assets acquired, net, as reflected in the
accompanying consolidated balance sheets, consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Mutual of Omaha Fund
Management Company .................. $16,530 $18,649
Russian investment operations ......... 2,163 2,458
Gold mining operations ................ 1,217 1,592
Polish brokerage operations ........... 306 246
------- -------
$20,216 $22,945
======= =======
</TABLE>
Valuation of Long-Term Venture Capital Investments
The Company's long-term venture capital investments consist of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
<S> <C> <C>
Domestic ......... $68,937 $47,354
Non-U.S. ......... 26,445 12,518
------- -------
$95,382 $59,872
======= =======
</TABLE>
The Company's domestic venture capital investments are in companies that
are primarily engaged in bringing new technology to market as well as more
mature companies in need of capital for expansion, acquisitions, management
buyouts or recapitalizations. At the time the investments are made, the
Company's investments are primarily in the form of unregistered common and
preferred stock, warrants and promissory notes. Most securities are valued at
fair value, as determined in good faith by management and approved by the Board
of Directors, when market quotes are not available. Of the total domestic
venture capital value at December 31, 1997, the value of securities for which
market quotes are not available was $43,629,000. In addition, total domestic
venture capital investments included cash that has been restricted for the
future purchase of venture capital investments of $3,654,000.
In addition, non-U.S. venture capital investments are the investments
held by certain consolidated partnerships. These venture capital investments
are in companies that are domiciled in Poland. Of the total non-U.S. venture
capital value at December 31, 1997, the value of securities for which market
quotes are not available was $15,689,000. In addition, total non-U.S. venture
capital investments included cash that has been restricted for the future
purchase of venture capital investments of $10,756,000.
In determining fair value, investments are initially stated at cost until
significant subsequent events require a change in
40
<PAGE> 43
Notes to Consolidated Financial Statements
(Continued)
valuation. The Company considers the financial condition and operating results
of the investee, prices paid in subsequent private offerings of the same or
similar securities, the amount that the Company can reasonably expect to
realize upon the sale of these securities, and any other factors deemed
relevant. Securities for which market quotations are available are valued at
the closing price as of the valuation date with an appropriate discount, if
restricted.
Long-term Investments
Long-term investments consists mainly of Russian investments of the First
Voucher Fund. These securities are classified as available for sale.
The Company believes that there is a significant unrealized value in the
assets included in the Voucher Fund's securities portfolio. In accordance with
SFAS 115, the securities in the Voucher Fund reflect the cost rather than "fair
value" until such time as the breadth and scope of the Russian securities
markets develop to certain quantifiable levels. The Company believes that these
markets are approaching this point, at which time the "fair value" of
securities held by the Voucher Fund would be reflected in the Company's
financial statements.
The Voucher Fund's assets consist of cash and cash equivalents,
securities (both liquid and illiquid), real estate holdings and other
miscellaneous assets. The cost of the securities portion of the portfolio on
the Company's balance sheet at December 31, 1997, was approximately $16
million. As of January 29, 1998, the value of these securities (based on market
quotations if available) was approximately $67 million, which represents an
increase of approximately $51 million, since the date of the acquisition. The
Company's pre-tax interest in this increase, at 51%, would be approximately $26
million. The cost of the cash and cash equivalents, real estate and
miscellaneous assets of the Voucher Fund on the Company's balance sheet at
December 31, 1997, was approximately $2 million, $24 million and $3 million,
respectively.
Currently, the Company recognizes realized gains and losses in its income
statement only when Voucher Fund securities are sold. Once the Russian
securities market develops to the requisite level, unrealized gains and losses
(such as the $51 million described above) would be reflected in long-term
investments in the Company's balance sheet with a corresponding after-tax
increase or decrease in stockholder's equity for the Company's 51% interest
with the remainder recorded as minority interest. The Company will continue to
recognize realized gains and losses in income upon the sale of such securities.
The Russian securities markets are significantly smaller and less liquid
than the securities markets in the United States. The relative lack of
liquidity may result in the Voucher Fund selling a portfolio security at a
price that does not reflect its underlying value. Accordingly, fair values are
not necessarily indicative of the amount that could be realized in a short
period of time on large volumes of transactions. In addition, the securities
investments in the Voucher Fund may be negatively affected by adverse economic,
political and social developments in Russia including changes in government and
government policies, taxation, currency instability, interest rates and
inflation levels and developments in law and regulations affecting securities
issuers and their shareholders and securities markets. As a result of the
foregoing, there can be no assurance that the Company will be able to realize
the values described above.
Valuation of Financial Instruments
The Company considers the liquid nature and readily available market quotations
when estimating fair value of financial instruments. As stated in the
accompanying consolidated balance sheets, the carrying values of the Company's
financial instruments approximate fair value, except for the long-term
investments of the Voucher Fund, as discussed above.
Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share." It is effective for fiscal years ending after December
15, 1997. SFAS 128 requires the replacement of earnings per share ("EPS") with
basic EPS. Basic EPS is computed by dividing reported earnings available to
stockholders by weighted average shares outstanding not including contingently
issuable shares. No dilution for potentially dilutive securities is included.
Fully diluted EPS, called diluted EPS under SFAS 128, is still required.
Amounts for 1996 and 1995 have been restated to conform to this presentation.
The computations for basic earnings per share and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
Earnings
Net Income Shares Per Share
------------ -------- ----------
For the year ended 12/31/97 (Dollars and shares in thousands
- ----------------------------- except per share amounts)
<S> <C> <C> <C>
Basic earnings per share
calculation ............... $29,166 24,873 $ 1.17
======
Options ..................... -- 692
Restricted stock ............ -- 65
------- ------
Diluted earnings per share
calculation ............... $29,166 25,630 $ 1.14
======= ====== ======
For the year ended 12/31/96
- ------------------------------
Basic earnings per share
calculation ............... $18,837 24,620 $ 0.77
======
Options ..................... -- 745
Restricted stock ............ -- 95
------- ------
Diluted earnings per share
calculation ............... $18,837 25,460 $ 0.74
======= ====== ======
For the year ended 12/31/95
- ------------------------------
Basic earnings per share
calculation ............... $22,811 24,407 $ 0.93
======
Options ..................... -- 750
Restricted stock ............ -- 154
------- ------
Diluted earnings per share
calculation ............... $22,811 25,311 $ 0.90
======= ====== ======
</TABLE>
Foreign Currency Translation
In accordance with SFAS 52, "Foreign Currency Translation", the functional
currency of the Company's natural resource operations is
41
<PAGE> 44
Notes to Consolidated Financial Statements
(Continued)
the U.S. dollar, as the revenues, costs of capital equipment and financing
costs are principally denominated in U.S. dollars. The functional currency of
the Company's financial services operations is generally the currency of the
country in which those operations are conducted. However, some of those
operations are conducted in countries having highly inflationary economies and
as a result the functional currency is currently the U.S. dollar. For those
entities, the gains and losses which result from remeasuring into the U.S.
dollar for reporting purposes are included in the accompanying consolidated
statements of income. The net foreign currency losses were $1.7 million in 1997
and $1.3 million in 1996. The net foreign currency amount in 1995 was
immaterial. For those entities for which the functional currency is the local
currency, the gains and losses which result from translating into the U.S.
dollar for reporting purposes are included in the accompanying consolidated
balance sheets' stockholders' equity section as a cumulative translation
adjustment.
Long-Lived Assets
The Company periodically reviews its long-lived assets which it continues to
hold and use for potential impairment. Those long-lived assets held and used in
connection with the Company's natural resource operations are reassessed
whenever there is a significant change in the market price of the goods
produced, and continuously during capital intensive periods of expansion.
Additionally, the building is reassessed for potential impairment when there
are significant changes in market rental rates or market values of comparable
buildings. The Company assesses the future useful life of these assets whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired businesses in assessing the recoverability of these assets.
During 1997, the Company experienced declines in the market prices of
both gold and timber. At this time it is the Company's intention to continue to
hold and use the long-lived assets used in the production of both gold and
timber. An impairment analysis was performed consistent with the Company's
intentions with no impairment identified.
Concentration of Risk
The Company performs ongoing evaluations of its subsidiaries and investments
and obtains political risk insurance which mitigates its exposure in foreign
countries.
Note 3-- Mining Inventory
Mining inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
(Dollars in Thousands)
<S> <C> <C>
Gold-in-process ................ $ 1,998 $ 1,658
Materials and supplies ......... 20,034 21,844
------- -------
$22,032 $23,502
======= =======
</TABLE>
<TABLE>
<CAPTION>
Note 4-- Mining Equipment and Facilities
December 31,
1997 1996
------- --------
(Dollars in Thousands)
<S> <C> <C>
Mobile mine equipment ................... $70,163 $ 62,177
Crusher ................................. 38,252 22,550
Processing plant and laboratory ......... 18,500 5,040
Leach pads and ponds .................... 26,685 19,318
Building and civil works ................ 13,987 10,813
Office furniture and equipment .......... 2,089 1,798
Motor vehicles .......................... 3,201 2,307
Construction in progress ................ 69 37,937
Other assets ............................ 2,278 2,010
------- --------
Total cost .............................. 175,224 163,950
Accumulated depreciation ................ (76,060) (56,143)
------- --------
$99,164 $107,807
======= ========
</TABLE>
Note 5-- Income Taxes
The following is a summary of the components of income before provision for
federal, state and foreign income taxes and minority interest for financial
reporting purposes:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Domestic ......... $51,394 $26,484 $10,824
Foreign .......... 10,416 7,181 31,708
------- ------- -------
$61,810 $33,665 $42,532
======= ======= =======
</TABLE>
The components of the provision for federal, state and foreign income taxes
consist of:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Current:
Federal .......... $13,328 $ 1,197 $ 260
State ............ 2,188 376 68
Foreign .......... 8,266 (1,091) 18,674
Deferred (Prepaid):
Federal .......... 4,536 6,326 4,072
State ............ (2) 2,531 1,438
Foreign .......... (769) 2,209 (7,914)
-------- ------- -------
$27,547 $11,548 $16,598
======== ======= =======
</TABLE>
Income taxes, as stated as a percentage of income before provision for
federal, state and foreign income taxes, are comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory tax rate .......... 35.0% 35.0% 35.0%
Increases (decreases) in tax
rate resulting from:
State income tax (net of
effect on federal
income tax) ...................... 2.3 5.6 2.3
Foreign income taxes ............... 6.2 (3.6) 2.5
Tax exempt income .................. -- (4.2) --
Other, net ......................... 1.1 1.5 (0.8)
---- ---- ----
Effective tax rate ................. 44.6% 34.3% 39.0%
==== ==== ====
</TABLE>
42
<PAGE> 45
Notes to Consolidated Financial Statements
(Continued)
The approximate income tax effect of each type of temporary difference is
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Deferred taxes related to foreign
mining operations ...................... $ (7,637) $ (9,628)
Net operating losses of foreign
subsidiaries ........................... 4,600 --
Deferred rent ............................ 499 464
Restricted stock ......................... 774 848
Reserves ................................. 1,041 1,669
Dealer advances .......................... (16,347) (14,244)
Venture capital and other investments..... (8,732) (5,206)
Other temporary differences, net ......... 1,068 528
-------- --------
(24,734) (25,569)
Valuation allowance ...................... (4,600) --
-------- --------
Net deferred tax liability ............... $(29,334) $(25,569)
======== ========
</TABLE>
U.S. Federal income taxes have been provided on all foreign earnings
except for the amount considered to be permanently invested outside the U.S.
which approximates $50,000,000 at December 31, 1997.
Note 6-- Stock Plans
The Company has a Stock Incentive Plan (the "1997 Plan") to provide incentives
to certain employees who have contributed and are expected to contribute
materially to the success of the Company and its subsidiaries. An aggregate
total of 1,500,000 shares of the Company's common stock may be awarded to
participants under the 1997 Plan. Under the 1997 Plan, the Company may grant
restricted stock, stock options and other stock based awards. The 1997 Plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee"). The 1997 Plan expires in February 2007. The Company's 1995
Restricted Stock Plan (the "1995 Plan") and 1988 Stock Option Plan (the "1988
Option Plan") were terminated upon the approval of the 1997 Plan by the
stockholders of the Company on May 20, 1997. The Company's 1990 Restricted
Stock Plan (the "1990 Plan") expired in January 1995. The 1997 Plan, 1995 Plan
and the 1990 Plan are collectively referred to as the "Plans."
Restricted stock is granted at a price to be determined by the Board of
Directors, generally $.10 per share. The following tables summarize restricted
stock plan activity for the Plans during 1997.
<TABLE>
<CAPTION>
Unvested Shares
-----------------------------------------------------
1997 Plan 1995 Plan 1990 Plan Total
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at 12/31/96 .... -- 69,680 259,841 329,521
Awarded ............... 27,875 134,332 -- 162,207
Vested ................ (2,520) (240) (123,682) (126,442)
Forfeited ............. -- (8,415) (30,275) (38,690)
------ ------- -------- --------
Balance at 12/31/97 .... 25,355 195,357 105,884 326,596
====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Vested Shares
--------------------------------------------------
1997 Plan 1995 Plan 1990 Plan Total
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at 12/31/96 .... -- 10,089 485,658 495,747
Vested ................ 2,520 240 123,682 126,442
----- ------ ------- -------
Balance at 12/31/97 .... 2,520 10,329 609,340 622,189
===== ====== ======= =======
</TABLE>
The Company awarded 78,137 shares in 1996 and 3,937 shares in 1995 under
the 1995 Plan. The Company awarded 123,400 shares in 1995 under the 1990 Plan.
The participant's right to sell the awarded stock under the Plans is
generally restricted as to 100% of the shares awarded during the first two
years following the award, 60% during the third year and 20% less each year
thereafter. The Company may repurchase unvested restricted shares at $0.10 per
share upon termination of employment. Awards under the Plans are compensatory,
and accordingly, the difference between the award price and the market value of
the shares under the Plans at the award date, is being amortized on a
straight-line basis over a five-year period.
Options issuable under the 1997 Plan become exercisable as determined by
the Committee not to exceed ten years from the date of grant. Options granted
to date vest over five years at an annual rate of 20% on each anniversary date
of the date of grant. Prior to the adoption of the 1997 Plan, options were
granted under the 1988 Option Plan. As of December 31, 1997, 1,139,625 shares
of the Company's common stock remain available for grant under the 1997 Plan.
In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(the "1995 Purchase Plan"), which qualifies as an "Employee Stock Purchase
Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986.
An aggregate total of 500,000 shares of common stock have been authorized for
issuance under the 1995 Purchase Plan, to be implemented through one or more
offerings, each approximately six months in length beginning on the first
business day of each January and July. The price at which shares may be
purchased during each offering will be the lower of (i) 85% of the closing
price of the common stock as reported on the NASDAQ National Market (the
"closing price") on the date that the offering commences or (ii) 85% of the
closing price of the common stock on the date the offering terminates. In 1997,
1996 and 1995, the Company issued 34,527, 33,433 shares and 18,228 shares under
the 1995 Purchase Plan, respectively.
The Company records stock compensation in accordance with Accounting
Principles Board ("APB") Opinion 25. Had the compensation cost for these plans
been determined consistent with SFAS 123, "Accounting for Stock-Based
Compensation", the Company's net income and earnings per share would have been
the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income: As reported $29,166 $18,837 $22,811
Pro forma $28,327 $18,369 $22,718
Diluted EPS: As reported $ 1.14 $ 0.74 $ 0.90
Pro forma $ 1.11 $ 0.72 $ 0.90
</TABLE>
The weighted-average grant-date fair value of options granted during
1997, 1996 and 1995 was approximately $4,651,000, $2,952,000 and $2,528,000,
respectively.
For purposes of the pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
43
<PAGE> 46
Notes to Consolidated Financial Statements
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Volatility 36% 34% 36%
Risk-Free interest rate 5.8% 6.6% 5.6%
Dividend yield 1.43% 1.71% 1.71%
Expected life of options 9 years 9 years 9 years
</TABLE>
The fair value of the "look-back" option feature of the 1995 Purchase
Plan is valued as the sum of its two separate components. The first component
is 15% of the value of a share of unvested common stock, and the second
component is 85% of the fair value of an option to purchase a share of common
stock at the market price on the date of grant. The following assumptions were
used for "look-back" option grants made under the 1995 Purchase Plan:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Volatility 28% 18% 28%
Risk-Free interest rate 5.7% 5.8% 5.6%
Dividend yield 1.43% 1.71% 1.71%
Expected life of options 6 months 6 months 6 months
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The following table summarizes the Option Plans activity for the three
years ended December 31, 1997.
<TABLE>
<CAPTION>
Weighted average
Number of exercise price
shares per share
------------- -----------------
<S> <C> <C>
Outstanding at December 31, 1994 1,794,500 $ 7.35
Granted 207,500 $ 27.48
Exercised (25,000) $ 6.03
--------- -------
Outstanding at December 31, 1995 1,977,000 $ 9.30
Granted 268,500 $ 24.88
Exercised (80,000) $ 6.34
--------- -------
Outstanding at December 31, 1996 2,165,500 $ 11.51
Granted 345,000 $ 29.52
Exercised (46,000) $ 9.89
Terminated (26,500) $ 19.24
--------- -------
Outstanding at December 31, 1997 2,438,000 $ 13.60
Exercisable at year end 1,662,800 $ 7.69
</TABLE>
1,662,800 of the 2,438,000 options outstanding at December 31, 1997 have
exercise prices between $4.1875 and $28.625, with a weighted average exercise
price of $7.69 and a weighted average remaining contractual life of 3.8 years.
All of these options are exercisable. The remaining 775,200 options have
exercise prices between $7.0625 and $29.875, with a weighted average exercise
price of $26.26 and a weighted average remaining contractual life of 9 years.
Note 7-- Net Capital
As a broker-dealer, PFD is subject to the Securities and Exchange Commission's
("SEC") regulations and operating guidelines which, among other things,
requires PFD to maintain a specified amount of net capital, as defined, and a
ratio of aggregate indebtedness to net capital, as defined, not exceeding 15 to
1. Net capital and the related ratio of aggregate indebtedness to net capital
may fluctuate on a daily basis. PFD's net capital, as computed under Rule
15c3-1, was $3,565,383 at December 31, 1997, which exceeded required net
capital of $1,134,105 by $2,431,278. The ratio of aggregate indebtedness to net
capital at December 31, 1997 was 4.77 to 1.
PFD is exempt from the reserve requirements of Rule 15c3-3, since its
U.S. broker-dealer transactions are limited to the purchase, sale and
redemption of redeemable securities of registered investment companies. All
customer funds are promptly transmitted and all securities received in
connection with activities as a broker-dealer are promptly delivered. PFD does
not otherwise hold funds or securities for, or owe money or securities to,
customers.
Note 8-- Benefit Plans
The Company and its subsidiaries have two defined contribution plans for
eligible employees: a retirement benefit plan and a savings and investment plan
("the Benefit Plans") qualified under Section 401 of the Internal Revenue Code.
The Company makes contributions to a trustee, on behalf of eligible employees,
to fund both the retirement benefit and the savings and investment plans. The
Company's expenses under the Benefit Plans were approximately $2,666,000 in
1997, $2,531,000 in 1996 and $1,930,000 in 1995.
Both of the Company's qualified Benefit Plans described above cover all
full-time employees who have met certain age and length-of-service
requirements. Regarding the retirement benefit plan, the Company contributes an
amount which would purchase a certain targeted monthly pension benefit at the
participant's normal retirement date. In connection with the savings and
investment plan, participants can voluntarily contribute up to 10% of their
compensation to the plan, and the Company will match this contribution up to
2%.
Note 9-- Related Party Transactions
Certain officers and/or directors of the Company and its subsidiaries are
officers and/or trustees of the Pioneer Family of Mutual Funds and the
Company's international mutual funds. Investment management fees earned from
the mutual funds were approximately $118,851,000 in 1997, $84,178,000 in 1996
and $60,832,000 in 1995. Underwriting commissions and distribution fees earned
from the sales of mutual fund shares were approximately $23,322,000 in 1997,
$16,636,000 in 1996 and $8,515,000 in 1995. Shareholder services fees earned
from the mutual funds were approximately $28,002,000 in 1997, $25,340,000 in
1996 and $22,447,000 in 1995.
Within the Pioneer Family of Mutual Funds, total revenues from Pioneer II
were approximately $50,933,000 in 1997, $39,102,000 in 1996 and $32,244,000 in
1995.
Certain partners of Hale and Dorr LLP, the Company's legal counsel, are
officers and/or directors of the Company and its subsidiaries. Amounts paid to
Hale and Dorr LLP consist of legal fees of approximately $635,000 in 1997,
$1,189,000 in 1996 and $1,587,000 in 1995.
Hale and Dorr LLP is a partner in the law firm Brobeck Hale and Dorr
International. The Company paid legal fees in the amount of approximately
$76,000 in 1997, $188,000 in 1996 and $1,355,000 in 1995 to Brobeck Hale and
Dorr International.
44
<PAGE> 47
Notes to Consolidated Financial Statements
(Continued)
Note 10--Commitments
U.S. rental expense amounted to approximately $3,766,000 in 1997, $2,977,000 in
1996 and $3,007,000 in 1995, respectively. Future minimum payments under the
leases amount to approximately $4,702,000 in 1998, $4,642,000 in 1999,
$4,514,000 in 2000, $4,608,000 in 2001, $1,979,000 in 2002 and $1,490,000
thereafter. These future minimum rental payments include estimated annual
operating and tax expenses of approximately $1,973,000.
Rental expense for the Polish Mutual Fund operations amounted to
approximately $956,000, $963,000 and $863,000 in 1997, 1996 and 1995,
respectively. The lease is open-ended and can be terminated by either the
Company or the lessor upon 90 days notice.
The Company is contingently liable to the Investment Company Institute
Mutual Insurance Company for unanticipated expenses or losses in connection
with its mutual fund operations in an amount not to exceed $500,000. Two thirds
of this amount is secured by an irrevocable standby letter of credit with a
bank.
The Company is committed to additional capital contributions of $1.2
million to Pioneer Poland U.S. L.P. and $1.2 million to Pioneer Poland U.K.
L.P. These contributions are due upon call by Management as prior contributions
become 80% invested. At December 31, 1997, the Company was committed to
additional capital contributions of $1.5 million to Pioneer Ventures Limited
Partnership II, a U.S. venture capital fund.
The Company acts as a passive, non-bank trustee for retirement plan
accounts. IRS regulations and operating guidelines allow a passive, non-bank
trustee to accept fiduciary accounts only if the trustee's net worth
(determined as of the end of the most recent taxable year) exceeds the greater
of (1) $100,000 or (2) two percent of the net assets of fiduciary accounts. At
December 31, 1997, the Company's net worth of $183.7 million was 2.9% of the
net assets of fiduciary accounts.
Note 11-- Notes Payable
Notes payable of the Company consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Revolving Credit Agreement ................... $ 96,000 $ 87,500
Senior note payable to a commercial
lender, principal payable on August 15,
2004, interest payable at 7.95%. ........... 20,000 --
Preferred shares financing related to the
Russian investment operations, principal
payable in three annual installments of
$2,000,000 through 1998, interest
payable at 5% .............................. 2,000 4,000
Small Business Administration ("SBA")
financing, notes payable to a bank,
interest payable semi-annually at rates
ranging from 6.12% to 9.8%, principal
due in 1998 through 2003 ................... 4,950 4,950
Note payable to a bank, interest payable
quarterly at the three month LIBOR rate
plus 6%, principal due in eight quarterly
installments through January, 1999,
secured by lease rental payments and
proceeds from insurance policies ........... 1,897 --
Note payable to a bank, guaranteed by
the Swedish Exports Credits Guarantee
Board, interest payable at 5.77%,
secured by equipment ....................... -- 812
Notes payable to a bank, guaranteed
by the Company, principal payable in
semi-annual installments, of $214,000
through November 30, 1999, no interest
payable, secured by equipment .............. 858 1,286
Note payable to a bank, guaranteed by the
Swedish Exports Credits Guarantee Board,
principal payable in semi-annual
installments of $1,415,000 through
January 31, 2002, interest payable at
6.42%, secured by equipment ................ 12,732 14,147
Note payable to a supplier, principal
payable in quarterly installments of
$336,000 through April 15, 2001,
interest payable at 7.85%, secured
by equipment ............................... 4,699 6,042
December 31,
1997 1996
------------ ------------
(Dollars in Thousands)
Note payable to a supplier, principal and
interest payable in quarterly installments
of $102,000 through April 15, 2001,
interest payable at 7.85%, secured
by equipment ............................... 1,239 1,535
Note payable to a supplier, principal
payable in quarterly installments of
$285,000 through May 30, 2001,
interest payable at 8.00%, secured
by equipment ............................... 3,988 5,128
Note payable to a supplier, principal
payable in quarterly installments of
$338,000 through December 15, 2001,
interest payable at 8.25%, secured by
equipment .................................. 5,237 6,422
Note payable to a supplier, principal
payable in semiannual installments of
$637,000 through April 15, 2003,
interest payable at 8.30%, secured by
equipment .................................. 5,795 --
Note payable to a bank, guaranteed by
OPIC, principal payable in twelve equal
semi-annual installments of $1,583,000
commencing March 15, 1998, interest
payable at 6.37% ........................... 19,000 19,000
Project financing, guaranteed by OPIC,
payable in semiannual installments of
$620,000 through December 15, 2003,
interest payable at 7.20% .................. 7,440 8,680
-------- --------
185,835 159,502
Less: Current portion ........................ (17,411) (10,002)
-------- --------
$168,424 $149,500
======== ========
</TABLE>
45
<PAGE> 48
Notes to Consolidated Financial Statements
(Continued)
In June 1996, the Company entered into an agreement with a syndicate of
commercial banks for a senior credit facility (the "Credit Facility"). Under
the Credit Facility, the Company may borrow up to $60 million (the "B-share
Revolver") to finance dealer advances relating to sales of back-end load shares
of the Company's domestic mutual funds. See Note 15 below for further
discussion on dealer advances. The B-share Revolver is subject to annual
renewal by the Company and the commercial banks. In the event the B-share
Revolver is not renewed at maturity it will automatically convert into a
five-year term loan. Advances under the B-share Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus 1.25%. The Credit Facility also
provides that the Company may borrow up to $80 million for general corporate
purposes (the "Corporate Revolver"). The Corporate Revolver is payable in full
on June 11, 2001. Advances under the Corporate Revolver bear interest, at the
Company's option, at (a) the higher of the bank's base lending rate or the
federal funds rate plus 0.50% or (b) LIBOR plus the applicable margin tied to
the Company's financial performance, of either 0.75%, 1.25%, 1.50% or 1.75%.
The Credit Facility provides that the Company must pay additional interest at
the rate of 0.375% per annum of the unused portion of the facility and an
annual arrangement fee of $35,000. The commitment fees were approximately $0.7
million. At December 31, 1997, the Company had borrowed $55 million under the
Corporate Revolver and $41 million under the B-share Revolver. For the years
ended December 31, 1997, 1996 and 1995, the weighted average interest rate on
the borrowings under the Credit Facility and lines of credit outstanding was
8.0%, 7.3% and 7.1%, respectively.
The Credit Facility contains restrictions that limit, among other things,
encumbrances on the assets of the Company's domestic mutual fund subsidiaries
and certain mergers and sales of assets. Additionally, the Credit Facility
requires that the Company meet certain financial covenants including covenants
that require the Company to maintain certain minimum ratios with respect to
debt to cash flow and interest payments to cash flow and a minimum tangible net
worth, all as defined in the Credit Facility. As of December 31, 1997, the
Company was in compliance with all applicable covenants of the Credit Facility.
Under the Credit Facility, the Company is required to maintain interest
rate protection agreements covering at least 60% of the outstanding
indebtedness under the B-share Revolver. As of December 31, 1997, the Company
entered into six five-year interest rate swap agreements with a member of the
Company's banking syndicate which has effectively fixed the interest rate on
notional amounts totaling $100 million. Under these agreements, the Company
will pay the bank a weighted average fixed rate of 6.76%, plus the applicable
margin (ranging from 0.75% to 1.75%), on the notional principal. The bank will
pay the Company interest on the notional principal at the current variable rate
stated under the B-share Revolver. The Company has incurred approximately
$976,000 and $499,000 of interest expense on these swap agreements during 1997
and 1996, respectively. The fair value of these agreements was $2,639,000, at
December 31, 1997, which represents the estimated amount the Company would be
obligated to pay to terminate the agreements.
In August 1997, the Company entered into an agreement (the "Note
Agreement") with a commercial lender pursuant to which the Company issued to
the lender Senior Notes in the aggregate principal amount of $20 million. The
Senior Notes, which bear interest at the rate of 7.95% per annum, have a
maturity of seven years. The restrictions and financial covenants under the
Note Agreement are substantially similar to the restrictions and financial
covenants under the Credit Facility. The Company used the proceeds of this
financing to reduce the amount outstanding under the Corporate Revolver.
In March 1996, TGL executed a loan agreement with Enskilda, a division of
Skandinaviska Enskilda Banken, pursuant to which Enskilda agreed to provide a
direct loan of SEK 94.5 million (approximately $14.2 million) bearing interest
at a fixed rate of 6.42% to finance the gyratory crusher and related equipment
procured from Svedala Crushing and Screening AB. This loan is guaranteed by the
Swedish Export Credits Board. As of December 31, 1997, TGL has drawn down SEK
93.8 million (or approximately $14.1 million) of which $1.4 million had been
repaid.
In April 1996, TGL obtained credit approval from Caterpillar Financial
Services Corporation ("Caterpillar"), pursuant to which Caterpillar agreed to
provide a revolving credit facility of up to $21 million, subsequently
increased to $23 million in September 1997, to finance the purchase of
replacement mining equipment. The revolving credit facility is subject to
renewal in May 1998. In the event the credit facility is not renewed at
maturity, most of the outstanding loan balances (approximately $20 million)
will continue to be repaid over a five year term. At December 31, 1997,
Caterpillar had issued disbursements, at TGL's request, for $26.3 million of
such facility bearing interest at fixed rates ranging from 7.85% to 8.30%, of
which $5.4 million had been repaid.
In October 1996, TGL and the Company executed definitive loan agreements
with the Overseas Private Investment Corporation ("OPIC") pursuant to which
OPIC agreed to guarantee financing up to $19 million with respect to the Phase
III expansion. Disbursement under this facility occurred in November 1996. The
underlying note is payable in twelve equal semiannual installments from March
15, 1998, through September 15, 2003, and bears a fixed interest rate of 6.37%.
In addition, a spread of 2.65% on outstanding borrowings is payable to OPIC. As
a condition to such OPIC financing, the Company was required to execute a
Project Completion Agreement pursuant to which the Company would advance funds,
as necessary (to the extent of dividends received during the construction stage
of the Phase III Expansion), to permit TGL to fulfill all of its financial
obligations, including cost overruns related to project development. Under the
Project Completion Agreement, the Company is also obligated to advance the
lesser of $9 million and any deficit with respect to a defined cash flow ratio
in the event of a payment default. The foregoing obligations of the Company
continue to exist until such time as TGL satisfies a production test and
certain financial and project development benchmarks. In addition, the Company
has guaranteed that if the percentage of gold proceeds that TGL must convert to
Ghanaian cedis increases above a certain threshold, and, as a result of
regulatory or other restrictions, TGL is unable to convert such proceeds to
satisfy its debt service obligations to OPIC, the Company shall cover up to $10
million of such obligations. The Company insured 90% of this obligation in
January 1997. In addition to third party financing facilities, the Company
provided $4.25 million in bridge financing to TGL in 1997 to satisfy TGL's
short term liquidity needs.
46
<PAGE> 49
Notes to Consolidated Financial Statements
(Continued)
Forest-Starma completed a $9.3 million project financing, guaranteed by
OPIC, in July 1996, of which $7.4 million was outstanding at December 31, 1997.
The underlying note is payable in twelve remaining equal semiannual
installments through December 15, 2003, and bears interest at a fixed rate of
7.20%. In addition, a guarantee fee of 2.75% on outstanding borrowings is
payable to OPIC prior to project completion, increasing to 5.125% after project
completion when the Company ceases to be an obligor in the transaction. As a
condition to OPIC's guarantee, the Company was required to execute a Project
Completion Agreement pursuant to which the Company would advance funds to
Forest-Starma, as necessary, to permit Forest-Starma to fulfill all of its
financial obligations, including cost overruns related to project development,
until such time as Forest-Starma satisfies a production test and certain
financial and project development benchmarks.
Maturities of notes payable at December 31, 1997, for each of the next
five years and thereafter are as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 ..................................... $ 17,411
1999 ..................................... 14,326
2000 ..................................... 13,470
2001 ..................................... 66,663
2002 ..................................... 7,555
Thereafter ............................... 66,410
--------
$185,835
========
</TABLE>
Note 12-- Minority Interest
The Company's minority interest liability includes the interests of the
minority equity holders of the Company's consolidated entities. The liability
for each entity is recorded based upon the net book value of that entity at the
balance sheet date, except for those instances in which agreements could result
in the Company redeeming those interests at amounts greater than their share of
the net book value. In those instances, adjustments are made to the liability
to reflect the minority equity holders' economic interests under those
agreements. As of December 31, 1997 and 1996, the Company's minority interest
liability consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Gold mining operations $ 7,958 $ 7,514
Russian investment operations 26,091 24,495
Polish brokerage operations 13 194
Poland Fund--venture capital 24,269 11,443
Pioneer Ventures Limited
Partnerships--venture capital 28,346 18,011
------- -------
Totals $86,677 $61,657
======= =======
</TABLE>
Note 13-- Major Customers
During the year ended December 31, 1997, gold sales aggregated $89.5 million.
During 1997, gold shipments from TGL in Ghana to two unaffiliated European
refiners accounted for $43.9 million and $41 million, respectively,
representing 95% of such total sales.
During the year ended December 31, 1996, gold sales aggregated $78.3
million. During 1996, gold shipments from TGL in Ghana to two unaffiliated
European refiners accounted for $41.2 million and $37.1 million, respectively,
representing 100% of such total sales.
During the year ended December 31, 1995, gold sales aggregated $90.2
million. During 1995, gold shipments from TGL in Ghana to two unaffiliated
European refiners accounted for $51.0 million and $39.2 million, respectively,
representing 100% of such total sales.
Note 14-- Acquisitions
Russian Investment Operations
On April 11, 1995, the Company completed its acquisition of the First Voucher
Fund and related financial entities. The Company financed the acquisition
through the use of its lines of credit in the amount of approximately $14
million and the issuance of preferred share financing in the amount of $6
million. Results of operations are included in the accompanying consolidated
statements of income commencing April 11, 1995. This transaction was accounted
for under the purchase method. Pro forma results of operations have not been
presented since the amounts are not material to the consolidated financial
statements.
Note 15-- Dealer Advances
Certain of the Pioneer Family of Mutual Funds maintain a multi-class share
structure, whereby the participating funds offer both the traditional front-end
load shares (Class A shares) and back-end load shares (Class B and Class C
shares). Back-end load shares do not require the investor to pay any sales
charge unless there is a redemption before the expiration of the minimum
holding period which ranges from three to six years in the case of Class B
shares and is one year in the case of Class C shares. However, the Company pays
upfront sales commissions (dealer advances) to broker-dealers ranging from 2%
to 4% of the sales transaction amount on Class B shares and 1% on Class C
shares. The participating Funds pay the Company distribution fees of 0.75% and
service fees of 0.25%, per annum of their net assets invested in Class B and
Class C shares, subject to annual renewal by the participating Fund's Board of
Trustees. In addition, the Company is paid a contingent deferred sales charge
(CDSC) on B and C shares redeemed within the minimum holding period. The CDSC
is paid based on declining rates ranging from 2% to 4% on the purchases of
Class B shares and 1% for Class C shares.
The Company capitalizes and amortizes Class B dealer advances for
financial statement purposes over periods which range from three to six years
depending on the participating Fund. The Company capitalizes and amortizes
Class C share dealer advances for financial statement purposes over a twelve
month period. The Company deducts the dealer advances in full for tax purposes
in the year such advances are paid. Distribution fees received by the Company
from participating Funds are recorded in income as earned. CDSC received by the
Company from redeeming shareholders reduce unamortized dealer advances
directly. In 1997, 1996 and 1995, the Company paid B-share dealer advances in
the amount of $16.3 million, $23.2 million and $14.9 million, respectively.
Note 16-- Financial Information by Business Segment
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in these consolidated financial statements. SFAS 131
requires companies to present segment information using the management
approach. The management approach is based on the way that management organizes
the segments within a Company for making operating decisions and assessing
performance. The Company's operating segments are organized around services and
products provided, as well as geographic regions. The segment information for
1996 and 1995 has been restated to conform to these requirements. The
intersegment transactions are for management services and the secondment of
employees. These transactions are generally priced on a cost or cost plus
basis.
47
<PAGE> 50
Notes to Consolidated Financial Statements
(Continued)
Note 16-- Financial Information by Business Segment (Continued)
Total revenues and income (loss) by business segment and geographic region,
excluding intersegment transactions (dollars in thousands):
<TABLE>
<CAPTION>
Financial Services
-------------------------------------
Domestic
Investment Czech
Management Russia Poland Republic
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Gross revenues and sales ................................... $ 176,900 $ 54,708 $14,542 $ 1,046
========== ======== ======= ========
Intersegment eliminations .................................. $ (8,427) $ (188) $ -- $ --
========== ======== ======= ========
Net revenues and sales ..................................... $ 168,473 $ 54,520 $14,542 $ 1,046
========== ======== ======= ========
Income (loss) before income taxes and minority interest .... $ 52,146 $ 12,811 $ 2,409 $ (1,406)
========== ======== ======= ========
Taxes ...................................................... $ 20,086 $ 5,411 $ 1,114 $ (162)
========== ======== ======= ========
Minority interest .......................................... $ -- $ 2,086 $ (52) $ --
========== ======== ======= ========
Net income (loss) .......................................... $ 32,060 $ 5,314 $ 1,347 $ (1,244)
========== ======== ======= ========
Depreciation and amortization .............................. $ 17,358 $ 1,673 $ 625 $ 280
========== ======== ======= ========
Interest expense ........................................... $ 2,885 $ 7,902 $ 6 $ --
========== ======== ======= ========
Capital expenditures ....................................... $ 6,986 $ 3,749 $ 322 $ --
========== ======== ======= ========
Gross identifiable assets at December 31, 1997 ............. $ 263,073 $135,809 $16,308 $ 237
========== ======== ======= ========
Intersegment eliminations .................................. $ (127,705) $ (3,877) $ -- $ --
========== ======== ======= ========
Net identifiable assets at December 31, 1997 ............... $ 135,368 $131,932 $16,308 $ 237
========== ======== ======= ========
Year ended December 31, 1996:
Gross revenues and sales ................................... $ 130,854 $ 21,147 $10,374 $ 245
========== ======== ======= ========
Intersegment eliminations .................................. $ (4,474) $ -- $ -- $ --
========== ======== ======= ========
Net revenues and sales ..................................... $ 126,380 $ 21,147 $10,374 $ 245
========== ======== ======= ========
Income (loss) before income taxes and minority interest .... $ 27,683 $ 2,655 $ (885) $ (3,172)
========== ======== ======= ========
Taxes ...................................................... $ 10,246 $ (1,806) $ (72) $ (272)
========== ======== ======= ========
Minority interest .......................................... $ -- $ 3,125 $ (83) $ --
========== ======== ======= ========
Net income (loss) .......................................... $ 17,437 $ 1,336 $ (730) $ (2,900)
========== ======== ======= ========
Depreciation and amortization .............................. $ 13,312 $ 577 $ -- $ --
========== ======== ======= ========
Interest expense ........................................... $ 2,328 $ 6,518 $ -- $ --
========== ======== ======= ========
Capital expenditures ....................................... $ 3,599 $ 10,716 $ 213 $ 631
========== ======== ======= ========
Gross identifiable assets at December 31, 1996 ............. $ 211,661 $ 92,353 $ 9,507 $ 313
========== ======== ======= ========
Intersegment eliminations .................................. $ (96,894) $ (3,092) $ -- $ --
========== ======== ======= ========
Net identifiable assets at December 31, 1996 ............... $ 114,767 $ 89,261 $ 9,507 $ 313
========== ======== ======= ========
Year ended December 31, 1995:
Gross revenues and sales ................................... $ 95,375 $ 5,762 $ 8,649 $ --
========== ======== ======= ========
Intersegment eliminations .................................. $ (3,144) $ -- $ -- $ --
========== ======== ======= ========
Net revenues and sales ..................................... $ 92,231 $ 5,762 $ 8,649 $ --
========== ======== ======= ========
Income (loss) before income taxes and minority interest .... $ 15,065 $ 5,020 $ 798 $ --
========== ======== ======= ========
Taxes ...................................................... $ 6,213 $ 2,156 $ 592 $ --
========== ======== ======= ========
Minority interest .......................................... $ -- $ 1,449 $ -- $ --
========== ======== ======= ========
Net income (loss) .......................................... $ 8,852 $ 1,415 $ 206 $ --
========== ======== ======= ========
Depreciation and amortization .............................. $ 8,597 $ 218 $ -- $ --
========== ======== ======= ========
Interest expense ........................................... $ 341 $ -- $ 3 $ --
========== ======== ======= ========
Capital expenditures ....................................... $ 5,676 $ 8,000 $ 646 $ --
========== ======== ======= ========
Gross identifiable assets at December 31, 1995 ............. $ 151,826 $ 48,957 $ 5,432 $ --
========== ======== ======= ========
Intersegment eliminations .................................. $ (66,594) $ -- $ -- $ --
========== ======== ======= ========
Net identifiable assets at December 31, 1995 ............... $ 85,232 $ 48,957 $ 5,432 $ --
========== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Venture Capital
--------------------------
Cent. & East.
Domestic Europe
----------- --------------
<S> <C> <C>
Year ended December 31, 1997:
Gross revenues and sales ................................... $ 1,828 $ 603
======= ========
Intersegment eliminations .................................. $ -- $ (81)
======= ========
Net revenues and sales ..................................... $ 1,828 $ 522
======= ========
Income (loss) before income taxes and minority interest .... $14,678 $ (2,454)
======= ========
Taxes ...................................................... $ 4,348 $ 297
======= ========
Minority interest .......................................... $ 4,005 $ (1,386)
======= ========
Net income (loss) .......................................... $ 6,325 $ (1,365)
======= ========
Depreciation and amortization .............................. $ 176 $ 214
======= ========
Interest expense ........................................... $ 402 $ --
======= ========
Capital expenditures ....................................... $ 38 $ 34
======= ========
Gross identifiable assets at December 31, 1997 ............. $77,101 $ 28,767
======= ========
Intersegment eliminations .................................. $ (7) $ --
======= ========
Net identifiable assets at December 31, 1997 ............... $77,094 $ 28,767
======= ========
Year ended December 31, 1996:
Gross revenues and sales ................................... $ 1,989 $ 594
======= ========
Intersegment eliminations .................................. $ -- $ --
======= ========
Net revenues and sales ..................................... $ 1,989 $ 594
======= ========
Income (loss) before income taxes and minority interest .... $ 9,272 $ (3,689)
======= ========
Taxes ...................................................... $ 2,964 $ (90)
======= ========
Minority interest .......................................... $ 1,804 $ (2,210)
======= ========
Net income (loss) .......................................... $ 4,504 $ (1,389)
======= ========
Depreciation and amortization .............................. $ 124 $ --
======= ========
Interest expense ........................................... $ 403 $ --
======= ========
Capital expenditures ....................................... $ 14 $ 24
======= ========
Gross identifiable assets at December 31, 1996 ............. $58,454 $ 15,603
======= ========
Intersegment eliminations .................................. $ (7) $ --
======= ========
Net identifiable assets at December 31, 1996 ............... $58,447 $ 15,603
======= ========
Year ended December 31, 1995:
Gross revenues and sales ................................... $ 1,016 $ 817
======= ========
Intersegment eliminations .................................. $ -- $ --
======= ========
Net revenues and sales ..................................... $ 1,016 $ 817
======= ========
Income (loss) before income taxes and minority interest .... $ 3,732 $ (850)
======= ========
Taxes ...................................................... $ 1,581 $ (250)
======= ========
Minority interest .......................................... $ (133) $ --
======= ========
Net income (loss) .......................................... $ 2,284 $ (600)
======= ========
Depreciation and amortization .............................. $ 109 $ --
======= ========
Interest expense ........................................... $ 402 $ --
======= ========
Capital expenditures ....................................... $ 49 $ 14
======= ========
Gross identifiable assets at December 31, 1995 ............. $39,562 $ 16,869
======= ========
Intersegment eliminations .................................. $ (1) $ --
======= ========
Net identifiable assets at December 31, 1995 ............... $39,561 $ 16,869
======= ========
</TABLE>
48
<PAGE> 51
Notes to Consolidated Financial Statements
(Continued)
<TABLE>
<CAPTION>
-Subtotal-
Real Estate Worldwide Gold
Services Financial Services Mining Timber Other Total
- ------------- -------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
$ 543 $ 250,170 $ 89,487 $ 11,879 $ 9,667 $ 361,203
======== ========== ======== ======== ========= ==========
$ -- $ (8,696) $ -- $ -- $ (9,667) $ (18,363)
======== ========== ======== ======== ========= ==========
$ 543 $ 241,474 $ 89,487 $ 11,879 $ -- $ 342,840
======== ========== ======== ======== ========= ==========
$ (2,939) $ 75,245 $ (2,818) $ (6,996) $ (3,621) $ 61,810
======== ========== ======== ======== ========= ==========
$ (1,035) $ 30,059 $ (426) $ (270) $ (1,816) $ 27,547
======== ========== ======== ======== ========= ==========
$ -- $ 4,653 $ 444 $ -- $ -- $ 5,097
======== ========== ======== ======== ========= ==========
$ (1,904) $ 40,533 $ (2,836) $ (6,726) $ (1,805) $ 29,166
======== ========== ======== ======== ========= ==========
$ 55 $ 20,381 $ 23,260 $ 2,871 $ 399 $ 46,911
======== ========== ======== ======== ========= ==========
$ -- $ 11,195 $ 2,766 $ 3,045 $ 2,065 $ 19,071
======== ========== ======== ======== ========= ==========
$ 344 $ 11,473 $ 11,520 $ 5,206 $ 177 $ 28,376
======== ========== ======== ======== ========= ==========
$ 7,173 $ 528,468 $152,866 $ 50,998 $ 24,199 $ 756,531
======== ========== ======== ======== ========= ==========
$ (1,847) $ (133,436) $ -- $ -- $ (19,302) $ (152,738)
======== ========== ======== ======== ========= ==========
$ 5,326 $ 395,032 $152,866 $ 50,998 $ 4,897 $ 603,793
======== ========== ======== ======== ========= ==========
$ 104 $ 165,307 $ 78,279 $ -- $ 2,679 $ 246,265
======== ========== ======== ======== ========= ==========
$ -- $ (4,474) $ -- $ -- $ (2,679) $ (7,153)
======== ========== ======== ======== ========= ==========
$ 104 $ 160,833 $ 78,279 $ -- $ -- $ 239,112
======== ========== ======== ======== ========= ==========
$ (463) $ 31,401 $ 4,737 $ (729) $ (1,744) $ 33,665
======== ========== ======== ======== ========= ==========
$ (186) $ 10,784 $ 1,519 $ (246) $ (509) $ 11,548
======== ========== ======== ======== ========= ==========
$ -- $ 2,636 $ 644 $ -- $ -- $ 3,280
======== ========== ======== ======== ========= ==========
$ (277) $ 17,981 $ 2,574 $ (483) $ (1,235) $ 18,837
======== ========== ======== ======== ========= ==========
$ 2 $ 14,015 $ 16,371 $ 116 $ 671 $ 31,173
======== ========== ======== ======== ========= ==========
$ -- $ 9,249 $ 137 $ -- $ -- $ 9,386
======== ========== ======== ======== ========= ==========
$ 14 $ 15,211 $ 74,789 $ 2,466 $ 199 $ 92,665
======== ========== ======== ======== ========= ==========
$ 2,692 $ 390,583 $149,613 $ 43,367 $ 18,209 $ 601,772
======== ========== ======== ======== ========= ==========
$ -- $ (99,993) $ -- $ -- $ (11,067) $ (111,060)
======== ========== ======== ======== ========= ==========
$ 2,692 $ 290,590 $149,613 $ 43,367 $ 7,142 $ 490,712
======== ========== ======== ======== ========= ==========
$ -- $ 111,619 $ 90,242 $ -- $ -- $ 201,861
======== ========== ======== ======== ========= ==========
$ -- $ (3,144) $ -- $ -- $ -- $ (3,144)
======== ========== ======== ======== ========= ==========
$ -- $ 108,475 $ 90,242 $ -- $ -- $ 198,717
======== ========== ======== ======== ========= ==========
$ -- $ 23,765 $ 24,365 $ -- $ (5,598) $ 42,532
======== ========== ======== ======== ========= ==========
$ -- $ 10,292 $ 8,521 $ -- $ (2,215) $ 16,598
======== ========== ======== ======== ========= ==========
$ -- $ 1,316 $ 1,807 $ -- $ -- $ 3,123
======== ========== ======== ======== ========= ==========
$ -- $ 12,157 $ 14,037 $ -- $ (3,383) $ 22,811
======== ========== ======== ======== ========= ==========
$ -- $ 8,924 $ 15,744 $ -- $ 328 $ 24,996
======== ========== ======== ======== ========= ==========
$ -- $ 746 $ 278 $ -- $ -- $ 1,024
======== ========== ======== ======== ========= ==========
$ -- $ 14,385 $ 15,601 $ 7,001 $ 116 $ 37,103
======== ========== ======== ======== ========= ==========
$ -- $ 262,646 $ 82,782 $ 33,212 $ 12,703 $ 391,343
======== ========== ======== ======== ========= ==========
$ -- $ (66,595) $ -- $ -- $ (5,679) $ (72,274)
======== ========== ======== ======== ========= ==========
$ -- $ 196,051 $ 82,782 $ 33,212 $ 7,024 $ 319,069
======== ========== ======== ======== ========= ==========
</TABLE>
49
<PAGE> 52
Information Relating to Shares
The Company's common stock is quoted on the NASDAQ National Market under
the symbol PIOG. At March 1, 1998, the Company had approximately 5,000
shareholders. The price range of the common stock and the dividends paid to
shareholders during each quarter of the last two years were as follows:
Price Range of Common Stock*
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
January--March ............ $26-3/4 $22-7/8 $30-1/2 $26-3/8
April--June ............... 26-1/2 23 28-3/4 26-1/4
July--September ........... 32-1/2 22-3/4 27 25-3/4
October--December ......... 33-3/8 27-1/8 26-3/4 21-3/4
</TABLE>
* Prices reflect the closing price of the Company's common stock on the
NASDAQ National Market.
Dividends on Common Stock
<TABLE>
<CAPTION>
Per Share
Record Date Payable Date Amount
- --------------------------- -------------------- ----------
<S> <C> <C>
March 1, 1996 ............. March 11, 1996 $ .10
June 3, 1996 .............. June 12, 1996 .10
September 3, 1996.......... September 10, 1996 .10
December 2, 1996 .......... December 10, 1996 .10
March 10, 1997 ............ March 17, 1997 .10
June 2, 1997 .............. June 9, 1997 .10
September 2, 1997.......... September 10, 1997 .10
December 1, 1997 .......... December 9, 1997 .10
March 2, 1998 ............. March 10, 1998 .10
</TABLE>
50
<PAGE> 53
[INSIDE BACK COVER]
THE PIONEER GROUP, INC. AND SUBSIDIARIES
Directors and Executive Officers*
Philip L. Carret, Director Emeritus.
Trustee Emeritus of certain of the Pioneer Family of Mutual Funds; Founder
Chairman of Carret & Company.
John F. Cogan, Jr., Chairman of the Board, Director and President. Chairman of
the Board, President and Trustee of each of the Pioneer Family of Mutual Funds;
President and Director of Pioneer Omega, Inc., Pioneer First Russia, Inc.,
Pioneer International Corporation and Pioneer Metals and Technology, Inc.;
Director of Pioneer Real Estate Advisors, Inc., Pioneer Capital Corporation,
Pioneer Management (Ireland) Limited, "Pioneer Investments," Pioneering Services
Corporation and Pioneer Forest, Inc.; Chairman of the Board and Director of
Pioneering Management Corporation, Pioneer Funds Distributor, Inc., Closed Joint
Stock Company "Pioneer Metals International," Closed Joint-Stock Company
"Forest-Starma," Teberebie Goldfields Limited and Pioneer Goldfields Limited;
Chairman of the Supervisory Board of Pioneer Fonds Marketing GmbH, Pioneer First
Polish Investment Fund Joint Stock Company S.A. and Pioneer Czech Investment
Company, A.S.; and Partner, Hale and Dorr LLP.
Robert L. Butler, Director and Executive Vice President. President and Director
of Pioneer Funds Distributor, Inc.; Director of Pioneering Management
Corporation, Pioneering Services Corporation, Pioneer Real Estate Advisors,
Inc., Pioneer International Corporation and Pioneer Management (Ireland)
Limited; Vice Chairman of the Supervisory Board of Pioneer Fonds Marketing GmbH;
and Member of the Supervisory Board of Pioneer First Polish Investment Fund
Joint Stock Company S.A. and Pioneer Czech Investment Company, A.S.
Maurice Engleman, Director. Chairman and CEO of Professional Equity Corporation
and Marketing Two, Inc., and Principal, Engleman & Associates.
Alan J. Strassman, Director. Partner and Chairman of the Board of Martingale
Asset Management; Treasurer and Member of the Board of Trustees of the Museum of
Fine Arts, Boston and a member of the Board of WGBH (public television and
radio)
Jaskaran S. Teja, Director. Senior Vice President of Pioneer International
Corporation; and Director of "Pioneer Investments," Pioneer Goldfields Limited
and Closed Joint Stock Company "Pioneer Metals International."
David D. Tripple, Director and Executive Vice President. Executive Vice
President and Trustee of each of the Pioneer Family of Mutual Funds; President
and Director of Pioneering Management Corporation; Director of Pioneer Capital
Corporation, Pioneer Real Estate Advisors, Inc., Pioneer International
Corporation, Pioneer Management (Ireland) Limited, "Pioneer Investments,"
Pioneer Funds Distributor, Inc., and Pioneer First Russia, Inc.; Member of
Supervisory Board of Pioneer First Polish Investment Fund Joint Stock Company
S.A. and Pioneer Czech Investment Company A.S.; and Director and Vice President
of Pioneer Omega, Inc.
John H. Valentine, Director. Director of Pioneer Capital Corporation; Director
of Entrepreneurial Management of Health Policy Institute; Director of
Visualization Technology, Inc.; Overseer of Hurricane Island/Outward Bound
School and Trustee of Thompson Island Outward Bound Education Center; and
Vice-Chairman of the Board of Boston Medical Center.
William H. Keough, Senior Vice President, Chief Financial Officer and Treasurer;
Treasurer of each of the Pioneer Family of Mutual Funds; an Treasurer of
Pioneering Management Corporation, Pioneering Services Corporation, Pioneer Real
Estate Advisors, Inc., Pioneer Capital Corporation, Pioneer SBIC Corp., Pioneer
Funds Distributor, Inc., Pioneer International Corporation, Pioneer Metals and
Technology, Inc., Pioneer First Russia, Inc. and Pioneer Omega, Inc.
Timothy T. Frost, Vice President. Director and Vice President of Pioneer Omega,
Inc. and Pioneer First Russia, Inc.; Director of "Pioneer Investments;" Senior
Vice President of Pioneer International Corporation; and Vice President of
Pioneer Real Estate Advisors, Inc.
Lucien Girard, III, Vice President. Managing Director and Chief Executive of
Pioneer Goldfields Limited; Managing Director of Teberebie Goldfields Limited;
and Director of Pioneer Metals and Technology, Inc.
Stephen G. Kasnet, Vice President. President and Director of Pioneer Real Estate
Advisors, Inc.; Trustee and Vice President of Pioneer Real Estate Shares; and
President of Pioneer Real Estate Advisors Poland, s.p. Z.O.O.
John F. Lawlor, Vice President. Vice President of Pioneering Management
Corporation; Director of Pioneer Goldfields Limited, Teberebie Goldfields
Limited, Pioneer Management (Ireland) Limited, Closed Joint Stock Company
"Pioneer Metals International" Pioneer Forest, Inc. and Closed Joint-Stock
Company "Forest-Starma;" and Vice President and Director of Pioneer Metals and
Technology, Inc.
Alicja K. Malecka, Vice President. President of Pioneer First Polish Investment
Fund Joint Stock Company S.A. and Pioneer Investment Poland Ltd.; Senior Vice
President of Pioneer International Corporation; Member of Supervisory Board of
Pioneer Czech Investment Company, A.S.; Director of "Pioneer Investments" and
Pioneer Polski Dom Maklerski S.A.; and Vice President of Pioneer Real Estate
Advisors, Inc.
Frank M. Polestra, Vice President. President and Director of Pioneer Capital
Corporation and Pioneer SBIC Corp.
William H. Smith, Jr., Vice President. President and Director of Pioneering
Services Corporation; Director and Vice President of Pioneer International
Corporation; Director of Pioneer Management (Ireland) Limited; and Member of
Supervisory Board of Pioneer Czech Investment Company, A.S.
Joseph P. Barri, Secretary. Secretary of each of the Pioneer Family of Mutual
Funds and the Company's subsidiaries; and Partner, Hale and Dorr LLP.
Robert P. Nault, General Counsel and Assistant Secretary. Assistant Secretary of
each of the Pioneer Family of Mutual Funds and the Company's subsidiaries.
* As defined pursuant to Section 16 of the Securities Exchange Act of 1934.
60 State Street, Boston Massachusetts 02109
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountant
As independent public accountants, we hereby consent to the incorporation of
our report, incorporated by reference into this form 10-K, into the Company's
previously filed registration statement nos. 33-61932, 33-59185, 33-59183 and
333-31847.
Arthur Andersen LLP
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00000
<CASH> 67,233
<SECURITIES> 38,341
<RECEIVABLES> 56,792
<ALLOWANCES> 0
<INVENTORY> 27,929
<CURRENT-ASSETS> 202,252
<PP&E> 245,662
<DEPRECIATION> (86,483)
<TOTAL-ASSETS> 603,793
<CURRENT-LIABILITIES> 135,671
<BONDS> 168,424
0
0
<COMMON> 2,522
<OTHER-SE> 181,165
<TOTAL-LIABILITY-AND-EQUITY> 603,793
<SALES> 0
<TOTAL-REVENUES> 342,840
<CGS> 0
<TOTAL-COSTS> 296,489
<OTHER-EXPENSES> (21,757)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,395
<INCOME-PRETAX> 56,713
<INCOME-TAX> 27,547
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,166
<EPS-PRIMARY> 1.170
<EPS-DILUTED> 1.140
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1.00000
<CASH> 27,809
<SECURITIES> 7,630
<RECEIVABLES> 31,880
<ALLOWANCES> 0
<INVENTORY> 15,605
<CURRENT-ASSETS> 91,219
<PP&E> 137,660
<DEPRECIATION> (53,189)
<TOTAL-ASSETS> 319,069
<CURRENT-LIABILITIES> 98,538
<BONDS> 0
2,483
0
<COMMON> 0
<OTHER-SE> 147,860
<TOTAL-LIABILITY-AND-EQUITY> 319,069
<SALES> 0
<TOTAL-REVENUES> 198,717
<CGS> 0
<TOTAL-COSTS> 158,908
<OTHER-EXPENSES> (624)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024
<INCOME-PRETAX> 39,409
<INCOME-TAX> 16,598
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,811
<EPS-PRIMARY> 0.930
<EPS-DILUTED> 0.900
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 32,477
<SECURITIES> 27,542
<RECEIVABLES> 43,186
<ALLOWANCES> 0
<INVENTORY> 24,908
<CURRENT-ASSETS> 140,720
<PP&E> 227,903
<DEPRECIATION> (69,436)
<TOTAL-ASSETS> 490,712
<CURRENT-LIABILITIES> 91,513
<BONDS> 149,500
0
0
<COMMON> 2,501
<OTHER-SE> 159,972
<TOTAL-LIABILITY-AND-EQUITY> 490,712
<SALES> 0
<TOTAL-REVENUES> 239,112
<CGS> 0
<TOTAL-COSTS> 212,692
<OTHER-EXPENSES> (7,283)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,318
<INCOME-PRETAX> 30,385
<INCOME-TAX> 11,548
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,837
<EPS-PRIMARY> .77
<EPS-DILUTED> .74
</TABLE>
