-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SnE4GOrcwdXzSRTls2FUaG0iOuahOkj+l853I3YzE7ieluXYShMfXleF8VRIgkMx 57U1iVxMJ3ThSsdFx+8W1Q== 0000950135-97-001490.txt : 19970401 0000950135-97-001490.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001490 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER GROUP INC CENTRAL INDEX KEY: 0000733060 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 135657669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08841 FILM NUMBER: 97568848 BUSINESS ADDRESS: STREET 1: 60 STATE ST STREET 2: 19TH FLOOR CITY: BOSTON STATE: MA ZIP: 02109-1820 BUSINESS PHONE: 8008211239 MAIL ADDRESS: STREET 1: 60 STATE STREET STREET 2: 19TH FLOOR CITY: BOSTON STATE: MA ZIP: 02109-1820 10-K 1 PIONEER GROUP, INC. ANNUAL REPORT ON FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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, 1996 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) DELAWARE 13-5657669 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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. [X]. Based on the last sale price of the Registrant's Common Stock on the Nasdaq National Market of $26.75 on March 24, 1997, the aggregate market value of the shares of voting stock held by non-affiliates of the Registrant on that date was $569,125,403. As of March 24, 1997, 25,130,568 shares of the Registrant's Common Stock, $0.10 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 1996 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 1997 Annual Meeting of Stockholders. ================================================================================ 2 PART I ITEM 1. BUSINESS OVERVIEW 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 30 open-end U.S. registered investment companies and one closed-end U.S. registered investment company (collectively, the "mutual funds") and eight 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 advisory services to institutions and corporations. The Company's international financial services businesses include investment operations in: (i) Warsaw, Poland, where the Company manages and distributes units of three mutual funds, owns 86% 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 three 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 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 management operations in the Czech Republic and has invested in an investment management operation in India. 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, including three projects pursuing the development of timber production in the Russian Far East. FINANCIAL SERVICES INVESTMENT MANAGEMENT ACTIVITIES The Company's wholly owned subsidiary, Pioneering Management Corporation ("Pioneering Management"), serves as investment manager to 30 domestic open-end mutual funds and one domestic closed-end mutual fund, consisting of six domestic growth portfolios, seven international growth portfolios, eight growth and income portfolios, six income portfolios, two tax-free income portfolios and two money market portfolios. These portfolios include the Pioneer World Equity Fund which commenced operations in late 1996 and the Pioneer Micro-Cap Fund which commenced operations in March 1997. All of the mutual funds (hereinafter referred to collectively as the "Funds") are registered under the Investment Company Act of 1940, as amended (the "1940 Act"). At March 1, 1997, the Funds had aggregate net assets with a market value of approximately $16.5 billion. In managing such assets, Pioneering Management employs 122 persons on a full-time basis, including 18 fund managers and 41 investment analysts and support staff. Management Contracts with the Funds. Pioneering Management manages each Fund pursuant to a management contract which is renewable annually by vote of either the Fund's Board (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 which were established in 1996 or 1997 or Funds which recently submitted their management contract to shareholders for approval) were all renewed for an additional year in 1996. Under these contracts, Pioneering Management is authorized 1 3 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 which 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 which is adjusted based upon the Fund's performance relative to the performance of an established index. For 1994, 1995 and 1996, Pioneering Management received revenues from management fees from the Funds of approximately $47 million, $54 million and $76 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 $2.1 million, $3.6 million and $2.4 million pursuant to expense limitation agreements with selected Funds during 1994, 1995 and 1996, respectively. Management fees from Pioneer II, the largest Fund, were approximately $20 million, $22 million and $29 million in 1994, 1995 and 1996, respectively. OTHER INVESTMENT MANAGEMENT ACTIVITIES Institutional Accounts. Pioneering Management acts as an investment manager to five private institutional accounts, acts as a subadvisor to two Luxembourg registered global funds marketed by an independent third party, 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 total net assets of approximately $706 million at March 1, 1997. Polish Funds. In 1992, subsidiaries of the Company organized and began distributing 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. 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. Pioneer First Polish Trust Fund Joint Stock Company ("Pioneer First Polish") serves as an investment manager and distributor of units of the First Polish Fund, Aggressive Investment Fund and Interest Bearing 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, excluding any assets invested in the Company's Funds. At December 31, 1996, Pioneer First Polish employed 96 full-time persons, including management and support staff. Pioneer First Polish is a wholly owned subsidiary of Pioneer International Corporation ("Pioneer International"), which, in turn, is a wholly owned subsidiary of the Company. At March 1, 1997, First Polish Fund, Aggressive Investment Fund and Interest Bearing Fund had net assets of approximately $345 million, $172 million and $22 million, respectively. Sales of units of the Polish Funds were $734 million, $21 million and $169 million in 1994, 1995 and 1996, 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"). Global Equity 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 management fees from Global Equity Fund, Global Bond Fund and Cashfonds of 1.25%, 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 1, 1997, Global Equity Fund, Global Bond Fund and Cashfonds had net assets of approximately $62 million, $11 million and $7 million, respectively. 2 4 India Fund. In 1994, subsidiaries of the Company organized Pioneer India Fund (the "India Fund"). Pioneering Management serves as the investment manager of the India Fund, and for such services receives a fee equal to 1.25% per annum of the India Fund's average daily net assets. ITI Pioneer AMC Ltd. ("ITI Pioneer"), an Indian company of which Pioneering Management owns 45%, Investment Trust of India Limited, an Indian corporation, owns 49%, and the employees of ITI Pioneer own 6%, serves as subadvisor for the India Fund, for which it receives fees ranging from 0.10% to 0.60% of the India Fund's average gross assets invested in India's securities markets. At March 1, 1997, the India Fund had net assets of approximately $21 million. In addition to serving as subadvisor to the India Fund, ITI Pioneer also serves as investment adviser to five private sector mutual funds for Indian citizens. These funds had aggregate net assets of approximately $66 million at March 1, 1997. Additional Information. For more information on assets under management and sales of mutual fund shares for the five years ended December 31, 1996, and other industry segment information for the three years ended December 31, 1996, see "Assets Under Management at December 31:" "Sales of Mutual Fund Shares" and Note 15-Financial Information by Business Segment included under Notes to Consolidated Financial Statements, all of which are included in the 1996 Annual Report to Stockholders (the "1996 Annual Report"), and are incorporated herein by reference. DISTRIBUTION OF FUND SHARES 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). In 1996, Pioneer Distributor sold shares of the Funds with an aggregate offering price of $2.4 billion, including Class A Shares (as defined below) with an aggregate offering price of $1.5 billion, Class B Shares (as defined below) with an aggregate offering price of $670 million, Class C Shares (as defined below) with an aggregate offering price of $88 million and shares of Pioneer Variable Contracts Trust with an aggregate offering price of $145 million. In connection therewith, Pioneer Distributor received aggregate commissions of $66.2 million, of which $59.1 million was reallowed to approximately 1,450 independent broker-dealers throughout the United States and in several foreign countries. In 1995, Pioneer Distributor received aggregate commissions of $58.7 million, of which $53.1 million was reallowed to broker-dealers. In 1994, Pioneer Distributor received aggregate commissions of $48.1 million, of which $42.5 million was reallowed to broker-dealers. One broker-dealer was responsible for approximately 9% of sales in 1996, 7% of sales in 1995 and 11% of sales in 1994. 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 the Funds which were established in 1996 and 1997) were all renewed for an additional year in 1996. 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 3 5 ("Class B Shares" and "Class C Shares"). On Class B Shares, 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. These early redemptions are subject to a contingent deferred sales charge (a "CDSC"), which ranges from 2.0% to 4.0%. An investment by any one account in Class B Shares is generally limited to $250,000. On Class C Shares, the investor does not pay any sales charge unless it redeems within one year of purchase. These early redemptions are subject to a CDSC of 1.0%. 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 who 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 ranging from 0.10% to 1.0%, depending on the Fund, 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 services fee of 0.25% for the first year). With respect to sales of Class C Shares, Pioneer Distributor will pay commissions to broker-dealers related to sales and service of such shares of 1% of the sales transaction amount (including a services fee of 0.25% for the first year). During 1994, 1995 and 1996, in connection with sales of Class B Shares, Pioneer Distributor paid commissions to broker-dealers of $4.7 million, $14.9 million and $23.2 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 (that are subject to annual renewals by the disinterested trustees of the Funds) 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 a distribution plan(s) 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 1996, the Boards of the Funds (other than the Funds which were established in 1996 and 1997) renewed the Class A, Class B and Class C Plans. In 1994, 1995 and 1996, Pioneer Distributor received distribution fees of $0.2 million, $2.5 million and $7.7 million, respectively. Domestic Sales of Shares of the Funds. Pioneer Distributor is a registered broker-dealer (see "Regulation" below), employing 105 full-time personnel, including 21 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 15 full-time 4 6 employees. In 1996, approximately 11% of the total sales of the U.S. registered Funds' shares were sold outside of the United States. Additional Information. For more information on sales of mutual fund shares for the five years ended December 31, 1996, see "Sales of Mutual Fund Shares" in the 1996 Annual Report, which information is incorporated herein by reference. SHAREHOLDER AND RELATED SERVICES Pioneering Services Corporation At December 31, 1996, the Funds had approximately 1,087,000 active shareholder accounts, including approximately 364,000 IRAs and other tax-qualified retirement accounts. Mutual fund shareholder accounts and, in particular, qualified accounts, require an exceptional amount of shareholder communications and transfer agency services. In order to compete successfully with other mutual fund complexes, the Company's wholly owned subsidiary, Pioneering Services Corporation ("Pioneering Services"), assumed transfer agent and shareholder servicing responsibilities for the Funds in 1985. Pioneering Services employs 285 full-time personnel, including 51 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 1996 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 1994, 1995 and 1996, Pioneering Services received revenues from service fees from the Funds and Pioneer Interest Shares (in 1994 and 1995) of approximately $20 million, $22 million and $25 million, respectively. In February 1997, Pioneer Ireland assumed responsibilities as sub-shareholder servicing agent for certain of the Funds. In that capacity, Pioneer Ireland will provide, under the direction of Pioneering Services, shareholder and transfer agency services to Fund shareholders located in Germany, Austria and Switzerland. Financial Services Limited. In January 1992, the Company's subsidiary, Pioneer International, established Financial Services Limited ("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 ("PZL") equivalent of $21.00 per account. The weighted average per account fee for 1996 was equal to the PZL equivalent of $17.10. In 1996, such fees aggregated approximately PZL 7.7 million (approximately $2.67 million). FSL provides similar unitholder services to an unaffiliated fund group and also provides business consulting and information services to institutional clients. At December 31, 1996, FSL serviced approximately 180,000 unitholder accounts and employed 116 full-time persons. 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 1994, 1995 and 1996, the Company received fees in connection with its services as trustee/custodian of $3.8 million, $3.7 million and $3.9 million, respectively. VENTURE CAPITAL Domestic 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 5 7 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 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 1, 1997, PVLP II had $14.3 million of unfunded commitments from investors. At December 31, 1996, Pioneer Capital and PVLP held approximately $16.4 million of investments (at cost) in 20 privately-held companies and $1.6 million (at cost) in six publicly-held companies. The aggregate value of these investments as of December 31, 1996, was $29.5 million. During 1996, Pioneer Capital and PVLP had net realized and unrealized gains of $9.8 million from their venture capital investment portfolio. At December 31, 1996, Pioneer Capital and PVLP had a total of $9.3 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, 1996, 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, 1996, PVLP II held approximately $12.8 million of investments (at cost) in 13 privately-held companies. The aggregate value of these investments as of December 31, 1996, was $15.3 million. During 1996, PVLP II had net realized and unrealized gains of $1.5 million from its venture capital investment portfolio. At December 31, 1996, PVLP II had a total of $2.6 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 December 31, 1996, 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 which are publicly traded are valued on a valuation date at the average of the last sales or closing 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 PCC, securities which 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 subsidiary, 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. This commitment provides the Company with a 7% indirect interest in PPUSLP and a 9% indirect interest in PPUKLP. At December 31, 1996, Pioneer Polish Fund held approximately $12 million of investments (at cost) in seven privately-held Polish companies. The value of these investments as of December 31, 1996, was approximately $11 million. 6 8 Follow on investments at December 31, 1996, were approximately $4 million. 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. 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 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 of 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 and (iii) 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 "Distribution of Fund Shares -- 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 1996, 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. 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 subsidiaries engaged in the venture capital industry must compete with a large number of venture capital firms, many of which have substantially larger staffs and more capital to invest. 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 Securities and Exchange Commission (the "SEC"), the Funds are also subject to certain regulation by the securities regulators in all fifty states and in the foreign jurisdictions in which certain 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, 7 9 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 fifty 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 and adviser to the Institutional Accounts, 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 violation of any of the applicable laws, rules or regulations to which Pioneer Distributor is subject could have an adverse effect upon the Company. 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 and Pioneer Global Equity Fund Plc are each authorized by The Central Bank of Ireland under the European Communities (Undertakings for Collective Investment in 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 with which they have contractual relationships. 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 agreements with the eight Institutional Accounts are all 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. NEW BUSINESS DEVELOPMENT Russian Investment Operations. 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, with over 2 million shareholders and over 125 portfolio 8 10 investments of March 1, 1997. 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 80% of the outstanding stock. The Company's Russian investment operations, which include Company for the Management of Investment Funds ("KUIF"), Pioneer Securities, Pioneer Services, Pioneer Investments and Pioneer Bank, are consolidated under Pioneer Omega's subsidiary, Pioneer First Russia, Inc. ("PFR"). In September 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 18.4% equity interest. This transaction was completed in January 1997. At March 1, 1997, PFR and its subsidiaries employed approximately 300 persons. KUIF serves as investment manager to the Voucher Fund and "Pioneer First," Russia's first open-ended unit investment Fund. Pioneer First, which invests mainly in Russian government bonds, was launched in November 1996. Pioneer Securities provides brokerage services, corporate financing and financial advisory services to Russian and western corporations. Pioneer Securities is a member of the Professional Association of Stock Market Participants (PAUFOR), 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 Pioneer First. Pioneer Investments will serve as investment manager to a direct equity fund to be sold to western institutional investors. The proposed fund will invest primarily in unlisted Russian securities. Pioneer Bank 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 and is one of approximately 40 dealers in government treasury bills (GKOs). In 1996, Pioneer Bank earned securities and interest income of approximately $15 million from its banking activities, offset by approximately $6 million in interest expense. Real Estate Advisory Services. In January 1996, the Company established Pioneer Real Estate Advisors, Inc. ("Pioneer Real Estate") to provide real estate advisory services to institutional investors and corporations in the United States, Poland, Russia and India. Pioneer Real Estate also provides advice regarding real estate management and investments to the Company's own subsidiaries. In that connection, Pioneer Real Estate, through its Moscow Representative Office, manages the Meridian Commercial Towers, an 18 story office tower located in Northern Moscow, which is owned by the Voucher Fund. Pioneer Real Estate, though a wholly owned subsidiary, is also developing a Polish real property fund to be sold to Polish and western institutional investors. India and Taiwan. Pioneering Management is a participant (45%) in a joint venture in India, which was organized to provide financial services in the Indian market, including mutual fund management. See "Investment Management Activities -- Other Investment Management Activities -- India Fund." The Company is a minority participant (10% ownership) in a joint venture in Taiwan, which was organized to manage and distribute investments in Taiwanese investment companies. Czech Republic. In 1995, subsidiaries of the Company organized and began distributing Pioneer Czech Investment Company Trust Fund (the "Pioneer Czech Fund"). 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. At December 31, 1996, Pioneer Czech employed 21 full-time persons. As of March 1, 1997, the Pioneer Czech Fund had net assets with a market value of approximately $13 million. Polish Brokerage Operations. In March 1996, Pioneer International acquired approximately 86% of Pioneer Polski Dom Maklerski, S.A., a Polish brokerage operation ("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. 9 11 NATURAL RESOURCE DEVELOPMENT PIONEER GOLDFIELDS LIMITED The Company's indirect wholly owned subsidiary, Pioneer Goldfields, a corporation organized under the laws of Guernsey, Channel Islands, 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 ("TGL"), 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 remaining 10% ownership interest in TGL is held by the Republic of Ghana. 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 venturer 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. The 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 which extend for 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 which 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. 10 12 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. This drilling added 1.9 million ounces to the audited reserves. 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. This drilling added 2.4 million ounces to the audited reserves. 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. TGL is changing its mining method from selective mining to bulk mining. TGL believes that this change will increase operating efficiencies and improve ore control. TGL is currently developing a new mine plan using a more sophisticated mine model and historical production data. The new mine plan will: (i) incorporate a new, modified pit design; (ii) facilitate the change in mining method; and (iii) address the slope instability problem. Until the new mine plan is complete, TGL cannot quantify the effect that the new mine plan will have on the calculation of previously reported proven and probable in situ mineable reserves. TGL anticipates, however, that proven and probable in situ mineable reserves will be reduced below the previously reported 9.1 million ounces. 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 what will be two pits, the Teberebie/Awunaben pit and the Mantraim pit. TGL processes its ore using a conventional heap leach operation. Higher-grade ore is crushed in one of TGL's two ore-crushing plants, each of which has a capacity of approximately 3.5 million tonnes of ore per year. In connection with the Phase III mine expansion (see "Development and Expansion" below), capacity is being expanded with the construction of the third (gyratory) ore-crushing plant and planned upgrades to one of the existing ore-crushing plants. When fully operational, total crushing capacity will increase to 12 million tonnes of ore per year. Cement is added to the crushed ore to bind the ore and to raise its alkalinity to a level conducive to cyanide leaching. Run-of-mine ore is not crushed or agglomerated with cement, but instead proceeds directly to later stages of processing. The agglomerate of ore and cement is then placed on a heap leach pad and the run-of-mine ore is placed on a dump leach pad. Both are then treated with a diluted cyanide solution which 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. 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 11 13 production levels (about 2,000 ounces per week) during the fourth quarter of 1991. Management initiatives permitting the efficient utilization of production equipment and facilities enabled TGL to increase production to over 3,000 ounces per week in 1993. After TGL's expansion in 1994, which is further described below, production increased to approximately 4,500 ounces per week. In 1996, production decreased to approximately 203,000 ounces, or 3,900 ounces per week, principally because of decreases in the gold recovery rate, ore processed, and the ore grade; offset partially by an increase in gold production from run-of-mine operations. With respect to the decrease in recovery rates, TGL experienced abnormally heavy rainfall resulting in excess dilution in the gold production process. In addition, TGL was unable to achieve forecasted production levels because of equipment availability problems resulting primarily from maintenance problems with the older equipment and difficulties in hiring and training experienced supervisors for mining operations. TGL produced its one millionth ounce of gold in January 1997, and estimates production of approximately 300,000 ounces in 1997. The 1997 production estimate assumes the successful implementation of TGL's Phase III mine expansion, including the start-up of the new gyratory crusher and South Plant, and the timely completion of schedule modifications to the West Plant. There can be no assurance that events, including those beyond the control of TGL, will not negatively affect the current timetable. TGL shipped approximately 203,000 ounces of gold in 1996, contributing $78.3 million to the Company's revenues. In 1995 and 1994, TGL shipped approximately 236,000 and 176,000 ounces of gold, respectively. A three-year financial summary for the gold mining business segment is shown below:
1996 1995 1994 (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) ------------- ------------- ------------- Revenues................................... $ 78.3 $90.2 $67.6 Net Income................................. $ 2.6 $14.0 $18.3 Total Assets............................... $ 148.3 $81.5 $75.7
The average realized price of gold sold by TGL during 1996, 1995 and 1994 was $385, $383 and $383 per ounce, respectively, based on the market spot price of gold at the time of sale. 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, the Company purchased put options to cover 1997 estimated production. The price of gold decreased significantly in the first quarter of 1997 reaching the price level of slightly below $340 per ounce. Should the market price of gold decline below $340 per ounce, the Company would continue to ship gold to refineries and exercise the put options, receiving payment for the difference between the market price of gold and $340 per ounce. The Company may consider additional hedging strategies if and when it deems circumstances appropriate. TGL's cash cost per ounce and total cost per ounce for 1996, 1995 and 1994 are summarized on the following table:
1996 1995 1994 ---- ---- ---- Cash Cost Per Ounce....................................... $268 $198 $161 Total Cost Per Ounce...................................... $361 $277 $248
The total cost per ounce includes $8 per ounce in 1996 and $6 per ounce in each of 1995 and 1994 for amounts expended by the Company, principally for political risk insurance premiums. Development and Expansion. TGL has completed two major capital expenditure programs at the Teberebie mine to date, designated Phase I and Phase II. 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. TGL is currently implementing a third capital expenditure program, 12 14 designated Phase III, to take advantage of the additional potential of the Teberebie mine. Phase III will include a third heap leach operation and the construction of a near-pit gyratory crushing facility which will act as the primary crushing facility for the West plant and the new South plant. The Phase III expansion is expected to provide annual crushing capacity of 12 million tonnes of ore. In March 1996, TGL received from the Ghana Environmental Protection Agency the necessary environmental permit to proceed with the Phase III expansion. Construction work on the project has since been substantially completed and the first gold pour at the South Plant is targeted for April 1997. Modifications to the West Plant conveyor systems are expected to be completed in late March 1997. Ten CAT 785 haul trucks and three CAT 5230 hydraulic shovels have been delivered to the site and the Company believes good progress has been made in training operators on the new equipment. The cost of the expansion is estimated at approximately $57.0 million, including 1996 and 1995 expenditures of $48.1 million and $2.6 million, respectively. Expansion capital expenditures in 1997 are estimated at approximately $6 million, of which $4.1 million had been expended through February of 1997. Expansion capital expenditures in 1996 consisted of approximately $29.7 million for the purchase and installation of crushing and processing facilities, approximately $14 million for incremental mining equipment, and $4.4 million for capitalized interest and third-party financing fees. For a description of the financing facilities relating to the Phase III expansion, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Natural Resource Development Businesses - -Gold Mining Business -- Liquidity and Capital Resources" included in the 1996 Annual Report, which is incorporated herein by reference. Customers and Employees. During 1996, 100% of gold sales represented gold shipments from TGL in Ghana to two unaffiliated European refiners for refining and subsequent sale. 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. At March 1, 1997, TGL had 1,357 employees, of which 1,324 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 July 1998. TGL experienced a two-day work stoppage in May 1994 and November 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 when it had been determined by TGL and local union officials that the employees had violated the disciplinary code. The union did not organize the 1996 work stoppage. The work stoppages had no 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. 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 in relation 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 13 15 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 not yet expired, however mining companies have registered their concern with certain of the proposed regulations. No date has been set by the GEPA for the implementation of the water quality regulations. 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%. As a result, the Company's first quarter 1994 earnings were enhanced by 90% of a $4.4 million reduction (which amounted to $0.16 per share) in income taxes deferred since commencement of commercial operations in April 1991. TGL's effective tax rate (U.S. and Ghana combined) in 1996, 1995 and 1994 was 32%, 35% and 33%, respectively. Pursuant to the terms of the MML, income taxes may be deferred until recovery of capital investment. Accordingly, deferred taxes at December 31, 1996, 1995 and 1994, were $9.6 million, $9.4 million and $15.9 million, respectively. The reduction in deferred taxes during 1994 includes the $4.4 million reduction attributable to the decrease in the income tax rate for mining companies. Income taxes were deferred during all of 1996. Income tax payments to the Republic of Ghana during 1995 and 1994 were $14.1 million and $6.2 million, respectively. Of such taxes paid in 1995, $5.5 million was attributable to the tax year ended December 31, 1994. Insurance. The Company maintains $65.9 million of "political risk" insurance principally from the Overseas Private Investment Corporation ("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. This insurance is presently limited to a ceiling of $64.4 million; however, the Company intends to apply to increase the ceiling in 1997. There can be no assurance that such OPIC insurance will become available in 1997. 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. 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 or its local subsidiary in Niger, Burkina Faso and Zimbabwe. 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. In 1995, Pioneer Goldfields incurred exploration costs of approximately $1.2 million, approximately $770,000 of which related to TGL's exploration activities at the Teberebie mine site and elsewhere in Ghana. 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 Khabarovsk Territory is located in the Russian Far East, bordering the Sea of Japan and the Sea of Okhotsk to the East, and the Amur River and Usuri River, which form the Russian border with China, to the South and West. The Company is in the process of consolidating its ownership of these three companies under its wholly owned subsidiary, Pioneer Forest, Inc. The Company's primary objectives in developing the three projects are: (i) to develop and utilize the substantial timber resources available to it in the Russian Far East in an environmentally sound and sustainable manner; (ii) to utilize advanced technology in timber harvesting and processing and to introduce western style management and timber marketing strategies to the Russian Far East; and (iii) to earn hard currency by exporting timber and timber products to Pacific Rim countries, principally Japan and South Korea. The Company believes that a number of factors suggest that the demand in the Pacific Rim region for Russian Far East timber will remain favorable, including: (i) strong and sustained population and economic growth; (ii) geographic proximity to the region; (iii) inadequate domestic supplies; (iv) reductions in supply 14 16 from historical suppliers, primarily U.S. and Canadian located in the Pacific Northwest; and (v) increasing quality of premium Russian logs. 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 816,300 hectares (approximately 2 million acres), with annual cutting rights of 895,000 cubic meters. All three companies are actively engaged in negotiations to expand existing leaseholds. The current leasehold rights of each of the projects are set forth below:
FOREST-STARMA AMGUN-FOREST UDINSKOYE ------------- ------------ --------- Hectares (acres) 129,900 485,400 201,000 (321,000) (1,200,000) (497,000) Annual Cutting Rights (m3) 245,000* 350,000 300,000
- --------------- * The Company is in the process of confirming with governmental authorities that it has been granted additional annual cutting rights of approximately 450,000 cubic meters and additional hectarage. Forest-Starma, in which the Company has a 76% direct interest and a 2.1% indirect interest, has developed a site, including a jetty, from which it exports timber. 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 quarters 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 were used to offset capitalized development costs. During the first quarter of 1997, the Company commenced commercial production of timber and amortization of deferred development costs. Capital required by this venture is now projected at approximately $49 million through the end of 1997, including $41.5 million in subordinated debt and accrued interest provided by the Company and $7.4 million in third-party outstanding financing. Forest-Starma completed a $9.3 million project financing, guaranteed by OPIC, in early July 1996, of which $8.7 million was outstanding at December 31, 1996. The underlying note is payable in fourteen 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. By the end of 1997, $1.9 million of principal will be paid on this third party financing, leaving an outstanding balance of $7.4 million. During the second half of 1996, Forest-Starma applied for $6.5 million in additional OPIC guaranteed financing for an expansion planned in 1997. If received, these funds will offset, in part, the subordinated debt provided by the Company for the 1997 expansion. Direct investment by the Company in Forest-Starma aggregated $27.1 million at December 31, 1996. Forest-Starma is expected to produce in excess of 300,000 cubic meters in 1997. The Company has signed an agreement to acquire an additional 14% direct interest in Forest-Starma. The transfer is currently awaiting regulatory approvals. 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 1995, Amgun-Forest and Udinskoye, the Company's other Russian timber ventures, each executed a long-term lease (50 years) relating to timber harvesting. The Company has a 75.6% direct interest and 1.3% indirect interest in Amgun-Forest and a 62% direct 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. 15 17 Preliminary estimates for these two projects are that, prior to securing third-party financing, the Company will provide funding of approximately $1 million in 1997. 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 Russia. 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 the summer of 1997. At December 31, 1996, the Company had expended approximately $2.3 million for exploration work related to Tas-Yurjah and expects to expend $1.5 million in 1997. 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 production and sale of powdered metals, permanent magnets and various trading endeavors. ITEM 2. DESCRIPTION OF PROPERTY The Company and its subsidiaries conduct their principal operations from leased premises with approximately 123,000 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 $2.8 million in 1996. The Company has agreed, in accordance with the current lease agreement, to lease an additional 22,400 square feet commencing in July 1997. As part of this arrangement, the Company will relinquish 7,100 square feet of space at the end of 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, two four-stage crushing plants, 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. See "Item 1 Business -- Natural Resource Development -- Pioneer Goldfields Limited -- Development and Expansion" for a description of TGL's Phase III expansion and the facilities being constructed in connection therewith. In addition, TGL has expanded its warehouse facilities. The expanded facilities were completed in the first quarter of 1997 and will be utilized during the second quarter of 1997. 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 has 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 78%-owned subsidiary, Forest-Starma, is pursuing the development of timber production in the Khabarovsk Territory of Russia under two long term leases comprising 129,900 hectares (approximately 321,000 acres) in the aggregate with annual cutting rights of 245,000 cubic meters. Forest-Starma is currently in the process of confirming with the governmental authorities that it has been granted additional cutting rights of approximately 450,000 cubic meters and additional hectarage. 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. 16 18 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. 17 19 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.
NAME AGE POSITIONS WITH THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES ---- --- ----------------------------------------------------------- John F. Cogan, Jr...... 70 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, Inc. ("Pioneer Forest"). Chairman and director of Pioneer Goldfields, TGL, Closed Joint Stock 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. Senior Partner of the Boston law firm, Hale and Dorr LLP, counsel to the Company. Robert L. Butler....... 56 Executive Vice President of the Company since 1985. Director of the Company since 1988. President and Director of Pioneer Distributor since 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. Previously, Vice President of the NASD. David D. Tripple....... 53 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...... 59 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. Lucien Girard, III..... 63 Vice President of the Company. Managing Director and Chief Executive of Pioneer Goldfields and TGL. Director of Pioneer Metals and Technology, Inc. ("Pioneer Metals").
18 20
NAME AGE POSITIONS WITH THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES ---- --- ----------------------------------------------------------- Stephen G. Kasnet...... 51 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......... 63 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...... 50 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...... 71 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, 60 Vice President of the Company and President and Director of Jr................... 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........ 50 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........ 33 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.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Incorporated by reference from the 1996 Annual Report 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 1996 Annual Report under the caption "Five Year Summary of Selected Financial Data." 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from the 1996 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated by reference from the 1996 Annual Report 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 1997 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" and "Certain Transactions." 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." 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: Report of Independent Public Accountants..................................... 27* Consolidated Statements of Income for the Three years Ended December 31, 1996....................................................................... 28* Consolidated Balance Sheets as of December 31, 1996 and 1995................. 29* Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1996.............................................. 30* Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1996................................................................... 31* Notes to Consolidated Financial Statements................................... 32*
- --------------- * Refers to page number in 1996 Annual Report. Each such financial statement or report is hereby incorporated herein by reference to the 1996 Annual Report 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. 20 22 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 31, 1997. 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. COGAN, JR. Principal Executive Officer and March 31, 1997 - ---------------------------------------- Director JOHN F. COGAN, JR. /s/ WILLIAM H. KEOUGH Principal Financial Officer and March 31, 1997 - ---------------------------------------- Principal Accounting Officer WILLIAM H. KEOUGH /s/ ROBERT L. BUTLER Director March 31, 1997 - ---------------------------------------- ROBERT L. BUTLER /s/ MAURICE ENGLEMAN Director March 31, 1997 - ---------------------------------------- MAURICE ENGLEMAN /s/ ALAN J. STRASSMAN Director March 31, 1997 - ---------------------------------------- ALAN J. STRASSMAN /s/ JASKARAN S. TEJA Director March 31, 1997 - ---------------------------------------- JASKARAN S. TEJA /s/ DAVID D. TRIPPLE Director March 31, 1997 - ---------------------------------------- DAVID D. TRIPPLE /s/ JOHN H. VALENTINE Director March 31, 1997 - ---------------------------------------- JOHN H. VALENTINE
21 23 INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT - ----------- ------- 3.1(10) -- Certificate of Incorporation, as amended 3.2(2) -- By-Laws, as amended 10.1(1)(2) -- Form of Management Contracts with Pioneer Funds 10.2(2) -- Form of Investment Company Service Agreements with Pioneer Funds 10.3(2)(9) -- Retirement Benefit Plan and Trust 10.4(6)(9) -- 1988 Stock Option Plan, as amended 10.5(6) -- Lease, dated as of July 3, 1991, between the Trustees of 60 State Street and the Company 10.6(3)(9) -- Form of Employment Agreements with Regional Vice Presidents 10.7(4) -- Finance Agreement between Teberebie Goldfields Limited and Overseas Private Investment Corporation ("OPIC") 10.8(4) -- Revised Form of Underwriting Contract with Pioneer Funds 10.9(4)(9) -- 1990 Restricted Stock Plan 10.10(5) -- Form of Management Contract with Pioneer U.S. Government Trust 10.11(5) -- Form of Management Contract with Pioneer Money Market Trust 10.12(5) -- Deed of Warranty, dated December 3, 1987, between the Government of the Republic of Ghana, Teberebie Goldfields Limited and The Pioneer Group, Inc. 10.13(5) -- Lease, dated February 2, 1988, between the Government of the Republic of Ghana and Teberebie Goldfields Limited 10.14(5) -- Agreement dated as of September 4, 1990, by and among Teberebie Goldfields Limited, the Republic of Ghana, Ghana Commercial Bank, Bank of Ghana, The Pioneer Group, Inc., OPIC and The Chase Manhattan Bank, N.A. 10.15(5) -- First Amended Finance Agreement, dated May 25, 1989, as amended September 4, 1990, between Teberebie Goldfields Limited and OPIC 10.16(5) -- Gold Refining and Purchasing Agreements Acknowledgment executed by Teberebie Goldfields Limited, the Republic of Ghana, Ghana Commercial Bank, Bank of Ghana, The Pioneer Group, Inc., Overseas Private Investment Corporation, and The Chase Manhattan Bank, N.A. 10.17(5) -- Map of Mining Operations in Tarkwa, Ghana 10.18(7) -- Collective Agreement between Teberebie Goldfields Limited and the Ghana Mine Workers Union of T.U.C. 10.19(7) -- Agreement, dated March 1, 1992, between Teberebie Goldfields Limited and Johnson Matthey Chemicals 10.20(7) -- Amendment, dated as of March 10, 1993, to Contract dated March 1, 1992, between Teberebie Goldfields Limited and Johnson Matthey Chemicals 10.21(8) -- Amendment, dated as of March 9, 1994, to contract between Teberebie Goldfields Limited and Johnson Matthey Chemicals 10.22(8) -- Refining Agreement, dated as of August 23, 1993, between Teberebie Goldfields Limited and Metalor 10.23(8) -- OPIC Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between OPIC and Pioneer Goldfields Limited, dated August 12, 1993 10.24(8) -- Master Gold Trading and Hedging Services Agreement, dated as of January 10, 1993 between Teberebie Goldfields Ltd. and Billiten Marketing and Trading B.V. 10.25(8) -- Agreement, dated as of September 29, 1993, between the Chase Manhattan Bank, N.A. and Teberebie Goldfields Ltd. 10.26(8) -- Letter Agreement, dated as of September 17, 1993, between OPIC and Teberebie Goldfields Ltd. 10.27(8) -- Credit Agreement, dated as of June 1, 1993, between Teberebie Goldfields Limited and Skandinaviska Enskilda Banken 10.28(10) -- Agreement, dated May 10, 1994, between Teberebie Goldfields Limited and Johnson Matthey PLC 10.29(10) -- Contract, dated May 30, 1994, among Timber Harvesting Equipment Sales, Inc., Joint-Stock Company "Forest-Starma" and the Company
24
EXHIBIT NO. EXHIBIT - ----------- ------- 10.30(10) -- Contract, dated August 4, 1994, among Morbark Northwest, Inc., Joint-Stock Company "Forest-Starma" and the Company 10.31(10) -- Contract, dated May 25, 1994, among Caterpillar Overseas S.A., Joint-Stock Company "Forest Starma" and the Company 10.32(10) -- OPIC Commitment to Guarantee Loans to Forest Starma, among OPIC, Forest Starma, Starma Holding Company and the Company 10.33(10) -- OPIC Contract of Insurance Against Business Income Loss between OPIC and the Company, effective September 30, 1992, as amended (No. D581) 10.34(10) -- OPIC Contract of Insurance Against Business Income Loss between OPIC and the Company, effective September 30, 1992, as amended (No. D582) 10.35(10) -- OPIC Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between OPIC and the Company, effective September 30, 1992 as amended (No. D547) 10.36(10) -- OPIC Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between OPIC and the Company, effective September 30, 1992 (No. D545) 10.37(10) -- Consulting Agreement, dated as of January 2, 1995, between the Company and Pioneer First Polish Trust Fund Joint Stock Company ("Pioneer Poland") 10.38(10) -- Services Contract, dated January 1, 1994, between Pioneering Services Corporation and Financial Services Limited 10.39(10) -- Agreement, dated June 25, 1992, between Pioneer Poland and Bank Polska Kasa Opieka S.A. ("Bank Pekao") 10.40(10) -- Agreement, dated as of June 25, 1992, between Bank Pekao and Pioneer International Corporation 10.41(10) -- Agreement, dated June 25, 1992, between Bank Pekao and Pioneer Poland 10.42(10) -- Agreement, dated September 24, 1992, between Pioneer Poland and Financial Services Limited 10.43(10) -- Letter Agreement dated February 28, 1995 between the Company and The First National Bank of Boston 10.44(11) -- Master Share Purchase Agreement dated as of April 7, 1995 by and among Pioneer Omega, Inc. and First Voucher Fund 10.45(11) -- Agreement dated as of April 7, 1995 by and among Pioneer Omega, Inc. and DOM Investment Company 10.46(11) -- Agreement dated as of April 7, 1995 by and among Pioneer Omega, Inc. and Moscow International Business Centre Limited 10.47(11) -- Stockholders Agreement dated as of April 11, 1995 by and among the Company and Moscow International Business Centre Limited 10.48(12) -- Collective Agreement dated as of July 3, 1995 between Teberebie Goldfields Limited and the Ghana Mineworker' Union of T.U.C. 10.49(12) -- Letter Agreement dated July 26, 1995 between the Company and The First National Bank of Boston 10.50(13) -- Contract of Insurance Against Incontrovertibility, Expropriation and Political Violence dated September 29, 1995 between the Overseas Private Investment Corporation and the Company 10.51(13) -- Commitment Letter dated September 29, 1995 between the Overseas Private Investment Corporation, the Company and Teberebie Goldfields Limited 10.52(13) -- Letter Agreement dated October 20, 1995 between the Company and The First National Bank of Boston 10.53(14) -- Credit Facilities Commitment Letter Agreement dated as of February 29, 1996 between the Company and The First National Bank of Boston 10.54(9)(14) -- 1995 Restricted Stock Plan 10.55(14) -- Credit Agreement between Teberebie Goldfields Limited and Skandinaviska Enskilda Banken AB dated as of March 11, 1996 10.56(9)(15) -- 1995 Employee Stock Purchase Plan
25
EXHIBIT NO. EXHIBIT - ----------- ------- 10.57(15) -- Loan Agreement dated as of April 23, 1996, by and between Teberebie Goldfields Limited and Caterpillar Financial Services Corporation. 10.58(15) -- Chattel Mortgage dated as of April 23, 1996, by and between Teberebie Goldfields Limited and Caterpillar Financial Services Corporation. 10.59(15) -- 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. 10.60(15) -- Loan Agreement dated as of May 16, 1996, by and between Teberebie Goldfields Limited and Caterpillar Financial Corporation. 10.61(16) -- Sublease dated as of August 15, 1996, between the Company and Citizens Financial Group, Inc. 10.62 -- Subscription Agreement dated as of October 16, 1996, between Pioneer First Russia, Inc. and International Finance Corporation. 10.63 -- Shareholders Agreement dated as of October 16, 1996, among Pioneer Omega, Inc. and Pioneer First Russia, Inc. and International Finance Corporation. 10.64 -- Put and Call Agreement dated as of October 16, 1996, among Pioneer First Russia, Inc. and Pioneer Omega, Inc. and International Finance Corporation. 10.65 -- Credit Facility Agreement dated 19th December, 1996, for Pioneer Real Estate Advisors, Inc. provided by Banque Societe Generale Vostok. 10.66 -- 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. 10.67 -- Second Amendment to Lease dated as of September 30, 1996, by and between the Trustees of 60 State Street Trust and the Company. 10.68 -- Third Amendment to Lease dated as of November 15, 1996, by and between the Trustees of 60 State Street Trust and the Company. 10.69 -- Finance Agreement dated as of October 25, 1996, between Teberebie Goldfields Limited and the Overseas Private Investment Corporation. 10.70 -- Project Completion Agreement dated as of October 28, 1996, among Teberebie Goldfields Limited, the Company and Overseas Private Investment Corporation. 10.71 -- Overseas Private Investment Corporation Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between the Overseas Private Investment Corporation and Pioneer Omega, Inc. 11 -- Computation of Earnings Per Share 13 -- 1996 Annual Report to Stockholders (which is not deemed "filed" except with respect to the portions specifically incorporated herein by reference) 21 -- Subsidiaries 23 -- Consent of Arthur Andersen LLP 27 -- Financial Data Schedule
- --------------- (1) Except Pioneer Short-Term Income Trust and Pioneer International Growth Fund. (2) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. (3) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for year ended December 31, 1988. (4) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for year ended December 31, 1989. (5) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for year ended December 31, 1990. (6) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. (7) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 26 (8) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (9) 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. (10) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for year ended December 31, 1994. (11) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for quarter ended March 31, 1995. (12) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for quarter ended June 30, 1995. (13) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for quarter ended September 30, 1995. (14) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (15) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (16) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. EX-10.62 2 SUBSCRIPTION AGREEMENT WITH PIONEER FIRST RUSSIA 1 EXHIBIT 10.62 ================================================================================ INVESTMENT NUMBER 4905 SUBSCRIPTION AGREEMENT BETWEEN PIONEER FIRST RUSSIA, INC. AND INTERNATIONAL FINANCE CORPORATION DATED OCTOBER 16, 1996 ================================================================================ 2 TABLE OF CONTENTS ----------------- ARTICLE OR SECTION ITEM PAGE NO. ------- ---- -------- ARTICLE I ................................................................ 2 DEFINITIONS - REFERENCES AND HEADINGS .................................. 2 Section 1.01. Definitions ............................................ 2 ----------- Section 1.02. References and Headings ................................ 4 ----------------------- ARTICLE II ............................................................... 5 DESCRIPTION OF PROJECT ................................................. 5 Section 2.01. Description of Project ................................. 5 ---------------------- ARTICLE III .............................................................. 5 REPRESENTATIONS AND WARRANTIES ......................................... 5 Section 3.01. Representations in Letter of Information ............... 5 ---------------------------------------- Section 3.02. Further Representations ................................ 5 ----------------------- Section 3.03. Warranty................................................ 6 -------- Section 3.04. Representations for the IFC Subscription................ 7 ---------------------------------------- Section 3.05 Representations of IFC.................................. 7 ---------------------- ARTICLE IV ............................................................... 8 AGREEMENT FOR SUBSCRIPTION ............................................. 8 Section 4.01. Subscription by IFC .................................... 8 ------------------- Section 4.02. Anti-dilution ..........................................10 ------------- Section 4.03. Suspension and Cancellation ............................11 --------------------------- ARTICLE V ................................................................11 CONDITIONS OF IFC SUBSCRIPTION AND PAYMENT .............................11 Section 5.01. Conditions of First IFC Subscription ...................11 ------------------------------------ Section 5.02. Conditions of Second IFC Subscription ..................13 ------------------------------------- Section 5.03. Conditions of Any IFC Subscription .....................14 ---------------------------------- 3 -ii- ARTICLE VI ...............................................................14 EVENTS OF SUSPENSION AND/OR CANCELLATION ...............................14 Section 6.01. Events of Suspension and/or Cancellation ...............14 ----------------------------------------- ARTICLE VII ..............................................................17 Miscellaneous ..........................................................17 Section 7.01. Taxes ..................................................17 ----- Section 7.02. Fees and Expenses ......................................18 ----------------- Section 7.03. Notices and Requests ...................................18 -------------------- Section 7.04. Evidence of Authority ..................................19 --------------------- Section 7.05. Saving of Rights .......................................19 ---------------- Section 7.06. English Language .......................................20 ---------------- Section 7.07. Governing Law ..........................................20 ------------- Section 7.08. Counterparts ...........................................21 ------------ ANNEX A ..................................................................22 - ------- DETAILS OF REQUIRED MINIMUM INSURANCE COVERAGE .........................22 ----------------------------------------------- SCHEDULE 1 ...............................................................23 - ---------- FORM OF SUBSCRIPTION REQUEST ...........................................23 ---------------------------- SCHEDULE 2 ...............................................................25 - ---------- FORM OF CERTIFICATE OF INCUMBENCY AND AUTHORITY ........................25 ----------------------------------------------- SCHEDULE 3 ...............................................................27 - ---------- AMENDMENT TO LETTER OF INFORMATION .....................................27 ---------------------------------- 4 SUBSCRIPTION AGREEMENT AGREEMENT, dated October 16, 1996, between: (PIONEER FIRST RUSSIA, INC.), a corporation organized and existing under the laws of the State of Delaware, in the United States of America (the "Company"), Address for communications: Mail: c/o The Pioneer Group, Inc. 60 State Street Boston, MA 02109 Attn.: General Counsel Facsimile: (617) 422-4293 and INTERNATIONAL FINANCE CORPORATION, an international organization established by Articles of Agreement among its member countries ("IFC"), Address for communications: Mail: 1818 H STREET N.W. Washington, D.C. 20433 Attn: Director, Europe Department Facsimile: (202) 477-6391 (202) 477-8164 WHEREAS: (A) The authorized capital of the Company is three million (3,000,000) shares of common stock, one cent of a dollar ($.01) par value per share ("Shares"). (B) For the purpose of financing a diversified financial services group in Russia, the Company, pursuant to the authority granted to and vested in the Board of Directors of the Company in accordance with the provisions of its Certificate of Incorporation, intends to issue such Shares from time to time and for such consideration and on such terms as the Board of Directors shall determine. 5 -2- (c) Subject to the terms and conditions of this Subscription Agreement, IFC has accepted to subscribe and pay for the number of Shares in the capital of the Company referred to in Article IV of this Agreement. NOW THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS - REFERENCES AND HEADINGS Section 1.01. Definitions. ----------- Wherever used in this Agreement, unless the context otherwise requires, the following terms shall have the following meanings: "Accounting Principles" means generally accepted accounting principles in the United States consistently applied; "Auditors" means Arthur Andersen or such other firm of independent public accountants as the Company shall appoint as auditors of the Company pursuant to Section 5.01(a); "Authorized Representative" means any of the persons designated in the Certificate of Incumbency and Authority; "Certificate of Incorporation" means the Certificate of Incorporation of the Company dated March 29, 1995, as amended October 1, 1996, and as it may be amended further from time to time; "Certificate of Incumbency and Authority" means the certificate to be provided to IFC by the Company pursuant to Section 7.04; "Dollars" and the sign "$" mean the lawful currency of the United States of America; 6 -3- "Event of Suspension and/or Cancellation" means any of the events provided for in Section 6.01; "First Voucher Bank" means First Voucher Bank, a commercial bank organized under the laws of Russia; "First Voucher Fund" means First Investment Voucher Fund, a voucher investment fund organized under the laws of Russia; "Fiscal Year" means the accounting year of the Company commencing each year on January 1 and ending on the following December 31, or such other accounting period of the Company as the Company may, with IFC's consent, designate; "IFC Shares" means the Shares subscribed or, as the context may require, to be subscribed pursuant to the IFC Subscription; "IFC Subscription" means the subscription of shares by IFC provided for in Article IV; "Initial Closing Date" means the date of IFC's first subscription; "Institute" means The Institute for the Economy in Transition; "KUIF" means Company for the Management of Investment Funds, an investment management company organized under the laws of Russia; "Letter of Information" means the letter from Pioneer dated June 10, 1996 addressed to IFC and containing information and representations about the Company and the Project and any amendment or supplement to such letter which is acceptable to IFC; "Net Asset Value" means total tangible assets less total liabilities; "Pioneer" means The Pioneer Group, Inc., a Delaware corporation; 7 -4- "Pioneer Omega" means Pioneer Omega, Inc., a Subsidiary of Pioneer; "Pioneer Securities" means Pioneer Securities, a brokerage company organized under the laws of Russia; "Pioneer Services" means Pioneer Services, a company organized under the laws of Russia to provide shareholder services to funds; "Project" means the Project described in Section 2.01; "Put and Call Agreement" means the agreement entered or to be entered into between IFC and Pioneer Omega, whereby, subject to the terms and conditions set forth therein, IFC shall have the option to sell to Pioneer Omega the IFC Shares and Pioneer Omega shall have the option to buy from IFC the IFC shares, in either case at the price determined on the basis of the higher of book value or a multiple of earnings; "Second Closing Date" means the date of IFC's payment for the second installment of IFC Shares; "Shares" means shares of common stock of the Company, one cent of a dollar ($.01) par value per share; and "Subsidiary" means, in relation to an entity, a company over fifty per cent (50%) of whose capital is owned, directly or indirectly by such entity. Section 1.02. References and Headings. ----------------------- (a) Unless otherwise provided, references to a specified Article, Section, Annex or Schedule shall be construed as a reference to that specified Article, Section, Annex or Schedule of this Agreement. (b) In this Agreement, the headings and the Table of Contents are inserted for convenience of reference only and shall not be used to define, interpret or limit any of the provisions of this Agreement. 8 -5- ARTICLE II DESCRIPTION OF PROJECT Section 2.01. Description of Project. ---------------------- The Project to be financed consists of the establishment of a diversified Russian financial services group, consisting initially of an investment management company, a securities company, a shareholder services company and an indirect majority interest in a commercial bank. Details of the Project are described in the Letter of Information, which is incorporated in this Agreement by reference. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. Representations in Letter of Information. ---------------------------------------- The Company confirms the representations contained in the Letter of Information, as amended and supplemented by Schedule 3 hereto, as if they had been set out in extenso in, and as of the date of, this Agreement. Section 3.02. Further Representations. ----------------------- The Company also represents as follows: (a) that it is a company duly incorporated under the laws of its jurisdiction of incorporation and has the corporate power to conduct its business as presently conducted and to enter into and perform its obligations under this Agreement and any agreements in implementation thereof; (b) that the authorized share capital of the Company is three million shares (3,000,000) Shares; (c) that the IFC Shares are available for subscription by IFC pursuant to the IFC Subscription and are free from any preemptive rights, liens, charges or encumbrances whatsoever; 9 -6- (d) that Pioneer Omega has converted all of the shares of Series A Preferred Stock of the Company which it previously held to nine hundred thousand (900,000) Shares and that there are no shares of Series A Preferred Stock authorized or outstanding; (e) that Pioneer's ownership of Pioneer Investments Russia has been transferred to Pioneer Omega and by Pioneer Omega to the Company in exchange for seventy-three thousand one hundred and fifty (73,150) Shares and that Pioneer Omega owns such seventy-three thousand one hundred and fifty (73,150) Shares; (f) that this Agreement has been duly authorized and executed by the Company and constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms; (g) that neither the making of this Agreement nor (when all the consents referred to in Section 5.01 (e) have been obtained) the compliance with its terms will conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default or require any consent under, any indenture, mortgage, agreement or other instrument or arrangement to which the Company is a party or by which it is bound, or violate any of the terms or provisions of the Company's Certificate of Incorporation or any judgment, decree or order or any statute, rule or regulation applicable to the Company; and (h) with the exceptions described in the Letter of Information, the Company and its Subsidiaries have obtained all governmental, corporate and other licenses, approvals and consents for the carrying on of their respective businesses as they are now carrried on and currently proposed to be carried on. Section 3.03. Warranty. -------- The Company acknowledges that it has made the representations referred to in Sections 3.01 and 3.02 with the intention of persuading IFC to enter into this Agreement and that IFC has entered into this Agreement on the basis of, and in full reliance on, each of such representations. The Company warrants to IFC that each of such representations is true and correct in all material respects as of the date of this Agreement and that none of them omits any matter the omission of which makes any of such representations misleading. Section 3.04. Representations for the IFC Subscription. ---------------------------------------- (a) For the purpose of each subscription of IFC Shares, the Company shall represent that: 10 -7- (i) the representations and warranties made or confirmed in Sections 3.01, 3.02 and 3.03 continue to be true, except as disclosed to and specifically accepted by IFC; (ii) no Event of Suspension and/or Cancellation has happened and is continuing; (iii) since the date of the Letter of Information nothing has occurred which might materially and adversely affect the carrying out of the Project or the Company's business prospects or financial condition, or which makes it improbable that the Company will be able to fulfill any of its obligations under this Agreement; and (iv) the proceeds of such subscription are needed by the Company for the purposes of the Project and will be invested in Russia through its Subsidiaries. (b) the representations contained in subsection (a) above shall be expressed to be effective as of the date of the relevant request for subscription and to continue to be effective as of the date of subscription. If any of such representations is no longer valid as of or prior to the date(s) of the subscription and payment, the Company shall immediately notify IFC and shall repay the amount paid upon demand by IFC if payment is made prior to receipt of such notice. Section 3.05 Representations of IFC. ---------------------- IFC hereby represents and warrants: (a) that it has the full power, authority and legal right to incur its obligations provided for in this Agreement, to execute and deliver this Agreement, and to perform and observe the terms and provisions hereof applicable to it; (b) this Agreement constitutes the legal, valid and binding obligation of IFC; (c) the execution, delivery and performance of this Agreement have been duly authorized by all necessary action on its part; 11 -8- (d) the execution, delivery and performance of this Agreement does not violate or exceed its powers or contravene any provision of its Articles of Agreement; and (e) all authorizations, consents, approvals and licenses required for the execution, delivery and performance of this Agreement have been duly obtained or granted and are in full force and effect. ARTICLE IV AGREEMENT FOR SUBSCRIPTION Section 4.01. Subscription by IFC. ------------------- (a) Subject to the terms and conditions of this Agreement, IFC agrees to subscribe and pay in full for Shares with an aggregate cost of $4.0 million (the "IFC Shares"). IFC will subscribe and pay for the IFC Shares in two installments, on the Initial Closing Date and the Second Closing Date. In the first IFC installment, on the Initial Closing Date IFC will subscribe and pay for two hundred thousand (200,000) Shares at a purchase price of $10.00 per share for a total subscription amount of $2.0 million. (b) As soon as possible (but in no event later than ninety (90) days after the Initial Closing Date), the Company will cause its Auditors to calculate the Net Asset Value of the Company as of the Initial Closing Date or on such other date the Company and IFC shall agree (the "Closing Net Asset Value). (c) If the Closing Net Asset Value is zero or greater, in the second installment, on the Second Closing Date IFC will subscribe and pay for two hundred thousand (200,000) Shares at a purchase price of $10.00 per share for an aggregate subscription of two million dollars ($2,000,000). The Company will issue to Pioneer or its designated Subsidiary, in consideration for Pioneer's or such Subsidiary's having made cash and/or non-cash contributions to the Company equal in value to not less than the amount by which the Closing Net Asset Value exceeds zero, a number of shares of Common Stock determined by dividing such amount by $10.00. (d) If the Closing Net Asset Value is less than zero, the Company shall issue such number of Shares, in consideration for IFC's previous subscription payment, such that the aggregate number of Shares held by IFC following such 12 -9- issuance represents the same proportion to the total Shares then issued and outstanding as $2 million does to the sum of $11,731,500 and the Closing Net Asset Value, with the number of shares to be issued rounded up to the nearest whole number. Following such issuance, on the Second Closing Date IFC will subscribe to Shares at an aggregate subscription price of two million dollars ($2,000,000) at a price per Share equal to the quotient obtained by dividing (i) the sum of $11,731,000 and the Closing Net Asset Value, by (ii) the total number of Shares issued and outstanding, including the IFC Shares previously issued. (e) IFC shall pay for the IFC Shares in Dollars to the credit of the Company at State Street Bank & Trust Company, 225 Franklin Street, Boston, MA 02101, or at such other bank in such place as the Company shall from time to time designate with the consent of IFC. (f) The Second Closing Date shall occur not later than ten (10) business days after the delivery by the Company to IFC of the Auditors' calculation of the Closing Net Asset Value. In the event IFC and the Company disagree about the Closing Net Asset Value, the parties shall meet to resolve such disagreement. If the parties shall not have reached agreement within ten (10) days, IFC may cause the calculation of the Closing Net Asset Value to be reviewed by an independent auditor (the "Independent Auditor") selected jointly by IFC and the Company. The determination of the Closing Net Asset Value by the Independent Auditor shall be binding upon both the Company and IFC. If the Closing Net Asset Value determined by the Independent Auditor is more than ten per cent (10%) lower than the Closing Net Asset Value determined by the Auditors, the Company shall pay the costs and expenses of the Independent Auditor. In all other cases, the costs and expenses of the Independent Auditor shall be paid by IFC. If IFC shall have disputed the calculation of the Closing Net Asset Value, the Second Closing Date shall occur not later than ten (10) days after the Closing Net Asset Value has been agreed upon by the Company and IFC or, if applicable, determined by the Independent Auditor. (g) Notwithstanding anything contained in this Agreement, IFC shall have the right, at any time and from time to time but, in any event, no later than March 31, 1997, in its discretion and without request by the Company, to subscribe and pay, on the terms set out in this Section 4.01, for any or all of the IFC Shares; provided, however, that the aggregate cost of the IFC Shares shall not exceed four million dollars ($4,000,000). (h) Upon each subscription and payment by IFC under this Section 4.01, the Company shall issue to IFC, or as IFC may direct, the number of fully paid Shares for which such payment is made, such shares to rank pari passu in all 13 -10- respects with, and to be identical to the existing Shares of the Company, and shall deliver to IFC, or as IFC shall direct, a share certificate evidencing valid title to the shares so issued free from any liens or preemptive rights, and shall furnish to IFC evidence satisfactory to IFC that such shares have been duly and validly authorized, issued and delivered and that all other legal requirements in connection therewith have been duly satisfied. (i) If IFC's purchase of IFC Shares at the Second Closing will result in Pioneer Omega's owning less than eighty per cent (80%) of the outstanding Shares of the Company immediately following such purchase, then Pioneer Omega shall have the right, exercisable simultaneously with the purchase by IFC of IFC Shares at the Second Closing, to purchase that number of additional Shares as will result in Pioneer Omega's owning the number of whole Shares that is closest to, but not less than, 80% of the outstanding Shares immediately following such purchase. The purchase price for each such Share shall be equal to the per share purchase price paid by IFC for IFC Shares at the Second Closing. The purchase price shall be paid at the Second Closing in cash or, with the prior consent of IFC, by the contribution to the Company of non-cash assets at a valuation approved by IFC. Section 4.02. Anti-dilution. ------------- Until all of the IFC Shares have been subscribed or the right to subscribe has terminated pursuant to Section 4.01 (g) or the right of the Company to further subscriptions has been canceled as provided in Section 4.03, whichever shall first occur, the Company shall not, unless IFC shall otherwise agree: issue any shares of any class, except as provided in Section 4.01; increase its capital except in accordance with the provisions of this Agreement; change the par value of, or the rights attached to, any of its shares of any class; or take any other action by amendment of its Charter or through reorganization, consolidation, sale of share capital, merger or sale of assets, or otherwise which might result in a dilution of the interest in the Company represented by the IFC Shares, except as provided in Section 4.01 or in the Letter of Information or as required by law. Section 4.03. Suspension and Cancellation. --------------------------- IFC may, by notice to the Company, suspend or cancel its obligation to subscribe and pay for the IFC Shares, or any unsubscribed portion thereof, as follows: (a) if the first subscription and payment shall not have been made by December 31, 1996, or such other date as may be agreed by the parties hereto; 14 -11- (b) if any Event of Suspension and/or Cancellation has occurred and is continuing, or if the event specified in subsection (k) of Section 6.01 is, in the reasonable opinion of IFC, imminent; (c) if, at any time, in the reasonable opinion of IFC, there shall exist any situation which indicates that performance by the Company of any of its obligations under this Agreement cannot be expected; or (d) on or after March 31, 1997. Upon the giving of such notice, the right of the Company to further subscriptions for any IFC Shares shall be suspended or canceled as the case may be. The exercise by IFC of the right of suspension does not preclude IFC from exercising its right of cancellation as provided in this Agreement, either for the same or another reason, and shall not limit any other provision of this Agreement. ARTICLE V CONDITIONS OF IFC SUBSCRIPTION AND PAYMENT Section 5.01. Conditions of First IFC Subscription. ------------------------------------ The obligation of IFC to make the first IFC Subscription and payment for IFC Shares shall be subject to the fulfillment, prior to or concurrently with the making of such first subscription and payment, of the following conditions, each in form and substance satisfactory to IFC: (a) arrangements and implementation reasonably satisfactory to IFC shall have been made, if not already made, with respect to the installation and operation of an accounting and cost control system and a management information system reasonably satisfactory to IFC, and for the appointment of the Auditors; (b) the Company shall have: (i) insured its properties and business with financially sound and reputable insurers against loss or damage in such manner and to the same extent as shall be no less than that generally accepted as customary in regard to property and business of like character (including, without limitation to the generality of the foregoing, the risks and coverages enumerated in the Annex A); and (ii) provided to IFC a copy of a certificate of its insurers, insurance brokers or agents confirming that such policies are in effect; 15 -12- (c) the following agreements, each in form and substance satisfactory to IFC, shall have been entered into by all parties to such agreements, shall have become (or, as the case may be, remain) unconditional and fully effective in accordance with their respective terms (except for this Agreement having become unconditional and fully effective, if that is a condition of any of such agreements) and a copy of each such agreement certified true and complete by the Company or other Pioneer affiliate(s) party or parties thereto shall have been furnished to IFC: (i) the Shareholders Agreement; (ii) the Put and Call Agreement; (iii) management services contracts, in a form satisfactory to IFC, between Pioneer and each of the Company's Subsidiaries; and (iv) secondment agreements, in a form satisfactory to IFC, between PIOGlobal, a subsidiary of Pioneer, and each of the Company's Subsidiaries; (d) the Company's Certificate of Incorporation and By-Laws shall be in form and substance satisfactory to IFC; (e) there shall have been obtained, or there shall have been made arrangements satisfactory to IFC, including but not limited to the execution of agreements, contracts, and other suitable legal documents, for obtaining, all governmental, corporate, creditors', shareholders' and other necessary licenses, approvals or consents for: (i) the financing by IFC under this Agreement; (ii) the carrying on of the business of the Company and its Subsidiaries as they are presently carried on and/or are contemplated to be carried on, with the exceptions noted in the Letter of Information; (iii) the due execution and delivery of, and performance under, this Agreement or the agreements referred to in sub-section (c) above, the IFC Shares and any documents in implementation of any thereof, (iv) the due execution of a Shareholders Agreement; and (v) the due execution of a Put and Call Agreement; (f) the Board of Directors of the Company, KUIF, Pioneer Securities, Pioneer Services and First Voucher Bank shall have adopted Policy Statements in a form reasonably satisfactory to IFC governing the activities and management of their respective operations; 16 -13- (g) IFC shall have received a legal opinion or opinions, in substance satisfactory to IFC, of counsel acceptable to IFC, and concurred in by counsel for the Company, with respect to: (i) the organization and existence of the Company and its authorized and subscribed share capital; (ii) the matters referred to in sub-sections (c), (d) and (e) above; (iii) the authorization, execution, validity and enforceability of this Agreement, the Put and Call Agreement, the Shareholders Agreement, the IFC Shares and any documents in implementation thereof; (iv) the compliance with all obligations referred to in Section 7.01; and (v) such other matters incident to the transactions contemplated by this Agreement and otherwise as IFC shall reasonably request; (h) IFC shall have received reimbursement of the fees and expenses of IFC's outside counsel as provided in Section 7.02 (a) unless paid beforehand directly to such counsel upon the request of IFC; and (i) the Certificate of Incumbency and Authority shall have been supplied to IFC. Section 5.02. Conditions of Second IFC Subscription. ------------------------------------- (a) IFC shall have received from the Company a copy of the report of the Auditors showing the Closing Net Asset Value; and (b) the Company shall have issued to Pioneer or its designated subsidiary for the consideration referred to in Section 4.01 (c) the number of shares determined by dividing the amount by which the Closing Net Asset Value exceeds zero by $10.00. Section 5.03. Conditions of Any IFC Subscription. ---------------------------------- The obligation of IFC to make any IFC Subscription shall be subject to the conditions that: (a) the representations and warranties confirmed or made in Article III above shall be true on and as of the date of the IFC Subscription and with the same effect as though such representations and warranties had been made on and as of the date of such IFC Subscription (but in the case of Section 3.02(g), without the words in parenthesis); (b) after giving effect to such IFC Subscription and payment the Company shall not thereby be in violation of its Certificate of Incorporation, any provision contained in any document to which the Company is a party (including 17 - 14- this Agreement) or by which the Company is bound, or any applicable law, rule or regulation; and (c) at least fifteen (15) days prior to the date of the proposed IFC Subscription, the Company shall have delivered to IFC a subscription request, in the form of Schedule 1 and in substance satisfactory to IFC containing inter alia certifications with respect to the foregoing conditions, signed by an Authorized Representative and expressed to be effective as of the date of the relevant IFC Subscription and/or payment. ARTICLE VI EVENTS OF SUSPENSION AND/OR CANCELLATION Section 6.01. Events of Suspension and/or Cancellation. ---------------------------------------- Each of the following events constitutes an Event of Suspension and/or Cancellation: (a) if the Company fails to carry out the Project and conduct its business with due diligence and efficiency and in accordance with sound financial and business practices; fails to carry out the Project in a manner that complies in all material respects with the project description which is contained in the Letter of Information (subject to any modifications to which IFC may agree); or fails to cause the proceeds of the first installment of the IFC Subscription to be applied exclusively to the Project and invested in Russia through its Subsidiaries; (b) if the Company fails to maintain at all times a firm of independent public accountants reasonably acceptable to IFC as auditors of the Company; (c) if the Company makes directly or indirectly any distribution on its share capital, or purchases, redeems or otherwise acquires any shares of the Company or any option over the same prior to subscription by IFC of all of the IFC Shares or the cancellation by IFC of the IFC Subscription; (d) if the Company breaches any of the covenants set forth in Section 4.02; (e) if the Company enters into any transaction with any person other than in the ordinary course of business, on ordinary commercial terms and on the 18 -15- basis of arm's-length arrangements, except to the extent disclosed in the Letter of Information; (f) if the Company enters into any partnership, profit-sharing or royalty agreement or other similar arrangement whereby the Company's income or profits are, or might be, shared with any other person; or, except to the extent disclosed in the Letter of Information, if the Company enters into any management contract or similar arrangement whereby its business or operations are managed by any other person; (g) if the Company changes its Certificate of Incorporation or By-Laws in any manner that would be inconsistent with the provisions of this Agreement; changes its Fiscal Year; changes the nature of the present and contemplated business or operations of the Company or any of its Subsidiaries or changes the nature or scope of the Project; sells, transfers, leases or otherwise disposes of all or a substantial part of its assets (whether in a single transaction or in a series of transactions, related or otherwise); or undertakes or permits any merger, consolidation or reorganization; (h) if the Company terminates, amends or grants any waiver in respect of any provision of any of the agreements referred to in Section 5.01 (c) above; or fails to perform any of the conditions included in Sections 5.01, 5.02 and 5.03 above; (i) if the Company fails to perform any of its obligations under this Agreement, the Shareholders Agreement or the Put and Call Agreement; (j) if any representation or warranty confirmed or made in the Letter of Information, Article III or in connection with the execution and delivery of this Agreement, or in connection with any request for subscription and/or payment under this Agreement, shall be found to have been incorrect in any material respect; (k) if any government or governmental authority shall have condemned, nationalized, seized, or otherwise expropriated all or any substantial part of the property or other assets of the Company or of its share capital or shall have assumed custody or control of such property or other assets or of the business or operations of the Company or of its share capital, or shall have taken any action for the dissolution or disestablishment of the Company or any action that would prevent the Company or its officers from carrying on its business or operations or a substantial part thereof; 19 -16- (1) if there shall have been entered against the Company or any of its Subsidiaries a decree or order by a court adjudging the Company bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property or other assets, or ordering the winding up or liquidation of its affairs; or the institution by the Company of proceedings to be adjudicated bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property or other assets, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due; or any other event shall have occurred which under any applicable law would have an effect analogous to any of those events listed above in this subsection; (m) if the Company or any of its Subsidiaries shall have convened a meeting for the purpose of making, or the Company shall have proposed or shall have entered into, any arrangement or composition with or for the benefit of its creditors, or the Company shall have ceased or shall have threatened to cease to carry on its business or any substantial part thereof or the Company shall have become unable to pay its debts as they fall due or shall have otherwise become insolvent; or any receiver or trustee shall have been appointed of the whole or any part of the assets of the Company or a distress or execution (or analogous process) relating to a liability shall have been levied or enforced upon or sued out against any of the chattels or property of the Company and such distress or execution shall not have been discharged within five (5) days; (n) if a default shall have occurred with respect to any indebtedness of the Company or under any agreement pursuant to which there is outstanding any such indebtedness of the Company, and such default shall have continued for more than any applicable period of grace; (o) if any license, approval or consent necessary for the carrying out of the Project and the business and operations generally of the Company or its Subsidiaries or for the performance by the Company of its obligations under this Agreement is not obtained when required or otherwise at any time ceases to be in full force and effect and the absence of such license, approval or consent would have a material adverse effect upon the ability of the Company or its Subsidiaries 20 -17- to carry on their respective businesses substantially as contemplated by the Letter of Information; or (p) any provision of this Agreement is or becomes invalid, illegal or unenforceable. ARTICLE VII MISCELLANEOUS Section 7.01. Taxes. ----- The Company shall pay all taxes (including stamp taxes), duties, fees or other charges payable on or in connection with the execution, issue, delivery, registration or notarization of this Agreement, the IFC Shares and any documents related thereto, and shall, upon notice from IFC, reimburse IFC or its assigns for any such taxes, duties, fees or other charges paid by IFC or its assigns thereon. Section 7.02. Fees and Expenses. ----------------- The Company shall pay or cause to be paid to IFC or as IFC may direct: (a) the fees and expenses of IFC's outside counsel in the United States and the Russian Federation (with respect to (i), (ii) and (iii) only, not to exceed in the aggregate seven thousand five hundred dollars ($7500)) incurred in connection with: (i) the preparation of IFC's investment in the Company; (ii) the preparation, review, execution and, where appropriate, registration, delivery and translation of this Agreement, the IFC Shares and any other documents related to this Agreement or the IFC Shares; (iii) the giving of any legal opinion required by IFC under this Agreement; (iv) any amendment or modification to, or waiver under, this Agreement; (v) the registration (where appropriate) and delivery of the evidences of payments by or to IFC in relation to the IFC Subscription; and (vi) the exercise by IFC of its rights or powers consequent upon, or arising out of, the occurrence of any Event of Suspension and/or Cancellation; and (b) all of IFC's reasonable costs and expenses, including legal fees, incurred by IFC in relation to the protection or enforcement, or attempted protection or enforcement, of any rights under this Agreement provided that the Company shall not be obliged to pay any such costs or expenses if any court of 21 -18- competent jurisdiction or duly appointed arbitrator determines against IFC in such instance. Section 7.03. Notices and Requests. -------------------- Any notice, request or other communication to be given or made under this Agreement to IFC or to the Company shall be in writing and except as otherwise provided in this Agreement it shall be deemed to have been duly given or made when it shall be delivered by hand, mail (or airmail if sent to another country), or confirmed facsimile to the party to which it is required or permitted to be given or made at the relevant address for communications of such party which is specified at the opening of this Agreement or at such other address for communication as such party shall have designated by notice to the party giving or making such notice, request or other communication. Any communication to be delivered to any party under this Agreement which is sent by confirmed facsimile will constitute written legal evidence between the parties. Section 7.04. Evidence of Authority. --------------------- The Company shall furnish to IFC the Certificate of Incumbency and Authority, that is, a certificate, in the form of Schedule 2 and in substance satisfactory to IFC, evidencing the authority of the person or persons who will, on behalf of the Company, sign the requests and certifications provided for in this Agreement, or take any other action or execute any other document required or permitted to be taken or executed by the Company under this Agreement, and the authenticated specimen signature of each such person. Section 7.05. Saving of Rights. ---------------- (a) The rights and remedies of IFC in relation to any misrepresentations or breach of warranty on the part of the Company shall not be prejudiced by any investigation by or on behalf of IFC into the affairs of the Company, by the execution or the performance of this Agreement or by any other act or thing which may be done by or on behalf of IFC in connection with this Agreement and which might, apart from this Section, prejudice such rights or remedies. (b) No course of dealing or waiver by IFC in connection with any condition of IFC Subscriptions and/or payment under this Agreement shall impair any right, power or remedy of IFC with respect to any other condition, or be construed to be a waiver thereof, nor shall the action of IFC in respect of any IFC Subscription and/or payment affect or impair any right, power or remedy of IFC in respect of any other IFC Subscription and/or payment. 22 -19- (c) Unless otherwise notified to the Company by IFC and without prejudice to the generality of subsection (b) above, the right of IFC to require compliance with any condition under this Agreement which may be waived by IFC in respect of any IFC Subscription and/or payment is expressly preserved for the purposes of any subsequent IFC Subscription and/or payment. (d) No course of dealing and no delay in exercising, or omission to exercise, any right, power or remedy accruing to IFC upon any default under this Agreement or any other agreement shall impair any such right, power or remedy or be construed to be a waiver thereof or an acquiescence therein; nor shall the action of IFC in respect of any such default, or any acquiescence by it therein, affect or impair any right, power or remedy of IFC in respect of any other default. Section 7.06. English Language. ---------------- All documents to be furnished or communications to be given or made under this Agreement shall be in the English language or, if in another language, shall be accompanied by a translation into English certified by a representative of the Company, which translations shall be the governing version between the Company and IFC. Section 7.07. Governing Law. ------------- (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, United States of America. (b) The Company hereby irrevocably agrees that any legal action, suit or proceeding arising out of or relating to this Agreement be brought in the courts of the State of New York or of the United States of America located in the State of New York. By the execution and delivery of this Agreement, the Company hereby irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding and designates, appoints and empowers CT Corporation, as its authorized agent to receive for and on its behalf service of summons or other legal process in any such action, suit or proceeding in the State of New York. Final judgment against the Company in any such action, suit or proceeding shall be conclusive. Nothing herein shall affect the right of IFC to commence legal proceedings or otherwise sue the Company in any other appropriate jurisdiction or to serve process upon the Company in any manner authorized by the laws of any such jurisdiction. 23 - 20 - (c) The Company further covenants and agrees that, for so long as it shall be bound to IFC under this Agreement, it shall maintain a duly appointed agent for the service of summons and other legal process in New York, New York, United States of America, for purposes of any legal action, suit or proceeding brought by IFC in respect of this Agreement and shall keep IFC advised of the identity and location of such agent. The Company further irrevocably consents, if for any reason there is no authorized agent for service of process in New York, to the service of process out of the said courts by mailing copies thereof by registered United States air mail, postage prepaid, to the Company at its address specified herein; and in such a case IFC shall also send by confirmed facsimile, or shall undertake that there is also sent by confirmed facsimile, a copy of such process to the Company. (d) The mailing of process in any such action, suit or proceeding (and whether to the Company or to its authorized agent) shall be deemed personal service and accepted by the Company as such and shall be legal and binding upon the Company for all the purposes of any such action, suit or proceeding. (e) In addition, the Company, to the extent permitted by law, irrevocably waives any objection which it may now or hereafter have to the laying of venue of any action, suit or proceeding arising out of New York or in the United States District Court for the Southern District of New York, and the Company hereby further irrevocably waives any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Section 7.08. Counterparts. ------------ This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names, as of the date first above written. PIONEER FIRST RUSSIA, INC. By: /s/ John F. Cogan Jr. --------------------------------------- Name: John F. Cogan Jr. --------------------------------- Title: President -------------------------------- 24 -21- INTERNATIONAL FINANCE CORPORATION By: /s/ Paul Hinchey --------------------------------------- Name: Paul Hinchey --------------------------------- Title: Division Manager -------------------------------- 25 - 22 - ANNEX A ------- Details of Required Minimum Insurance Coverage ---------------------------------------------- The Company's insurance policies shall include, but not be limited to, coverage for the following risks: 1. Fire and Broad Perils or All-Risks, in respect of all assets, with the sums insured to be based on Replacement Cost; 2. Business Interruption; 3. General Third-Party Liability, covering all activities of the Company, for at least $250,000; 4. Errors and Omissions; 5. Fidelity; and 6. Directors and Officers Liability. The Company's cancellation provisions for the above insurance policies should be no less than thirty (30) days. 26 - 23 - SCHEDULE 1 ---------- Form of Subscription Request ---------------------------- (To be Typed on Letterhead of the Company) [Date:] International Finance Corporation 1818 H Street N.W. Washington D.C. 20433 United States of America Reference: IFC Investment No. 4905 Purpose: Request for Subscription No. _______ --------------------------------------------- Gentlemen: 1. Please refer to the Subscription Agreement (the Agreement) dated _______________, between International Finance Corporation ("IFC") and the undersigned Company (the "Company"). 2. Expressions defined in the Agreement shall bear the same meanings herein. 3. In accordance with the provisions of the Agreement and the enclosed resolution of the Company's Board of Directors, the Company hereby requests the subscription by IFC of: ______________IFC Shares _________________, and payment therefor as follows: Amount requested: ............................. Date needed: .................................. At Bank: ...................................... Address: ................................... Account: ................................... 4. For the purposes of this subscription and payment, the Company hereby makes the representations contained in Section 3.04 of the Agreement. 27 - 24 - Such representations are effective as of the date of this request for subscription and payment and shall continue to be effective as of the date(s) of subscription and payment. If any of such representations is no longer valid as of or prior to the date(s) of the subscription and payment, the Company shall immediately notify IFC and shall repay the amount paid upon demand by IFC if payment is made prior to receipt of such notice. [For the second Subscription only: 5. The number of IFC Shares and the price per share has been calculated in accordance with Section 4.01 of the Subscription Agreement as follows. The Closing Net Asset Value, as determined by the auditors and notified to IFC pursuant to Section 5.02(a) is $________________. [(i)] This amount is zero or greater and therefore the second IFC subscription shall be for 200,000 IFC shares at a price per share of $10.00. Furthermore, the Company has issued to Pioneer or its designated Subsidiary _____________ Shares for the consideration stated in Section 4.01(a). [(ii)] This amount is less than zero and therefore the price per share shall be the quotient obtained by dividing (i) the sum of $11,731,500 and the Closing Net Asset Value by (ii) the total Shares issued and outstanding. The number of Shares to be subscribed equals $2,000,000 divided by the price per share, rounded up to the nearest whole number. Very truly yours, (Name of the Company) By: Authorized Representative(1) - ------------ (1) As named in the Certificate of Incumbency and Authority. 28 - 25 - SCHEDULE 2 ---------- Form of Certificate of Incumbency and Authority ----------------------------------------------- (Section 7.04 of Subscription Agreement refers) (Letterhead of the Company) [Address] [Date] International Finance Company 1818 H Street, N.W. Washington, D.C. 20433 United States of America Ladies and Gentlemen: Certificate of Incumbency and Authority --------------------------------------- With reference to the Subscription Agreement signed between us, dated _______________, 199_ (the "Subscription Agreement"), I the undersigned [Chairman] [Director] of [name of Company] (the Company) with the authority of my Board of Directors, hereby certify that the following are the names, offices and true specimen signatures of the persons each of whom will, and shall continue to be (until you receive authorized written notice from the Company that they, or any of them, no longer continue to be) authorized: (a) to sign on behalf of the Company the requests for IFC Subscription and payment provided for in the Subscription Agreement; (b) to sign the certificates provided for in the Subscription Agreement; and (c) to take, in the name of the Company, any other action required or permitted to be taken, done, signed or executed under the Subscription Agreement and under any other agreement to which we are both parties; 29 - 26 - Name Office Specimen Signature ---- ------ ------------------ 1 2 Yours faithfully, [NAME OF CORPORATION] By [Chairman] [Director] - ------------- 1 As many, or as few, names may be included as the Company shall desire. 2 Designations may be changed by the Company at any time by issuing a new Certificate of Incumbency and Authority authorized by the Board of Directors of the Company. 30 - 27 - SCHEDULE 3 ---------- Amendment to Letter of Information ---------------------------------- 31 SCHEDULE 3.01 ------------- TO THE SUBSCRIPTION AGREEMENT ----------------------------- BETWEEN PIONEER FIRST RUSSIA, INC. AND INTERNATIONAL FINANCE CORPORATION ------------------------------------------------------------------------ DATED OCTOBER 15, 1996 ---------------------- The Pioneer Group, Inc. (the "Sponsor") hereby confirms the representations and information set forth in a letter from the Sponsor to the International Finance Corporation (the "IFC") dated June 10, 1996 (the "Letter of Information") relating to Pioneer First Russia, Inc., a company incorporated in Delaware (the "Company") and the financing of the project described in the Letter of Information (the "Project") and which is the subject of the Subscription Agreement, except as set forth below: (1) The Certificate of Incorporation of the Company has been amended to reflect authorized share capital set forth in the Subscription Agreement. (2) With respect to the information set forth in paragraph (3) of the Letter of Information, it now appears unlikely that the minority shareholders will transfer their shares in Pioneer Investments in exchange for shares in the Company. As a result, should any exchange or transfer by the minority shareholders of Pioneer Investment for shares in the Company occur later than 30 days after the second disbursement; such transfer will be executed only at the fair market value of shares of the Company and only with unanimous approval by the Board of Directors of the Company. (3) In addition to the subsidiary companies listed in paragraph (8) of the Letter of Information, the Company has formed the following wholly owned subsidiaries: UKS Securities Limited, incorporated in England AS Holdings, Inc., incorporated in Delaware, USA Both companies were formed to facilitate off-shore trading in Russian securities. Pioneer Securities shares in First Voucher Bank have dropped to 20.1%. (4) In addition to the contracts set forth in paragraph (9) of the Letter of Information, the following material contract (i.e., a contract other than in the ordinary course of business, which would or might affect the judgment of a prospective investor), have been entered into by subsidiaries of the Company: KUIF has entered into an agreement with Pioneer Services to maintain the register of unit holders of Pioneer First Open Unit Investment Fund, dated September 19, 1996. 1 32 KUIF has entered into an agreement with Imperial Bank on providing depository services with respect to Pioneer First Open Unit Investment Fund, dated September 19, 1996. KUIF has entered into an agreement with Promradtechbank, to act as agent for the distribution and redemption of units of Pioneer First Open Unit Investment Fund, dated September 5, 1996. KUIF has entered into an agreement with Credo Audit to provide audit services to Pioneer First Unit Investment Fund, dated September 19, 1996. Pioneer First Open Unit Investment Fund under the management of KUIF was registered with the Commission on the Capital Markets of the Russian Federation on October 5, 1996. The brokerage contract between KUIF and Pioneer Securities with respect to First Investment Voucher Fund portfolio trading, dated October 1, 1995, has expired. It is expected that a client service agreement between KUIF and Pioneer Securities will be signed shortly. Pioneer Services has entered into a contract with KUIF to provide registrar services to First Investment Voucher Fund, dated September 6, 1996. (5) With respect to the information contained in paragraph (10) of the Letter of Information, the Sponsor expects that, over the course of the next year, the Company and its subsidiaries will enter into the following material contracts in connection with the Project: KUIF, as manager of the Pioneer First Open Unit Investment Fund, will enter into additional contracts with agents to distribute and redeem units and contracts with respect to advertising and marketing of the Fund. KUIF may register additional unit investment funds and may enter into contracts with a specialized depository, specialized registrar (Pioneer Services), any agent or paying agents that distribute the unit funds, an auditor and advertising company for such additional unit investment funds. Documents have been filed with the appropriate registration authorities to increase the charter capital of First Voucher Bank in the amount of 6 billion rubles. Pioneer Services will enter into a contract to provide registrar services for joint stock company International Business Center. Pioneer Services will lease office space at Smolnaya 24 from Pioneer Real Estate Advisors. The Company may elect to prepay a portion of that rent and contribute certain contractual rights to the charter capital of Pioneer Services. 2 33 Pioneer Services will enter into a lease agreement with the Company obligating Pioneer Services to pay royalties for the use of certain software owned by the Company. The Russian operating entities will enter into management services contracts with The Pioneer Group, Inc., with respect to charges incurred by the Sponsor and related entities including the Moscow representative office of Pioneer International; and secondment agreements with PIOGlobal. (6) With respect to the information contained in paragraph (11) of the Letter of Information, the Company and its subsidiaries have filed all tax returns and reports required by law to be filed by them. To the best knowledge of the Company and in accordance with applicable law, the Company has paid all tax assessments, fees and governmental charges levied upon the Company, its properties or its income or assets. (7) With respect to the information contained in paragraph (13) of the Letter of Information, First Voucher Investment Fund has obtained title to the building located at Smolnaya 24. (8) With respect to the information contained in paragraph (14) of the Letter of Information, Pioneer Services has obtained a license to act as registrar from the Federal Commission on Securities and Capital Markets of the Russian Government. First Voucher Bank has obtained a full hard currency license from the Central Bank of Russia. (9) With respect to the information contained in paragraph (15) of the Letter of Information, the Sponsor currently intends to raise and manage one off-shore fund that will make direct equity and direct equity like investments in Russia. /s/ Timothy T. Frost - -------------------------------------- Timothy T. Frost Vice President Pioneer First Russia October 15, 1996 3 EX-10.63 3 SHAREHOLDERS AGREEMENT 1 EXHIBIT 10.63 ================================================================================ INVESTMENT NUMBER 4905 SHAREHOLDERS AGREEMENT AMONG PIONEER OMEGA, INC. AND PIONEER FIRST RUSSIA, INC. AND INTERNATIONAL FINANCE CORPORATION DATED OCTOBER 16, 1996 ================================================================================ 2 TABLE OF CONTENTS ----------------- ARTICLE OR SECTION ITEM PAGE NO. ------- ---- -------- ARTICLE I ................................................................. 2 DEFINITIONS ............................................................... 2 Section 1.01. Definitions .............................................. 2 ----------- ARTICLE II ................................................................ 2 RETENTION OF SHARES ....................................................... 2 Section 2.01. Retention of Shares ...................................... 2 -------------------- Section 2.02. No Recognition ........................................... 3 -------------- ARTICLE III ............................................................... 3 COVENANTS OF PIONEER OMEGA ................................................ 3 Section 3.01. IFC Director ............................................. 3 ------------ Section 3.02. IFC Approval ............................................. 3 ------------ Section 3.03. Company Operations ....................................... 4 ------------------ Section 3.04. Insurance, Auditors ...................................... 4 ------------------- Section 3.05. Reports .................................................. 5 ------- ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties ........................... 6 ------------------------------ ARTICLE (V) ............................................................... 6 MISCELLANEOUS ............................................................. 6 Section 5.01. Notices and Requests ..................................... 6 -------------------- Section 5.02. Governing Law ............................................ 7 ------------- Section 5.03. Successors and Assigns ................................... 8 ---------------------- Section 5.04. Counterparts ............................................. 8 ------------ 3 SHAREHOLDERS AGREEMENT AGREEMENT, dated October 16, 1996, among: PIONEER FIRST RUSSIA, INC., a corporation organized and existing under the laws of the State of Delaware, in the United States of America (the "Company"); Address for communications: Mail: c/o The Pioneer Group, Inc. 60 State Street Boston, MA 02109 Attn.: General Counsel Facsimile: (617) 4224293 PIONEER OMEGA, INC., a corporation organized and existing under the laws of the State of Delaware, in the United States of America ("Pioneer Omega"); Address for communications: Mail: c/o The Pioneer Group, Inc. 60 State Street Boston, MA 02109 Attn.: General Counsel Facsimile: (617) 4224293 and INTERNATIONAL FINANCE CORPORATION, an international organization established by Articles of Agreement among its member countries ("IFC"), Address for communications: Mail: 1818 H STREET NW Washington, D.C. 20433 Attn.: Director, Europe Department Facsimile: (202) 477-6391 (202) 477-8164 4 -2- WHEREAS: (A) By a Subscription Agreement of even date herewith between the Company and IFC (the "Subscription Agreement"), IFC has agreed, subject to the terms and conditions set forth therein, to subscribe and pay for in full shares of the common stock of the Company (the "IFC Shares"). (B) It is a condition of subscription and disbursement for the IFC Shares that the parties hereto have entered into this Agreement. (C) The Company and Pioneer Omega, in consideration of IFC entering the Subscription Agreement and to induce IFC to make the first subscription thereunder, have agreed to undertake the obligations herein contained. NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. ----------- Wherever used in this Agreement, unless otherwise defined herein or unless the context otherwise requires, the terms defined in the Subscription Agreement have the same respective meanings whenever used in this Agreement. ARTICLE II RETENTION OF SHARES Section 2.01. Retention of Shares. ------------------- Pioneer Omega hereby undertakes that, so long as IFC remains a shareholder of the Company, unless IFC otherwise agrees, it shall not sell, transfer, assign, pledge or in any other manner dispose of, or encumber or permit any encumbrances to exist over, any of the Shares held by it from time to time, if such transfer would have the effect of reducing the Shares held by Pioneer Omega to less than fifty-one per cent (51%) of the outstanding Shares. Transfers of Shares 5 -3- between Pioneer Omega and other Subsidiaries of Pioneer will not be subject to the provisions of this Section 2.01, so long as the transferee has delivered to IFC a deed of ratification and accession under which the transferee undertakes to be bound by this Agreement as if it were an original party to this Agreement. Section 2.02. No Recognition. -------------- The Company agrees with IFC that, to the extent permitted by law, it will not recognize any purported sale, transfer, assignment, pledge, encumbrance or other disposition of Shares in violation of this Article 1I, and shall in any event notify IFC promptly upon receipt of any request to register or record any transfer of the Shares held by Pioneer Omega. ARTICLE III COVENANTS OF PIONEER OMEGA Section 3.01. IFC Director. ------------ (a) The Board of Directors of the Company ("Board") shall initially consist of six (6) Directors. The Company agrees that until such time as IFC shall cease to be a shareholder of the Company, IFC shall be entitled to nominate one person to the Board and Pioneer Omega agrees to vote for the election of the person nominated by IFC as Director. (b) Pioneer Omega agrees to vote to remove the person nominated by IFC from the Board of Directors upon IFC's request. (c) In the event that the person nominated by IFC shall cease for any reason to be a Director, IFC shall have the right to nominate a new Director, and Pioneer Omega agrees to vote to elect such person as Director. (d) IFC agrees to vote to remove any person nominated by Pioneer Omega from the Board of Directors at Pioneer Omega's request. Section 3.02. IFC APPROVAL. Pioneer Omega shall procure that unless applicable law for the time being in force otherwise requires, the Board of Directors shall not pass resolutions concerning any of the following matters, unless at a meeting duly convened at which the appropriate quorum is present and the Director nominated by IFC votes in favor of such resolution: 6 -4- (a) material changes to the Policy Statements of each of the Company, KUIF, Pioneer Securities, Pioneer Services and First Voucher Bank, governing the activities and management of their respective operations; (b) material amendments of the management service contracts between Pioneer and each of the Company's Subsidiaries; (c) material amendments to the management agreement between First Voucher Fund and KUIF; and (d) changes to the dividend policy as set out in the Letter of Information. Section 3.03. Company Operations. ------------------ Pioneer Omega shall procure: (a) that unless applicable law for the time being in force otherwise requires, the Company will at all times carry out the Project in accordance with the project description which is contained in the Letter of Information (subject to any modifications which IFC may agree) and in accordance with the Policy Statements adopted by the Board of Directors of the Company and the Board of Directors of the Subsidiaries; (b) that the proceeds of the first and second IFC subscriptions shall be applied exclusively to the Project; and (c) that IFC shall have the right to receive and comment on the proposed annual (and any interim) budgets prepared for the Company and any Subsidiary, and the Company and Pioneer Omega hereby agree to accept all reasonable requests by IFC for changes to any such budgets. Section 3.04. Insurance, Auditors. ------------------- Pioneer Omega shall procure that the Company will at all times: (a) insure its properties and business with financially sound and reputable insurers against loss and damage in such manner and to the same extent as shall be no less than that generally accepted as customary in regard to property and business of like character including, without limitation to the generality of the 7 -5- foregoing, the risks and coverages enumerated in Annex A of the Subscription Agreement; and (b) maintain at all times a firm of independent public accountants reasonably acceptable to IFC and authorize them to communicate directly with IFC. Section 3.05. Reports. ------- (a) Pioneer Omega shall procure that the Company will: (i) prepare annual financial statements, reflecting truly and fairly the financial position and the results of operations in conformity with generally accepted accounting principles in the United States consistently applied and audited by the Company's auditors; and (ii) cause its auditors to prepare an annual management letter assessing the Company's compliance with the internal and external policies and contractual obligations and the adequacy of its appraisal, follow-up and internal control standards which will also assess the compliance of the Company and its subsidiaries with the risk management guidelines and financial policies contained in the Policy Statements. These documents will be made available to IFC within 120 days of the end of the relevant fiscal year. (b) Pioneer Omega shall procure that the Company will prepare quarterly operational reports, in a format acceptable to IFC, which shall contain appropriate narrative and statistical information on the business of the Company and a general review of market conditions which affect the Company. These reports will reflect truly and fairly the Company's financial position and results of the operations and will be prepared in conformity with generally accepted accounting principles in the United States. In addition, these quarterly reports will assess the compliance of the Company and its Subsidiaries with the risk management guidelines and financial policies contained in the Policy Statements. These reports will be made available to IFC within 60 days of the end of the relevant quarter. 8 -6- ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties. ------------------------------ Each of the Company, Pioneer Omega and IFC represents and warrants that: (a) it has the corporate power to enter into this Agreement; (b) it has full power, authority and legal right to execute and deliver this Agreement, and to perform and observe the terms and provisions hereof applicable to it; (c) the execution and delivery of this Agreement and the performance of its terms have been duly authorized by all necessary actions on its part; (d) the execution and delivery of this Agreement and the performance of its obligations thereunder will not violate or exceed its powers, or contravene (i) any provision of any applicable law, (ii) any provision of its Certificate of Incorporation or (iii) any provision of any mortgage, deed, contract or agreement to which it is a party, or which is binding upon it or any of its assets, except that IFC represents only that the execution, delivery and performance of this Agreement does not violate or exceed its powers or contravene any provision of its Articles of Agreement; and (e) all authorizations, consents, approvals and licenses required for the execution and delivery of this Agreement and its performance have been duly obtained or granted and are in full force and effect. ARTICLE V MISCELLANEOUS Section 5.01. Notices and Requests. -------------------- Any notice, request or other communication to be given or made under this Agreement to IFC, Pioneer Omega or the Company shall be in writing and 9 -7- except as otherwise provided in this Agreement it shall be deemed to have been duly given or made when it shall be delivered by hand, mail (or airmail if sent to another country), or confirmed facsimile to the party to which it is required or permitted to be given or made at the relevant address for communications of such party which is specified at the opening of this Agreement or at such other address for communication as such party shall have designated by notice to the party giving or making such notice, request or other communication. Any communication to be delivered to any party under this Agreement which is sent by confirmed facsimile will constitute written legal evidence between the parties. Section 5.02. Governing Law. ------------- (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, United States of America. (b) The Company, Pioneer Omega and IFC, hereby irrevocably agree that any legal action, suit or proceeding arising out of or relating to this Agreement be brought in the courts of the State of New York or of the United States of America located in the State of New York. By the execution and delivery of this Agreement, the Company, Pioneer Omega and IFC each hereby irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding and the Company and Pioneer Omega designates, appoints and empowers CT Corporation as its authorized agent to receive for and on its behalf service of summons or other legal process in any such action, suit or proceeding in the State of New York. Final judgment against any party in any such action, suit or proceeding shall be conclusive. Nothing herein shall affect the right of IFC to commence legal proceedings or otherwise sue the Company or Pioneer Omega in any other appropriate jurisdiction or to serve process upon the Company or Pioneer Omega in any manner authorized by the laws of any such jurisdiction. (c) Each of the parties hereto further covenants and agrees that, for so long as it shall be bound by this Agreement, it shall maintain a duly appointed agent for the service of summons and other legal process in New York, New York, United States of America, for purposes of any legal action, suit or proceeding brought in respect of this Agreement and shall keep the other parties hereto advised of the identity and location of such agent. Each of the parties hereto further irrevocably consents, if for any reason there is no authorized agent for service of process in New York, to the service of process out of the said courts by mailing copies thereof by registered United States air mail, postage prepaid, to such party at its address specified herein; and in such a case the sender shall also send by confirmed facsimile, or shall undertake that there is also sent by confirmed facsimile, a copy of such process to the party being served. 10 -8- (d) The mailing of process in any such action, suit or proceeding (and whether to a party or to its authorized agent) shall be deemed personal service and accepted by a party as such and shall be legal and binding upon a party for all the purposes of any such action, suit or proceeding. (e) In addition, each of the parties hereto, to the extent permitted by law, irrevocably waives any objection which it may now or hereafter have to the laying of venue of any action, suit or proceeding arising out of New York or in the United States District Court for the Southern District of New York and hereby further irrevocably waives any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Section 5.03. Successors and Assigns. ---------------------- This Agreement shall bind and inure to the benefit of the respective successors and assigns of the parties hereto, except that, Pioneer Omega may not assign or otherwise transfer all or any part of their respective rights and obligations under this Agreement without the prior written consent of IFC except as provided in Section 2.01, and IFC may not assign or otherwise transfer all or any part of its rights or obligations under this Agreement without the prior written consent of Pioneer Omega. Section 5.04. Counterparts. ------------ This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names as of the date first above written. PIONEER OMEGA, INC. By /s/ John F. Cogan, Jr. ------------------------------------ Name: John F. Cogan, Jr. Title: President 11 -9- PIONEER FIRST RUSSIA, INC. By /s/ John F. Cogan, Jr. ------------------------------------ Name: John F. Cogan, Jr. Title: President INTERNATIONAL FINANCE CORPORATION By /s/ Paul Hinchey ------------------------------------ Name: Paul Hinchey Title: Division Manager EX-10.64 4 PUT AND CALL AGREEMENT 1 EXHIBIT 10.64 ================================================================================ INVESTMENT NUMBER 4905 PUT AND CALL AGREEMENT among PIONEER FIRST RUSSIA, INC. and PIONEER OMEGA, INC. and INTERNATIONAL FINANCE CORPORATION Dated October 16,1996 ================================================================================ 2 TABLE OF CONTENTS ----------------- ARTICLES OR SECTION ITEM PAGE NO. ARTICLE I ................................................................ 2 DEFINITIONS, REFERENCES AND HEADINGS ..................................... 2 Section 1.01. Definitions ........................................... 2 ----------- Section 1.02. References and Headings ............................... 5 ----------------------- ARTICLE II ............................................................... 5 THE PUT OPTION ........................................................... 5 Section 2.01. Put Option ............................................ 5 ---------- Section 2.02. Late Payment .......................................... 7 ------------ Section 2.03. Saving of Rights ...................................... 7 ---------------- ARTICLE III .............................................................. 7 THE CALL OPTION .......................................................... 7 Section 3.01. Call Option ........................................... 7 ----------- Section 3.02. Late Payment .......................................... 9 ------------ Section 3.03. Saving of Rights ...................................... 9 ---------------- ARTICLE IV ...............................................................10 REPRESENTATIONS AND WARRANTIES ...........................................10 Section 4.01. Representations and Warranties ........................10 ------------------------------ ARTICLE V ................................................................11 MISCELLANEOUS ............................................................11 Section 5.01. Calculations ..........................................11 ------------ Section 5.02. Taxes .................................................11 ----- Section 5.03. Reports ...............................................11 ------- Section 5.04. Further Assurances ....................................11 ------------------ Section 5.05. Right of First Option .................................12 --------------------- Section 5.06. Covenant Concerning Issuance of Other Classes of Shares and Other Securities ..........................14 Section 5.07. Notices and Requests ..................................15 -------------------- Section 5.08. Successors and Assigns ................................15 ---------------------- Section 5.09. Governing Law .........................................15 ------------- Section 5.10. Counterparts ..........................................16 ------------ 3 PUT AND CALL AGREEMENT AGREEMENT, dated October 16, 1996, among: PIONEER FIRST RUSSIA, INC., a corporation organized and existing under the laws of the State of Delaware, in the United States of America (the "Company"); Address for communications: Mail: c/o The Pioneer Group, Inc. 60 State Street Boston, MA 02109 Attn.: General Counsel Facsimile: (617) 422-4293 PIONEER OMEGA, INC., a corporation organized and existing under the laws of the State of Delaware, in the United States of America ("Pioneer Omega"); Address for communications: Mail: c/o The Pioneer Group, Inc. 60 State Street Boston, MA 02109 Attn.: General Counsel Facsimile: (617) 422-4293 and INTERNATIONAL FINANCE CORPORATION, an international organization established by Articles of Agreement among its member countries ("IFC"), Address for communications: Mail: 1818 H Street NW Washington, D.C. 20433 Attn.: Director, Europe Department Facsimile: (202) 477-6391 (202) 477-8164. WHEREAS: 4 -2- (A) By a Subscription Agreement of even date herewith between the Company and IFC (the "Subscription Agreement"), IFC has agreed, subject to the terms and conditions set forth therein, to subscribe and pay for in full, shares of the common stock of the Company of par value one cent of a dollar ($.01) each, for an aggregate subscription price of up to four million dollars ($4,000,000). (B) It is a condition of subscription and disbursement under the Subscription Agreement that the parties hereto shall have entered into this Agreement. NOW THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS, REFERENCES AND HEADINGS Section 1.01. Definitions. ----------- Wherever used in this Agreement, unless the context otherwise requires or unless otherwise defined herein, terms defined in the Subscription Agreement have the same meanings herein. Wherever used in this Agreement, unless the context otherwise requires, the following terms shall have the following meanings: "Annualized IFC Share Earnings" means for any Fiscal Year in which an Option Notice is delivered, the sum of the IFC Share Earnings for each quarter of such Fiscal Year, divided by the aggregate number of months in such quarters, times twelve; "Average IFC Share Earnings" means, for purposes of calculating the Option Price, either (i) in the instance when the Option Notice is delivered during the first six months of the Company's Fiscal Year, the average of the IFC Share Earnings for the three Fiscal Years ended immediately prior to the date of the Option Notice or, (ii) in the instance when the Option Notice is delivered at any other time, the average of the IFC Share Earnings for the two Fiscal Years ended immediately prior to the date of the Option Notice and the Annualized IFC 5 -3- Share Earnings for the Fiscal Year in which the Option Notice is delivered. "Business Day" means a day on which banks are open for business in New York, New York; "Call Notice" means the notice given by Pioneer Omega to IFC pursuant to Section 3.01(a), which shall set forth: (i) the number of IFC Shares; (ii) the Settlement Date; and (iii) the Settlement Place; "Call Option" means the option described in Section 3.01 of Pioneer Omega to buy from IFC at the Option Price all but not less than all of the IFC Shares; "Call Period" means the period, commencing on the eighth anniversary of the Initial Closing Date and ending on the tenth anniversary of the Initial Closing Date; "IFC Shares" means the aggregate of: (i) all Shares subscribed by IFC pursuant to the Subscription Agreement; (ii) all Shares subscribed or acquired by IFC pursuant to the exercise of preemptive rights, options or warrants accruing to IFC in relation to any IFC Shares; (iii) all Shares received by IFC by the conversion of any IFC Shares or as a result of stock splits or stock dividends; and (iv) all shares (of any company) received by IFC in exchange, replacement or substitution of any IFC Shares; less, any IFC Shares sold by IFC prior to the Put Notice or ---- Call Notice, as the case may be. 6 -4- "IFC Shares NAV" means, as of any date, the Net Asset Value (total tangible assets less total liabilities), divided by the number of Shares outstanding on a fully diluted basis on that date and multiplied by the number of IFC Shares outstanding at that date; "IFC Share Earnings" means, in respect of any period, the amount obtained by (i) first, dividing the Net Income by the weighted average Shares outstanding during such period, and then (ii) multiplying the quotient so obtained by the weighted average number of IFC Shares during such period. For the purpose of this subsection, the Company's total Net Income shall be that shown on the Company's financial statements plus any charge for amortization of goodwill for the relevant Fiscal Year; "Net Income" means income after tax and before extraordinary items; "Option Price" means the greater of: (i) the IFC Shares NAV, and (ii) twelve (12) times the Average IFC Share Earnings; "Put Notice" means the notice given by IFC to Pioneer Omega pursuant to Section 2.01 (a), which shall set forth: (i) the number of IFC Shares; (ii) the Option Price and the basis for its determination; (iii) the Settlement Date; and (iv) the Settlement Place; "Put Option" means the option described in Section 2.01 of IFC to sell to Pioneer Omega at the Option Price all of the IFC Shares; "Put Period" means the period, subject to the proviso in Section 2.01 (a), commencing on the fourth anniversary of the Initial Closing Date and ending on the eighth anniversary of the Initial Closing Date; "Section" or "Sections" means a section or sections of this Agreement; 7 -5- "Settlement Date" means the date specified in the Put Notice or the Call Notice for making payment for the IFC Shares at the Option Price, which shall not be less than thirty days nor more than sixty days after the date of the Put Notice or Call Notice; and "Settlement Place" means the bank in New York, as designated by IFC in the Put Notice or by notice to Pioneer Omega after receipt of the Call Notice (or such other place as the parties hereto may agree), where Pioneer Omega shall pay for the IFC Shares. Section 1.02. References and Headings. ----------------------- (a) Unless otherwise provided, references to a specified Article, Section, Annex or Schedule shall be construed as a reference to that specified Article, Section, Annex or Schedule of this Agreement. (b) In this Agreement, the headings and the Table of Contents are inserted for convenience of reference only and shall not be used to define, interpret or limit any of the provisions of this Agreement. ARTICLE II THE PUT OPTION Section 2.01. Put Option. ---------- (a) IFC shall have the option ("Put Option") to sell all but not less than all of the IFC Shares at any time during the Put Period and, upon delivery to Pioneer Omega of the Put Notice, except as provided in Sections 2.01 (c) and (d), Pioneer Omega shall be obliged to pay the Option Price on the Settlement Date at the Settlement Place. (b) The Put Option may be exercised only with respect to all of the IFC Shares. (c) Within ten (10) days following delivery of the Put Notice, Pioneer Omega may notify IFC that it elects to pay for the IFC Shares in three installments, the first installment on the Settlement Date, the second installment on the first 8 -6- anniversary of the Settlement Date and the third installment on the second anniversary of the Settlement Date. (d) Unless Pioneer Omega so elects to pay for the IFC Shares in installments, Pioneer Omega shall, on the Settlement Date and at the Settlement Place, pay the Option Price. If Pioneer Omega elects to pay for the IFC Shares in installments, it shall on the Settlement Date and at the Settlement Place pay one-third of the Option Price. On the first anniversary of the Settlement Date, or if such date is not a Business Day on the first Business Day thereafter, it shall pay one-third of the Option Price times one hundred and six per cent (106%), and on the second anniversary of the Settlement Date, or if such date is not a Business Day on the first Business Day thereafter, it shall pay one-third of the Option Price times one hundred and twelve per cent (112%). (e) Pioneer Omega shall pay for the IFC Shares in Dollars in immediately available funds, without any deduction whatsoever for any fees, taxes, duties or other charges howsoever called, all of which shall be borne by Pioneer Omega. (f) Unless Pioneer Omega so elects to pay for the IFC Shares in installments, IFC shall, upon receipt of the Option Price (as notified to IFC by the bank specified in the Put Notice), on the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing the IFC Shares paid for by Pioneer Omega free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any, required under the laws of the State of Delaware to effect the transfer. If Pioneer Omega elects to pay for the IFC Shares in installments, IFC shall, upon receipt of one-third of the Option Price (as notified to IFC by the bank specified in the Put Notice), on the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing one-third of the IFC Shares (rounded up to the nearest whole number) held by IFC on the Settlement Date free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any, required under the laws of the State of Delaware to effect the transfer. IFC shall, upon receipt of the second third of the Option Price (as notified to IFC by the bank specified in the Put Notice), on the first anniversary of the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing one-half of the IFC Shares held by IFC on the first anniversary date of the Settlement Date (rounded up to the nearest whole number) free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any, required under the laws of the State of Delaware to effect the transfer. IFC shall, upon receipt of the final third of the Option Price (as notified to IFC by the bank specified in the Put Notice), on the second anniversary of the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing the 9 -7- remaining IFC Shares free and clear of liens, charges and encumbrances, together with all instruments or transfer, if any, required under the laws of the State of Delaware to effect the transfer. Section 2.02. Late Payment. ------------ Without prejudice to the remedies available to IFC under this Agreement or otherwise, if Pioneer Omega shall fail to make payment when due as specified pursuant to this Agreement, Pioneer Omega shall pay in Dollars, in respect of such payment due and unpaid, a late payment charge calculated from the date such payment is due until all amounts due are paid at the rate of fifteen percent (15%) per annum; such late payment charge shall accrue from day to day and be prorated on the basis of a 360-day year for the actual number of days in the abovementioned relevant period. Section 2.03. Saving of Rights. ---------------- Without prejudice to any remedies available to IFC under this Agreement or otherwise, and notwithstanding any other provision of this Agreement, in the event that, after IFC shall have delivered a Put Notice during the Put Period to Pioneer Omega, Pioneer Omega shall fail to pay, as herein provided, for the IFC Shares, IFC, at its sole discretion, shall be free to sell, transfer or otherwise dispose of any or all of such IFC Shares, provided, however, that Pioneer Omega shall remain obligated to pay to IFC the unpaid balance of the Option Price, and any late payment charge due pursuant to Section 2.02, but reduced by an amount equal to the proceeds, if any, from such sale, transfer or disposition by IFC. ARTICLE III THE CALL OPTION Section 3.01. Call Option. ----------- (a) Pioneer Omega shall have the option ("Call Option") to buy all but not less than all of the IFC Shares at any time during the Call Period and, upon delivery to IFC of the Call Notice, except as provided in Sections 3.01(c) and (d), Pioneer Omega shall be obliged to pay the Option Price on the Settlement Date at the Settlement Place. Following receipt of the Call Notice, IFC shall calculate the Option Price and promptly notify Pioneer Omega. 10 -8- (b) The Call Option may be exercised only with respect to all of the IFC Shares. (c) The Call Notice may provide that Pioneer Omega elects to pay for the IFC Shares in three installments, the first installment on the Settlement Date, the second installment on the first anniversary of the Settlement Date and the third installment on the second anniversary of the Settlement Date. (d) Unless Pioneer Omega so elects to pay for the IFC Shares in installments, Pioneer Omega shall, on the Settlement Date and at the Settlement Place, pay the Option Price. If Pioneer Omega elects to pay for the IFC Shares in installments, it shall, on the Settlement Date and at the Settlement Place pay one-third of the Option Price. On the first anniversary of the Settlement Date, or if such date is not a Business Day on the first Business Day thereafter, it shall pay one-third of the Option Price times one hundred and six per cent (106%), and on the second anniversary of the Settlement Date, or if such date is not a Business Day on the first Business Day thereafter, it shall pay one-third of the Option Price times one hundred and twelve per cent (112%). (e) Pioneer Omega shall pay for the IFC Shares in Dollars in immediately available funds, without any deduction whatsoever for any fees, taxes, duties or other charges howsoever called, all of which shall be borne by Pioneer Omega. (f) Unless Pioneer Omega so elects to pay for the IFC Shares in installments, IFC shall, upon receipt of the Option Price (as notified to IFC by the bank designated by IFC by notice to Pioneer Omega after receipt of the Call Notice), on the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing the IFC Shares paid for by Pioneer Omega free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any, required under the laws of the State of Delaware to effect the transfer. If Pioneer Omega elects to pay for the IFC Shares in installments, IFC shall, upon receipt of one-third of the Option Price (as notified to IFC by the bank designated by IFC by notice to Pioneer Omega after receipt of the Call Notice), on the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing one-third of the IFC Shares (rounded up to the nearest whole number) held by IFC on the Settlement Date free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any, required under the laws of the State of Delaware to effect the transfer. IFC shall, upon receipt of the second third of the Option Price (as notified to IFC by the bank designated by IFC by notice to Pioneer Omega after receipt of the Call Notice), on the first anniversary of the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates represent- 11 -9- ing one half of the IFC Shares held by IFC on the first anniversary date of the Settlement Date (rounded up to the nearest whole number) free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any required under the laws of the State of Delaware to effect the transfer. IFC shall, upon receipt of the final third of the Option Price (as notified to IFC by the bank designated by IFC by notice to Pioneer Omega after receipt of the Call Notice), on the second anniversary of the Settlement Date and at the Settlement Place deliver to Pioneer Omega the certificate or certificates representing the remaining IFC Shares free and clear of liens, charges and encumbrances, together with all instruments of transfer, if any, required under the laws of the State of Delaware to effect the transfer. Section 3.02. Late Payment. ------------ Without prejudice to the remedies available to IFC under this Agreement or otherwise, if Pioneer Omega shall fail to make payment on or before the date such payment is due as specified pursuant to this Agreement, Pioneer Omega shall pay in Dollars, in respect of such payment due and unpaid, a late payment charge calculated from the Settlement Date until all amounts due are paid at the rate of fifteen percent (15%) per annum; such late payment charge shall accrue from day to day and be prorated on the basis of a 360-day year for the actual number of days in the abovementioned relevant period. Section 3.03. Saving of Rights. ---------------- Without prejudice to any remedies available to IFC under this Agreement or otherwise, and notwithstanding any other provision of this Agreement, in the event that, after IFC shall have delivered a Call Notice during the Call Period to Pioneer Omega, Pioneer Omega shall fail to pay, as herein provided, for the IFC Shares, IFC, at its sole discretion, shall be free to sell, transfer or otherwise dispose of any or all of such IFC Shares, provided, however, that Pioneer Omega shall remain obligated to pay to IFC the unpaid balance of the Option Price, and any late payment charge due pursuant to Section 3.02, but reduced by an amount equal to the proceeds, if any, from such sale, transfer or disposition by IFC. 12 -10- ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties. ------------------------------ Each of Pioneer Omega, the Company and IFC hereby represents and warrants: (a) that it has the full power, authority and legal right to incur its obligations provided for in this Agreement, to execute and deliver this Agreement, and to perform and observe the terms and provisions hereof applicable to it; (b) that this Agreement constitutes the legal, valid and binding obligations of it, enforceable against it in accordance with the terms thereof, except that IFC represents that the Agreement constitutes its legal, valid and binding obligation; (c) that the execution, delivery and performance of this Agreement have been duly authorized by all necessary action on its part; (d) that the execution, delivery and performance of this Agreement does not violate or exceed its powers or contravene (i) any provision of any applicable law, regulation, decree or order to which it is subject, (ii) any provision of its Certificate of Incorporation and By-Laws, or (iii) any provision of any mortgage, deed, contract, agreement or other instrument to which it is a party, or which is binding upon it or any of its assets except that IFC represents only that the execution, delivery, and performance of this Agreement does not violate or exceed its powers or contravene any provisions of its Articles of Agreement, and (e) all authorizations, consents, approvals and licenses required for the execution, delivery and performance of this Agreement have been duly obtained or granted and are in full force and effect. 13 -11- ARTICLE V MISCELLANEOUS Section 5.01. Calculations. ------------ The determination of the Option Price shall be made by IFC based on IFC's own records and the audited and unaudited financial statements supplied to IFC by the Company and, if necessary, other information reasonably obtained by IFC. Section 5.02. Taxes. ----- Pioneer Omega shall pay all taxes (including stamp taxes), duties, fees, or other charges payable on or in connection with the execution, issue, delivery, registration or notarization of this Agreement, and the sale, transfer or delivery of the IFC Shares and any documents related thereto, and shall, upon notice from IFC, reimburse IFC or its assigns for any such taxes, duties, fees, or other charges paid by IFC thereon. Section 5.03. Reports. ------- (a) The Company shall provide to IFC, as soon as available, but in any event within sixty (60) days after the end of each quarter of each Fiscal Year complete financial statements for such quarter prepared in accordance with generally accepted accounting principles in the United States in form satisfactory to IFC and all such statements as IFC may reasonably request or as may be appropriate or helpful to IFC to exercise its rights or verify calculations under this Agreement. (b) The Company shall also provide IFC, as soon as available, but in any event within one hundred and twenty (120) days after the end of each Fiscal Year, complete financial statements for such year prepared in accordance with generally accepted accounting principles in the United States together with an audit report thereon prepared by the Auditors, all in a form satisfactory to IFC. Section 5.04. Further Assurances. ------------------ (a) Each of the Company, Pioneer Omega and IFC undertakes to take such actions as may be necessary to carry out the transactions contemplated by this Agreement, including, without limitation, obtaining any approvals from govern- 14 -12- mental or regulatory authorities, or its shareholders or Board of Directors that may be required at any time to permit the taking of all actions contemplated hereby. (b) The Company undertakes not to take any action the effect of which would be to restrict or prevent the sale, transfer or disposition of any IFC Shares pursuant to this Agreement. Section 5.05. Right of First Option. --------------------- (a) Except as provided in this Section 5.05, nothing in this Agreement shall limit the right of IFC, at any time, to sell, transfer or otherwise dispose of all or any portion of the IFC Shares that are not then subject to a Put Notice or Call Notice, provided it complies with the conditions set forth in this Article V. (b) In the event that IFC wishes to sell or otherwise transfer any IFC Shares to any party, it shall first offer to sell such IFC Shares to Pioneer Omega, in accordance with the following provisions: (i) Any sale or other disposition of any of the IFC Shares, other than according to the terms of this Section 5.05, shall be void and shall transfer no right, title, or interest in or to any of such IFC Shares to the purported transferee. (ii) The rights of Pioneer Omega under this Section 5.05 shall not apply to any pledge of IFC Shares by IFC which creates a mere security interest, provided that the pledgee provides the Company and Pioneer Omega with a written agreement to be bound hereby to the same extent as the IFC. (iii) If IFC desires to sell, transfer or otherwise dispose of any of the IFC Shares, or of any interest in the IFC Shares, whether voluntarily or by operation of law, in any transaction other than pursuant to Article II or Article III of this Agreement, IFC shall first deliver written notice of its desire to do so (the "Notice") to the Company and Pioneer Omega. The Notice must specify: (i) the number of IFC Shares proposed to be sold or otherwise disposed of (the "Offered Shares"), (ii) the cash purchase price per Offered Share, (iii) if known, the name and address of any party to which IFC proposes to sell or otherwise dispose of the Offered Shares or an interest in the Offered Shares (the "Offeror"), and (iv) all other material terms and conditions of the proposed transaction. 15 -13- (iv) Pioneer Omega shall have the first option to purchase all or any part of the Offered Shares for the consideration per share and on the terms and conditions specified in the Notice. Pioneer Omega must exercise such option by delivering written notice to such effect to IFC no later than 45 days after the Notice is deemed under Section 5.07 hereof to have been delivered to Pioneer Omega. (v) In the event that Pioneer Omega duly exercises its option to purchase all or part of the Offered Shares, the closing of such purchase shall take place at the offices of the Company not later than the date five days after the expiration of such 45-day period. (vi) In the event that Pioneer Omega does not exercise its option within such 45-day period with respect to all of the Offered Shares, the option shall expire with respect to the Offered Shares that Pioneer Omega has not agreed to purchase. IFC shall have the fight, during the 90-day period following the date of notice from Pioneer Omega that it does not intend to purchase a portion of the Offered Shares (or, if no such notice is given, during the 90-day period following the 45-day period after the date of the Notice) to sell or otherwise transfer to any purchaser any or all of the Offered Shares not being purchased by Pioneer Omega, provided that the sale price is not lower than that set forth in the Notice and the other terms and conditions of sale are not more favorable to the purchaser of such Offered Shares than . those set forth in the Notice. If such Offered Shares have not been sold to a third party in accordance with the terms of this clause (vi) within such 90-day period, IFC must again comply fully with the transfer restrictions set forth in this Section 5.05 prior to effecting any transfer of such Offered Shares. 16 -14- Section 5.06 Covenant Concerning Issuance of Other Classes of Shares and ----------------------------------------------------------- Other Securities - ---------------- (a) Between the Initial Closing Date and the end of the Call Period (or, if sooner, the date on which IFC owns no Shares), the Company agrees that it shall not issue any Shares (as defined in Section 1.01) or any securities that are convertible into Shares unless and until it shall first have delivered written notice (an "Issuance Notice") to IFC to the effect that the Company intends to issue such shares or other securities ("New Shares") and shall have offered to IFC the right to purchase its pro rata portion of such New Shares upon terms and conditions no less favorable to IFC than are offered to all other purchasers of the New Shares. IFC's pro rata portion of such New Shares shall be determined based upon the outstanding shares of the Company on the date of the Issuance Notice assuming the conversion to Shares of all then outstanding convertible securities, if any. (b) The Issuance Notice shall specify in reasonable detail the terms of the proposed issuance of New Shares, including the purchase price, any rights and privileges attaching to the New Shares, the reason for the proposed issuance and, if known, the identity or identities of any proposed offerees of the New Shares other than Pioneer Omega. (c) IFC shall have 30 days from the date of delivery or deemed delivery of the Issuance Notice in which to inform the Company in writing whether it intends to purchase any part of its pro rata portion of the New Shares. If IFC does not so inform the Company prior to the expiration of such 30-day period, it will be deemed to have waived its right to purchase any of the New Shares and the Company may sell such New Shares on terms and conditions not less favorable to the Company than those contained in the Issuance Notice. (d) If IFC elects to purchase New Shares, the closing of such purchase and sale shall take place at the offices of the Company not later than the 15th day following the date of notice from IFC that it intends to purchase such New Shares, or at such other time or place as shall be agreed between IFC and the Company. (e) Any New Shares purchased by IFC shall be treated as IFC Shares for purposes of the Put Option and the Call Option. 17 -15- Section 5.07. Notices and Requests. -------------------- Any notice, request or other communication to be given or made under this Agreement to IFC, the Company or to Pioneer Omega shall be in writing and except as otherwise provided in this Agreement it shall be deemed to have been duly given or made when it shall be delivered by hand, mail (or airmail if sent to another country), or confirmed facsimile to the party to which it is required or permitted to be given or made at the relevant address for communications of such party which is specified at the opening of this Agreement or at such other address for communication as such party shall have designated by notice to the party giving or making such notice, request or other communication. Any communication to be delivered to any party under this Agreement which is sent by confirmed facsimile will constitute written legal evidence between the parties. Section 5.08. Successors and Assigns. ---------------------- This Agreement shall bind and inure to the benefit of the respective successors and assigns of the parties hereto, except that Pioneer Omega may not assign or otherwise transfer all or any part of its respective rights and obligations under this Agreement without the prior written consent of IFC. IFC may not assign or otherwise transfer all or any of its rights and obligations under this Agreement without the prior written consent of Pioneer Omega. Section 5.09. Governing Law. ------------- (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, United States of America. (b) The Company, Pioneer Omega and IFC, hereby irrevocably agree that any legal action, suit or proceeding arising out of or relating to this Agreement be brought in the courts of the State of New York or of the United States of America located in the State of New York. By the execution and delivery of this Agreement, the Company, Pioneer Omega and IFC each hereby irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding and the Company and Pioneer Omega designates, appoints and empowers CT Corporation as its authorized agent to receive for and on its behalf service of summons or other legal process in any such action, suit or proceeding in the State of New York. Final judgment against any party in any such action, suit or proceeding shall be conclusive. Nothing herein shall affect the right of IFC to commence legal proceedings or otherwise sue the Company or Pioneer Omega in any other appropriate jurisdiction or to serve process upon the Company or Pioneer Omega in any manner authorized by the laws of any such jurisdiction. 18 -16- (c) Each of the parties hereto further covenants and agrees that, for so long as it shall be bound by this Agreement, it shall maintain a duly appointed agent for the service of summons and other legal process in New York, New York, United States of America, for purposes of any legal action, suit or proceeding brought in respect of this Agreement and shall keep the other parties hereto advised of the identity and location of such agent. Each of the parties hereto further irrevocably consents, if for any reason there is no authorized agent for service of process in New York, to the service of process out of the said courts by mailing copies thereof by registered United States air mail, postage prepaid, to such party at its address specified herein; and in such a case the sender shall also send by confirmed facsimile, or shall undertake that there is also sent by confirmed facsimile, a copy of such process to the party being served. (d) The mailing of process in any such action, suit or proceeding (and whether to a party or to its authorized agent) shall be deemed personal service and accepted by a party as such and shall be legal and binding upon the party for all the purposes of any such action, suit or proceeding. (e) In addition, each of the parties hereto, to the extent permitted by law, irrevocably waives any objection which it may now or hereafter have to the laying of venue of any action, suit or proceeding arising out of New York or in the United States District Court for the Southern District of New York and hereby further irrevocably waives any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Section 5.10. Counterparts. ------------ This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 19 -17- IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names as of the date first above written. PIONEER FIRST RUSSIA, INC. By /s/ John F. Cogan, Jr. ------------------------------------ Name: John F. Cogan, Jr. Title: President PIONEER OMEGA, INC. By /s/ John F. Cogan, Jr. ------------------------------------ Name: John F. Cogan, Jr. Title: President INTERNATIONAL FINANCE CORPORATION By /s/ Paul Hinchey ------------------------------------ Name: Paul Hinchey Title: Division Manager EX-10.65 5 US $2,625,000 CREDIT FACILITY 1 EXHIBIT 10.65 US $ 2,625,000 CREDIT FACILITY for PIONEER REAL ESTATE ADVISORS, INC. PROVIDED BY BANQUE SOCIETE GENERALE VOSTOK AGREEMENT DATED 19TH DECEMBER, 1996 GIDE LOYRETTE NOUEL 9, DMITROVSKY PEREULOK 103031 MOSCOW 2 2. CREDIT FACILITY AGREEMENT This agreement entered into in Moscow, Russian Federation, on 19th December, 1996 is made by and between: (1) Banque Societe Generale Vostok, whose registered office is located at 5, Nikitsky Pereulok, 103009 Moscow, Russian Federation, (hereinafter referred to as the "BANK"), represented by Thierry Garde, Deputy Managing Director, and Roger Durrios, Chief Accountant, acting in compliance with the provisions of its Charter, on the one part; and (2) Pioneer Real Estate Advisors, Inc., a company organised and existing under the laws of the State of Delaware, U.S.A., having its principal place of business at 60 State Street, Boston, MA, U.S.A., (hereinafter referred to as the "BORROWER"), Mr Grenville Carr Jones, Managing Director of Pioneer Real Estate Advisors, Inc., acting on the basis of a power of attorney, on the other part; (hereinafter collectively defined as the "PARTIES"); by which it is agreed as follows: ARTICLE 1: DEFINITIONS - ---------------------- In this Agreement: "ACCOUNT" shall mean the Borrower's Dollar account N(degree) 10228 0081 309 opened with the Bank; "ACCOUNTS" shall mean any account of the Borrower opened with the Bank; "ACKNOWLEDGEMENT LETTER" shall mean each letter from the relevant Tenant or other Tenants pursuant to Article 6.3. undertaking to pay the relevant Rent payments under the relevant Lease to the Bank, which shall be substantially in the form attached in Appendix 3 b) hereto; "AGREEMENT" shall mean this Agreement including all amendments and appendixes which form an integral part hereof; "AVAILABILITY PERIOD" shall mean the period during which the Borrower shall be entitled to make Drawings as specified in Article 3.1. below; "BUSINESS DAY" shall mean, for all purposes, any day except Saturday, Sunday and any day which shall be in Moscow (Russia), Paris (France), New York (U.S.A.) or London (England) a legal holiday or a day on which banking institutions are authorised or required by law or other action of a governmental or State agency to close; 3 3. "COMMITMENT" shall mean the maximum amount which the Borrower may borrow under Article 2.1. of this Agreement; "CREDIT FACILITY" shall mean the credit facility made available by the Bank to the Borrower in an amount not exceeding the Commitment; "DEFAULT INTEREST" shall mean interest payable at a rate equal to overnight LIBOR (as defined below) plus eight (8) per cent per annum; "DOLLARS" shall mean the lawful currency of the United States of America; "DRAWING" shall mean the principal amount of each borrowing by the Borrower under this Agreement during the Availability Period or the principal amount outstanding with respect to the Loan after the first instalment repayment; "DRAWING DATE" shall mean the date on which a Drawing shall be made available to the Borrower; "DUE DATE" shall mean any date upon which a payment of principal, interest, fees, commissions or other sums is due by the Borrower to the Bank under this Agreement; "EVENT OF DEFAULT" shall mean any event which constitutes or, with notice or lapse of time or both would constitute, an Event of Default described in Article 9; "GENERAL CONDITIONS" shall mean the General Conditions of the Bank, a copy of which constitutes APPENDIX 1 hereto; "INSURANCE POLICIES" shall mean the insurance policies covering damage to property and loss of Rent in respect of the premises let to the Tenants under the Leases; "INTEREST PAYMENT DATES" shall mean 7th, April, 1997 (being the first interest payment date), 7th July, 1997, 6th October, 1997, 5th January, 1998, 6th April, 1998, 6th July, 1998, 5th October, 1998, and 5th January, 1999. "INTEREST PERIOD" shall mean a period (i) in respect of each Drawing, a period starting on Drawing Dates and ending on the day before the first interest payment date as specified in clause 4.2. and (ii) for any subsequent interest period, the period starting on the relevant interest payment date and ending on the day before the next interest payment date; "LEASE" shall mean any lease entered into between one of the Tenants and the Borrower listed in APPENDIX 2 hereto; "LIBOR" shall mean in relation to the Loan or any Drawing, the arithmetic mean (rounded upward to the nearest one sixteenth of one percent) of the rate of interest per annum quoted to the Bank by leading banks in the London interbank market at or about 11.00 a.m. London time two (2) Business Days before the first day of any Interest Period for the offering of Dollar deposits for a comparable amount and period, shown on the "Reuters, Money News, page LIBO" as at 11:00 a.m. (London time) on such day, and with respect to any day which is not a 4 4. date on which such quotation is made at the London interbank market, the latest such rates shown on such display; and the term "Reuters, Money News, page LIBO" shall mean the display designated "page LIBO" on Reuters Service, or such other page as may replace the "page LIBO" on that service for the purpose of the London interbank offered rates of major banks for US Dollar deposits per annum; "LOAN" shall mean the aggregate sum of the Drawings in Dollars lent by the Bank under the terms of this Agreement to the Borrower; "RENT" shall mean the Base Rent payable by Tenants under the Lease as defined therein; "RENT ASSIGNMENT LETTER" shall mean each letter from the Borrower to a Tenant informing the latter of the irrevocable assignment of Rent payments to the Bank, duly acknowledged and returned to the Bank by such Tenant, which shall be in the form attached in APPENDIX 3 a) hereto; "TENANT" shall mean any of the tenants of the Borrower whose name appears on the list included in APPENDIX 2 hereto or the relevant tenant in application of the provisions of Article 6.3 below. ARTICLE 2: OBJECT OF THIS AGREEMENT - ----------------------------------- 2.1.Subject to other terms and conditions provided under this Agreement, the Bank agrees to provide Drawings during the Availability Period to the Borrower up to an aggregate amount not exceeding the Commitment as follows: Commitment: two million six hundred and twenty five thousand (2,625,000) Dollars to be drawn down in accordance with the provisions of Article 3 below. Facility Period: period from 26th December, 1996 to 5th January, 1999. Purpose: to finance the property development activities of the Borrower. The Bank shall have the right to monitor or verify the application of the Loan but shall not be obliged to do so. 2.2.The Borrower undertakes to repay the Loan in accordance with the provisions of this Agreement and to abide by its other provisions. ARTICLE 3: AVAILABILITY OF THE LOAN - DRAWINGS - ---------------------------------------------- 3.1.The Credit Facility shall be made available by the Bank to the Borrower in one or several Drawings of at least one hundred thousand (100,000) Dollars and an integral multiple thereof (unless the relevant Drawing is requested for an amount equal to the undrawn amount of the Credit Facility) up to the amount of the Commitment. The Availability Period shall be between 26th December 1996 and 7th April, 1997 both dates inclusive. 5 5. 3.2. Drawings shall be effected by transfer of immediately available funds in Dollars into the Account upon not less than three (3) Business Days advance written notice of Drawing, in the form attached as APPENDIX 4 hereto, indicating the Drawing Date, which shall be a Business Day occurring before the end of the Availability Period. The Bank shall automatically deduct from the first Drawing the arrangement fee described in Article 8.1. (b) below. 3.3. Availability of the Credit Facility and Drawings shall be subject to the absence of occurrence of any Event of Default and to the following conditions precedent having been fulfilled in form and content satisfactory to the Bank: (a) the receipt by the Bank of copies of Rent Assignment Letters and original of the relevant Acknowledgement Letters in respect of Leases representing in value (calculated by capitalising future Rent payments) at least one hundred and thirty per cent. (130%) of the Commitment; (b) the receipt by the Bank of satisfactory copies of each of the Tenants' Leases duly executed and stamped with the Borrower; (c) the receipt by the Bank of a letter from Holme Roberts & Owen LLP, legal counsel to the Borrower substantially in the form attached hereto as Appendix 6; (d) the receipt by the Bank of a copy of the Insurance Policies; (e) the receipt by the Bank of satisfactory evidence of the assignment by the Borrower to the Bank of the benefit of the proceeds of the Insurance Policies; and (f) the receipt by the Bank of a notarised copy of the by-laws, certificate of incorporation and evidence of accreditation of the Representation Office in Russian Federation of the Borrower; (g) the receipt by the Bank of a duly signed letter of support from The Pioneer Group, Inc., in the form and content satisfactory to the Bank; and (h) the receipt by the Bank of a certified copy of the minutes of the Board of Directors of the Borrower authorising the Borrower to enter into the Agreement. 3.4. During the Availability Period, each Drawing shall be made available for a period starting on the Drawing Date and ending on 7th April, 1997. On 8th April, 1997, all Drawings shall be consolidated into one single Loan to be amortised in accordance with the provisions of Article 5 below. ARTICLE 4: INTEREST - ------------------- 4.1. The Drawings and, as from 8th April, 1997, the Loan shall bear interest for the relevant Interest Period at the rate of LIBOR 3 months increased by six per cent. (6%) per annum. 6 6. All interest payable under this Agreement is calculated on the basis of a 360 day year and for the actual number of days elapsed, including the Drawing Date, or the first day of the Interest Period but excluding the last day of the Interest Period, as appropriate. In the event the publication of the LIBOR 3 months is suspended or disappears prior to the total repayment of the Loan, a new interest rate applicable to the Loan shall be agreed upon by the parties. In the event the Parties do not agree within one calendar month following the date the publication of the LIBOR 3 months was suspended or the LIBOR 3 months disappeared, the Loan shall bear interest at a rate which shall be the latest quoted LIBOR 3 months on the preceding Business Day of the said suspension or disappearance. In any event, the application of any new interest rate shall be retroactive to the date the publication of the relevant LIBOR 3 months was suspended or the LIBOR 3 months disappeared. The Bank shall, on the very date of its calculation, notify the Borrower of the interest rate applicable to the considered Interest Period, as well as of the amount of interest which shall be due for such Interest Period according to the actual number of days elapsed on the basis of a 360 day year. 4.2. From the first Drawing Date until 5th January, 1999, the Borrower shall pay interest on the outstanding balance of the Loan in accordance with this Agreement. Such interest shall be payable quarterly on the Interest Payment Dates: 4.3. In the event any amount due by the Borrower under the Agreement is not paid at its Due Date, the Borrower shall have to pay Default Interest. Default Interest shall be due in respect of any sum owed to the Bank under this Agreement which remains due and payable after a Due Date. For the avoidance of doubt, it is acknowledged that the Borrower shall not pay any Default Interest if the Bank fails to timely deduct from the Accounts the sum due by the Borrower under this Agreement, provided that the sums on the Accounts are sufficient to repay all the sums due to the Bank under this Agreement on Due Dates. ARTICLE 5: REPAYMENT - -------------------- 5.1. The Loan shall be repaid in eight (8) instalments on 7th April, 1997, 7th July, 1997, 6th October 1997, 5th January, 1998, 6th April, 1998, 6th July, 1998, 5th October, 1998, and 5th January, 1999 in accordance with Appendix 5. 5.2. It is intended (without prejudice to the rights of the Bank) that payments shall be effected by debiting the Accounts according to the following procedure. Pursuant to the terms of the Rent Assignment Letter and the Acknowledgement Letter, each Tenant shall pay all sums under the relevant Lease into the Account. Upon receipt 7 7. of payments from the Tenants, the Bank shall be entitled to retain a sufficient sum with respect to repayment dates, taking into account expected payments of Rent under the Leases, to cover the following quarterly repayment of principal plus the following quarterly payment of interest, as provided by this Agreement and the schedule in Appendix 5 to this Agreement. Payments in respect of the Loan, interest and other outstanding sums on each Due Date shall automatically be made by the Bank by transferring the appropriate sum in immediately available funds from the Account into an account in the name of the Bank. The Accounts shall be interest bearing account for the Borrower, the conditions for the remuneration of the sums on such account shall be those applicable under the General Conditions for Banks' customers of similar standing. Any Rouble deposited into the Roubles Account would be converted into Dollars: (i) on the date of receipt of Roubles, provided that such receipt is made before 12:00 a.m. of such date and that the relevant conversion order is received by the Bank before 12:00 a.m. of such date; (ii) at a conversion rate which will be the standard exhange rate that the Bank offers on similar currency exchange transactions to customers of similar standing. 5.3. If any Due Date does not fall on a Business Day, payment shall be effected on the next Business Day. All payments by the Borrower shall be made without set off or counterclaim and without any deduction. If the Borrower is compelled either by law, regulation or recommendation of a competent regulatory or professional body or authority to make any deduction, it shall pay additional amounts to ensure receipt by the Bank of the full amount which the Bank would have received but for such deduction. 5.4. Prepayment at the request of the Borrower shall be allowed at any time subject to prior prepayment notice received by the Bank at least three (3) Business Days in advance and the payment of a prepayment fee of three quarter per cent (0.75%) on the amount prepaid. Furthermore, the Borrower shall automatically repay to the Bank all amount in interests and fees increased by all expenses and charges if any incurred by the Bank as the result of the said prepayment. Prepayment shall be applied against the repayment instalments in order of maturity. In addition, there shall be prepayment in the following circumstances: (a) If any Lease is terminated and another lease is not substituted for it in accordance with the revisions of Article 6.3. below within a period of two (2) months, the Borrower shall, within three (3) Business Days from the receipt of a written request of the Bank, reimburse part of the Loan so that the outstanding Loan remains under seventy seven per cent (77%) of the remaining capitalised value of the capitalised future payments of Rent under the Leases. Prepayment shall be applied against the repayment instalments in order of maturity. Upon such prepayment, a prepayment fee equal to three quarter per cent (0.75%) of the amount prepaid shall be due by the Borrower to the Bank and the Borrower shall 8 8. automatically repay to the Bank all amount in interests and fees increased by all expenses and charges if any incurred by the Bank as the result of the said prepayment; and (b) If a change in circumstances beyond the control of the Parties (including the unavailability of Dollars) makes it illegal or impossible for the Bank or for the Borrower to perform their obligations under this Agreement, the Bank's obligations under this Agreement shall be automatically terminated and the Borrower shall automatically repay to the Bank all amount in due capital, interests and fees increased by all expenses and charges if any incurred by the Bank as the result of the said prepayment. For the avoidance of doubt, it is understood that there will be no prepayment penalty in case of prepayment under Article 5.4. (b). 5.5. The Borrower irrevocably grants to the Bank the right to debit from the Accounts or any of its other accounts with the Bank, without the need for any further preliminary consent, any sum due to the Bank under this Agreement, but not to exceed the amount specifically assigned to the Bank hereunder. With regard to this Agreement, for the avoidance of doubt, the Bank may not debit or offset from the Account any amounts in excess of proceeds actually received from the Tenants. 5.6. The Borrower also irrevocably grants to the Bank the right to sell against Roubles such fraction of the Dollar payments of the Tenants as required by the Russian legislation within 2 banking days from the receipt of such payment and to repurchase Dollars for the whole amount of Roubles received from the obligatory sale, but in any event for an amount which is not in excess of the total amount of any sums due and payable to the Bank by the Borrower upon the next payment under this Agreement. ARTICLE 6: ASSIGNMENT OF RENT AND OF INSURANCE POLICIES - ------------------------------------------------------- 6.1. The Loan and all other payments due by the Borrower to the Bank under this Agreement shall be secured by the irrevocable assignment by the Borrower of its rights to payments of Rent under the Leases and of the proceeds of Insurance Policies. 6.2. The Bank accepts such assignment up to one hundred and thirty per cent. (130%) of sum of the Loan and the Drawing requested. The Bank shall have the right (but shall not be obliged) to enforce its rights to receive the Rent payments under the Leases in order to recover any such sum, in which case the Borrower shall provide whatever assistance the Bank may reasonably need for that purpose. 6.3. If any Lease is terminated for any reason whatsoever before the repayment of all sums due under this Agreement, the Borrower may propose to the Bank to assign its rights under another comparable lease. Upon agreement of the Bank and receipt by it of a Rent Assignment Letter and an Acknowledgement Letter from the relevant tenant, such lease and tenant shall be deemed to be a Lease and a Tenant respectively for the purposes of this Agreement. Likewise, in the event that an Insurance Policy is terminated, the Borrower shall immediately sign a new insurance policy with a new insurance company satisfactory to 9 9. the Bank and shall assign its rights to the proceeds of the new insurance policy to the Bank. 6.4. Upon payment of all sums due by the Borrower to the Bank under this Agreement, the Bank shall provide the Borrower with any document it may reasonably request to evidence the termination of all assignments hereunder and the Bank agrees to take all other action reasonably requested by the Borrower. The Bank will pay promptly to the Borrower any amounts received pursuant to such assignment following payment of all sums due by the Borrower to the Bank under this Agreement. Any material cost involved in the provision of such documents or in taking such action shall be borne by the Borrower. ARTICLE 7 : REPRESENTATIONS, COVENANTS, WARRANTIES AND UNDERTAKINGS OF THE - -------------------------------------------------------------------------- BORROWER AND THE BANK - --------------------- 7.1. The Borrower represents, covenants and warrants as follows: (a) that it has due authority to enter into this Agreement and it has all necessary corporate or administrative consents and notifications for the execution and performance of this Agreement; (b) to provide the Bank with copies of its quarterly uncertified accounts; (c) to inform the Bank in the event of any material adverse change affecting its ability to repay the Loan; (d) to inform the Bank within five (5) Business Days in the event that any Lease or Insurance Policy is terminated, or that any of their respective material terms and conditions are amended; (e) to maintain an insurance cover over the premises let under the Leases similar to the Insurance Policies at the date thereof; (f) to inform the Bank within three (3) Business Days in the event that any Event of Default has occurred; and (g) to provide the Bank with any relevant information relating to the Borrower's ability to perform hereunder which the Bank may reasonably request. 7.2. The Borrower undertakes to open a Rouble Account with the Bank within one (1) month from the date of the execution of the Agreement in accordance with the Instruction of the Central Bank n(degree) 16 of 16th July, 1996 which provides in its Article 1.2. that a foreign entity may open only one Rouble Account. 7.3. The Bank represents, covenants and warrants that it is duly registered and licensed by the Central Bank of the Russian Federation and with the relevant tax authorities and has received all licenses, registration certificates or approvals necessary to execute and perform its obligations under this Agreement. ARTICLE 8: COMMISSIONS, FEES AND MISCELLANEOUS PAYMENTS - ------------------------------------------------------- 10 10. 8.1. The commissions and reimbursable expenses payable by the Borrower to the Bank under this Agreement consist of: (a) a one time commitment fee to be calculated at the rate of one half per cent (0.5 %) per annum on the undrawn part of the Commitment; and payable together with the first interest payment; (b) an arrangement fee of an amount of one quarter per cent. (0,25%) of the Commitment plus an amount up to twelve thousand (12.000) Dollars (V.A.T. excluded) for the drafting of the documentation and the legal review of the Leases; the arrangement fee shall be payable on the date of the first Drawing. 8.2. In addition, the Borrower shall promptly pay to the Bank, upon receipt of calculation detai1s and attestation that such costs, if any, were actually incurred: (a) all funding breakage costs, any taxes or stamp duties arising out of the acceleration of the Loan or part thereof due to an Event of Default or to new circumstances making it illegal for the parties to perform their obligations hereunder; (b) such amount as is necessary to indemnify the Bank fully against the consequences of any non-performance by the Borrower of any of its obligations hereunder or any Event of Default; . (c) all reasonable costs including legal fees incurred by the Bank in connection with the enforcement of this Agreement, including those incurred in connection with the collection of Rent payments under any of the Leases, provided that the Bank shall notify the Borrower thirty (30) days prior to the Bank's attempt to collect the Rent payments during which period the Borrower may itself take action to collect such payments; and (d) all losses resulting from any judgement or claim being payable in a different currency from that agreed hereunder. 8.3. (a) In the event that a change in Russian legislation, administrative, regulatory or legal circumstances or a change in the interpretation of such rules resulting in the Bank incurring increased costs or receiving a lower return in relation to the Loan, the Borrower shall compensate the Bank upon demand for the corresponding amount as certified by the Bank. The Bank shall provide details of its calculations and attest that such costs were actually incurred. (b) If any additional amount becomes payable to the Bank under Article 8.3. (a) and if such amount is deemed to be material for the Borrower, the Bank will (if so requested by the o Borrower) consult with the Borrower for up to fifteen (15) days from the date of such request with a view to agreeing to a mutually acceptable alternative arrangement which will avoid or minimise the payment of such material additional amount. However, the Bank shall not be obliged to agree to any arrangement if in its bona fide opinion such 11 11. arrangement would or might be materially adverse to it or its business, operations or financial condition. If no solution has been reached within fifteen (15) days from the date of the request of the Borrower to the Bank, the Borrower may prepay the Loan and all other sums due under this Agreement within thirty (30) days without penalty. In case of such prepayment, the Borrower shall automatically repay to the Bank all amount in interests and fees due to the Bank under the Agreement increased by all expenses and charges, if any, incurred by the Bank as the result of the said prepayment. ARTICLE 9: EVENTS OF DEFAULT - ---------------------------- 9.1. Each of the following events shall constitute an Event of Default: (a) failure of the Borrower to pay any sum under this Agreement within ten (10) calendar days from the date it has become due; (b) failure of the Borrower to perform its obligations materially under the Leases giving the right to Tenants to terminate such agreements; (c) if the total value of the Leases (calculated by capitalising all due Rent payments under the Leases) falls at any time below one hundred and thirty per cent (130%) of the Loan for a continuous period of more than two (2) months and if no Lease is subsituted in accordance with Article 5.4. (a) and 6.3. of this Agreement; (d) if any representation made by the Borrower in this Agreement shall prove to be untrue in any material respect on the date as of which it was made or if the Borrower shall default in the due performance by it of any obligation and, except for breaches under Article 9.1.(a) and (b) above and those incapable of being remedied, such default shall continue unremedied for a period of thirty (30) days after written notice to the Borrower; (e) insolvency or strong and continuous threat thereof, initiation of bankruptcy or analogous proceedings, initiation of amicable settlement proceedings by the creditors of the Borrower; and (f) in the case of any event which, in the reasonable opinion of the Bank, materially adversely affects the Borrower's ability to fulfil its obligations hereunder or if the Bank shall cease to be reasonably satisfied with the financial position of the operations of the Borrower. 9.2. If an Event of Default occurs, the Loan and all other sums due under this Agreement shall become immediately due and payable and shall be forthwith repaid by the Borrower but only upon written notice of the Bank to the Borrower so stating in accordance with this Article 9. In addition, the Bank shall then be entitled to direct Tenants to make payments into any account designated by the Bank for any amount due under this Agreement. 12 12. ARTICLE 10: ASSIGNMENT - ---------------------- 10.1. The Bank shall be entitled to assign any part of its rights under this Agreement to another bank comparable with the standing of the Bank and properly licensed and authorised to conduct business in the Russian Federation with the prior consent of the Borrower which shall not be unreasonably withheld or delayed. The failure by the Borrower to answer within thirty (30) days from written notification shall be deemed to constitute consent. 10.2. The Borrower shall have the right to assign any part of its rights under this Agreement to another member of The Pioneer Group subject to the prior written approval of the Bank. ARTICLE 11: MISCELLANEOUS PROVISIONS - ------------------------------------ 11.l. All notices under this Agreement shall be made in writing and sent by fax (with written confirmation delivered by hand against receipt), or delivered by hand or by a major courrier company against receipt to the following address: (a) If to the Bank: Attention Mr. Seraphin Rehbinder / Mr. Thierry Garde Banque Societe Generale Vostok 5, Nikitsky Pereulok 103009 Moscow Russian Federation Fax: 7 501 940 08 09 Tel: 7 501 940 08 15 (b) If to the Borrower: Attention Mr Grenville Carr-Jones Pioneer Real Estate Advisors, Inc. Smolnaya 24/D 2nd Floor Moscow, Russian Federation Fax: 7 095 960 2920 Tel: 7 095 960 2929 and Mr Robert P. Nault General Counsel The Pioneer Group, Inc., 60 State Street, Boston Massachusetts 02109 United States of America Fax: 617 422-4293 Tel: 617 422-4981 Any change of address or of contact numbers shall be notified in advance. 13 13. Any such notice shall be deemed to be given if in writing when delivered and if by fax upon receipt of the written confirmation. However, a notice given in accordance with the above but received on a non Business Day or after business hours in the place of receipt shall only be deemed to be given on the next Business Day. 11.2. No failure or delay by the Bank in exercising any right or power hereunder shall operate as a waiver thereof or prejudice any other or further exercise by the Bank of its rights or remedies hereunder. 11.3. The Borrower accepts the General Conditions of the Bank as an integral part of this Agreement. If any provision of this Agreement is inconsistent with the provisions of the General Conditions, the provisions of this Agreement shall prevail. 11.4. This Agreement shall come into force on the date of its execution and shall remain valid until all sums due by the Borrower pursuant to this Agreement are fully repaid. 11.5. All amendments to this Agreement shall be valid only if done in writing and signed by both Parties. 11.6. This Agreement shall be governed by Russian law. All disputes between the parties will be discussed between the parties in order to achieve an amicable solution. If an amicable solution has not been reached within fifteen (15) days from the date of the notice of dispute from the complaining party to the other, the dispute shall be submitted to the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with the rules of such Court. 11.7. This Agreement is established in two (2) originals in Russian and two (2) originals in English, one (1) in English and one (1) in Russian for the Bank and one (1) in English and one (1) in Russian for the Borrower. In case of discrepancy between the two versions, the English version shall prevail. 14 14. For Banque Societe Generale Vostok: For Pioneer Real Estate Advisors, Inc.: /s/ Thierry Garde /s/ Greenville Carr Jones - ----------------------------------- -------------------------------------- Name: Thierry Garde Name: Mr. Grenville Carr Jones Title: Deputy Managing Director Title: Managing Director /s/ Roger Durrios - ----------------------------------- Name: Roger Durrios Title: Chief Accountant [Seal] 15 15. APPENDIX 1 GENERAL CONDITIONS OF THE BANK 16 [Logo] BAHK COCbETE )KEHEPAJIb BOCTOK BANK SOCIETE GENERALE VOSTOK GENERAL CONDITIONS 1. DEFINITIONS In these conditions: "The Bank" means BANK SOCIETE GENERALE VOSTOK, "the Customer" means a person or persons holding any account with the Bank (and shall when the context so requires include person(s) requesting such an account or other services from the Bank); "Authorised Signatories" are as defined in condition 3. The singular includes the plural, and vice versa: where there is more than one person included in the expression "the Customer" all obligations by the customer are joint and several. 2. LAW The relationship between the Bank and customer is governed by Law and subject to applicable exchange control, fiscal and central banking regulations in Russia. These general conditions apply but are not exhaustive. In particular, financial terms applicable to accounts, overdrafts, lending contracts, and other services provided by the Bank are such as may from time to time be agreed between the Bank and the Customer. 3. AUTHORISED SIGNATORIES All cheques and orders must be signed by Authorised Signatories. "Authorised Signatories" are (i) in the case of a Customer who is an individual sole account holder, that Customer and (ii) Persons authorised to sign by a Mandate duly completed, in a form provided by the Bank, and deposited with the Bank. Any change of Mandate must be by completion Of a fresh Mandate, in a form provided by the Bank and shall not be effective until such new Mandate has been received by the Bank. 4. CURRENT ACCOUNTS Debit balances on current account are not permitted without prior agreement of the Bank permitting an overdraft, and shall carry interest at the rate then agreed between the Bank and the Customer, which may be debited by the Bank to any account with it of the Customer, normally the current account concerned, quarterly or half yearly as may be determined by the Bank. Such rate of interest will normally be expressed as an annual percentage above the Bank's prime rate for the relevant currency from time to time, subject to a minimum percentage, and the Customer shall be bound by such changes in prime rates as may from time to time be made by the Bank for all its Customers. In addition the Bank will make charges for the operation of the account in accordance with its standard practice from time to time (details of which will be supplied to the Customer on request) such charges being debited in the same way as for interest above. 5. LOAN ACCOUNTS The particular terms and conditions applicable to Loan and Personal Loan Accounts are as published from time to time by the Bank and/or as may be agreed between the Bank and the Customer. 6. OTHER ACCOUNTS The particular terms and conditions applicable to Deposit and Savings Accounts are as published from time to time by the Bank and/or as may be agreed between the Bank and the Customer. 7. NUMBERED ACCOUNTS Current, savings, and deposit accounts may be opened in numbered form. The terms and conditions applicable to the relevant type of account will apply, but Authorised Signatories will be permitted to sign cheques and orders by use of the relevant account numbered (mandates, specimen signature forms, cheques and other account operating forms being adapted accordingly). The normal duty of Secrecy will apply provided that, upon request to the Bank by an authorised officer of the Bank Supervisory Department of the Central Bank of Russia may inspect the Register of Numbered Accounts, containing particulars of the account holders, for the sole 17 purpose of enable him to discharge his duty as Bank examiner and in particular for ensuring that deposits are not accepted by the Bank from persons ordinarily resident of the Russian Federation or of Russian origin. 8. OTHER SERVICES Documentary Credits Credit Facilities against Commercial bills, stocks and shares, goods and other deeds Discounting commercial bills Letters of Guarantee Acceptances, endorsements, drafts, etc. Foreign Exchange Dealing Investment Management Commodity Trading Additional Conditions apply to each of such services, including in the case of documentary credits the Uniform Customs and Practice for Documentary Credits issued by the Council of the International Chamber of Commerce. Copies of the Additional Conditions applicable to particular services are available upon request, and will apply thereto in any event. 9. CHEQUES The Bank will not pay cheques otherwise than in forms issued and/or approved by it. It is the responsibility of the Customer to ensure the security and proper use of cheques issued to or held by the Customer. The Bank will not be liable for any loss arising from or in connection with the loss, theft or misuse by any third party of any cheque. The Customer should immediately notify the Bank in writing concerning the loss or theft of any cheques. The Bank will not be liable for any consequential refusal by it to pay such cheques. 10. CURRENCIES A Current Account will normally be denominated in a single currency (multi-currency facilities normally being by way of loan subject to a facility letter, rather than by way of overdraft). The limit of an overdraft facility on Current Account will be expressed in the currency in which that Current Account is denominated. Cheques may not be drawn on Current Account in currencies other than that in which the Current Account is denominated without the prior consent of the Bank, and at a rate of exchange to be determined by the Bank upon presentation for payment. Payments into Current Account, including repayment of any debit balance should be in the currency in which that Current Account is denominated, save that the Customer may make payments into Current Account, including repayment of any debit balance in an alternative currency subject to the prior consent of the Bank and at a rate of exchange determined by the Bank. 11. STATEMENTS The Bank will supply periodic statements of account to the Customer, and/or as Authorised Signatories may direct, at intervals to be agreed. The Customer shall be deemed to receive such statements on delivery to, or within 15 days after posting by letter post to the Customer, any Authorised Signatory, or any person directed or apparently authorised by Authorised Signatories to receive such Statements, unless the Customer delivers a complaint in writing to the Bank of non-receipt within 30 days after the relevant periodic day upon which such statements are normally dispatched or agreed to be dispatched by the Bank. The Customer shall be responsible for checking all such statements, and all entries therein, whether debits, credits, balances, or otherwise, and details thereof, and unless the Customer delivers a complaint in writing to the Bank disputing or questioning any entries therein within 15 days after receipt, or deemed receipt, by the Customer of the statement such statement shall be treated as confirmed and agreed by the Customer. The Customer will also be asked by the Bank periodically to agree and sign the acknowledgement of balances, and the signature thereof by or on behalf of the Customer shall be confirmation that all preceding entries in accounts of the Customer are correct and that the position as between the Bank and the Customer as at the date when such acknowledgement was prepared by the Bank is as stated therein. 12. REPAYMENT All debit balances on Current Account are repayable on demand whether or not subject to periodic review and whether or not resulting from advances made for an unconcluded purpose or otherwise under a facility referable to a purpose or period. Loans, otherwise than by way overdraft on Current Account, are repayable in accordance with the provisions of the Facility Letter applicable thereto. Default in repayment of any sum due to the Bank shall result in all other indebtedness and liabilities of the Customer to the Bank becoming 18 immediately due and payable, and the Bank shall then cease to be liable to make further advances or have any further commitment to the Customer. All payments to be made by the Customer whether in repayment of debit balances on Current Account or in repayment of loans shall be made in full, free and clear of any set off or counterclaim deductions or withholdings of any kind whatsoever, including, without limitation to the foregoing, any taxes that may be imposed by any governmental of fiscal agency on any payments to be made hereunder. The books of the Bank shall be conclusive evidence as to the state of indebtedness and liabilities of the Customer to the Bank at any time. 13. CUSTOMER SET-OFF In any case where the Customer has more than one account with the Bank, including all its branches worldwide, the Customer shall not be entitled without the prior consent of the Bank to draw on one account in excess of the credit balance or permitted limit thereof by reference to any undrawn balances or non-utilisation of limits on other accounts, not otherwise without such consent to combine or set off balances on separate accounts. This is particularly important among accounts denominated in different currencies. In the case of any combination or set-off permitted by the Bank resulting in the need for currency conversion such conversion shall be effected at such rate as may be determined by the Bank. 14. BANK'S SET-OFF AND LIEN The Bank, including all its branches worldwide, shall have the right without prior notice to the Customer at any time to combine or set off balances on separate accounts of the Customer with it. The Bank shall further be entitled to set off against any credit balance of the Customer with it any other liabilities of the Customer to the Bank, present, future, actual or contingent (whether under any guarantee or counter-indemnity or otherwise). The Bank shall also have a lien on all securities or other property of the Customer from time to time held by the Bank, whether for safe custody or otherwise. In the case of any exercise by the Bank of its rights of combination, set-off or lien resulting in the need for currency conversion such conversion shall be effected at such rate as may be determined by the Bank. 15. SECURITY . The Bank may at any time require the provision of security as a condition of the continuation of facilities whether or not indebtedness or other liabilities under such facilities have become due. 16. INSURANCE Goods and property of the Customer from time to time deposited with or otherwise in the possession of the Bank shall be insured against all risks by the Customer with insurers approved by the Bank, and satisfactory evidence thereof produced to the Bank upon request, failing which the Bank may (but shall not be bound to), insure at the expense of the Customer. The Bank shall not be liable for insuring non insurable risks. 17. EXPENSES Costs and Expenses incurred by the Bank in connection with any application for or conduct of an account or other services for a Customer, whether before or after any account is opened or services provided, are to be paid by the Customer to the Bank on demand on a full indemnity basis, or may (at the option of the Bank) be debited by the Bank to any account of the Customer with the Bank. 18. DEMANDS AND NOTICES A demand or notice hereunder by the Bank shall be in writing, signed by an officer or agent of the Bank, and may be served on the Customer either by hand or by post. In the case of a company service by hand may be made either by delivering the same to any officer of the company at any place or leaving the same addressed to the company at its registered office or a place of business last known to the Bank. A demand or notice by post may be addressed to the Customer at the registered office or address or place of business last known to the Bank and shall be deemed to have been received within 15 days after the day on which it was posted and shall be effective notwithstanding it be returned undelivered and notwithstanding the death or incapacity of the Customer. Any notice by the Customer to the Bank shall be in writing, signed by Authorised Signatories, and delivered to the office of the Bank where the Customer's account is kept either personally or by post. Any such notice to the Bank shall not be effective until received by the Bank. Prior to service of any written notice or demand hereunder preliminary notification may be given, and may be but need not be, acted upon, orally, or by telephone, or telex or facsimile communication, in the case of the Bank by or apparently by any officer or agent 19 of the Bank, and in the case of the Customer by or apparently by any Authorised Signatory, but shall be confirmed by written notice or demand as soon as possible thereafter. 19. LEGAL JURISDICTION Legal proceeding against the Customer may be brought by the Bank in the Courts of any country wherein (i) the Bank carries on business. (ii) the Customer is domiciled or resident or has its registered or other principal office or place of central management or control. (iii) the Customer has movable or immovable property. Legal proceedings against the Bank may be brought by the Customer in the Courts of the country in and from which the Bank carries on business. 20. AMENDMENTS The Bank may from time to time amend these General Conditions subject to giving to the Customer written notice of amendments not less than 15 days before such amendments will take effect. The continuance of the banker-customer relationship 30 days after dispatch by the Bank of such notice shall constitute agreement of the Customer to the amendments so notified. SIGNED ------------------------------------ 20 16. APPENDIX 2 LIST OF LEASES AND TENANTS
- ---------------------------------------------------------------------------------------------- NAME OF DEVELOPMENT NAME AND DETAILS QUARTERLY CAPITALISED AMOUNT OF AND DETAILS OF PREMISES OF RENT RENT REMAINING OWED TENANT IN UNDER THE LEASE IN DOLLARS DOLLARS - ---------------------------------------------------------------------------------------------- [ ] [ ] Sixteenth floor AO Mary Kay U1. Smolnaya 24/D Cosmetics 125445, Moscow - ---------------------------------------------------------------------------------------------- [ ] [ ] Part fifteenth floor AO Mary Kay UI. Smolnaya 24/D Cosmetics 125445, Moscow - ---------------------------------------------------------------------------------------------- [ ] [ ] Sixth floor Scala (Cyprus) U1. Smolnaya 24/D Limited 125445, Moscow - ---------------------------------------------------------------------------------------------- [ ] [ ] Seventh floor Van Melle AG UI. Smolnaya 24/D Switzerland 125445, Moscow - ---------------------------------------------------------------------------------------------- [ ] [ ] Fourth floor Akzo Nobel N.V. U1. Smolnaya 24/D 125445, Moscow - ---------------------------------------------------------------------------------------------- [ ] [ ] Part Fifth floor Akzo Nobel N.V. U1. Smolnaya 24/D 125445, Moscow - ---------------------------------------------------------------------------------------------- [ ] [ ] Part Fifth floor Akzo Nobel N.V. U1. Smolnaya 24/D 125445, Moscow - ----------------------------------------------------------------------------------------------
21 17. APPENDIX 3 (a) FORM OF RENT ASSIGNMENT LETTER [Letterhead of Pioneer Real Estate Advisors, Inc.] [Name and address of the Tenant] [ ], 1996 Dear Sirs, We refer to the lease agreement entered into between ourselves and your company on [date] relating to the premises located at [address and other details] (the "LEASE"). We hereby inform you that we have assigned all of our rights to receive Base Rent payments under the Lease to Banque Societe Generale Vostok pursuant to a credit agreement between ourselves and Banque Societe Generale Vostok dated [ ], 1996. Pursuant to the provisions of this assignment, we hereby instruct you irrevocably to make all payments of Rent under the Lease from [date] to the following account: Account N(degree) [_______________________] Banque Societe Generale Vostok 5, Nikitsky Pereulok 103009 Moscow or to such account as Banque Societe Generale Vostok may from time to time direct. To confirm receipt of this letter, please return a copy the acknowledgement letter, a form of which is attached hereto, duly signed by a duly empowered representative of your company, to Banque Societe Generale Vostok at the address indicated above for the attention of Mr. Seraphin Rehbinder / Mr. Thierry Garde, with a copy by fax sent to us for the attention of [ ] at the following number: [ ]. Yours faithfully, For Pioneer Real Estate Advisors, Inc. By: Title: [stamp] 22 18. APPENDIX 3 (b) FORM OF ACKNOWLEDGEMENT LETTER [LETTERHEAD OF THE TENANT] Banque Societe Generale Vostok 5 Nikitsky Terenlok 103009 Moscow [ ], 1996 For the attention of Mr. Seraphin Rehbinder / - --------------------------------------------- Mr. Thierry Garde - ----------------- Re.: Lease Agreement dated [ ] between Pioneer Real Estate Advisors, Inc. as lessor and our company as lessee (the "LEASE AGREEMENT") -------------------------------------------------------------------- Dear Sirs, We refer to the letter dated [ ] addressed to us by Pioneer Real Estate Advisors, Inc. under which we have been instructed to pay from [ ] all the Base Rent payments due under the Lease Agreement to Banque Societe Generale Vostok on the Account n(degree) [_____________] or on any other account which may from time to time be notified to us by Banque Societe Generale Vostok. Therefore, we irrevocably undertake to pay from [ ] to the order of Banque Societe Generale Vostok, all the Rent due under the Lease Agreement, irrespective of any instruction to the contrary we may receive from Pioneer Real Estate Advisors, Inc., after the date hereof. For the avoidance of doubt, it is understood that the present undertaking does not imply for us any extra obligation regarding the Lease Agreement. We understand that we will be released of this undertaking only after full repayment of all sums due by Pioneer Real Estate Advisors, Inc. to Banque Societe Generale Vostok or suspension of our obligations under the Lease, which will be notified to us by Banque Societe Generale Vostok. Subject to the terms hereof, all provisions of the Lease Agreement and our rights and obligations under the Lease Agreement remain unchanged. Yours faithfully, For [ ] By: .. Title: [stamp] . 23 19. APPENDIX 4 FORM OF NOTICE OF DRAWING From: Pioneer Real Estate Advisors, Inc. To: Banque Societe Generale Vostok Attention Mr. Seraphin Rehbinder / Mr. Thierry Garde ------------------------------------------ AGREEMENT WITH PIONEER REAL ESTATE ADVISORS, INC. N(DEGREE)[ ] DATED [ ], DECEMBER 1996 FOR AN AMOUNT OF US$ [ ] 1. We wish to borrow the Loan as follows: (a) Drawing Date: [Not earlier than 3 Business Days from the date of the notice of drawing and not later than the end of the Availability Period defined in Article 3.1.] (b) Amount: [$ [ ] or multiple thereof] (c) Interest Period: [number of days from Drawing Date to [ ], 1996] (d) Purpose: [Purchase of inventory / services / other] 2. We confirm that each condition precedent under Article 3.3. has been fulfilled and that no Event of Default has occurred and is continuing. For: Pioneer Real Estate Advisors, Inc. Name: ------------------------------ Title: ------------------------------ Seal 24 20. APPENDIX 5 CASH-FLOW CHART 25 Pioneer loan repayment projections. (In US Dollars, according to Tenant's leases payment schedule).
- ---------------------------------------------------------------------------------------------------------------------------- DATE Outstanding Pioneer Income * Principal Interest (12% p.a.) Arrang. fee Total - ------ ----------- --------------------------- Monthly Cumulative Payments Payments (0.25% upfront) Payments - ---------------------------------------------------------------------------------------------------------------------------- Nov-96 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Dec-96 0.00 317,195.00 317,195.00 0.00 0.00 0.00 0.00 Jan.97 2,625,000.00 0.00 317,195.00 0.00 0.00 -6,562.50 -6,562.50 Feb-97 2,625,000.00 0.00 317,195.00 0.00 0.00 0.00 0.00 Mar-97 2,625,000.00 0.00 317,195.00 0.00 0.00 0.00 0.00 Apr-97 2,625,000.00 283,649.00 600,844.00 -200,000.00 -78,750.00 0.00 -278,750.00 May-97 2,425,000.00 0.00 600,844.00 0.00 0.00 0.00 0.00 Jun-97 2,425,000.00 0.00 600,844.00 0.00 0.00 0.00 0.00 Jul-97 2,425,000.00 310,213.00 911,057.00 -200,000.00 -72,750.00 0.00 -272,750.00 Aug-97 2,225,000.00 0.00 911,057.00 0.00 0.00 0.00 0.00 Sep-97 2,225,000.00 0.00 911,057.00 0.00 0.00 0.00 0.00 0ct-97 2,225,000.00 310,214.00 1,221,271.00 -328,125.00 -66,750.00 0.00 -394,875.00 Nov-97 1,896,875.00 0.00 1,221,271.00 0.00 0.00 0.00 0.00 Dec-97 1,896,875.00 0.00 1,221,271.00 0.00 0.00 0.00 0.00 Jan-98 1,896,875.00 487,273.00 1,708,544.00 -328,125.00 -56,906.25 0.00 -385,031.25 Feb-98 1,568,750.00 0.00 1,708,544.00 0.00 0.00 0.00 0.00 Mar-98 1,568,750.00 0.00 1,708,544.00 0.00 0.00 0.00 0.00 Apr-98 1,568,750.00 513,839.00 2,222,383.00 -328,125.00 -47,062.50 0.00 -375,187.50 May-98 1,240,625.00 0.00 2,222,383.00 0.00 0.00 0.00 0.00 Jun-98 1,240,625.00 0.00 2,222,383.00 0.00 0.00 0.00 0.00 Jul-98 1,240,625.00 513,838.00 2,736,221.00 -328,125.00 -37,218.75 0.00 -365,343.75 Aug-98 912,500.00 0.00 2,736,221.00 0.00 0.00 0.00 0.00 Sep-98 912,500.00 0.00 2,736,221.00 0.00 0.00 0.00 0.00 Oct-98 912,500.00 513,839.00 3,250,060.00 -456,250.00 -27,375.00 0.00 -483,625.00 Nov-98 456,250.00 0.00 3,250,060.00 0.00 0.00 0.00 0.00 Dec-98 456,250.00 0.00 3,250,060.00 0.00 0.00 0.00 0.00 Jan-99 456,250.00 513,839.00 3,763,898.00 -456,250.00 -13,687.50 0.00 -469,937.50 Feb-99 0.00 0.00 3,763,899.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------ DATE Cumulative Cash in hand Cash in hand - ------ Payments (monthly) (cumulative) - ------------------------------------------------------------ Nov-96 0.00 0.00 0.00 Dec-96 0.00 317,195.00 317,195.00 Jan.97 -6,562.50 -6,562.50 310,632.50 Feb-97 -6,562.50 0.00 310,632.50 Mar-97 -6,562.50 0.00 310,632.50 Apr-97 -285,312.50 4,899.00 315,531.50 May-97 -285,312.50 0.00 315,531.50 Jun-97 -285,312.50 0.00 315,531.50 Jul-97 -558,062.50 37,463.00 352,994.50 Aug-97 -558,062.50 0.00 352,994.50 Sep-97 -558,062.50 0.00 352,994.50 0ct-97 -952,937.50 -84,661.00 268,333.50 Nov-97 -952,937.50 0.00 268,333.50 Dec-97 -952,937.50 0.00 268,333.50 Jan-98 -1,337,968.75 102,241.75 370,575.25 Feb-98 -1,337,968.75 0.00 370,575.25 Mar-98 -1,337,968.75 0.00 370,575.25 Apr-98 -1,713,156.25 138,651.50 509,226.75 May-98 -1,713,156.25 0.00 509,226.75 Jun-98 -1,713,156.25 0.00 509,226.75 Jul-98 -2,078,500.00 148,494.25 657,721.00 Aug-98 -2,078,500.00 0.00 657,721.00 Sep-98 -2,078,500.00 0.00 657,721.00 Oct-98 -2,562,125.00 30,214.00 687,935.00 Nov-98 -2,562,125.00 0.00 687,935.00 Dec-98 -2,562,125.00 0.00 687,935.00 Jan-99 -3,032,062.50 43,901.50 731,836.50 Feb-99 0.00 0.00 0.00
* Pioneer income - rentals of 4 tenants (7 lease agreements) to be assigned to loan. ** Loan coverage - 130% min. (ratio of Pioneer cumulative assigned income to initial outstanding). Availability period starts on 26.12.96 - -------------------------------------------------------------------------------- 26 21. APPENDIX 6 [DRAFT LETTER FROM HOLMES ROBERTS OWEN LLP] 27 Appendix 6 December __, 1996 Banque Societe Generale Vostok Nikitsky Pereulok 5 103009 Moscow, Russia Gentlemen: We have acted as counsel to Pioneer Real Estate Advisors, Inc. ("PREA"), a Delaware, U.S.A. corporation in connection with its execution and delivery of a certain Credit Facility Agreement (the "Agreement"), dated as of __ December 1996, between PREA and Banque Societe Generale Vostok (the "Bank"). We are giving this opinion pursuant to section 3.3(c) of the Agreement. I. INFORMATION RELIED UPON. In rendering this opinion, we have reviewed, are familiar with and have relied upon the Agreement, as executed and delivered by PREA and the Bank, and the lease agreements (the "Leases") between PREA and the entities listed in Appendix 2 of the Agreement (the "Tenants"). In addition, we have reviewed and relied upon relevant and published laws, acts, regulations and instructions of various government agencies and legislative bodies of the Russian Federation and of the City of Moscow in effect as of December 2, 1996 ("Relevant Law"). This opinion is based only on Relevant Law and no opinion is given with respect to the laws of any other jurisdiction, region, oblast, city or municipality. II. OPINION. Based upon our examination of the Agreement, the Leases and Relevant Law and subject to the assumptions and qualifications set forth below, we are of the opinion that under Relevant Law, to the extent such law is applicable to any of the Leases, the following formalities are required in order to effect PREA's assignment to the Bank of PREA's right to receive base rents under the Leases as security for the Credit Facility under the Agreement: 1. NOTIFICATION AND ASSURANCES TO TENANTS. PREA shall notify Tenants in writing regarding the assignments to the Bank by PREA of the base rents under the Leases, pursuant to Article 830 (1) of the Civil Code of the Russian Federation ("Civil Code"). It must be noted that, pursuant to Article 830 (2) of the Civil Code, the Tenants have the right to request evidence of the assignment and the obligation of the Tenants to pay the Bank will not mature until the Bank demonstrates evidence of the assignment to the Tenants so requesting. 28 2. RECEIPT BY THE BANK OF A LICENSE TO CARRY ON LENDING ACTIVITIES. The Bank must be duly licensed by the Central Bank of the Russian Federation to lend money against the assignment of claims, pursuant to Articles 825 and 173 of the Civil Code. 3. REGISTRATION OF THE AGREEMENT. Pursuant to Article 389 (2) of the Civil Code and Presidential Decree # 293 of February 28, 1996, to effect the assignment, the Bank is required to register the Agreement with the Russian Federal Commission for Immovable Property and Real Estate Appraisal ("Commission"). The Commission, however, has not yet promulgated procedures for such registration, and, therefore, at present it is not currently possible to register the Agreement with the Commission. While we cannot opine on the possible impact of this impossibility to register the Agreement on the validity of the assignment, if past trends of legislative and regulatory interpretation are any indication, we think that Russian courts and/or government agencies of competent jurisdiction are likely to recognize the assignment as valid and enforceable under Relevant Law, on the condition that the Bank timely registers the Agreement once the Commission establishes registration procedures. III. ASSUMPTIONS. In rendering the opinion we have assumed the following: 1. In respect of all documents we have reviewed, examined or relied upon, we have assumed the genuineness of all signatures, the conformity to original documents of all the documents submitted to us as certified, photostatic or facsimile copies and the authenticity of the originals of such documents. 2. In respect of all the documents issued by government agencies of the Russian Federation and various regional government bodies, we have assumed that such government agencies acted in compliance with their established rules and procedures in issuing such documents and that any individual or individuals executing, certifying or otherwise issuing any such documents on behalf of the government agencies have all the requisite authority to act on behalf of such government agencies. IV. FURTHER QUALIFICATIONS. This opinion is subject to the following additional qualifications: 1. This opinion speaks only to Relevant Law in effect as of December 2, 1996. No opinion is given as to any prospective matter, and no undertakiing is given to update this opinion or advise you of any changes in Relevant Law after such date. . . 2 29 2. Relevant Law and all interpretations of such law by the government agencies of the Russian Federation and the City of Moscow, and all statements made by us in this opinion with respect to Relevant Law and application of it to the legal status PREA, the Bank and the Tenants, are of necessity subject to the exercise of broad discretionary powers of relevant authorities and legislative bodies of the government agencies of the Russian Federation and the City of Moscow. 3. The opinions expressed in this letter are limited to the matters expressly set forth herein, and no other opinion should be inferred beyond the matters expressly stated. This opinion is solely for your benefit in connection with the transactions contemplated by the Agreement and may not be relied on by the Bank for any other purpose or by any other person for any purpose, nor may the Bank furnish copies of this opinion to any other person without the prior written consent of Holme Roberts & Owen LLP. Very truly yours Holme Roberts & Owen LLP By: - ------------------------------------- Margaret B. McLean, Partner 3 EX-10.66 6 FIRST AMENDMENT TO LEASE 1 EXHIBIT 10.66 FIRST AMENDMENT TO LEASE ------------------------ This First Amendment to Lease (the "First Amendment") is dated as of the 31st day of January, 1994 by and between John A. Pirovano, William A. Halsey and Stanton H. Zarrow, as TRUSTEES OF 60 STATE STREET TRUST under Declaration of Trust dated September 10, 1970 and recorded with the Suffolk County Registry of Deeds in Book 8389, Page 286, as amended (the "Landlord") and THE PIONEER GROUP, INC. ("Tenant"). RECITALS -------- WHEREAS, Landlord and Tenant entered into a lease dated as of July 3, 1991 (the "Lease") for certain space ("Premises") in the building commonly known as 60 State Street, Boston, Massachusetts (the "Building"); and WHEREAS, Landlord and Tenant desire to amend the Lease to include within the Premises all of Floor 19 of the Building consisting of approximately 21,698 rentable square feet of space, shown as the "F1oor 19 Premises" on the floor plan attached hereto as AMENDMENT TO EXHIBIT A-1 and incorporated herein, 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 fromm Landlord, the Floor 19 Premises on the following terms and conditions: 1. TERM. The Term for the Floor 19 Premises shall commence on July 1, 1994 and shall expire on March 31, 2007, unless earlier terminated as set forth in Amendment Section 6 or extended pursuant to the Lease. Tenant acknowledges that the Term for the Floor 19 Premises shall continue notwithstanding any election by Tenant not to renew the initial Term of the Lease for all or a portion of the remainder of Tenant's Premises which initial Term expires on March 31, 2002. Landlord and Tenant further acknowledge that the Floor 19 Premises shall be deemed Additional Space provided that Tenant's rights to extend the Term for the Floor 19 Premises shall be subject to the rights of Hale and Dorr pursuant to the Hale and Dorr Lease, as amended. The Floor 19 Premises shall not be deemed to be Substitute Option Space pursuant to Section 2.1.3(a). -1- 2 2. ANNUAL FIXED RENT FOR INITIAL TERM AND ADDITIONAL RENT. Annual Fixed Rent for the Floor 19 Premises shall be as follows: (i) For the period from July 1, 1994 through December 31, 1994, Tenant shall not be required to pay any Annual Fixed Rent for the Floor 19 Premises. (ii) From January 1, 1995 through December 31, 1998, the Annual Fixed Rent for the Floor 19 Premises shall be $8.50 per rentable square foot ($184,433.00 per annum; $15,369.42 per month). (iii) From January 1, 1999 through December 31, 2002, the Annual Fixed Rent for the Floor 19 Premises shall be $10.50 per rentable square foot ($227,829.00 per annum; $18,985.75 per month). (iii) From January 1, 2003 through March 31, 2007, Annual Fixed Rent for the Floor 19 Premises shall be $12.50 per rentable square foot ($271,225.00 per annum; $22,602.08 per month). Tenant shall pay additional rent for the Floor 19 Premises on the same terms and conditions as provided in the Lease for the initial Premises provided that, for the period from July 1, 1994 through December 31, 1994, Tenant shall not be required to pay Operating Expenses Allocable to the Floor 19 Premises or Landlord's Tax Expenses Allocable to the Floor 19 Premises. 3. LANDLORD'S WORK ON THE FLOOR 19 PREMISES. Notwithstanding any provisions of the Lease to the contrary including, without limitation, Sections 3.1 and 3.6, Landlord's Work with respect to the Floor 19 Premises shall be solely as set forth on AMENDMENT EXHIBIT B-1 and except for Landlord's Work, the Floor 19 Premises shall be delivered to Tenant broom-clean and in their then "as is" condition. Landlord shall perform Landlord's Work, at Landlord's sole cost and expense, and shall use reasonable efforts to substantially complete Landlord's Work and to deliver the Floor 19 Premises to Tenant by July 1, 1994. 4. TENANT'S WORK ON THE FLOOR 19 PREMISES. Commencing on July 1, 1994, Tenant shall have the right to construct improvements to the Floor 19 Premises 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 -2- 3 of the Lease including Section 3.5. All Tenant improvements to the Floor 19 Premises shall be performed at Tenant's sole cost and expense, and Landlord shall not be obligated to reimburse or otherwise compensate Tenant for such improvements. 5. PARKING. Pursuant to Section 2.2.1 of the Lease, Tenant shall have the right to occupy seven (7) additional parking spaces in the Building garage and Tenant shall pay therefor the amounts calculated in accordance with Section 2.5. 6. LANDLORD'S RECAPTURE OF FLOOR 19. The Hale and Dorr Lease provides in Section 2.1.3 thereof that Hale and Dorr has the right and option to occupy Floor 19 as of April 1, 2005. If Hale and Dorr exercises its rights under the Hale and Dorr Lease with respect to the Floor 19 Premises, then the following shall apply: (i) Landlord shall notify Tenant on or before May 1, 2004 if Hale and Dorr exercises its right to lease Floor 19 ("Landlord's Floor 19 Notice"). (ii) The Lease will terminate with respect to the Floor 19 Premises only as of March 31, 2005 and Tenant shall surrender the Floor 19 Premises to Landlord on or before that date in accordance with the terms of the Lease. Landlord and Tenant expressly acknowledge that, except for the Floor 19 Premises, the Lease will remain in full force and effect with respect to the entire Premises then being covered by the Lease, if any. (iii) For the period from October 1, 2004 through March 31, 2005, Tenant's obligation to pay Base Rent for the Floor 19 Premises and Operating Expenses Allocable to the Floor 19 Premises and Landlord's Tax Expenses Allocable to the Floor 19 Premises shall be waived. (iv) Notwithstanding any provisions of the Lease, as amended hereby, to the contrary, Landlord's Floor 19 Notice shall be deemed to be Landlord's Offer of Floor 16, pursuant to Section 2.1.4(b), except that: (a) Landlord shall not be required to include an estimate of 90% of FRV. The Annual Fixed Rent for Floor 16 for the period of April 1, 2005 through March 31, 2007 shall be at the rate of $12.50 per rentable square foot ($280,087.50 per annum based on 22,407 rentable -3- 4 square feet); (b) the Annual Fixed Rent for Floor 16 for the period of October 1, 2004 through March 31, 2005 shall be abated fully; and (c) Landlord shall complete the improvements specified in Amendment Exhibit B-2. 7. ADJUSTMENT OF DATES. Notwithstanding any provision of this First Amendment to the contrary, if Landlord fails to substantially complete Landlord's Work and to deliver either the Floor 19 Premises or Floor 16, as the case may be, to Tenant on the applicable date set forth above, Landlord shall not be liable for any damages caused thereby nor shall this First Amendment or the Lease be void or voidable, but the specified dates for (a) the commencement of the Term for the applicable space, (b) Tenant's right to commence work on or to use the applicable space, and (c) the commencement of Tenant's obligation to pay Base Rent for the applicable space, Operating Expenses Allocable to the applicable space and Landlord's Tax Expenses Allocable to the applicable space shall be adjusted by one (1) day for each day of delay, and all other dates shall remain as specified in this First Amendment provided that the dates described in clause (c) above shall not be so adjusted if Landlord's failure to substantially complete Landlord's Work or to deliver the applicable space is a result of the acts or omissions of Tenant. As an example, if Landlord is unable to deliver the Floor 19 Premises as required by this First Amendment until July 15, 1994, then the Term of the Lease for the Floor 19 Premises, and Tenant's right to commence work on and to use the Floor 19 Premises, shall commence on July 15, 1994, and, provided Landlord's failure to substantially complete Landlord's Work or to deliver the applicable space is not a result of the acts or omissions of Tenant, then Tenant shall not be required to pay Annual Fixed Rent, Operating Expenses Allocable to the Floor 19 Premises or Landlord's Tax Expenses Allocable to the Floor 19 Premises for the period of July 15, 1994 through January 14, 1995, but all other dates with respect to the Floor 19 Premises including, without limitation, the date on which Tenant is required to surrender the Floor 19 Premises (March 31, 2005 or March 31, 2007, as the case may be) shall remain the same. 8. WAIVERS AND SUBORDINATION OF CERTAIN RIGHTS. Notwithstanding any provision of the Lease to the contrary including, without limitation, Sections 2.1.3(a), 2.1.4 and 2.1.5, Tenant hereby (a) consents to ITT Sheraton's lease of Floors 13, 14, 15 and 16 through September 30, 2004; (b) subordinates its rights with respect to Floors 13, 14 and 15 to the right to extend -4- 5 the term of the ITT Sheraton Lease, as amended, through December 31, 2008; and (c) subordinates its rights with respect to the space on Floor 9 now occupied by Lourie & Cutler together with up to an additional approximately 2,000 square feet of contiguous space for the continuing occupancy of Lourie & Cutler. In addition, Tenant hereby acknowledges that Landlord has used diligent efforts to gain control of the Sheraton Space and the initial L&C Space pursuant to Section 2.1.3(a) of the Lease. 9. LANDLORD'S WORK FLOORS 13, 14 AND 15. In the event Tenant leases any of Floors 13, 14 or 15 pursuant to Section 2.1.4, then Landlord's work on such Floors shall consist of the work described in Section 2.1.3(c) and only those sections of Exhibit E/F to the Lease that are set forth in Items 7 through 10 of AMENDMENT EXHIBIT B-l, and neither the time frames nor the penalties associated with the applicable sections of Exhibit E/F shall be applicable. 10. CAPITALIZED TERMS. Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Lease. 11. 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. 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-Trustee, but not individually TENANT: THE PIONEER GROUP, INC. By:/s/ John F. Cogan -------------------------------- John F. Cogan, its President hereunto duly authorized -5- 6 AMENDMENT EXHIBIT A-1 Floor 19 Premises ----------------- -6- 7 AMENDMENT EXHIBIT B-1 Landlord's Work on Floor 19 Premises ------------------------------------ Landlord's Work for the Floor 19 Premises shall consist solely of the following: 1. Demolish the existing improvements from slab to the slab including removal of improvements above the ceiling, provided that Landlord may leave in place all or any portion of the sprinkler distribution system, exit lighting and other improvements which may be required to maintain the space in compliance with applicable safety codes and insurance requirements, or as may be required to prevent damage to the Building; 2. Repair the core walls, patch and prime; 3. Repair any damage caused during demolition or construction of Landlord's Work; 4. Remove the connecting stair to the 20th floor and repair the slab; 5. Install an ADA compliant unisex restroom in a location to be selected by Tenant and using finishes comparable to the finishes in the unisex restrooms in Tenant's existing Premises provided that, notwithstanding any provision of this First Amendment to the contrary, Landlord shall not be required to have the unisex restroom substantially complete until the later of (a) July 1, 1994 or (b) ninety (90) days after Tenant delivers to Landlord notice of the designated location for the unisex restroom. If the ninety (90) day period has not lapsed and Landlord's Work other than the unisex restroom is substantially complete, Landlord shall be entitled to deliver possession of the Premises to Tenant and the date of such delivery shall be used for the purpose of determining the commencement date for the Floor 19 Premises. In addition, at any time prior to Tenant giving Landlord notice of the location for the unisex restroom, Tenant may notify Landlord in writing of Tenant's election to install the unisex restroom. If Tenant so elects the installation of the unisex restroom shall no longer be part of Landlord's Work and Landlord shall reimburse Tenant for up to Fifteen Thousand Dollars ($15,000.00) of the cost of installing the unisex restroom using finishes comparable to the finishes in the unisex restrooms in Tenant's existing Premises. Landlord's reimbursement shall be made within thirty (30) days of Tenant's delivery to Landlord of paid invoices, lien waivers, and such other documentation as Landlord may reasonably require; -7- 8 6. Install electrical panels on Floor 19 to permit Tenant to connect its life-safety devices as required by applicable Building codes and the ADA; 7. Furnish and install a balancing device on Floor 19 to ensure that the Landlord provides 0.15 cfm of fresh air per rentable square foot; 8. Provide sufficient cooling capacity for the Floor 19 Premises including, without limitation, the following auxiliary areas: computer rooms, telephone equipment rooms, conference rooms, special use rooms, copy centers, word processing areas and mailrooms, as shown on the plans submitted by Tenant and approved by Landlord, all as required pursuant to Exhibit J, Section II. Notwithstanding the foregoing or any other provision of the Lease or this First Amendment, Landlord shall not be required to provide additional cooling capacity should Tenant substantially change the configuration of the Floor 19 Premises. Any modification to the existing floor fan units or the addition of supplemental fan coil units resulting from such a change of configuration and/or use shall be at Tenant's sole expense; 9. The restrooms in the Floor 19 Premises shall comply with operational standards reasonably satisfactory to Tenant and with all code requirements as of the date possession of the Floor 19 Premises is delivered to Tenant, including toilet exhaust. All plumbing fixtures and water, waste and vent systems shall be in good repair and shall be at least equal to operational standards of first-class downtown Boston office towers; 10. Provide electrical power to the Floor 19 Premises sufficient to comply with the provisions of Exhibit J, Section VI; and 11. If the Floor 19 Premises shall be damaged by fire or by any other cause, risk or reason prior to Landlord's delivery of the Floor 19 Premises to Tenant, the provisions of Section 6.1 shall apply to such space as if such space were included within the Premises, notwithstanding the fact that Landlord shall not have delivered such space, except that, in addition to the work set forth above, Landlord's restoration obligation under Section 6.1 shall be limited to restoration of such space as shell space only, meaning without damage to the restrooms, core, exterior walls, floor slabs, steelwork, fireproofing, window frames, mullions or other structural elements of the Building or to the Building systems. -8- 9 Except as specifically set forth above, all improvements to the Floor 19 Premises shall be made by and at the expense of Tenant, subject to Landlord's approval which shall not be unreasonably withheld or delayed, and subject to the other terms and conditions of the Lease including Section 3.5. -9- 10 AMENDMENT EXHIBIT B-2 Improvements ------------ If Tenarnt exercises its right to lease Floor 16 pursuant to Section 2.1 4(b) of the Lease, Landlord's Work on Floor 16 shall consist solely of the following: 1. Install an ADA compliant unisex restroom in a location to be selected by Tenant and using finishes comparable to the finishes in the unisex restrooms in Tenant's existing Premises provided that, notwithstanding any provision of this First Amendment to the contrary, Landlord shall not be required to have the unisex restroom substantially complete until the later of (a) October 1, 2004 or (b) ninety (90) days after Tenant delivers to Landlord notice of the designated location for the unisex restroom. If the ninety (90) day period has not lapsed and Landlord's Work other than the unisex restroom is substantially complete, Landlord shall be entitled to deliver possession of the Premises to Tenant and the date of such delivery shall be used for the purpose of determining the commencement date for Floor 16. In addition, at any time prior to Tenant giving Landlord notice of the location for the unisex restroom, Tenant may notify Landlord in writing of Tenant's election to install the unisex restroom. If Tenant so elects the installation of the unisex restroom shall no longer be part of Landlord's Work and Landlord shall reimburse Tenant for up to Fifteen Thousand Dollars ($15,000.00) of the cost of installing the unisex restroom using finishes comparable to the finishes in the unisex restrooms in Tenant's existing Premises. Landlord's reimbursement shall be made within thirty (30) days of Tenant's delivery to Landlord of paid invoices, lien waivers, and such other documentation as Landlord may reasonably require; 2. Install electrical panels on Floor 16 to permit Tenant to connect its life-safety devices as required by applicable Building codes and the ADA; 3. Furnish and install a balancing device on Floor 16 to ensure that the Landlord provides 0.15 cfm of fresh air per rentable square foot; 4. Provide sufficient cooling capacity for Floor 16 including, without limitation, the following auxiliary areas: computer rooms, telephone equipment rooms, conference rooms, special use rooms, copy centers, word processing areas and mailrooms, as shown on the plans submitted by -10- 11 Tenant and approved by Landlord, all as required pursuant to Exhibit J, Section II. Notwithstanding the foregoing or any other provision of the Lease or this First Amendment, Landlord shall not be required to provide additional cooling capacity should Tenant substantially change the configuration and/or use of Floor 16. Any modification to the existing floor fan units or the addition of supplemental fan coil units shall be at Tenant's sole expense; 5. The restrooms in Floor 16 shall comply with operational standards reasonably satisfactory to Tenant and with all code requirements as of the date possession of Floor 16 is delivered to Tenant, including toilet exhaust. All plumbing fixtures and water, waste and vent systems shall be in good repair and shall be at least equal to operational standards of first-class downtown Boston office towers; 6. Provide electrical power to Floor 16 sufficient to comply with the provisions of Exhibit J, Section VI; 7. Landlord shall not be obligated to, but at its option, may remove any then existing improvements in such space, in which event Landlord shall repair any damages caused by such removal (unless the repair would be rendered unnecessary by Tenant's immediate intended use of such space), leaving such space without damage to the restrooms, core, exterior walls, floor slabs, steelwork, fireproofing, window frames, mullions or other structural elements of the Building or to the Building systems; and 8. If Floor 16 shall be damaged by fire or by any other cause, risk or reason prior to Landlord's delivery of Floor 16 to Tenant, the provisions of Section 6.1 shall apply to such space as if such space were included within the Premises, notwithstanding the fact that Landlord shall not have delivered such space, except that, in addition to the work set forth above, Landlord's restoration obligation under Section 6.1 shall be limited to restoration of such space as shelf space only, meaning without damage to the restrooms, core, exterior walls, floor slabs, steelwork, fireproofing, window frames, mullions or other structural elements of the Building or to the Building systems. Except as specifically set forth above, all improvements to Floor 16 shall be made by and at the expense of Tenant, subject to Landlord's approval which shall not be unreasonably withheld or delayed, and subject to the other terms and conditions of the Lease including Section 3.5. -11- 12 CONSENT OF LENDERS ------------------ The undersigned hereby acknowledge notice of the First Amendment to Lease between Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated January 31, 1994 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 REAL ESTATE INVESTMENT SERVICES, a California general partnership, as General Partner By: /s/ ----------------------------- Authorized signatory By: /s/ ----------------------------- Authorized signatory -12- 13 CONSENT OF LENDERS ------------------ The undersigned hereby acknowledge notice of the First Amendment to Lease between Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated January , 1994 and consent thereto. TEACHERS INSURANCE ANNUITY ASSOCIATION OF AMERICA By: /s/ -------------------------------- its hereunto duly authorized -13- EX-10.67 7 SECOND AMENDMENT TO LEASE 1 EXHIBIT 10.67 SECOND AMENDMENT TO LEASE ------------------------- This SECOND AMENDMENT TO LEASE ("SECOND AMENDMENT") is made as of September,30, 1996 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 (collectively, the "LEASE"), for certain space ("PREMISES") on the 3rd, 4th 17th, 18th and 19th floors of the building commonly known as 60 State Street, Boston, Massachusetts (the "BUILDING"); WHEREAS, Landlord has offered, and Tenant has accepted, to lease certain additional space consisting of approximately 7,120 rentable square feet of space, shown as the "FLOOR 6 PREMISES" on the floor plan attached hereto as SECOND AMENDMENT EXHIBIT A and incorporated herein; and WHEREAS, Landlord and Tenant desire to amend the Lease to include the Floor 6 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 6 Premises on the following terms and conditions: 1. TERM. The Term for the Floor 6 Premises shall commence on June 16, 1996 and shall expire on December 31, 1998, unless earlier terminated as set forth in the Lease. Notwithstanding Section 2.4.2 or any other provision of the Lease to the contrary, Tenant shall have no right to extend the Term for the Floor 6 Premises beyond December 31, 1998. Landlord and Tenant hereby acknowledge that the Floor 6 Premises shall be deemed Substitute Option Space pursuant to Section 2.1.3(a) and subject to Tenant's rights under Section 2.1.3(b). 2. ANNUAL FIXED RENT FOR INITIAL TERM AND ADDITIONAL RENT. Annual Fixed Rent for the Floor 6 Premises shall be as follows: (i) For the period from June 16, 1996 through March 31, 1997, the Annual Fixed Rent for the Floor 6 Premises shall be $14.00 per rentable square foot ($99,680.00 per annum; $8,306.67 per month). (ii) For the period from April 1, 1997 through March 31, 1998, the Annual Fixed Rent for the Floor 6 Premises shall be $14.75 per rentable square foot ($105,020.00 per annum; $8,751.67 per month). 1 2 (iii) For the period from April 1, 1998 through December 31, 1998, the Annual Fixed Rent for the Floor 6 Premises shall be $15.50 per rentable square foot ($110,360.00 per annum; $9,196.67 per month). Tenant shall pay additional rent for the Floor 6 Premises on the same terms and conditions as provided in the Lease for the initial Premises. 3. LANDLORD'S WORK ON THE FLOOR 6 PREMISES. Notwithstanding any provisions of the Lease to the contrary including, without limitation, Sections 3.1 and 3.6, the Floor 6 Premises shall be delivered to Tenant broom-clean and in their then "as is" condition. 4. TENANT'S WORK ON THE FLOOR 6 PREMISES. Commencing on June 16, 1996, Tenant shall have the right to construct improvements to the Floor 6 Premises 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 6 Premises shall be performed at Tenant's sole cost and expense, and Landlord shall not be obligated to reimburse or otherwise compensate Tenant for such improvements. 5. CAPITALIZED TERMS. Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Lease. 6. 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. EXECUTED under seal as of the date first set forth above. LANDLORD: TRUSTEES OF 60 STATE STREET TRUST By: /s/ ----------------------------------- 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 hereunto duly authorized 2 3 SECOND AMENDMENT EXHIBIT A -------------------------- Plan of Floor 6 Premises ------------------------ [GRAPHIC OF FLOOR PLAN] 4 CONSENT OF LENDERS ------------------ The undersigned hereby acknowledge notice of the Second Amendment to Lease between the Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated September 30, 1996 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 4 5 CONSENT OF LENDERS ------------------ The undersigned hereby acknowledges notice of the Second Amendment to Lease between the Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated September 30, 1996 and consent thereto. TEACHERS INSURANCE ANNUITY ASSOCIATION OF AMERICA By: /s/ ------------------------------- its hereunto duly authorized 5 EX-10.68 8 THIRD AMENDMENT TO LEASE 1 EXHIBIT 10.68 THIRD AMENDMENT TO LEASE ------------------------ This THIRD AMENDMENT TO LEASE ("THIRD AMENDMENT") is made as of November 15, 1996 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, and as further amended by a certain Second Amendment to Lease ("SECOND AMENDMENT") dated September 30, 1996 (collectively, the "LEASE"), for certain space ("PREMISES") on the 3rd, 4th, 6th, 17th, 18th and 19th floors of the building commonly known as 60 State Street, Boston, Massachusetts (the "BUILDING"); WHEREAS, Landlord has offered, and Tenant has accepted, to lease certain additional space consisting of approximately 22,407 rentable square feet of space, shown as the "FLOOR 5 PREMISES" on the floor plan attached hereto as THIRD AMENDMENT EXHIBIT A and incorporated herein, which offer and acceptance are specifically contingent upon the execution of a lease termination agreement by and between Landlord and the current tenant of the Floor 5 Premises; and WHEREAS, Landlord and Tenant desire to amend the Lease to include the Floor 5 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 5 Premises on the following terms and conditions: 1. TERM. The Term for the Floor 5 Premises shall commence on July 16, 1997 and shall expire on March 31, 2002, unless earlier terminated as set forth in the Lease. Landlord and Tenant hereby acknowledge that (a) 7,487 rentable square feet of the Floor 5 Premises shall be deemed "Initial L&C Space" pursuant to Section 2.1.3(a) of the Lease, (b) 11,203 rentable square feet of the Floor 5 Premises shall be deemed "Substitute Option Space" pursuant to Section 2.1.3(b) of the Lease, and (c) the remainder of the Floor 5 Premises, approximately 3,717 rentable square feet, shall remain undesignated. Notwithstanding the foregoing, Landlord and Tenant further acknowledge that as of January 1, 1999, Tenant shall be deemed to have exercised its expansion option with respect to the space set forth in clauses (b) and (c) in the preceding sentence (collectively referred to herein as the "Remaining Two-Thirds of 5 L&C Space") and such space shall be subject to all terms and conditions and entitled to all of the rights applicable to "Additional Space" under the Lease. 1 2 2. ANNUAL FIXED RENT FOR INITIAL TERM AND ADDITIONAL RENT. Annual Fixed Rent for the Floor 5 Premises shall be as follows: (i) For the period from July 16, 1997 through March 31, 1998, the Annual Fixed Rent for the Floor 5 Premises shall be $14.75 per rentable square foot; (ii) For the period from April 1, 1998 through March 31, 1999, the Annual Fixed Rent for the Floor 5 Premises shall be $15.50 per rentable square foot; ' (iii) For the period from April 1, 1999 through March 31, 2000, the Annual Fixed Rent for the Floor 5 Premises shall be $16.25 per rentable square foot; (iv) For the period from April 1, 2000 through March 31, 2001, the Annual Fixed Rent for the Floor 5 Premises shall be $17.00 per rentable square foot; and (v) For the period from April 1,2001 through March 31, 2002, the Annual Fixed Rent for the Floor 5 Premises shall be $17.75 per rentable square foot. Tenant shall pay additional rent for the Floor 5 Premises on the same terms and conditions as provided in the Lease for the initial Premises. 3. LANDLORD'S WORK ON THE FLOOR 5 PREMISES. Notwithstanding any provisions of the Lease to the contrary including without limitation, Sections 3.1 and 3.6, Landlord's Work with respect to the Floor 5 premises shall be solely as set forth on AMENDMENT EXHIBIT B and except for Landlord's Work, the Floor 5 premises shall be delivered to Tenant broom-clean and in their then "as is" condition. 4. TENANT'S WORK ON THE FLOOR 5 PREMISES. Commencing on July 16, 1997, Tenant shall have the right to construct improvements to the Floor 5 Premises 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 5 Premises shall be performed at Tenant's sole cost and expense, and Landlord shall not be obligated to reimburse or otherwise compensate Tenant for such improvements. 5. ADDITIONAL PARKING SPACE. Commencing on July 16, 1997, Tenant shall be entitled to occupy one additional reserved parking space on the P-2 level of the Building garage upon the terms set forth in Section 2.2.1 of the Lease. The foregoing additional parking space shall be treated in all respects as one of the Parking Spaces, and Tenant shall pay additional rent therefor at the rate set forth in Section 2.5 of the Lease. 6. FLOOR 6 PREMISES. Pursuant to the Second Amendment, Tenant elected to designate the Floor 6 Premises as Substitute Option Space for the period from June 16, 1996 through December 31, 1998 in accordance with Section 2.1.3(b) of the Lease. Landlord and Tenant hereby agree as follows: (a) the term with respect to the Floor 6 Premises shall expire on December 31, 1997, (b) effective as of July 16, 1997, the Floor 6 Premises shall no longer be deemed to be Substitute Option Space for the period of time from July 16, 1997 through December 31, 1997, (c) Landlord shall 2 3 not offer Tenant the right to extend the term of the Floor 6 Premises to be coterminous with the term of the Lease pursuant to Section 2.1.4(a) of the Lease prior to April 1, 1997, and (d) if Tenant elects not, or fails timely, to accept Landlord's right of first offer with respect to the Floor 6 Premises, or waives its right of first offer with respect thereto, Tenant shall have the right to remain in the Floor 6 Premises, even though no longer designated as Substitute Option Space, through December 31, 1997 at the Annual Fixed Rental for such space and such period of time set forth in the Second Amendment and upon all of the other terms and conditions of the Lease. 7. CAPITALIZED TERMS. Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Lease. 8. 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. 9. CONTINGENCY. This Third Amendment to Lease is specifically contingent upon the execution of a certain Lease Termination Agreement by and between Landlord and Lahive and Cockfield, the current tenant in the Floor 5 Premises. EXECUTED under seal as of the date first set forth above. LANDLORD: TRUSTEES OF 60 STATE STREET TRUST By: /s/ ------------------------------------- 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/ Diane N. Benson ------------------------------------- Diane N. Benson its Vice President hereunto duly authorized 3 4 THIRD AMENDMENT EXHIBIT A ------------------------- Plan of Floor 5 Premises ------------------------ [GRAPHIC OF FLOOR PLAN] 5 THIRD AMENDMENT EXHIBIT B LANDLORD'S WORK ON FLOOR 5 PREMISES ----------------------------------- Landlord's Work for the Floor 5 Premises shall consist of the following: 1. Install an ADA compliant unisex restroom in a location to be selected by Tenant and using finishes comparable to the finishes in the unisex restrooms in Tenant's existing Premises for a cost not to exceed Fifteen Thousand Dollars ($15,000.00). 2. Install electrical panels to permit Tenant to connect its life-safety devices as required by applicable Building codes and the ADA; 3. Furnish and install a balancing device on Floor 5 to ensure that the Landlord provides 0.15 cfm of fresh air per rentable square foot; 4. Provide sufficient cooling capacity for the Floor 5 Premises including, without limitation, the following auxiliary areas: telephone equipment rooms, conference rooms, special use rooms, copy rooms, word processing areas and mailrooms, as shown on the plans submitted by Tenant and approved by Landlord shall not be required to provide additional cooling capacity should Tenant substantially change the configuration and/or use of the Floor 5 Premises. Any modification to the existing floor fan units or the addition of supplemental fan coil units shall be at Tenant's sole expense; 5. The restrooms in the Floor 5 Premises shall comply with operational standards reasonably satisfactory to Tenant and with all code requirements as of the date possession of the Floor 5 Premises is delivered to Tenant, including toilet exhaust. All plumbing fixtures and water, waste and vent systems shall be in good repair; 6. Provide electrical power to the Floor 5 Premises sufficient to comply with the provisions of Exhibit J, Section VI; and 7. If the Floor 5 Premises shall be damaged by fire or by any other cause, risk or reason prior to Landlord's delivery of the Floor 5 Premises to Tenant, the provisions of Section 6.1 shall apply to such space as if such space were included within the Premises, notwithstanding the fact that Landlord shall not have delivered such space, except that, in addition to the work set forth above, Landlord's restoration obligation under Section 6.1 shall be limited to restoration of such space as shell space only, meaning without damage to the restrooms, core, exterior walls, floor slabs, steelwork, fireproofing, window frames, mullions or other structural elements of the Building or to the Building systems. Except as specifically set forth above, all improvements to the Floor 5 Premises shall be made by and at the expense of Tenant, subject to Landlord's approval which shall not be unreasonably withheld or delayed, and subject to the other terms and conditions of the Lease including Section 3.5. 6 CONSENT OF LENDERS ------------------ The undersigned hereby acknowledge notice of the Third Amendment to Lease between the Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated November 15, 1996 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 6 7 CONSENT OF LENDERS ------------------ The undersigned hereby acknowledges notice of the Third Amendment to Lease between the Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated November 15, 1996 and consent thereto. TEACHERS INSURANCE ANNUITY ASSOCIATION OF AMERICA By: /s/ ------------------------------- its hereunto duly authorized 7 EX-10.69 9 FINANCE AGREEMENT 1 EXHIBIT 10.69 ================================================================================ FINANCE AGREEMENT BETWEEN TEBEREBIE GOLDFIELDS LIMITED AND OVERSEAS PRIVATE INVESTMENT CORPORATION DATED AS OF OCTOBER 25, 1996 [OPIC/641-95-353-IG] ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS ............................................................................... 1 Section 1.01. Definitions ....................................................................... 1 Section 1.02. Interpretation .................................................................... 12 Section 1.03. Project Cost ...................................................................... 13 ARTICLE II. AMOUNT AND TERMS OF THE LOAN .............................................................. 13 Section 2.01. Amount and Disbursement ........................................................... 13 Section 2.02. Commitment Fee .................................................................... 14 Section 2.03. Cancellation of the Commitment .................................................... 14 Section 2.04. Maintenance Fee ................................................................... 14 Section 2.05. Interest .......................................................................... 14 Section 2.06. Repayment of the Loan ............................................................. 15 Section 2.07. Voluntary Prepayment .............................................................. 15 Section 2.08. Mandatory Prepayment .............................................................. 15 Section 2.09. Facility Fee ...................................................................... 16 Section 2.10. Taxes ............................................................................. 16 Section 2.11. Miscellaneous ..................................................................... 17 ARTICLE III. REPRESENTATIONS AND WARRANTIES ............................................................ 19 Section 3.01. Existence and Power of the Company ................................................ 19 Section 3.02. Authority of the Company .......................................................... 19 Section 3.03. Compliance with Agreements ........................................................ 20 Section 3.04. Financial Condition ............................................................... 20 Section 3.05. Capitalization of the Company ..................................................... 20 Section 3.06. Bank Accounts ..................................................................... 21 Section 3.07. Subsidiaries ...................................................................... 21 Section 3.08. Relationships between the Company and its Parent Companies ........................ 21 Section 3.09. Liens ............................................................................. 21 Section 3.10. Taxes and Reports ................................................................. 22 Section 3.11. Defaults .......................................................................... 22 Section 3.12. Litigation ........................................................................ 22 Section 3.13. Compliance with Law; Corrupt Practices ............................................ 22 Section 3.14. Easements, Property Interests, Utilities, Etc ..................................... 23 Section 3.15. Environmental Matters ............................................................. 23 Section 3.16. Project Cost and Project Completion ............................................... 23 Section 3.17. Projections ....................................................................... 24 Section 3.18. Disclosure ........................................................................ 24
3 -ii- ARTICLE IV. CONDITIONS PRECEDENT TO FIRST DISBURSEMENT .................................................. 24 Section 4.01. Corporate Authorization ............................................................ 24 Section 4.02. Funding Arrangements ............................................................... 25 Section 4.03. Financing Documents ................................................................ 25 Section 4.04. Government Approvals ............................................................... 28 Section 4.05. Land ............................................................................... 28 Section 4.06. Insurance ............................................................. ............ 28 Section 4.07. Appointment of Agent ............................................................... 28 Section 4.08. Legal Opinions ..................................................................... 29 Section 4.09. Environmental Impact Assessment; Environmental Recommendations...................... 29 Section 4.10. Other Documents .................................................................... 29 ARTICLE V. CONDITIONS PRECEDENT TO EACH DISBURSEMENT .................................................... 29 Section 5.01. Representations and Defaults ....................................................... 29 Section 5.02. Change in Circumstances ............................................................ 30 Section 5.03. Certification ...................................................................... 30 Section 5.04. Financial Information and Construction Progress .................................... 30 Section 5.05. Equity Investment .................................................................. 30 Section 5.06. Payment or Reimbursement of Expenses ............................................... 31 Section 5.07. Funding Arrangements ............................................................... 31 ARTICLE VI. AFFIRMATIVE COVENANTS ....................................................................... 31 Section 6.01 Project Completion.................................................................. 31 Section 6.02. Company Operations ................................................................. 32 Section 6.03. Maintenance of Rights and Compliance with Laws ..................................... 32 Section 6.04. Government Approvals; Foreign Exchange Consents .................................... 32 Section 6.05. Retention Accounts ................................................................. 33 Section 6.06. Maintenance of Insurance ........................................................... 33 Section 6.07. Accounting and Financial Management ................................................ 35 Section 6.08. Financial Statements and Other Information ......................................... 36 Section 6.09. Access to Records; Inspection; Meetings ............................................ 38 Section 6.10. Notice of Default and Other Matters ................................................ 38 Section 6.11. Security Documents ................................................................. 38 Section 6.12. Financial Ratios ................................................................... 39 Section 6.13. Environmental Requirements ......................................................... 39 ARTICLE VII. NEGATIVE COVENANTS ......................................................................... 40 Section 7.01. Mortgage and Lien Restrictions ..................................................... 40 Section 7.02. Indebtedness ....................................................................... 41 Section 7.03. Debt Service Coverage Ratio ........................................................ 42 Section 7.04. Prepayment of Indebtedness under the SEB Credit Agreements ......................... 42 Section 7.05. No Alteration of Agreements ........................................................ 42 Section 7.06. Restricted Payments ................................................................ 43 Section 7.07. Conduct of Business with Sponsor ................................................... 44 Section 7.08. Conduct of Business with Government ................................................ 44
4 -iii- Section 7.09. Sale of Assets; Mergers ............................................................ 44 Section 7.10. Lease Obligations .................................................................. 45 Section 7.11. Hedging Arrangements ............................................................... 45 Section 7.12. Ordinary Conduct of Business ....................................................... 45 Section 7.13. Worker Rights ...................................................................... 46 ARTICLE VIII. DEFAULTS AND REMEDIES ..................................................................... 46 Section 8.01. Events of Default .................................................................. 46 Section 8.02. Remedies upon Event of Default ..................................................... 49 Section 8.03. Jurisdiction and Consent to Suit ................................................... 49 Section 8.04. Judgment Currency .................................................................. 50 Section 8.05. Immunity ........................................................................... 50 ARTICLE IX. MISCELLANEOUS ............................................................................... 51 Section 9.01. Notices ............................................................................ 51 Section 9.02. English Language ................................................................... 52 Section 9.03. Governing Law ...................................................................... 53 Section 9.04. Succession ......................................................................... 53 Section 9.05. Survival of Agreements ............................................................. 53 Section 9.06. Integration; Amendments ............................................................ 53 Section 9.07. Severability ....................................................................... 53 Section 9.08. No Waiver .......................................................................... 53 Section 9.09. Waiver of Jury Trial ............................................................... 54 Section 9.10. Waiver of Litigation Payments ...................................................... 54 Section 9.11. Indemnity .......................................................................... 54 Section 9.12. Further Assurances ................................................................. 55 Section 9.13. Counterparts ....................................................................... 55
SCHEDULES - --------- 3.05 Capitalization of the Company 3.06 Bank Accounts 3.15 Environmental Exceptions 4.04 Government Approvals 6.13 Exceptions to Environmental Standards 8.03 Arbitration Provisions X Environmental Standards 5 -iv- EXHIBITS - -------- A Form of Debenture B Form of Disbursement Request C Form of Instrument of Charge D Form of Intercreditor Agreement E Form of New York Account Security Agreement F Form of Promissory Note G Form of Project Completion Agreement H Form of Refiner Consent I Form of Security Agreement J Form of Self-Monitoring Questionnaire K Form of Share Retention Agreement L Form of Subordination Agreement 6 FINANCE AGREEMENT AGREEMENT, dated as of October 25, 1996, between TEBEREBIE GOLDFIELDS LIMITED, a corporation organized and existing under the laws of the Republic of Ghana (the "COMPANY"), and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America ("OPIC"), W I T N E S S E T H: WHEREAS, the Company intends to expand its existing gold mine operations located southwest of the town of Tarkwa in western Ghana (the "Teberebie Mine") in order to increase the Teberebie Mine's output from approximately 235,000 to in excess of 400,000 troy ounces of gold per year; and WHEREAS, to secure a portion of the financing for the Project (as defined below), the Company has requested that OPIC provide a Loan or Loans (as defined below) in an amount up to U.S. $19,000,000 pursuant to Section 234(b) of the Foreign Assistance Act of 1961, as amended, which OPIC is willing to do on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows: ARTICLE I. DEFINITIONS SECTION 1.01. DEFINITIONS. Unless otherwise provided, capitalized terms used herein shall have the definitions specified below: "ADJUSTED NET INCOME" for any period means Net Income for such period, excluding therefrom any extraordinary or non-recurring items, any unusual items of gain or loss not incurred in the ordinary course of business and any non-cash gains or losses included in arriving at Net Income for such period, PLUS (without duplication) (a) the aggregate amounts deducted in determining Net Income for such period in respect of (i) net non-cash charges (including, without limitation, depreciation, amortization, deferred tax expense, non-cash interest expense and other non-cash charges), (ii) interest expense forming part of Debt Service, and (iii) 7 -2- income taxes MINUS (b) any increase in Net Working Capital from the beginning to the end of such period. "AFFILIATE" means, with respect to any Person, (i)any other Person that is directly or indirectly controlled by, under common control with or controlling such Person; (ii) any other Person owning beneficially or controlling five percent (5%) or more of the equity interest in such Person; (iii) any officer, director or partner of such Person; or (iv) any spouse or relative of such Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of partnership interests or voting securities, by contract or otherwise. "AGREEMENT" means this Finance Agreement between the Company and OPIC. "AUTHORIZED OFFICER" means, with respect to any Person, its Chairperson, Managing Director, Director, President, Secretary or Treasurer, any Vice President, Assistant Secretary or Assistant Treasurer thereof, and any other officer designated in writing by such Person as having been authorized to execute and deliver this Agreement, the Notes, any of the other Financing Documents to which it is or will be a party, or any other notice or instrument contemplated hereunder. "BUSINESS DAY" means any day other than a Saturday, Sunday or day on which commercial banks are authorized by law to close in the City of New York or Washington, D.C., United States of America. "CAPITAL EXPENDITURES" for any period means all expenditures for property, plant and equipment and other expenditures for fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with U.S. GAAP) as the same are, or would be, set forth in a statement of cash flows for such period prepared in accordance with U.S. GAAP, excluding (a) not more than $54,000,000 of capital expenditures that constitute part of the total cost of the Project referred to in Section 1.03 and (b) any expenditures for the restoration or replacement of any capital asset in respect of which proceeds of any property or casualty insurance have been received, to the extent financed by such insurance proceeds. "CASH AVAILABLE FOR DEBT SERVICE" for any period means the difference between (a) Adjusted Net Income for such period and (b) Capital Expenditures for such period. "CATERPILLAR LOAN" means Indebtedness of the Company to Caterpillar Financial Services Corporation pursuant to the Caterpillar Loan Agreements in an aggregate principal amount not to exceed $20,513,200 at any time outstanding. 8 -3- "CATERPILLAR LOAN AGREEMENTS" means (a) the Loan Agreement dated as of August 30, 1996 between the Company and Caterpillar Financial Services Corporation, together with one associated promissory note of the Company that has not yet been dated, a copy of which has been provided to OPIC, in the principal amount of $347,882.90, two associated promissory notes of the Company dated October 2, 1996 in the respective principal amounts of $2,459,339.85 and $356,943.05, and seven associated promissory notes of the Company dated September 10, 1996, copies of which have been provided to OPIC, in the respective principal amounts of $224,168.12, $46,750.00, $448,031.60, $475,624.30, $1,011,881.65, $1,011,881.65, and $39,299.75, (b) the Loan Agreement dated as of May 16, 1996 between the Company and Caterpillar Financial Services Corporation, together with four associated promissory notes of the Company dated May 31, 1996, copies of which have been provided to OPIC, in the principal amounts of $747,145.75, $475,624.30, $2,451,179.85, and $2,023,763.30; and (c) the Loan Agreement dated as of April 23, 1996, between the Company and Caterpillar Financial Services Corporation, together with two associated promissory notes of the Company dated April 23, 1996, copies of which have been provided to OPIC, in the principal amounts of $6,713,030.55 and $1,680,389.65. "CHARTER DOCUMENTS" means, in respect of any company, corporation, partnership, governmental agency or other enterprise, its founding act, charter, articles of incorporation and by-laws, memorandum and articles of association, statute, or similar instrument, including but not limited to the Regulations of the Company. "CLOSING DATE" means any Business Day on which a Disbursement is made. "COMMITMENT" means OPIC's commitment to guarantee a Loan or Loans in an amount not to exceed $19,000,000 less (i) the portion thereof which pursuant to Section 2.03 has been canceled or has been deemed canceled and (ii) any Loan amounts repaid or prepaid. "COMMITMENT FEE" has the meaning set forth in Section 2.02. "COMMITMENT LETTER" means the letter agreement among the Company, the Sponsor, and OPIC, dated September 29, 1995, as amended. "COMMITMENT PERIOD" means the period commencing on the date hereof and ending on the earlier of (i) the first date on which the sum of the amounts of the disbursements of the Loan equals the amount of the Commitment and (ii) September 30, 1997. 9 -4- "COMPANY" means Teberebie Goldfields Limited, a corporation organized and existing under the laws of the Republic of Ghana. "COMPLETION DATE" has the meaning set forth in the Project Completion Agreement. "CORPORATE SERVICES AGREEMENTS" means the Corporate Services Agreement dated as of October 9, 1995 between the Company and PGL and the Corporate Services Agreement dated as of October 9, 1995 between PGL and the Sponsor and any renewal or extension of either thereof. "CORRUPT PRACTICES LAWS" means (i) the Foreign Corrupt Practices Act of 1977 (Pub.L. No. 95-213, Sections 101-104), as amended, and (ii) any other law, regulation, order, decree or directive having the force of law and relating to bribery, kick-backs, or similar business practices. "CURRENT ASSETS" means assets treated as current assets under U.S. GAAP. "CURRENT LIABILITIES" means all Indebtedness and liabilities, in each case due on demand or to become due within one year, and other liabilities treated as current liabilities under U.S. GAAP. "DEBENTURE" means the Debenture entered into or to be entered into between the Company and OPIC substantially in the form of Exhibit A. "DEBT SERVICE" means, for any period, all payments made or required to be made or to have been made by the Company during such period in respect of any of its Indebtedness (other than payments in reimbursement of out-of-pocket expenses incurred in connection with any such Indebtedness and other than Indebtedness referred to in Section 7.02(b) or 7.02(f)). "DEBT SERVICE COVERAGE RATIO" means the ratio of (a) the Company's Cash Available for Debt Service for the four most recently completed fiscal quarters of the Company, taken as a single accounting period, to (b) the Debt Service of the Company for such period of four completed fiscal quarters. "DEED OF WARRANTY" means the Deed of Warranty Confirmation and Conditions between the Government of the Republic of Ghana and the Company, dated December 3, 1987. "DISBURSEMENT" means the disbursement of the Loan. 10 -5- "DISBURSEMENT REQUEST" means a request for disbursement of the Loan substantially in the form of Exhibit B. "DOLLARS" or "$" means United States dollars. "ECOBANK DOCUMENTATION" means the letter agreement dated November 2, 1995, a copy of which has been provided to OPIC, between the Company and Ecobank Ghana Ltd. "ENVIRONMENTAL STANDARDS" means the standards attached hereto as Schedule X. "EQUIPMENT MORTGAGES" means (a) the Debenture dated the 21st day of November, 1989, issued by the Company in favor of SEB, as supplemented by the Further Charge (Debenture) dated the 29th day of September, 1995, and the Further Charge (Debenture) dated the 30th day of September, 1996, to the extent it establishes in favor of SEB a first charge on the assets described therein as of the date hereof to secure Indebtedness referred to in Section 7.02(d), but not to the extent it may now or hereafter establish a Lien on any other asset or secure any other Indebtedness of the Company; and (b) the Chattel Mortgage dated April 23, 1996 between the Company and Caterpillar Financial Services Corporation, to the extent it establishes in favor of Caterpillar Financial Services Corporation a Lien on (i) the "Present Security" listed on Schedule 1 thereto, as in effect on the date hereof; (ii) the equipment described in four Acknowledgments executed by the Company and dated May 31, 1996, as in effect on the date hereof, copies of which have been delivered to OPIC; (iii) the equipment described in seven Acknowledgments executed by the Company and dated September 10, 1996, as in effect on the date hereof, copies of which have been delivered to OPIC; and (iv) one new Caterpillar shovel Model 5230 (7LL00064) and two new Drilltech Drills Model D245SH (serial numbers 731162 and 762181), each ordered by the Company before the date hereof, all to secure Indebtedness referred to in Section 7.02(h), but not to the extent it may now or hereafter establish a Lien on any other asset or secure any other Indebtedness of the Company. "EQUIPMENT PURCHASE CONTRACTS" means, at any time, all agreements then in force pursuant to which the Company has acquired or has the right to acquire crusher or earth moving equipment or spare parts. "EVENT OF DEFAULT" has the meaning set forth in Section 8.01. 11 -6- "EXISTING HEDGING CONTRACTS" means at any time, all agreements then in force pursuant to which the Company has entered into or may in the future enter into any Hedging Arrangements, including without limitation (on the date hereof) the Master Gold Trading and Hedging Services Agreement, dated as of January 1, 1993, between the Company and Billiton Marketing and Trading B.V. and the Terms and Conditions for Bullion Trading dated September 29, 1993 between the Company and The Chase Manhattan Bank, N.A. "EXPANSION LOAN AGREEMENT" means the Series D Unsecured Bridge Notes numbered PGI-01 through PGI-08 executed by the Company in favor of the Sponsor in an aggregate original principal amount of $12,100,000. "FACILITY FEE" has the meaning set forth in Section 2.10. "FINANCIAL STATEMENTS" means, with respect to any Person, such Person's quarterly or annual balance sheet and statements of income, retained earnings, and sources and application of funds for such fiscal period, together with all notes thereto and with comparable figures for the corresponding period of its previous Fiscal Year, each prepared in Dollars in accordance with U.S. GAAP, PROVIDED that any such quarterly balance sheets or statements of income, retained earnings or sources and application of funds will be unaudited, will be subject to normal year-end audit adjustments and, to the extent that they will not include footnotes, need not be in accordance with U.S. GAAP. "FINANCING DOCUMENTS" has the meaning set forth in Section 4.03. "FISCAL YEAR" means, with respect to the Company, the period beginning on January 1 and ending on December 31 of each year. "FUNDING DOCUMENTS" has the meaning set forth in Section 4.02. "FUNDING SPREAD" means the number of basis points in excess of the Interest Index required in connection with the Funding Documents. "HEDGING ARRANGEMENT" means any interest rate or currency swap, future, option, cap, collar, ceiling, hedge, or other interest rate protection agreement or foreign exchange contract, or any other agreement or arrangement designed to protect against or benefit from fluctuations in interest rates, currency values, or the price of gold or any other commodity. "INDEBTEDNESS" of any Person means, at any date (i) any obligation of such Person for borrowed money or arising out of any credit facility, including any obligation or 12 -7- credit facility denominated in gold or any other commodity, (ii) any obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) any obligation of such Person to pay the deferred purchase price of property or services, (iv) any obligation of such Person under conditional sales or other title retention agreements, (v) the net aggregate rentals under any lease by such Person as lessee that under U.S. GAAP would be capitalized on the books of the lessee or is the substantial equivalent of the financing of the property so leased, (vi) any obligation of such Person to purchase securities or other property which arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any obligation of such Person secured by any Lien upon property, (viii) any Indebtedness of others secured by a Lien on any asset of such Person, and (ix) any Indebtedness of others guaranteed, directly or indirectly, by such Person. "INDEMNIFIED PERSONS" has the meaning set forth in Section 9.11. "INSTRUMENT OF CHARGE" means the Instrument of Charge entered into or to be entered into between the Company and OPIC, substantially in the form of Exhibit C. "INTERCREDITOR AGREEMENTS" means the Intercreditor Agreements entered into or to be entered into between OPIC and Caterpillar Financial Services Corporation and between OPIC and Skandinaviska Enskilda Banken AB (publ), each substantially in the form of Exhibit D. "INTEREST RATE" has the meaning set forth in Section 2.05. "LIEN" means any lien, pledge, mortgage, security interest, deed of trust, charge, assignment, hypothecation, title retention or other encumbrance on or with respect to, or any preferential arrangement having the practical effect of constituting a security interest with respect to the payment of any obligation with, or from the proceeds of, any asset or revenue of any kind. "LOAN" means, on any date, the aggregate of the outstanding unpaid principal amounts of the Notes then outstanding. "LOAN DOCUMENTS" has the meaning set forth in Section 4.03. "LOAN MATURITY DATE" means September 15, 2003. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the Project, (ii) the business, operations, prospects, condition (financial or otherwise), or property of the Company or (until the date of Project Completion) the Sponsor, (iii) the ability 13 -8- of the Company or any other party to perform in a timely manner its material obligations under any of the Financing Documents, (iv) the validity or enforceability of any material provision of any Financing Document, (v) the rights and remedies of OPIC, if any, under any of the Financing Documents, or (vi) the Liens provided to OPIC under the Security Documents. "MINING LAW" means the Minerals and Mining Law, 1986 (P.N.D.C.L. 153) of Ghana, as amended by the Minerals and Mining (Amendment) Act, 1994 (Act 475). "MINING LEASES" means the leases between the Government of the Republic of Ghana and the Company, dated February 2, 1988 and June 18, 1992, which grant the Company the exclusive right to work, develop, and produce gold and associated minerals in its mining concession subject to the Mining Law. "NET WORKING CAPITAL" as of any date the difference between (a) current assets (other than cash) and (b) current liabilities (other than current portion of Debt Service) in each case that are (or would be) shown on a balance sheet of the Company as of such date. "MOF LETTER" means the letter, dated October 2, 1996, of the Minister of Finance and Economic Planning of Ghana addressed to the Directors of PGL and to OPIC which has been furnished to OPIC. "NEW YORK ACCOUNT SECURITY AGREEMENT" means the New York Account Security Agreement entered into or to be entered into among the Company, Chase Manhattan Bank (National Association) and OPIC substantially in the form of Exhibit E. "NET INCOME" means, with respect to any Person for any fiscal period, the net income of such Person for such period after Taxes but before extraordinary items, determined in accordance with U.S. GAAP. "NEW SEB LOAN" means Indebtedness of the Company to Skandinaviska Enskilda Banken AB (publ) pursuant to the New SEB Credit Agreement in an aggregate principal amount not to exceed the Dollar equivalent (at the exchange rate set forth therein) of SEK 94,500,000 at any time outstanding. "NEW SEB CREDIT AGREEMENT" means the Credit Agreement dated March 11, 1996 between the Company and Skandinaviska Enskilda Banken AB (publ), as amended by supplemental agreements dated September 20, 1996 and October 11, 1996. 14 -9- "NOTE" means any promissory note issued by the Company pursuant to this Agreement substantially in the form of Exhibit F and any note issued in substitution or exchange therefor. "OPIC" means Overseas Private Investment Corporation, an agency of the United States of America. "OPIC BILATERAL" means the Agreement of September 30, 1958, between the United States of America and Ghana, as supplemented by the Agreement between the United States and Ghana effected by exchange of notes signed at Accra and Osu March 3, 1967. "OPIC SPREAD" means two and sixty-five hundredths percent (2.65%) per annum. "PAYING AGENT" means The First National Bank of Boston, a banking corporation organized and existing under the laws of the United States of America, or any successor or successors thereto designated as Paying Agent under the Funding Documents. "PAYMENT DATE" means each September 15 and March 15, commencing March 15, 1997, until the Loan and all amounts due hereunder or under the Notes are paid in full, unless such date is not a Business Day, in which case the Payment Date will be the next succeeding Business Day. "PERMITTED LIENS" means Liens that the Company is permitted under the terms of Section 7.01 to create, assume or permit to exist. "PERSON" means and includes (i) an individual, (ii) a legal entity, including but not limited to, a partnership, a joint venture, a corporation, a trust, and an unincorporated organization, and (iii) a government or any department or agency thereof. "PGH" means Pioneer Goldfields Holdings, Inc., a Delaware corporation. "PGL" means Pioneer Goldfields Limited, a limited liability company organized and existing under the laws of Guernsey, the Channel Islands. "PREPAYMENT PREMIUM" has the meaning set forth in Section 2.08. "PROJECT" means the expansion of the Teberebie Mine intended to increase the output of the Teberebie Mine from approximately 235,000 to in excess of 400,000 troy ounces of gold per year, as more fully described in the Sponsor Disclosure Report; the report of Pincock, Allen & Holt, dated September 22, 1995, captioned "Due 15 -10- Diligence Review, Pioneer Goldfields Limited, Teberebie Gold Mine, Ghana, West Africa"; and the draft "Five-Year Business Plan (1996-2000) of TGL and PGL". "PROJECT COMPLETION" has the meaning set forth in Section 3 of the Project Completion Agreement. "PROJECT COMPLETION AGREEMENT" means the Project Completion Agreement entered into or to be entered into among the Sponsor, the Company, and OPIC substantially in the form of Exhibit G. "PROJECT DOCUMENTS" has the meaning set forth in Section 4.03. "PROJECT SCHEDULE" means a document in form and substance satisfactory to OPIC setting forth quarterly milestones in the execution of the Project. "REFINER CONSENTS" means the Consents entered into or to be entered into by each party to any Refining Contracts other than the Company substantially in the form of Exhibit H. "REFINING CONTRACTS" means, at any time, all agreements then in force pursuant to which the Company has the right to sell gold, gold dore or gold ore, including without limitation (on the date hereof) the Company's agreements with (i) Johnson Matthey PLC, dated April 1, 1996, and (ii) Metalor, Metaux Precieux SA Metalor, dated April 18, 1995. "RESTRICTED PAYMENTS" means (i) any dividend or other distribution to the holders of any class of shares of the Company's capital stock (other than dividends payable solely in shares of the Company's capital stock); (ii) any direct or indirect payment (other than payments made solely in shares of the Company's capital stock) on account of the purchase, acquisition, redemption, or retirement of any shares of the Company's capital stock or any option, warrant, or right to acquire shares of the Company's capital stock; (iii) any payment, whether of principal, interest, fees, expenses or otherwise, in respect of any Indebtedness owed to the Sponsor or any Affiliate of the Sponsor (except for repayment on or before the Closing Date of Indebtedness referred to in Section 7.02 (e)); and (iv) any other payment of fees or compensation, or transfer of any asset, to the Sponsor or any Affiliate of the Sponsor other than an aggregate of not more than $500,000 of compensation determined on an arm's-length basis paid by the Company to PGL and its Affiliates in any Fiscal Year pursuant to the Corporate Services Agreements and an aggregate of not more than $1,000,000 of amounts paid in any Fiscal Year to reimburse PGL or any Affiliate of PGL for the cost of services provided to or for 16 -11- the benefit of the Company by any third-party service provider pursuant to the terms of the Corporate Services Agreements. "SEB" means Skandinaviska Enskilda Banken, a bank organized in Sweden. "SEB CREDIT AGREEMENTS" means the two Credit Agreements dated May 31, 1989, and June 1, 1993, respectively, between the Company and SEB. "SECURITY AGREEMENT" means the Security Agreement entered into or to be entered into between the Company and OPIC substantially in the form of Exhibit I. "SECURITY DOCUMENTS" has the meaning set forth in Section 4.03. "SELF-MONITORING QUESTIONNAIRE" means the Annual Self-Monitoring Questionnaire attached hereto as Exhibit J, as the same may be revised and supplemented by OPIC from time to time. "SHARE RETENTION AGREEMENT" means the Share Retention Agreement entered into or to be entered into between the Sponsor and OPIC substantially in the form of Exhibit K. "SPONSOR" means The Pioneer Group, Inc., a Delaware corporation. "SPONSOR DISCLOSURE REPORT" means the U.S. Sponsor Disclosure Report dated August 11, 1995 that the Sponsor has submitted to OPIC. "SPONSOR GUARANTEES" means any guarantee or guarantees of the Company's obligations to SEB or OPIC executed by the Sponsor in favor of SEB or OPIC at any time. "SPOT MARKET PRICE OF GOLD" on any day means the most recent London gold market pm spot fixing in U.S. dollars. "SUBORDINATION AGREEMENT" means the Subordination Agreement entered into or to be entered into among the Sponsor, PGH, PGL, OPIC and the Company substantially in the form of Exhibit L. "TANGIBLE NET WORTH" means, as of any date for any Person, (i) the total stockholders' equity (including capital stock, paid-in capital and retained earnings, after deducting treasury stock and reserves) that would appear on such Person's Financial Statements prepared as of that date, plus (ii) the outstanding principal amount of Subordinated Debt (as defined in the Subordination Agreement) and unpaid interest thereon, less (iii) the aggregate book value of all intangible assets (other than the Company's capitalized costs of development of the Project, to the 17 -12- extent not otherwise included in such total as determined in accordance with U.S. GAAP) that would be shown on such Person's Financial Statements as of that date (including, without limitation, goodwill, leases, licenses, concessions, patents, trademarks, trade names, copyrights, franchises, and unrealized appreciation of assets but excluding in each case any such capitalized costs of development). "TAXES" has the meaning set forth in Section 2.11. "TEBEREBIE MINE" means the Company's gold mine operations located approximately six kilometers southwest of the town of Tarkwa in western Ghana. "TOTAL LIABILITIES" of any Person means, at any date, all or any liabilities, obligations and reserves, contingent or otherwise, which, in accordance with U.S. GAAP, would be reflected as a liability on a balance sheet of such Person as at such date other than outstanding principal of Subordinated Debt and unpaid interest thereon. "TREASURY COST" means, with respect to any amount, the cost to OPIC of funds obtained from the United States Department of Treasury (or any account maintained therewith) in an amount equal to such amount. "U.S. GAAP" means generally accepted accounting principles in the United States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts. SECTION 1.02. INTERPRETATION. In this Agreement, unless otherwise indicated or otherwise required by the context: (a) Reference to and the definition of any document (including this Agreement) shall be deemed a reference to such document as it may be amended, supplemented, revised, or modified from time to time; (b) All references to an "Article", "Section", "Schedule", or "Exhibit" are to an Article or Section hereof or to a Schedule or an Exhibit attached hereto and made a part hereof; (c) The table of contents, article and section headings, and other captions in this Agreement are for the purpose of reference only and do not limit or affect its meaning; (d) Defined terms in the singular shall include the plural and vice versa, and the masculine, feminine or neuter gender shall include all genders; 18 -13- (e) Accounting terms used herein but not defined in Section 1.01 shall have the respective meanings given to them under U.S. GAAP; (f) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and (g) Any reference herein to a time of day is to Washington, D.C. time. SECTION 1.03. PROJECT COST. The total cost of the Project (including provisions for contingencies) is estimated to be the equivalent of $74,000,000 to be funded as follows:
Senior Debt: Amount ------------ ------ the Loan $19,000,000 the Caterpillar Loans 20,512,936 the New SEB Loan 14,000,000 (estimated Dollar equivalent) Equity: ------- Company funds from operations 20,487,064 Total Funding: $74,000,000 --------------
ARTICLE II. AMOUNT AND TERMS OF THE LOAN SECTION 2.01. AMOUNT AND DISBURSEMENT. (a) COMMITMENT. Subject to the terms and conditions hereof, OPIC agrees to provide, a loan for the Project in the principal amount of not more than $19,000,000. Disbursements of the Loan hereunder shall only be made from the date hereof through the end of the Commitment Period. (b) DISBURSEMENT; TERM. Subject to the satisfaction of the conditions set forth in Articles IV and V, the Company may request a Disbursement of the Loan by delivering a Disbursement Request to OPIC not less than 10 Business Days prior to the Closing Date. Each 19 -14- Disbursement shall be evidenced by one or more (as OPIC may specify) Notes in an aggregate principal amount equal to the principal amount of the Disbursement and dated the Closing Date. All Notes shall be issued for a term ending on or before the Loan Maturity Date. The amount of the Loan shall not exceed the amount of the Commitment. (c) NUMBER AND AMOUNT OF DISBURSEMENTS. The Loan hereunder shall be disbursed in one Disbursement, which shall be in an amount of $10,000,000 or a multiple of $1,000,000 in excess thereof. SECTION 2.02. COMMITMENT FEE. Commencing from the date hereof and continuing through the Commitment Period, a commitment fee (the "COMMITMENT FEE") shall accrue on a daily basis at the rate of one-half percent (0.5%) per annum on the undisbursed and uncancelled amount of the Commitment. The Commitment Fee shall be payable in arrears to OPIC on each Payment Date and on the date of expiration of the Commitment Period. SECTION 2.03. CANCELLATION OF THE COMMITMENT. The Company may cancel any portion of the Commitment to the extent of any undisbursed portion of the Commitment upon payment to OPIC of a cancellation fee (the "Cancellation Fee") equal to one and one-half percent (1.50%) of the amount canceled. Any portion of the Commitment that for any reason expires or is terminated without being disbursed shall be deemed to have been canceled, and the Cancellation Fee shall apply. SECTION 2.04. MAINTENANCE FEE. The Company shall pay to OPIC an annual maintenance fee of $5,000 on each March 15, so long as any part of the Loan remains outstanding. SECTION 2.05. INTEREST. (a) INTEREST RATE. On each Payment Date the Company shall pay interest in arrears to the order of OPIC on the daily outstanding principal balance of each Note at the rate ("Interest Rate") specified in such Note, which Interest Rate shall be a fixed rate per annum, set as of the date of Disbursement in accordance with the Funding Documents, equal to the sum of: (i) a market rate of interest for fixed-rate loans; and (ii) the OPIC Spread. 20 -15- (b) DEFAULT INTEREST. If the Company fails to pay in full when due any principal or interest on any Note, or any other amount due hereunder or under any other Financing Document, the Company shall pay to the order of OPIC on demand interest on such at a rate equal to the sum of (i) the Treasury Cost for such amount; (ii) the OPIC Spread; and (iii) to the extent permitted by applicable law, two percent (2.0%) per annum. SECTION 2.06. REPAYMENT OF THE LOAN. The Company shall repay the Loan in approximately equal semi-annual installments payable on each Payment Date commencing on March 15, 1998 and ending on September 15, 2003. SECTION 2.07. VOLUNTARY PREPAYMENT. At any time after the end of the Commitment Period, and in accordance with the terms of the applicable Funding Documents, the Company may prepay the Loan in whole or in part upon the payment to OPIC of the following premiums (each a "PREPAYMENT PREMIUM"), each expressed as a percent of the principal amount prepaid and each in addition to any prepayment premium set forth in the Funding Documents: if prepayment occurs in the twelve month period commencing with (i) the last day of Commitment Period, the Prepayment Premium shall be three percent (3%); (ii) the first anniversary of the last day of the Commitment Period, the Prepayment Premium shall be two percent (2%); (iii) the second anniversary of last day of Commitment Period, the Prepayment Premium shall be one percent (1%); and (iv) thereafter without Prepayment Premium. The amount of any such voluntary prepayment shall be applied to the repayment schedule provided for in Section 2.07 in inverse order of maturity. SECTION 2.08. MANDATORY PREPAYMENT. Prepayment of the Loan shall be mandatory, and the Company shall reduce the amount of the Loan, in the event that, and in the amount by which: (a) the aggregate amount of insurance proceeds received by the Company for or in respect of its properties or assets during any Fiscal Year, which are not applied or committed within 180 days after the receipt thereof to the repair or replacement of such properties or assets, exceeds $2,000,000; and (b) the amount by which (x) the sum of (i) Restricted Payments made in any Fiscal Year and (ii) any other payment to the Sponsor or any Affiliate of the Sponsor referred to in Section 7.06(b) made in such Fiscal Year exceeds (y) (A) seventy percent (70%) of the Company's Net Income for the preceding Fiscal Year, as reflected in the Company's audited Financial Statements or (B) if audited Financial Statements for such preceding Fiscal Year have 21 -16- not yet been delivered to OPIC but at least 90 days have passed from the end of such preceding Fiscal Year, thirty-five percent (35%) of the Company's Net Income for such preceding Fiscal Year, as shown in the Company's unaudited Financial Statements for such preceding Fiscal Year, as certified to OPIC by an Authorized Officer of the Company before such Restricted Payment is made. No Restricted Payments referred to in clause (B) of the foregoing sentence may be made unless arrangements satisfactory to OPIC shall have been made with respect to any part of such Restricted Payments that prove to have exceeded seventy percent (70%) of the Company's Net Income for the preceding Fiscal Year, as shown in the Company's audited Financial Statements for the repayment of such part to the Company or for the prepayment by the Company of a principal amount of the Loan equal to the amount of such part. The Company shall (i) within 10 Business Days after the occurrence of any event requiring funds to be applied to a prepayment pursuant to this Section, give notice to OPIC describing such event and specifying the principal amount of such prepayment and the Business Day (specified in accordance with the requirements of the applicable Funding Documents) on which such prepayment shall be made and (ii) on the Business Day so specified, make the prepayment required by this Section, together with accrued and unpaid interest and Prepayment Premium (if any) on the principal amount prepaid. Amounts applied to prepayment of the Loan pursuant to this Section shall be allocated among the outstanding Disbursements in accordance with the Funding Documents and shall be applied to the repayment schedule provided for in Section 2.07 in inverse order of maturity. For purposes of determining whether any Prepayment Premium is due, the Loan prepayment resulting from this Section 2.08 shall have the same effect as if such prepayment occurred pursuant to Section 2.07, except that solely with respect to Section 2.08(a) no Prepayment Premium shall be due. SECTION 2.09. FACILITY FEE. The Company shall pay OPIC a facility fee (the "FACILITY FEE") of $470,000, all of which has been paid. SECTION 2.10. TAXES. (a) All sums payable by the Company hereunder or under, the Notes or any Funding Document, whether of principal, interest, fees, expenses or otherwise, shall be paid in full, free of any deductions or withholdings for any and all present and future taxes, levies, imposts, stamps, duties, fees, assessments, deductions, withholdings, and other governmental charges, and all liabilities with respect thereto (collectively, to the extent they are thus with respect to sums payable by the Company hereunder or under the Notes or any Funding Document, referred to as "Taxes"), excluding any Taxes ("Certificateholder Taxes") for which any beneficial owner of an 22 -17- ownership interest in the Loan or in any certificate of participation evidencing an interest in payments due by the Company in respect of the Loan is expressly stated in the Funding Documents to be liable. In the event that the Company is prohibited by law from making payments hereunder or under, the Notes or any Funding Document free of such deductions or withholdings (other than Certificateholder Taxes), then the Company shall pay such additional amount as may be necessary in order that the actual amount received after such deduction or withholding shall equal the full amount stated to be payable hereunder, or there under, respectively. (b) The Company shall pay when due directly to all appropriate taxing authorities any and all present and future Taxes, and all liabilities with respect thereto imposed by law or by any taxing authority on or with regard to any aspect of the transactions contemplated by this Agreement or the execution and delivery of this Agreement, the Notes, the Security Documents or the Funding Documents, except for any Taxes or other liabilities that the Company is contesting in good faith by appropriate proceedings, PROVIDED that the Company hereby indemnifies OPIC and holds OPIC harmless from and against any and all liabilities, fees or additional expense with respect to or resulting from any delay in paying, or omission to pay, Taxes. Within 30 days after the payment by the Company of any Taxes, the Company shall furnish OPIC with the original or a certified copy of the receipt evidencing payment thereof, together with any other information OPIC may reasonably require to establish to its satisfaction that full and timely payment of such Taxes has been made. (c) OPIC shall notify the Company of any payment of Taxes required or requested of it and shall give due consideration to any advice or recommendation given in response thereto by the Company, and upon notice from OPIC that Taxes or any liability relating thereto (including penalties and interest) have been paid, the Company shall pay or reimburse OPIC therefor within 30 days of such notice. (d) Without prejudice to the survival of any other agreement of the Company hereunder, the agreements and obligations of the Company contained in this Section 2.10 shall survive the payment in full of principal and interest hereunder and under the Notes. SECTION 2.11. MISCELLANEOUS. (a) PAYMENT OR REIMBURSEMENT OF EXPENSES. The Company shall pay or reimburse OPIC, upon request, OPIC's reasonable out-of-pocket costs and expenses incurred in connection with the Commitment Letter and the negotiation, preparation, execution and delivery, and implementation of this Agreement, the Notes, and the other Financing Documents, including, without limitation, (i) the reasonable fees and expenses of outside legal counsel, business advisors and consultants, (ii) the costs of reproducing and binding post-closing document transcripts (including up to five OPIC copies), (iii) travel expenses, and (iv) other such out-of-pocket expenses incurred by OPIC, including any reasonable costs and expenses (including, without 23 -18- limitation, reasonable attorneys' fees and expenses and the reasonable cost of travel) incurred by OPIC in preserving in full force and effect or enforcing its rights hereunder or under any of the Financing Documents or incurred in connection with the modification, amendment or waiver of any provision of any such document, including but not limited to release of the Liens in favor of OPIC arising under the Security Documents. Such payment shall be due and payable within 30 days after the Company's receipt of OPIC's request therefor from time to time and upon the execution of the Finance Agreement, PROVIDED that (x) to the extent of any portion of the Facility Fee that has been paid to OPIC, travel expenses incurred by OPIC staff shall be reimbursed out of such fee and (y) costs and expenses related to enforcement of any right of OPIC under any Financing Document shall be due and payable upon demand. (b) CURRENCY AND PLACE OF PAYMENT. All payments required hereunder shall be made in Dollars in immediately available funds without any offset or deduction for Taxes or otherwise to the Paying Agent as provided for in the Funding Documents or, as the case may be, to OPIC by wire transfer (via a United States domestic bank) to the following destination: U.S. Treasury Department New York, NY ABA No. 0210-3000-4 TREAS NYC/CTR/BNF=AC71000001 OBI=OPIC Loan No. 641-95-353-IG (c) COMPUTATION OF INTEREST ON NOTES AND FEES. Except as otherwise provided herein or in the Funding Documents or in any Note, interest, default interest, the Commitment Fee, and any other fees shall accrue on a daily basis and shall be computed on the basis of a 360-day year of twelve 30-day months. (d) APPLICATION OF PAYMENTS TO OPIC. Payments received by OPIC under this Agreement or with respect to any Note shall be applied to amounts due under this Agreement and under the Notes in such manner as OPIC in its sole discretion may determine to be appropriate, notwithstanding any instruction to the contrary from the Company. 24 -19- ARTICLE III. REPRESENTATIONS AND WARRANTIES The Company represents and warrants to OPIC that: SECTION 3.01. EXISTENCE AND POWER OF THE COMPANY. The Company is a corporation duly organized and validly existing, has been permitted to commence business, and is in good standing under the laws of Ghana. The Company is duly authorized to do business in each jurisdiction in which its business makes such authorization necessary and where the failure to be so authorized would reasonably be expected to have a Material Adverse Effect, has the requisite power to own and operate its properties, to carry on its business and the Project, to borrow money and create Liens on its rights, properties and assets as and to the extent contemplated by the Security Documents and to execute, deliver, and perform this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party. SECTION 3.02. AUTHORITY OF THE COMPANY. The Company's execution, delivery, and performance of this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party (i) have been duly authorized by all necessary corporate action; (ii) will not violate any applicable law, regulation, license, permit, ruling or order of any governmental authority, court or tribunal other than a violation that could not reasonably be expected to have a Material Adverse Effect; and (iii) will not breach, or result in the imposition of any Lien upon any of its assets (except as permitted by Section 7.01) under any of its Charter Documents or any agreement or other requirement by which it or any of its properties may be bound or affected, other than any breach of any such agreement or other requirement that individually and in the aggregate could not reasonably be expected to have a Material Adverse Effect. The execution and delivery by the Company of this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party will cause each such respective instrument to constitute a legal, valid, and binding obligation of the Company enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally or general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). No consent of any other Person, including shareholders of the Company, is required in connection with the execution, delivery, performance, validity, or enforceability of any of the Financing Documents, other than such consents as have been obtained or the failure to obtain which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company's obligations hereunder and under the Notes will rank not less than pari passu with all of the Company's other unsecured Indebtedness and obligations. 25 -20- SECTION 3.03. COMPLIANCE WITH AGREEMENTS. The Deed of Warranty and the Mining Leases are valid, binding, and enforceable obligations of the Government of Ghana, enforceable in accordance with their terms. Neither the Company nor, to the best knowledge of the Company, the Government of Ghana is in breach of any provision of the Deed of Warranty or either Mining Lease. SECTION 3.04. FINANCIAL CONDITION. The Company's Financial Statements, dated June 30, 1996, which have been furnished to OPIC, are complete and correct and fairly present, in all material respects, its financial condition and results of its operations for the period then ended. It has no contingent obligation, liability for Taxes, material or long-term commitment, or outstanding Indebtedness of any kind except as disclosed in such Financial Statements other than liabilities not in excess of $1,000,000 in the aggregate outstanding at any one time incurred in ordinary course of business which would not be required to be disclosed in such Financial Statements in accordance with U.S. GAAP. Since the date of such Financial Statements there has been no change in the Company's financial condition or prospects that could have a Material Adverse Effect, and as of the date of this Agreement the Company has not made any Restricted Payment or declared any dividend or distribution payable to holders of any shares of its capital stock. SECTION 3.05. CAPITALIZATION OF THE COMPANY. (a) The authorized capital of the Company consists of (i) 9,000,000 Class A ordinary shares of no par value (the "Class A Shares"), of which 1,860,000 shares are issued and outstanding; and (ii) 1,000,000 Class B ordinary shares of no par value (the "Class B Shares"), of which 206,667 shares are issued and outstanding. All such issued and outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable. All of the issued and outstanding Class A Shares are owned beneficially and of record by PGL, and all of the issued and outstanding Class B Shares are owned beneficially and of record by the Government of the Republic of Ghana. Except as set forth on Schedule 3.05, there are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of the Company. (b) One hundred percent of the issued and outstanding shares of capital stock of PGL is owned beneficially and of record by PGH, and all such issued and outstanding shares of capital stock have been duly authorized and validly issued and are fully paid and non-assessable. There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, 26 -21- acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of PGL. (c) All of the issued and outstanding shares of capital stock of PGH are owned beneficially and of record by the Sponsor, and all such issued and outstanding shares of capital stock have been duly authorized and validly issued and are fully paid and non-assessable. There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of PGH. SECTION 3.06. BANK ACCOUNTS. The Company has no bank accounts except those listed on Schedule 3.06. SECTION 3.07. SUBSIDIARIES. The Company does not own or otherwise control any voting stock of, or have any ownership interest in, any other Person, including any other corporation or partnership. SECTION 3.08. RELATIONSHIPS BETWEEN THE COMPANY AND ITS PARENT COMPANIES. Except pursuant to (a) the terms of the Corporate Services Contracts, (b) subrogation rights of the Sponsor arising from the Sponsor Guarantees, (c) arrangements for compensation of officers, employees or directors of the Company for their services as such at a rate established on an arm's length basis, or (d) the Expansion Loan Agreement, the Company has no obligation or liability, contingent or actual, to the Sponsor or any Affiliate of the Sponsor, and there are no agreements or arrangements in existence pursuant to the terms of which the Company could in the future have any obligation or liability, contingent or actual, to the Sponsor or any Affiliate of the Sponsor. SECTION 3.09. LIENS. The Security Documents are, or upon filing, recording or registration will be, effective to create in favor of OPIC valid, enforceable and perfected first (or, in the case of equipment of the Company that is subject to Liens under the Equipment Mortgages, second) Liens on all of the Company's assets intended to be covered thereby, including without limitation all rights of the Company (and of the Sponsor or any Affiliate of the Sponsor) under (i) all existing or future Refining Contracts; (ii) all existing or future agreements for the supply of fixtures, equipment or spare parts for use in its mining and exploration business, including without limitation the Equipment Purchase Contracts; (iii) the Deed of Warranty; (iv) the Mining Leases; and (v) any other agreements with the Government of the Republic of Ghana relating to the Teberebie Mine, 27 -22- subject in each case only to Permitted Liens. The Company does not have outstanding, nor is it contractually bound to create, any Lien on or with respect to, any of its other properties, assets, rights or revenues, except for Permitted Liens and except for Liens the Company may be obligated to create pursuant to the terms of the Existing Hedging Contracts. SECTION 3.10. TAXES AND REPORTS. All tax returns and reports of the Company required by law to be filed in Ghana, and each governmental subdivision thereof, have been duly filed for periods ending prior to the date of this Agreement, and all Taxes, assessments, fees and other governmental charges due or reasonably anticipated to become due in respect of the Company, or any assets, income, or franchises of the Company, that if not paid could reasonably be expected to have a Material Adverse Effect, have been duly paid or have been adequately provided for on the books of the Company. SECTION 3.11. DEFAULTS. No Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, has occurred and is continuing. Neither the Company nor, to the best knowledge of the Company, any other party is in breach of any provision of any contract to which the Company is a party, which breach could reasonably be expected to have a Material Adverse Effect. SECTION 3.12. LITIGATION. No action, suit, other legal proceeding, arbitral proceeding or investigation is pending by or before any domestic or foreign court or governmental authority or in any arbitral or other forum, or, to the best knowledge of the Company, is threatened, against the Company or any of its properties or rights that (i) relates to any of the transactions contemplated by this Agreement or any other Financing Document, or (ii) has, or if adversely determined could reasonably be expected to have, a Material Adverse Effect. SECTION 3.13. COMPLIANCE WITH LAW; CORRUPT PRACTICES (a) The Company is conducting its businesses in compliance in all material respects with all applicable laws, regulations, and authorizations of all relevant governmental authorities, noncompliance with which could have a Material Adverse Effect, and in compliance with its Charter Documents. The Company has duly obtained all consents, licenses, approvals, and authorizations and has effected all declarations, filings, and registrations necessary for the due execution, delivery and performance of this Agreement and each of the other Financing Documents to which it is or will be a party and in order to carry out and complete the Project. 28 -23- (b) Without limiting the effect of clause (a), the Company and its officers, directors, employees, and agents have complied with all applicable Corrupt Practices Laws in obtaining any consents, licenses, approvals, authorizations, rights, and privileges in respect of the Project, and are otherwise conducting the Project and the business of the Company in compliance with applicable Corrupt Practices Laws. The Company's internal management and accounting practices and controls are adequate to ensure compliance with applicable Corrupt Practices Laws. SECTION 3.14. EASEMENTS, PROPERTY INTERESTS, UTILITIES, ETC. All easements, leasehold and other property interests, and all utility and other services, means of transportation, facilities, other materials and other rights that can reasonably be expected to be necessary for the construction, completion and operation of the Project in accordance with applicable requirements of law and the Financing Documents (including, without limitation, gas, electrical, water and sewage services and facilities) have been procured or are commercially available for the Project, and, to the extent appropriate, arrangements have been made on commercially reasonable terms for such easements, interests, services, means of transportation, facilities, materials and rights. No material licenses, trademarks, patents or other similar agreements are necessary for the construction, ownership, operation and maintenance of the Project. SECTION 3.15. ENVIRONMENTAL MATTERS. Except as set forth on Schedule 3.15, the Company has duly complied, in all material respects, with, and its business, operations, assets, equipment, property, leaseholds, and other facilities are materially in compliance with, the provisions of all applicable environmental, health and safety laws, codes, ordinances and directives, and all rules and regulations promulgated thereunder. The Company (x) has been issued and will maintain all required permits, licenses, certificates and approvals relating to, and (y) has received no complaint, order, directive, claim, citation or notice by any governmental authority with respect to: (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters. SECTION 3.16. PROJECT COST AND PROJECT COMPLETION. The Company's good faith estimate of the total cost of the Project (including provisions for contingencies) is $74,000,000 and the Company's good faith estimate of the date on which it will achieve Project Completion is December 31, 1998. 29 -24- SECTION 3.17. PROJECTIONS. The projections of the cash flows of the Company set forth in the "1996 Five Year Business Plan", a copy of which has been provided to OPIC before the date hereof, are the Company's best good faith estimates of the cash flows of the Company for the period(s) covered therein. SECTION 3.18. DISCLOSURE. All documents, reports or other written information pertaining to the Project (including, without limitation, the Sponsor Disclosure Report, the 1996 Five Year Business Plan referred to in Section 3.17, this Agreement, and the other Financing Documents) that have been furnished to OPIC are true and correct and do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. There is no fact known to the Company, that has not been disclosed to OPIC in writing, the existence of which could reasonably be expected to have a Material Adverse Effect. No condition has arisen since the date of the Sponsor Disclosure Report that has or could reasonably be expected to have a Material Adverse Effect. ARTICLE IV. CONDITIONS PRECEDENT TO FIRST DISBURSEMENT Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the first Disbursement of the Loan is subject to the prior fulfillment, to OPIC's satisfaction in its sole discretion, of the following conditions precedent and to their continued fulfillment on the date of the first Disbursement: SECTION 4.01. CORPORATE AUTHORIZATION. OPIC shall have received satisfactory evidence of all necessary corporate documents and authorizations of the Company and the Sponsor, including without limitation certificates of Authorized Officers of the Company and the Sponsor, dated the Closing Date: (a) attaching a copy of each of the Charter Documents of the Company, as amended to date, certifying that the attached copies are true and complete and in full force and effect as of the Closing Date, together with evidence satisfactory to OPIC that such documents have been approved (to the extent such approval is required) by the competent governmental agencies and authorities in Ghana; 30 -25 - (b) attaching a copy of the resolutions of the Board of Directors and any resolutions of shareholders of the Company and the Sponsor, and of all documents evidencing any other necessary corporate action (each such resolution and document satisfactory to OPIC in form and substance), authorizing it to execute, deliver and perform (in the case of the Company) this Agreement, the Notes, and (in the case of the Company and the Sponsor) each of the other Financing Documents to which it is or will be a party and to engage in the transactions herein contemplated, and certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; and (c) certifying the names, titles and specimen signatures of the Persons who are authorized to execute and deliver on behalf of the Company or the Sponsor of this Agreement, the Notes, each of the other Financing Documents to which either the Company or the Sponsor is or will be a party and all other notices or instruments contemplated hereunder and thereunder. SECTION 4.02. FUNDING ARRANGEMENTS. Suitable arrangements shall have been made for funding the Loan, which funding arrangements shall be satisfactory to OPIC in form and substance (all agreements and documents required in connection with such funding arrangements being collectively referred to herein as the "FUNDING DOCUMENTS"), including without limitation satisfaction by the Company of all conditions precedent contemplated by the Financing Documents to be satisfied by it as conditions precedent to the obligations of any other party to the Funding Documents and performance by the Company of all other obligations on its part to be performed prior to the making of the first Disbursement pursuant to any Financing Document, except, in each case, to the extent that any such condition precedent or the performance of any such obligation of the Company shall have been waived by the Person or Persons entitled to waive such condition precedent or performance under the terms of the applicable Financing Documents. Further the Company shall arrange for, and pay all costs associated with, the funding of the Loan, including without limitation the fees of all placement agents, paying agents and liquidity facility providers and their respective counsel, and all documents, instruments and approvals required in connection with such funding shall be satisfactory to OPIC in form and substance. SECTION 4.03. FINANCING DOCUMENTS. OPIC shall have received the following documents, each of which shall be satisfactory to OPIC in form and substance, each of which shall have been duly executed by the Company and the other respective parties thereto and each of which shall be in full force and effect in accordance with its terms without default: 31 -26- (a) OPIC shall have received duly executed originals (or, at OPIC's sole discretion, a true and complete copy) of each of the following agreements and documents (the "LOAN DOCUMENTS"): (i) this Agreement; (ii) any Notes issued in connection with the Disbursement; (iii) the Project Completion Agreement; (iv) the Share Retention Agreement; (v) the Subordination Agreement; and (vi) the Intercreditor Agreements. (b) OPIC shall have received duly executed originals (or, at OPIC's sole discretion, a true and complete copy) of the following agreements and documents (the "SECURITY DOCUMENTS"), whereby the payment of all amounts due or to become due hereunder and under the Notes (including but not limited to principal, interest and fees) is secured by valid and enforceable first (or in the case of equipment of the Company that is subject to Liens under the Equipment Mortgages, second) Liens on all of the Company's assets, as described therein: (i) the Debenture; (ii) the Instrument of Charge; (iii) the Security Agreement; (iv) the New York Account Security Agreement; (v) the Refiner Consents; and (vi) all such other agreements, documents or actions which in the opinion of OPIC or special legal counsel to OPIC in Ghana are necessary or advisable to secure the payment of all amounts due or to become due hereunder and under the Notes with valid, enforceable, and perfected first (or in the case of equipment of the Company that is subject to Liens under the Equipment Mortgages, second) Liens on all of the Company's assets. Each of the Security Documents shall be in full force and effect and shall have been duly filed and registered or recorded in every jurisdiction in which such filing and registration or recording is necessary to make valid and effective against third parties the Liens intended to be created thereby, and the rights of OPIC thereunder, and OPIC shall have received evidence satisfactory to it that such filing and registration or recording has been made and that all stamp duties, taxes, charges and fees payable in connection therewith have been duly paid. (c) OPIC shall have received copies of the following documents, each of which shall be satisfactory to OPIC in form and substance, shall have been duly executed by the parties thereto and shall have been certified by an Authorized Officer of the Company as being true and 32 -27- complete and in full force and effect in accordance with its terms without default (the "PROJECT DOCUMENTS"): (i) the Mining Leases; (ii) the Deed of Warranty; (iii) the SEB Credit Agreements; (iv) the New SEB Credit Agreement; (v) the Caterpillar Loan Agreements; (vi) the Ecobank Documentation; (vii) the Expansion Loan Agreement; (viii) the Equipment Mortgages; (ix) the Sponsor Guarantees; (x) the Corporate Services Agreements; (xi) the Equipment Purchase Contracts; (xii) the Refining Contracts; (xiii) the Existing Hedging Contracts; (xiv) the MOF Letter; (xv) all contracts relating to the design and construction of the Project with a value of $5,000,000 or more; (xvi) the Project Schedule; (xvii) all other agreements and instruments pursuant to the terms of which the Company has or could in the future have any obligation or liability, contingent or actual, to the Sponsor or any Affiliate of the Sponsor (other than agreements or instruments for compensation of officers of the Company for their services as such at a rate established on an arm's length basis); and (xviii) other construction, supply, lease, management or other relevant contracts reasonably required as conditions of Disbursement. (d) OPIC shall have received duly executed originals (or, at OPIC's sole discretion, a true and complete copy) of each of the Funding Documents required to fund the Loan on terms and conditions satisfactory to OPIC, including without limitation a Funding and OPIC Guaranty Agreement among the Company, OPIC and a paying agent satisfactory to OPIC. The Loan Documents, the Security Documents, the Project Documents, and the Funding Documents, together with any other agreements or instruments pursuant to which the Loan or any portion thereof is made to the Company, are collectively referred to herein as the "FINANCING DOCUMENTS." 33 -28- SECTION 4.04. GOVERNMENT APPROVALS. OPIC shall have received copies, certified by an Authorized Officer of the Company as true and complete and in full force and effect, of any registration, declaration, filing, governmental consent, license, approval, authorization, or permit required by the Government of Ghana or, in the opinion of special legal counsel to OPIC in Ghana, necessary or advisable, all of which are listed on Schedule 4.04, including without limitation (i) approval of the Project for purposes of the OPIC Bilateral; (ii) registration of the Loan with the Bank of Ghana and foreign exchange consents permitting the remittance of all amounts payable under the Financing Documents; (iii) all approvals, permits and consents necessary for the Company to carry out the Project and its ongoing operations at the Teberebie Mine; (iv) foreign exchange consents necessary in connection with the Retention Agreement, (v) all approvals necessary for this Agreement, the Loan, the Note(s), and the other Financing Documents, and the payment of all amounts due or to become due with respect thereto, not to be subject to any Taxes, and (vi) approvals necessary for the performance by the Company of this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party. SECTION 4.05. LAND. OPIC shall have received evidence in form and substance satisfactory to it that the Company, either directly or indirectly, has acquired complete leasehold rights to the land necessary for the Project, subject only to Permitted Liens. SECTION 4.06. INSURANCE. OPIC shall have received from the insurer a copy of each insurance policy required by Section 6.06, showing OPIC's endorsement as additional insured, together with evidence that each such policy is in full force and effect without default. SECTION 4.07. APPOINTMENT OF AGENT. OPIC shall have received evidence that: (i) the agent for service of process referred to in Section 8.03 has been duly appointed and holds such appointment without reservation until six months after the Loan Maturity Date, together with evidence of the prepayment in full of the fees of such agent; (ii) the agent for service of process referred to in the Project Completion Agreement and the Share Retention Agreement have been duly appointed and holds such appointment without reservation until six months after the Loan Maturity Date, together with evidence of the prepayment in full of the fees of such agents; and (iii) the agent for service of process referred to in the Security Agreement and the New York Account Security Agreement has been duly appointed and holds such appointment without reservation until six months after the Loan Maturity Date, together with evidence of the prepayment in full of the fees of such agent. 34 -29- SECTION 4.08. LEGAL OPINIONS. OPIC shall have received written opinions, dated the Closing Date, satisfactory to OPIC in form and substance, of (i) counsel to OPIC in Ghana, (ii) counsel to the Company in Ghana, (iii) counsel to the Company in the United States; (iv) counsel to the Sponsor and PGH in the United States; and (v) counsel to OPIC in the United Kingdom. SECTION 4.09. ENVIRONMENTAL IMPACT ASSESSMENT; ENVIRONMENTAL RECOMMENDATIONS. (a) The Company shall have provided OPIC with an environmental impact assessment which takes the implementation of the Project into account and which shall have been approved by the Ghanaian Environmental Protection Agency in connection with its issuance of the environmental permit required for the Project, and OPIC shall have been satisfied with the views and conclusions set forth therein. (b) The Company shall have provided OPIC with (i) a report summarizing its plans for implementation of the recommendations contained in Section 6 of the "Environmental Audit of Teberebie Goldfields Limited" prepared by Steffen, Robertson & Kirsten and dated January, 1995, and (ii) the anticipated schedule on which such implementation is to be accomplished. SECTION 4.10. OTHER DOCUMENTS. OPIC shall have received such other certificates, opinions, agreements and documents, each satisfactory to OPIC in form and substance, as it may reasonably request. ARTICLE V. CONDITIONS PRECEDENT TO EACH DISBURSEMENT Unless OPIC otherwise agrees in writing and save as otherwise provided herein, it shall be a condition precedent to the Company's right to each Disbursement (including the first Disbursement), that each of the following conditions be satisfied on the date of any such Disbursement: SECTION 5.01. REPRESENTATIONS AND DEFAULTS. The representations and warranties set forth in Article III shall be true and correct in all material respects on the date of such Disbursement as if made on such date, and on such date no 35 -30- Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, shall have occurred and be continuing. SECTION 5.02. CHANGE IN CIRCUMSTANCES. At the time of each Disbursement, no circumstance shall exist, and no change of law or regulation of any governmental authority shall have occurred, that has had or could have a Material Adverse Effect. SECTION 5.03. CERTIFICATION. The Company shall have furnished OPIC with a certificate of an Authorized Officer of the Company, dated the date of such Disbursement (i) certifying the satisfaction of the conditions set forth in Sections 5.01 and 5.02, (ii) setting forth the Project costs to which any prior Disbursements have been applied, and (iii) setting forth the Project costs to which the present Disbursement will be applied and certifying that the proceeds of this Disbursement are presently needed for these purposes. SECTION 5.04. FINANCIAL INFORMATION AND CONSTRUCTION PROGRESS. Not less than 15 Business Days before the Closing Date, OPIC shall have received: (i) any Financial Statements, reports, and other information that the Company, pursuant to Section 6.09, would otherwise be required to furnish to OPIC on or before the Closing Date, and (ii) evidence, satisfactory to OPIC in form and substance, that the Project is being executed substantially in accordance with the Project Schedule with none of the milestones set forth therein being reached more than 90 days beyond the end of the quarter set forth therein for their accomplishment and the aggregate cost of the Project expended as of such Closing Date is such as not to pose any risk that the total cost of the Project will exceed $74,000,000 by more than 15%. SECTION 5.05. EQUITY INVESTMENT. The aggregate outstanding principal amount of the Loan after giving effect to each Disbursement, when added to the aggregate principal amount of the Indebtedness of the Company under the SEB Credit Agreements, the New SEB Credit Agreement and the Caterpillar Loan Agreements, shall not exceed 300% of the aggregate amount by which the retained earnings of the Company as of the date of such Disbursement (or as of the end of the most recently completed fiscal quarter of the Company as to which the Company has delivered Financial Statements pursuant to Section 6.09(a) or (b)) exceed the retained earnings of the Company as of March 31, 1995. Evidence of such retained earnings shall be in form and substance satisfactory to OPIC and may include (in the case of retained earnings as of a date that is not the end of a fiscal quarter of 36 -31- the Company) certificates of the Company's independent accountants referred to in Section 6.07(a). SECTION 5.06. PAYMENT OR REIMBURSEMENT OF EXPENSES. All fees and other amounts due to OPIC with respect to the making of the Loan, and all other amounts payable or reimbursable by the Company in connection with the making of the Loan, shall have been paid, including, but not limited to, (i) the Commitment Fee, (ii) the Facility Fee, (iii)any Taxes payable pursuant to Section 2.10, and (iv) any amounts payable pursuant to Section 2.11(a), including the fees and expenses of OPIC legal counsel and business consultants and the costs of filing, registration and recordation of any of the Financing Documents. SECTION 5.07. FUNDING ARRANGEMENTS. Suitable arrangements shall have been made for funding the Disbursement, in accordance with the Funding Documents, which funding arrangements shall be satisfactory to OPIC in form and substance, including without limitation satisfaction by the Company of all conditions precedent contemplated by the Financing Documents to be satisfied by it as conditions precedent to the obligations of any other party to the Funding Documents and performance by the Company of all other obligations on its part to be performed prior to the making of the first Disbursement pursuant to any Financing Document, except, in each case, to the extent that any such condition precedent or the performance of any such obligation of the Company shall have been waived by the Person or Persons entitled to waive such condition precedent or performance under the terms of the applicable Financing Documents. ARTICLE VI. AFFIRMATIVE COVENANTS Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Company covenants and agrees as follows: SECTION 6.01. PROJECT COMPLETION. The Company shall construct and implement the Project promptly, shall apply the proceeds of the Loan exclusively to the Project (or to the repayment of Indebtedness incurred prior to the date hereof, the proceeds of which were applied exclusively to the Project), and shall use its best efforts to cause Project Completion to be achieved on or prior to December 31, 1998. If the Company becomes unable to achieve the completion undertakings set out in the preceding 37 -32- sentence, or becomes unable to meet its other obligations prior to Project Completion, the Company shall promptly so notify OPIC. SECTION 6.02. COMPANY OPERATIONS. The Company shall duly and punctually perform its obligations under this Agreement, the Notes, and each of the other Financing Documents to which it is a party. The Company shall conduct its operations on the basis of customary commercial practice and arm's-length arrangements, with due diligence and efficiency and under the supervision of qualified and experienced management. The Company shall repair, replace and protect each of its assets to the extent required so that its business can be conducted properly at all times. SECTION 6.03. MAINTENANCE OF RIGHTS AND COMPLIANCE WITH LAWS. The Company shall (i) whenever in its power to do so, acquire, maintain, and renew all rights, contracts, powers, privileges, leases, lands, sanctions, and franchises necessary for the conduct of its business and the performance of its obligations hereunder and under the other Financing Documents; (ii) conduct its business in compliance with all applicable Corrupt Practices Laws and in compliance in all material respects with all other applicable laws and directives of governmental authorities having force of law, including applicable environmental standards; and (iii) duly pay before they become overdue all Taxes, assessments and other government charges levied or imposed in any jurisdiction upon its property, earnings or business that, if not paid, could have a Material Adverse Effect, except amounts being contested in good faith by appropriate proceedings diligently pursued for which adequate reserves shall have been established. SECTION 6.04. GOVERNMENT APPROVALS; FOREIGN EXCHANGE CONSENTS. (a) The Company shall obtain, and shall at all times maintain in full force and effect, all material registrations, declarations, filings, governmental consents, licenses, approvals, authorizations, and permits (including, without limitation, those listed in Schedule 4.04) necessary for the performance by the Company of this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party. (b) Following each Disbursement of the Loan, the Company shall promptly cause such disbursed portion of the Loan to be duly registered or recorded with the Bank of Ghana and shall take all other steps necessary to secure the foreign exchange consents required for the payment of all amounts due hereunder and under the Notes. The Company shall furnish OPIC with a copy of each such registration, recording and consent. 38 -33- SECTION 6.05. RETENTION ACCOUNTS. The Company shall cause all proceeds of any of its sales of gold, gold dore or gold ore to be deposited in the Gold Sales Proceeds Account and shall cause the Balance at all times be not less than the Debt Service Reserve Requirement. Capitalized terms used in this Section 6.05 and not otherwise defined in this Agreement have the meanings set forth in the New York Account Security Agreement. SECTION 6.06. MAINTENANCE OF INSURANCE. (a) The Company shall maintain or cause to be maintained in effect insurance with respect to the Project (and with respect to equipment or other assets being acquired for use in the Project as to which the Company bears the risk of loss) against such hazards (including, without limitation, fire, lightning, collapse, wind and hail, explosion, smoke, aircraft and vehicles, riot, civil commotion, vandalism, other extended coverage risks, marine cargo losses, flood and earthquake, environmental impairment liability and environmental remediation (to the extent insurance for environmental impairment liability and environmental remediation is available (unless the Company shall have demonstrated to OPIC, and OPIC shall have concurred, that such insurance is not available on commercially reasonable terms), and any other hazards to the extent that properties of a nature similar to those included in the Project and in the same or similar localities are usually insured), in such form (including the form of the loss payable clauses) and with such insurers as shall be selected by the Company and approved by OPIC (such approval not to be withheld unreasonably), such insurance to be in such amount as the Company would, in the prudent management of its property, maintain, or would be maintained by others similarly situated in respect of property similar to the Project, PROVIDED that (i) the amount of such insurance with respect to the Project shall not at any time be less than the greater of the total cost of the construction and acquisition of the Project (other than the cost of the land underlying the Project) or the amount of all obligations of the Company from time to time owing to OPIC under this Agreement or any other Loan Document, whether for principal, interest, fees, expenses or otherwise and (ii) such insurance shall be on a "no co-insurance/agreed-amount" basis. The Company shall also carry workers' compensation insurance, disability benefits insurance, and such other form of insurance which the Company is required by law to provide, covering loss resulting from injury, sickness, disability, or death of the employees of the Company, except, subject to OPIC's approval, to the extent the Company can become a qualified self-insurer under relevant statutes. The Company shall also carry business interruption insurance covering risk of loss as a result of the cessation or material interruption of the business of the Company for a period of 9 months or any part thereof and providing for payments during a period of 9 months of not less than $18,900,000. 39 -34- ALL insurance policies required hereby covering loss or damage to the Project shall name the Company and OPIC as additional insureds as their interests may appear and, shall provide that any payment thereunder for any loss or damage shall be made to OPIC (unless otherwise approved by OPIC), except that such policies may provide that any payment of less than $2,000,000 made in respect of any single casualty or other occurrence may be paid solely to the Company. OPIC shall apply all such proceeds as a prepayment of the Loan pursuant to Section 2.09, PROVIDED that if no Event of Default shall have occurred and be continuing, OPIC shall forthwith remit to the Company any proceeds paid to OPIC, (i) upon certification by the Company that the property damaged or lost has been fully repaired or replaced, or (ii) if, within 60 days of the event giving rise to such payment of proceeds, OPIC shall have approved a plan submitted by the Company whereby the property damaged or destroyed by such event is to be fully repaired or replaced. All policies shall (unless the Company shall have demonstrated to OPIC, and OPIC shall have concurred, that such policies are not available on commercially reasonable terms) insure the interests of OPIC regardless of any breach or violation by the Company of warranties, declarations or conditions contained in such policies or any action or inaction of the Company or others; expressly provide that all provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each such insured; waive any right of subrogation of the insurers to any rights of the Company or OPIC in respect of any liability of the Company or OPIC and any right of the insurers to any setoff or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of the Company or OPIC; provide that, if such insurance is canceled, terminated or materially changed for any reason whatsoever (other than non-payment of premium), the insurers will promptly notify the Company and OPIC and any such cancellation, termination or change shall not be effective as to the Company or OPIC for 30 days after receipt of such notice, and appropriate certification shall be made to the Company by each insurer with respect thereto; and provide, or each insurer shall agree with OPIC, that the insurer shall give OPIC 35 days' prior notice of the expiration of insurance under such policy in accordance with its terms if the Company has failed by such time to pay any premium due in respect of the renewal of insurance under such policy. (b) The Company shall, without cost to OPIC, maintain or cause to be maintained in effect insurance policies with respect to the Project insuring against liability for death of, or loss, injury or damage to, the person or property of others from such risks, in such form and with such insurers as shall (in the case of such risks, form and insurers) be selected by the Company and approved by OPIC (which approval shall not be unreasonably withheld) and in such amounts as the Company would in the prudent management of its property maintain, or would be maintained by others similarly situated in respect of property similar to the Project. Each of the insurance policies maintained in accordance with this Section 6.06(b) shall name the Company and OPIC as additional insureds thereunder with respect to the Project and shall (unless the Company shall have demonstrated to OPIC, and OPIC shall have concurred, that such policies are not available on commercially reasonable terms) insure the interests of OPIC regardless of any breach of or violation by the Company of, any declarations or conditions contained in such policies. Each 40 -35- such insurance policy shall (unless the Company shall have demonstrated to OPIC, and OPIC shall have concurred, that such a policy is not available on commercially reasonable terms) expressly provide that all of the provisions thereof, except the limits of liability (which shall be applicable to all insureds as a group) and liability for premiums (which shall be solely a liability of the Company) shall operate in the same manner as if there were a separate policy covering each insured, and shall provide that such insurance, as to the interest of OPIC therein, shall not be invalidated by the use or operation of the Project for purposes which are not permitted by such policy. (c) On or before the date of the first Disbursement hereunder and thereafter at intervals of not more than twelve calendar months (or less at the request of OPIC) until all obligations of the Company under the Loan Documents shall have been paid in full, the Company shall furnish to OPIC a certificate signed by a duly authorized representative of each insurer, showing the insurance then maintained by the Company pursuant to this Section 6.06 and stating that such insurance complies with the terms hereof. The Company shall cause the insurers with whom it maintains such insurance to agree to advise the Company and OPIC in writing promptly of any default in the payment of any premiums or any other act or omission on the part of the Company of which they have knowledge and which might invalidate or render unenforceable, in whole or in part, any such insurance. (d) In the event the Company fails to take out or maintain the full insurance coverage required by this Agreement or fails to keep the Project in good order and repair and in as reasonably safe condition as its operations permit, OPIC, upon 30 days' written notice (unless the aforementioned insurance would lapse within such period or such other event as would lessen the security for the Loan would occur, in which event notice should be given as soon as reasonably possible) to the Company of any such failure on its part, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same, pay such taxes or other charges or complete the Project or make such repairs, renewals and replacements as may be necessary to maintain the Project in good order and repair and in as reasonably safe conditions as the Company's operations permit. All amounts so advanced therefor by OPIC shall become additional obligations of the Company to OPIC, and the Company will forthwith pay such amounts to OPIC, together with interest thereon at the default rate specified in Section 2.06(b) from the date so advanced. SECTION 6.07. ACCOUNTING AND FINANCIAL MANAGEMENT. (a) The Company shall (i) maintain adequate management information and cost control systems, (ii) maintain a system of accounting, (iii) prepare its Financial Statements in accordance with U.S. GAAP, (iv) engage Coopers & Lybrand, Chartered Accountants, or other independent internationally recognized accountants satisfactory to OPIC to prepare an annual audit report on the Company's Financial Statements, (v) notify OPIC of any change in such accountants and the reason therefor, and (vi) upon OPIC's reasonable request to the Company, 41 -36- instruct such accountants to communicate directly with OPIC regarding the Company's accounts and operations. Without limiting the foregoing, the Company shall maintain the systems described in clauses (i) and (ii) and related management and accounting policies in a manner adequate to ensure compliance with applicable Corrupt Practices Laws. (b) The Company shall make arrangements satisfactory to OPIC for overseeing the financial operations of the Company, including its cash management, accounting and financial reporting, and for overseeing the Company's relationship with its lenders and independent accountants; such arrangements may include, but shall not be limited to, employing a chief financial officer to oversee the financial operations of the Company. SECTION 6.08. FINANCIAL STATEMENTS AND OTHER INFORMATION. At its cost the Company shall furnish OPIC with financial information and reports expressed in U.S. dollars and in the English language, all prepared in accordance with U.S. GAAP, including but not limited to the following: (a) Within 60 days after the end of each fiscal quarter of each Fiscal Year, its unaudited Financial Statements, and a comparison between such Financial Statements and the projections for such fiscal quarter furnished pursuant to Section 6.08(f) below, all certified by the chief financial officer of the Company as being complete and correct, together with such officer's certificate that his or her review has not disclosed the existence of an Event of Default, or an event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, or, if any such event or condition then exists, specifying the nature and period of existence thereof and what action the Company has taken or proposes to take with respect thereto; (b) Within 120 days after the end of each Fiscal Year, its audited Financial Statements, together with a certificate by the independent accountants reporting thereon describing briefly the scope of their examination (which shall include a review of the relevant terms of this Agreement) and certifying whether their examination has disclosed the existence of an Event of Default, or an event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, and if so, specifying the nature and period of existence thereof; (c) Until the Company shall have achieved Project Completion, a report within 45 days after the end of each fiscal quarter certified by an Authorized Officer setting forth in reasonable detail the progress of the Project, including (i) expenditures of funds, (ii) estimated future costs, (iii) unexpended funds available to the Company, (iv) the progress and percentage of completion of the major phases of Project construction and the total construction work of the Project, and (v) the acquisition of fixtures and equipment. (d) Within 45 days after the end of each Fiscal Year, a report certified by an Authorized Officer setting forth in reasonable detail all transactions during such Fiscal Year 42 -37- between (x) the Company and (y) the Sponsor or Affiliates of the Sponsor (other than arrangements for compensation of officers, employees or directors of the Company for their services as such at a rate established on an arm's length basis); (e) Within 30 days after the Company is required to make any report to the Government of Ghana pursuant to Section 17(a), 17(c), 17(e) and 17(f) of the Mining Leases, a copy of each such report, to the extent that any information it contains is not duplicative of other information to be provided by the Company pursuant to this Section 6.08; (f) Not later than 30 days prior to the beginning of each Fiscal Year, an annual operating forecast for the Company, including its projected quarterly Financial Statements for such Fiscal Year, together with a statement of the assumptions on which such forecast is based; (g) Within 90 days after the end of each Fiscal Year, the Self-Monitoring Questionnaire, in such form as OPIC may from time to time prescribe, and certified by an Authorized Officer as true and complete; (h) Notice of any change in the percentage of the proceeds of the Company's sales of gold or gold ore that the Company is permitted by the Government of Ghana or the Bank of Ghana to keep in bank accounts outside of Ghana, within 30 days after each such change; (i) Within 90 days after the end of each Fiscal Year, an environmental compliance report summarizing the environmental performance of the Project during such Fiscal Year and providing sufficient information for OPIC to monitor the performance of the Project with respect to environmental protection, including, at a minimum, narrative summaries of (i) the results of any environmental monitoring or sampling activity conducted at the Teberebie Mine, (ii) accidents at the Teberebie Mine impacting the environment or resulting in the loss of life, and (iii) environmental deficiencies at the Teberebie Mine identified by the Ghanaian environmental regulatory authorities and any remedial actions taken or proposed to be taken with respect thereto; (j) Within 90 days after the date of effectiveness of any amendment to the Mining Law, a copy of such amendment together with a statement from the Company's Ghanaian counsel describing in reasonable detail what effect (if any) such amendment will have on the Company and the Project; and (k) Copies of all other annual or interim audit reports and management letters submitted to the Company by its independent accountants and such other information and data with respect to its operations (including without limitation supporting information as to compliance with this Agreement) as OPIC may reasonably request from time to time. 43 -38- SECTION 6.09. ACCESS TO RECORDS; INSPECTION; MEETINGS. The Company shall, upon request of OPIC, give, or cause to be given, to any representatives of OPIC access during normal business hours to, and permit them to examine, copy and make extracts from, any and all records and documents in the possession or subject to the control of the Company relating to its operations and financial affairs, and to inspect any of its facilities or properties. If OPIC so requests, the Company shall give OPIC not less than 15 days' notice of, and shall permit an Authorized Officer of OPIC to attend, each meeting of its shareholders and of its directors. Subject to all applicable law, OPIC shall treat the information contained in such records and documents and received in such meetings, or otherwise received from the Company, as confidential information not to be disclosed to other Persons. SECTION 6.10. NOTICE OF DEFAULT AND OTHER MATTERS. The Company shall immediately notify OPIC of (i) the occurrence of each Event of Default and of each event or condition known to any of its officers that with the passage of time or the giving of notice, or both, could constitute an Event of Default, (ii) any actions, suits, other legal proceedings or arbitral proceedings against the Company that involve claims aggregating more than the equivalent of $2,000,000, individually or in the aggregate, and (iii) the occurrence of any other condition or event (including government action) that could have a Material Adverse Effect. SECTION 6.11. SECURITY DOCUMENTS. The Company at its cost shall take all actions necessary to maintain each of the Security Documents in full force and effect and enforceable in accordance with its terms and fully perfected and effective against third parties, including (i) making all necessary filings, registrations and recordations, (ii) making all necessary payments of stamp duties, fees, taxes and other charges, (iii) issuance of any necessary supplemental documentation, such as continuation statements, (iv) discharge of all claims or other Liens adversely affecting the rights of OPIC in the property, rights or assets subject to any Security Document (other than Permitted Liens), (v) publication or other delivery of notice to third parties, (vi) deposit of title documents, and (vii) taking all actions necessary to ensure that all after-acquired property of the Company is subject to a valid and enforceable first-ranking Lien in favor of OPIC, subject to Permitted Liens. Without limitation to any of the foregoing, the Company will cause each party to any Refining Contract, other than the Company, to enter into a Refiner Consent contemporaneously with entering into such Refining Contract and will deliver a copy of such Refiner Consent to OPIC within 30 days after execution thereof. 44 -39- SECTION 6.12. FINANCIAL RATIOS. The Company shall maintain the following financial ratios: (i) the ratio of the Company's Total Liabilities to its Tangible Net Worth shall not exceed 1.5 to 1.0; and (ii) the ratio of the Company's Current Assets to its Current Liabilities shall not be less than 1.0 to 1. For purposes of this covenant, any obligations denominated in gold shall be expressed in U.S. dollars at a rate equivalent to the Spot Market Price of Gold at the time as of which compliance with this covenant is being determined. SECTION 6.13. ENVIRONMENTAL REQUIREMENTS. (a) The Company shall comply in all material respects with, and shall conduct its business, operations, assets, equipment, property, leaseholds, and other facilities in compliance in all material respects with, the provisions of all applicable environmental, health and safety laws, codes, ordinances and directives, and all rules and regulations promulgated thereunder. The Company shall maintain all required permits, licenses, certificates and approvals relating to: (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters. (b) Except as set forth on Schedule 6.13, the Company shall carry out the Project and operate the Teberebie Mine in compliance with the Environmental Standards, PROVIDED that failure to comply with any requirement of the Environmental Standards shall not be a breach of this paragraph if, in order to comply with any other paragraph of this Section or as a condition to Project Completion (as defined in the Project Completion Agreement), the Company must provide OPIC with or implement a plan to comply with such requirement of the Environmental Standards. (c) Within one year after the first Disbursement of the Loan, the Company shall have complied with and fully implemented the "Environmental Action Plan" dated April 1996 prepared by Steffen, Robertson & Kirsten (the "Environmental Action Plan") and shall have provided OPIC with evidence satisfactory to OPIC establishing such compliance and implementation, PROVIDED that failure to implement any part of the Environmental Action Plan shall not be a breach of this paragraph if, in order to comply with any other paragraph of this Section or as a condition to Project Completion (as defined in the Project Completion Agreement), the Company must implement a plan that would bring the Company into compliance with such part of the Environmental Action Plan. (d) Not later than July 31, 1997, the Company shall cause SGS Environment: A Division of SGS Laboratory Services (Ghana) Limited to complete and provide OPIC with a supplemental Environmental Impact Study with regard to operations at the Teberebie Mine (the "Supplemental Environmental Impact Study"), which shall report on (i) the effect of the 45 - 40 - expansion and proposed expansion of waste dumps and operational units into wetland areas and (ii) the effect on the wetlands at or adjacent to the Teberebie Mine site from siltation due to ongoing erosion associated with expected future mine operations. The Supplemental Environmental Impact Study must be acceptable to OPIC and shall cover, without limitation effects on the hydrology of the area, impacts on surface and ground water quality, impacts on primary forested swamps and other environmentally sensitive resources, and impacts on rare palm species and threatened and endangered species of palms. (e) Not later than December 31, 1997, the Company shall provide OPIC with a proposed plan, based on the findings in the Supplemental Environmental Impact Study, for protection of forested swamps and environmentally sensitive resources, including mitigation or conservation measures the Company proposes to adopt. If OPIC is not satisfied with the proposed strategy, the Company shall prepare an analysis of alternatives, including an identification of operation and disposal locations that will have less impact on the forested swamps and will meet the requirements of the Environmental Standards for erosion and sediment control. (f) Not later than January 31, 1997, the Company shall provide OPIC with a plan, satisfactory to OPIC, to modify the system for treating cyanide at the Teberebie Mine to meet the Environmental Standards for total cyanide prior to effluent discharge to wetlands or other surface water bodies, including a schedule for implementation. (g) Not later than December 31, 1997, the Company shall have fully completed all aspects of implementation of the plan referred to in paragraph (f) hereof. ARTICLE VII. NEGATIVE COVENANTS Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Company covenants and agrees as follows: SECTION 7.01. MORTGAGE AND LIEN RESTRICTIONS. The Company shall not create, assume or otherwise permit to exist any Liens on any of its properties or assets, whether now owned or hereafter acquired, or in any proceeds or income therefrom, except for: (a) the Liens created under the Security Documents or pursuant to any of the other Financing Documents; (b) the Equipment Mortgages; 46 -41- (c) any ownership interest or pre-emptive right of the Government of Ghana with respect to, or right of the Govermnent of Ghana to seize or distrain, gold or other minerals as set forth in the Mining Law, the Deed of Warranty or the Mining Leases, as each thereof is in effect on the date hereof; (d) Liens for Taxes or other statutory Liens that are being contested or litigated in good faith; (e) Liens securing Indebtedness referred to in Section 7.02(f) if the Company shall have provided information satisfactory to OPIC in OPIC's sole discretion demonstrating that such Liens could not in any way interfere with OPIC's rights as a secured creditor of the Company or its ability to enforce such rights without restriction or interference or as to which OPIC shall have issued a written waiver of the restrictions contained in this Section 7.01; and (f) any mechanic's, worker's or other like Liens arising by mandatory provision of law securing obligations incurred in the ordinary course of business that are not yet overdue or that are being contested or litigated in good faith. SECTION 7.02. INDEBTEDNESS. The Company shall not incur, assume, guarantee, or permit to exist or otherwise become liable for Indebtedness except: (a) that provided herein and in the Notes; (b) Indebtedness consisting of trade credit from suppliers of goods or services incurred in the ordinary course of business and on terms requiring payment in full in not more than 90 days; (c) Indebtedness consisting of not more than $500,000 of principal owed under the Ecobank Documentation and other Indebtedness thereunder that does not consist of principal owed; (d) Indebtedness consisting of not more than $4,000,000 of principal owed under the SEB Credit Agreements and other Indebtedness thereunder that does not consist of principal owed; (e) prior to the date of the Disbursement hereunder, Indebtedness to the Sponsor pursuant to the Expansion Loan Agreement; 47 -42- (f) Indebtedness to the Sponsor, PGH or PGL that is subordinated to the Loan on the terms set forth in the Subordination Agreement; (g) Indebtedness consisting of not more than the Dollar equivalent of SEK 94,500,000 of principal owed under the New SEB Credit Agreement (at the exchange rate provided therein) and other Indebtedness thereunder that does not consist of principal owed; (h) Indebtedness consisting of not more than $20,513,200 of principal owed under the Caterpillar Loan Agreements and other Indebtedness thereunder that does not consist of principal owed; and (i) other Indebtedness, PROVIDED that the Company's ratio of Total Liabilities to Tangible Net Worth shall not at any time exceed 1.5 to 1.0. SECTION 7.03. DEBT SERVICE COVERAGE RATIO. At all times before the Completion Date while the Sponsor has paid less than an aggregate of $9,000,000 pursuant to Section 3(b) of the Project Completion Agreement, the Company shall not permit the Debt Service Coverage Ratio at any time to be less than 1:1; and at all other times the Company shall not permit the Debt Service Coverage Ratio at any time to be less than 1.4:1. SECTION 7.04. PREPAYMENT OF INDEBTEDNESS UNDER THE SEB CREDIT AGREEMENTS. The Company shall not make or permit to be made on its behalf any prepayment of Indebtedness outstanding under the SEB Credit Agreements, the New SEB Credit Agreement or the Caterpillar Loan Agreements in advance of the respective repayment schedules set forth therein. SECTION 7.05. NO ALTERATION OF Agreements. (a) The Company shall not terminate, amend or grant any waiver of, or assign any of the respective duties or obligations under, any of its Charter Documents or any provision of any of the Financing Documents to which it is a party (other than amendments or waivers, either to correct manifest error or which are of a formal, minor, or technical nature and do not change materially any Person's rights or obligations, PROVIDED that the Company promptly gives OPIC notice of such amendment or waiver). (b) The Company will not amend any provision of the SEB Credit Agreements, the New SEB Credit Agreement; the Caterpillar Loan Agreements, or the Ecobank Documentation in any manner that could materially adversely affect OPIC, it being understood that any amendment that would (i) increase the aggregate principal amount of Indebtedness or rate of interest payable 48 -43- under any such agreement, (ii) accelerate the date upon which any payment of principal of, or interest with respect to, any such Indebtedness is required to be made, or (iii) amend any covenant, acceleration, or default provision in any manner that could reasonably be expected to increase the likelihood of the occurrence of a default under any thereof shall, without limitation, be deemed to materially adversely affect OPIC. SECTION 7.06. RESTRICTED PAYMENTS. The Company shall not make any Restricted Payments until all amounts due or to become due hereunder or under the Notes shall have been paid in full; PROVIDED that the Company may (subject to the mandatory prepayment provisions set forth in Section 2.09(b)) make any Restricted Payment if (i) no Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, shall have occurred and be continuing or would exist and be continuing after giving effect to such Restricted Payment; (ii) after giving effect to such Restricted Payment (A) the Company's Tangible Net Worth would not be less than $45,000,000 and (B) the aggregate amount of all Restricted Payments paid in any Fiscal Year of the Company would not exceed (x) seventy percent (70%) of the Company's Net Income for the preceding Fiscal Year, as shown in the Company's audited Financial Statements or (y) if audited Financial Statements for such preceding Fiscal Year have not yet been delivered to OPIC but at least 90 days have passed from the end of such preceding Fiscal Year, thirty-five percent (35%) of the Company's Net Income for such preceding Fiscal Year, as shown in the Company's unaudited Financial Statements for such Fiscal Year, as certified to OPIC by an Authorized Officer of the Company before such Restricted Payment is made, unless, in either such case, the Loan is prepaid at the time of such Restricted Payment in the amount of such excess; and (iii) in the case of any Restricted Payment made after the date of Project Completion, the Company shall have provided OPIC with a certificate stating that the ratio of (x) the Company's Cash Available for Debt Service for the four most recently completed fiscal quarters of the Company, taken as a single accounting period, to (y) the Company's Debt Service, as projected by the Company in good faith, for the four next succeeding fiscal quarters of the Company, taken as a single accounting period, is not less than 2.00 to 1, together with a statement in reasonable detail of the method by which such ratio was calculated by the Company and the assumptions on which it is based. No Restricted Payments referred to in clause (ii) (B) (y) of the proviso to the foregoing sentence may be made unless arrangements satisfactory to OPIC shall have been made for the repayment to the Company of any part of such Restricted Payments that prove to have exceeded seventy percent (70%) of the Company's Net Income for the preceding Fiscal Year, as shown in the Company's audited Financial Statements. 49 -44- SECTION 7.07. CONDUCT OF BUSINESS WITH SPONSOR. (a) The Company shall not directly or indirectly conduct any business with, or enter into any business transaction involving, the Sponsor or any Affiliate of the Sponsor, except on an arm's length basis and subject to the reporting requirement set forth in Section 6.08(d). (b) The Company shall not pay, or incur or assume any obligation to pay, any amount to the Sponsor or any Affiliate thereof, including without limitation salaries, bonuses, commissions, management fees, consulting fees, technical assistance fees and debt service; PROVIDED that, subject to Section 7.07(a), the Company may pay or incur or assume obligations to pay (i) Restricted Payments to the extent permitted by Section 7.06, (ii) compensation to officers, employees or directors of the Company that are also Affiliates of the Sponsor for services as an officer, employee or director of the Company, and (iii) fees to PGL or any Affiliate of PGL pursuant to the terms of the Corporate Services Agreements in an amount not to exceed $500,000 in any Fiscal Year of the Company, (iv) amounts paid to reimburse PGL or any Affiliate of PGL for the cost of services provided to or for the benefit of the Company by any third-party service provider pursuant to the terms of the Corporate Services Agreements in an amount not to exceed $1,000,000 in any Fiscal Year, and (v) any other amount not referred to in the immediately preceding clauses (i) through (iv) (subject to the mandatory prepayment provisions set forth in Section 2.09(b)) if, after giving effect to the payment of such other amount (x)no Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, shall have occurred and be continuing and (y) the Company shall be in compliance with the financial ratios set forth in Section 6.13. SECTION 7.08. CONDUCT OF BUSINESS WITH GOVERNMENT. The Company shall not agree to sell gold directly or indirectly to the Government of Ghana at a price below the Spot Market Price of Gold. SECTION 7.09. SALE OF ASSETS; MERGERS. The Company shall not: (a) sell, assign, convey, lease or otherwise dispose of all or a substantial part of its assets or properties, whether now owned or hereafter acquired, except for the replacement of a capital asset with an asset of equal or greater value; (b) dissolve, liquidate, wind up, have a receiver appointed to take possession of its assets or otherwise cease to do business; (c) create any subsidiaries; 50 -45- (d) acquire by purchase or otherwise any of the shares of capital stock or assets of another Person; or (e) merge or consolidate with any Person; PROVIDED that the Company may create and contribute assets valued at not more than $3,000,000 in the aggregate to one or more subsidiaries or joint ventures if (i) each shareholder or joint venturer therein (other than the Company) has been approved by OPIC and (ii) the sole activity thereof at all times is the conduct of exploration activities carried on to locate or assess the quality or extent of gold or diamond deposits within Ghana other than the Teberebie Mine. SECTION 7.10. LEASE OBLIGATIONS. The Company shall not enter into any agreement or arrangement to acquire by lease the use of any property or equipment of any kind, if the annual rental payable under such lease, when aggregated with the annual rentals payable under all other leases already entered into by the Company, would exceed $500,000 or its equivalent in any Fiscal Year. SECTION 7.11. HEDGING ARRANGEMENTS. The Company shall not without OPIC's prior written consent, which shall not be unreasonably withheld, enter into any Hedging Arrangement other than the purchase of put options that give the Company the right to sell not more than 36,000 troy ounces of gold per month at a price not less than $310 per troy ounce. SECTION 7.12. Ordinary Conduct of BUSINESS. The Company shall not: (a) carry on any business other than (i) completion and operation of the Project and the Teberebie Mine; and (ii) exploration activities costing less than $3,000,000 in any Fiscal Year of the Company (including any amounts contributed in such Fiscal Year to any subsidiary or joint venture referred to in the proviso to Section 7.09) that are carried on for the purpose of locating or assessing the quality or extent of gold or diamond deposits within Ghana other than at the Teberebie Mine, and the Company shall not take any action that would constitute or result in any material alteration to the nature or scope of that business; (b) materially change the nature or scope of the Project; (c) make any investments outside the ordinary course of business; 51 -46- (d) change its name or take any other action that might adversely affect the Liens created by the Security Documents; (e) enter into any partnership, profit-sharing or royalty agreement or other similar arrangement whereby the Company's income or profits are, or might be, shared with any other Person; (f) purchase any equity securities of, make or permit to exist any loans or advances to, invest or acquire any interest whatsoever in, or assume, guarantee, endorse or otherwise become directly or contingently liable for any obligation or Indebtedness of, any Person, other than the endorsement of negotiable instruments for collection in the ordinary course of business and the prudent investment of idle surplus funds in readily marketable Dollar-denominated debt securities; or (g) fail to maintain its corporate existence and its right to carry on its operations. SECTION 7.13. WORKER RIGHTS. The Company shall not take any action to prevent its employees from lawfully exercising their right of free association and their right to organize and bargain collectively. The Company shall not require employees to work more than eight hours per day for six consecutive days (a "standard work week"), except with financial remuneration at a rate in excess of that to which such workers would otherwise be entitled for working a standard work week. The Company shall not employ workers under the age of 16 years. The Company further agrees to observe applicable laws relating to a minimum age for employment of children and acceptable conditions of work with respect to minimum wages, hours of work and occupational health and safety, and not to use forced labor. The Company is not responsible under this Section 7.13 for the actions of a government. ARTICLE VIII. DEFAULTS AND REMEDIES SECTION 8.01. EVENTS OF DEFAULT. The occurrence and continuation of any of the following events or circumstances shall constitute an "EVENT OF DEFAULT" hereunder: (a) The Company fails to pay when due any principal or interest payable pursuant to any Note or any other amount payable pursuant to this Agreement; 52 -47- (b) The Company fails to pay when due any principal of or interest on any of its Indebtedness other than the Loan, and such failure continues beyond the grace period, if any, applicable thereto; or a default occurs under any agreement or instrument evidencing, or under which the Company has outstanding at the time, any such Indebtedness and such default continues beyond the grace period, if any, applicable thereto, if the effect of such default is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; (c) Any representation or warranty made by or on behalf of the Company in this Agreement, or in any notice or other certificate, document, Financial Statement or other statement delivered pursuant hereto, proves to have been incorrect in any material respect when made; (d) The Company fails to comply with any covenant or provision set forth in Section 6.10 or Article VII, or the Sponsor fails to perform any of its obligations under the Project Completion Agreement or the Share Retention Agreement; (e) The Company fails to comply with or perform any agreement or covenant contained herein other than those referred to in Sections 8.01 (a), (b), (c) and (d) above, and such failure continues for 30 days after the occurrence thereof; (f) Any authorization, consent or approval of any governmental agency or public authority necessary for the execution, delivery or performance of this Agreement, the Notes, or any of the other Financing Documents or for the validity or enforceability of any of the Company's obligations under this Agreement, the Notes or any of the other Financing Documents, is not effected or given or is withdrawn or ceases to remain in full force and effect; (g) The Deed of Warranty or either of the Mining Leases are amended or terminated without OPIC's consent, or the Company violates any term of the Deed of Warranty or either of the Mining Leases that would result in the termination thereof or give the Government of Ghana the right to terminate any thereof; (h) The Government of Ghana gives notice of a termination under Section 28 of either of the Mining Leases; (i) This Agreement, the Notes, or any of the other Financing Documents at any time for any reason ceases to be in full force and effect, or is declared to be void or is repudiated, or the validity or enforceability hereof or thereof is at any time contested by the Company, or, in the case of the Security Documents, ceases to give or provide the respective Liens, rights, titles, remedies, powers, or privileges intended to be created thereby; (j) Any governmental authority condemns, nationalizes, seizes or otherwise expropriates any substantial portion of the assets or the capital stock of the Company or takes any 53 -48- action that would prevent the Company from carrying on any material part of its business or operations; (k) The Company or any other party fails to comply with or perform any of its material obligations or undertakings set forth in any Financing Document (other than this Agreement, the Project Completion Agreement and the Share Retention Agreement) and such failure continues for 30 days after the occurrence thereof; (l) The Company or, prior to Project Completion, the Sponsor (i)applies for, or consents to the appointment of, a receiver, trustee, custodian, intervenor or liquidator of itself or of all or a substantial part of its assets or enters into any voluntary dissolution, winding up or liquidation proceeding, (ii) files a voluntary petition in bankruptcy, admits in writing that it is unable to pay its debts as they become due or generally fails to pay its debts as they become due, (iii) makes a general assignment for the benefit of creditors, (iv) files a petition or answer seeking reorganization or arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) files an answer admitting the material allegations of, or consents to, or defaults in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding where such action or failure to act will result in a determination of bankruptcy or insolvency against it; (m) Without its application, approval or consent, a proceeding is instituted in any court of competent jurisdiction or by or before any government or governmental agency of competent jurisdiction, seeking in respect of the Company or, prior to Project Completion, the Sponsor: adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of Indebtedness, the appointment of a trustee, receiver, liquidator or the like of it or of all or any substantial part of its property or assets, or other like relief in respect of it under any bankruptcy, reorganization or insolvency law; and, if such proceeding is being contested by it in good faith, the same continues undismissed for a period of 120 days; (n) Any final judgment or judgments for the payment of money in an aggregate amount in excess of $2,000,000 or its equivalent in another currency is rendered against the Company, and such judgment or judgments is not satisfied or discharged within 60 days of entry; (o) Any environmental claim shall have been asserted against the Company or any other party to the Financing Documents, and such claim could reasonably be expected to have a Material Adverse Effect; or (p) Any event shall have occurred that, in the reasonable judgment of OPIC, could have a Material Adverse Effect. 54 -49- SECTION 8.02. REMEDIES UPON EVENT OF DEFAULT. (a) Except as otherwise provided in Section 8.02(b), if any Event of Default has occurred and is continuing, OPIC may at any time in its sole discretion do any one or more of the following: (i) suspend or terminate the Commitment, (ii) declare, by written demand for payment to the Company, any portion or all of the Loan to be due and payable, whereupon such portion of the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Financing Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Company hereby expressly waives, or (iii) without notice of default or demand, proceed to protect and enforce its rights and remedies by appropriate proceedings, whether for damages or the specific performance of any provision of this Agreement, any Note, or any other Financing Document, or in aid of the exercise of any power granted in this Agreement, any Note, any other Financing Document, or by law, or may proceed to enforce the payment of any Note. (b) Upon the occurrence of an Event of Default referred to in Sections 8.01(1) or (m), (i) the Commitment shall automatically be terminated, and (ii) the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Financing Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Company hereby expressly waives. SECTION 8.03. JURISDICTION AND CONSENT TO SUIT. (a) Without prejudice to OPIC's or the Company's right to bring suit in any appropriate domestic or foreign jurisdiction, any proceeding to enforce this Agreement, any Note, or any other Financing Document to which the Company is a party (unless otherwise specified) may be brought by OPIC in any state or federal court of competent jurisdiction in the District of Columbia of the United States of America or in any other jurisdiction where the Company or any of its property may be found. The Company hereby irrevocably waives any present or future objection to any such venue, and irrevocably consents and submits unconditionally to the non-exclusive jurisdiction for itself and in respect of any of its property of any such court. The Company further agrees that final judgment against it in any such action or proceeding arising out of or relating to this Agreement shall be conclusive and may be enforced in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of its obligation. (b) Prior to the first Closing Date, the Company shall irrevocably designate and appoint CT Corporation System, 1025 Vermont Avenue, N.W., Washington, D.C. or another agent satisfactory to OPIC for service of process in the District of Columbia as its authorized agent to receive and forward on its behalf service of process in any such proceeding, and shall 55 -50- provide OPIC with evidence of the prepayment in full of the fees of such agent. The Company agrees that service of process, writ, judgment, or other notice of legal process upon said agent shall be deemed and held in every respect to be effective personal service upon it. The Company shall maintain such appointment (or that of a successor satisfactory to OPIC) continuously in effect at all times while the Company is obligated under the Finance Agreement or any Note. Nothing herein shall affect OPIC's right to serve process in any other manner permitted by applicable law. (c) OPIC shall have the option in its sole discretion to refer any dispute, controversy or claim arising out of or relating to this Agreement, the Notes or any other Financing Agreement, or the breach, termination or validity hereof or thereof, including any dispute concerning the scope of this Section 8.03(c), for final settlement by arbitration in accordance with the arbitration provisions set forth in Schedule 8.03. The Company hereby expressly and irrevocably submits to the jurisdiction of the arbitral tribunal appointed in accordance with the procedures set forth in Schedule 8.03 with respect to any such dispute, controversy or claim, to the exclusion of the jurisdiction of the legal, equitable or arbitral courts of the Republic of Ghana or of any other country or jurisdiction. The Company shall not in any event have the right to refer any such dispute, controversy or claim to arbitration. SECTION 8.04. JUDGMENT CURRENCY. This is an international loan transaction in which the specification of Dollars is of the essence, and such currency shall be the currency of account in all events. The payment obligation of the Company hereunder and under the Notes shall not be discharged by an amount paid in another currency, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars in the United States of America under normal banking procedures does not yield the amount of Dollars then due. In the event that any payment by the Company, whether pursuant to a judgment or otherwise, upon conversion and transfer, does not result in the payment of such amount of Dollars at the place such amount is due, OPIC shall be entitled to demand immediate payment of, and shall have a separate cause of action against the Company for, the additional amount necessary to yield the amount of Dollars then due. In the event OPIC, upon the conversion of such judgment into Dollars, shall receive (as a result of currency exchange rate fluctuations) an amount greater than that to which it was entitled, the Company shall be entitled to immediate reimbursement of the excess amount. SECTION 8.05. IMMUNITY. The Company represents and warrants that it is subject to civil and commercial law with respect to its obligations under this Agreement, the Notes, and each of the other Financing Documents to which it is a party, that the making and performance of this Agreement, the Notes, and such other Financing Documents and the borrowings by the Company pursuant hereto 56 -51- constitute private and commercial acts rather than governmental or public acts and that neither the Company nor any of its properties or revenues has any right of immunity from suit, court jurisdiction, attachment prior to judgment, attachment in aid of execution of a judgment, set-off, execution of a judgment or from any other legal process with respect to its obligations under this Agreement, the Notes, and such other Financing Documents. To the extent that the Company may hereafter be entitled, in any jurisdiction in which judicial proceedings may at any time be commenced with respect to this Agreement, any Note or any other Financing Document to which it is a party, to claim for itself or its revenues or assets any such immunity, and to the extent that in any such jurisdiction there may be attributed to the Company such an immunity (whether or not claimed), the Company hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity. The foregoing waiver of immunity shall have effect under the United States Foreign Sovereign Immunities Act of 1976. ARTICLE IX. MISCELLANEOUS SECTION 9.01. NOTICES. Each notice, demand, report or other communication relating to this Agreement shall be in writing, shall be hand-delivered or sent by mail (postage prepaid), telegram or facsimile transmission (with a copy by mail to follow, receipt of which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses, or to such other address or number as each party shall have last specified by notice to the other parties: To the Company: Teberebie Goldfields Limited P.O. Box 6 Tarkwa Ghana (Attention: Lucien Girard) (Facsimile: 011-233- 362-273) with copies to: The Pioneer Group, Inc. 60 State Street Boston, Massachusetts 02109 57 - 52- United States of America (Attention: Donald H. Hunter) (Facsimile: 617-422-4296) and Hale and Dorr The Willard Office Building 1455 Pennsylvania Avenue, N.W. Washington, DC 20004 (Attention: David Sylvester, Esq.) (Facsimile: 202-942-8484) To OPIC: Overseas Private Investment Corporation 1100 New York Avenue, N.W. Washington, D.C. 20527 United States of America (Attn: Vice President for Finance (Facsimile: 202-408-9866) Re: Teberebie project). Either party may, by written notice to the other, change the address to which such communications should be sent to it. SECTION 9.02. ENGLISH LANGUAGE. All documents to be furnished or communications to be given or made under this Agreement, the Notes, and each of the other Financing Documents to which the Company is a party shall be in the English language or, if in another language, shall be accompanied by a translation into English certified by an Authorized Officer of the Company, which translation shall be the governing version between the Company and OPIC. 58 -53- SECTION 9.03. GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. SECTION 9.04. SUCCESSION. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto, PROVIDED that the Company shall not, without the prior written consent of OPIC, assign or delegate all or any part of its interest herein or obligations hereunder. SECTION 9.05. SURVIVAL OF AGREEMENTS. Each agreement, representation, warranty and covenant contained or referred to in this Agreement shall survive any investigation at any time made by OPIC and shall survive the Disbursement of the Loan, except for changes permitted hereby, and, save as otherwise provided in Section 2.11, shall terminate only when all amounts due or to become due under this Agreement and the Notes are paid in full. SECTION 9.06. INTEGRATION; AMENDMENTS. This Agreement embodies the entire understanding of the parties hereto, and supersedes all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. The provisions of this Agreement may be waived, supplemented or amended only by an instrument in writing signed by Authorized Officers of the Company and OPIC. SECTION 9.07. SEVERABILITY. If any provision of this Agreement is prohibited or held to be invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that (i) the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and (ii) any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal, or unenforceable in any other jurisdiction. SECTION 9.08. NO WAIVER. (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights,powers or remedies. No single or partial 59 -54- exercise of any such right shall preclude any other or further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing. (b) The rights or remedies provided for herein are cumulative and are not exclusive of any other rights, powers or remedies provided by law. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion of any other appropriate right or remedy. SECTION 9.09. WAIVER OF JURY TRIAL. The Company and OPIC each hereby irrevocably waives, to the fullest extent permitted by law, any right to have a jury participate in resolving any dispute arising out of, in connection with, related to, or incidental to the relationship between them established by this Agreement, the Notes, any other Financing Document and any other instrument, document or agreement entered into in connection with this Agreement or the transactions contemplated hereby. SECTION 9.10. WAIVER OF LITIGATION PAYMENTS. In the event that any action or lawsuit is initiated by or on behalf of OPIC in Ghana or elsewhere against the Company or any other party to any Financing Document, the Company, to the fullest extent permissible under applicable law, irrevocably waives its right to, and agrees not to request, plead, or claim that OPIC and its successors, transfers, and assigns (any such Person, an "OPIC PLAINTIFF") post, pay, or offer, any cautio judicatum solvi bond, litigation bond, or any other bond, fee, payment, or security measure provided for by any provision of law applicable to such action or lawsuit (any such bond, fee, payment, or measure, a "LITIGATION PAYMENT"), and the Company further waives any objection that it may now or hereafter have to an OPIC Plaintiff's claim that such OPIC Plaintiff should be exempt or immune from posting, paying, making or offering any such Litigation Payment. SECTION 9.11. INDEMNITY. To the extent permitted by law, the Company indemnifies and holds harmless OPIC and each of its directors, officers, employees, agents, counsel, subsidiaries and Affiliates (the "INDEMNIFIED PERSONS") from and against any and all losses, liabilities (or actions in respect thereof), obligations, damages, penalties, actions, judgments, suits, costs, expenses (including without limitation attorneys' fees and expenses as they are incurred in connection with investigating, preparing, or defending any such action or claim) or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against any Indemnified Person in any way relating to or arising out of this Agreement. the Financing Documents or any of them or any of the transactions contemplated hereby or thereby; provided, that the indemnity shall not apply to the extent that there is a final determination that the Loss resulted from (a) the gross 60 -55- negligence or willful misconduct of such Indemnified Person; (b) a failure by OPIC to fulfill its guarantee obligations under the Funding Documents with respect to the Loan; or (c) a failure by the Company to pay its financial obligations under the Financing Documents (except to the extent arising from fraud or misrepresentation). This indenmity obligation shall survive the expiration, termination or other modification of this Agreement. SECTION 9.12. FURTHER ASSURANCES. From time to time, the Company shall execute and deliver to OPIC such additional documents as OPIC may require to carry out the purposes of this Agreement or the Financing Documents or to preserve and protect OPIC's rights as contemplated herein or therein. SECTION 9.13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument. 61 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer as of the date first above written. TEBEREBIE GOLDFIELDS LIMITED By: /s/ ------------------------------------ Its: Managing Director ----------------------------------- OVERSEAS PRIVATE INVESTMENT CORPORATION By: /s/ ------------------------------------ Its: Investment Officer ----------------------------------- [Exhibits Intentionally Omitted] EX-10.70 10 PROJECT COMPLETION AGREEMENT 1 EXHIBIT 10.70 ------------------------------------------------------------------ PROJECT COMPLETION AGREEMENT AMONG TEBEREBIE GOLDFIELDS LIMITED, THE PIONEER GROUP, INC. AND OVERSEAS PRIVATE INVESTMENT CORPORATION DATED AS OF OCTOBER 28, 1996 ------------------------------------------------------------------ 2 PROJECT COMPLETION AGREEMENT TABLE OF CONTENTS Page ---- Section 1. Definitions .....................................................1 Section 2. Interpretation ..................................................2 Section 4. Nature of Obligations ...........................................7 Section 5. Waiver ..........................................................9 Section 6. Reinstatement of Guaranty .......................................9 Section 7. Payments Free and Clear of Taxes, Etc ...........................9 Section 8. Representations and Warranties .................................10 Section 9. Covenants of the Sponsor .......................................12 Section 10. Subrogation and Subordination ..................................13 Section 11. Payments .......................................................13 Section 12. Remedies; No Waiver ............................................14 Section 13. Time of Essence ................................................14 Section 14. Jurisdiction and Consent to Suit ...............................14 Section 15. Successors and Assigns .........................................15 Section 16. Benefits of Agreement ..........................................15 Section 17. Notices ........................................................15 Section 18. GOVERNING LAW ..................................................17 Section 19. Jury Trial Waiver ..............................................17 Section 20. Severability ...................................................18 Section 21. Amendments .....................................................18 Section 22. Waiver of Litigation Payments ............................. ....18 Section 23. Indemnity ......................................................18 Section 24. Counterparts ...................................................18 Section 25. Termination ....................................................19 3 PROJECT COMPLETION AGREEMENT PROJECT COMPLETION AGREEMENT ("Agreement"), dated as of October 28, 1996, by and among TEBEREBIE GOLDFIELDS LIMITED, a company organized and existing under the laws of the Republic of Ghana (the "Company"), THE PIONEER GROUP, INC., a corporation organized and existing under the laws of the State of Delaware (the "Sponsor"), and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America ("OPIC"). WITNESSETH: ----------- WHEREAS, the Sponsor, through its direct and indirect wholly-owned subsidiaries, is the beneficial owner of ninety percent (90%) of the issued and outstanding shares of capital stock of the Company; WHEREAS, under a Finance Agreement with the Company, dated as of the date hereof (the "Finance Agreement"), OPIC will provide a credit facility of up to $19,000,000 (the "Loan") to the Company upon condition, among other things, that the Sponsor enter into and perform this Agreement; WHEREAS, the Sponsor desires to induce OPIC to provide the Loan, and, therefore, is willing to cause the Company to achieve Project Completion (as defined below) and in the interim to guarantee (on the terms set forth herein) the Company's obligations and the repayment of the Loan; and WHEREAS, all things have been done that are necessary to constitute this Agreement a valid contract; NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows: SECTION 1. DEFINITIONS. (a) Terms of this Agreement beginning with capital letters shall have the definitions given in the Finance Agreement, unless the context otherwise requires or specifies. (b) In addition, as used herein, the following terms shall have the following meanings: "COMPLETION CERTIFICATE" shall have the meaning ascribed thereto in Section 3(d)(v). 4 -2- "COMPLETION DATE" shall have the meaning ascribed thereto in Section 3(d). "INDEMNIFIED PERSONS" shall have the meaning ascribed thereto in Section 24. "PCA CALL" shall have the meaning ascribed thereto in Section 3(e)(i). "PCA CALL AMOUNT" shall have the meaning ascribed thereto in Section 3(e)(i). "PCA SUBSCRIPTION" shall have the meaning ascribed thereto in Section 3(f). "PCA SUBORDINATED LOAN" shall have the meaning ascribed thereto in Section 3(f). "PROJECT COMPLETION" shall have the meaning ascribed thereto in Section 3(d). SECTION 2. INTERPRETATION. The rules of interpretation for this Agreement and the Exhibits hereto set forth in Section 1.02 of the Finance Agreement shall apply mutatis mutandis to this Agreement and the Exhibits hereto as if set forth in full in this Section 2. SECTION 3. PROJECT COMPLETION. (a) SPONSOR'S OBLIGATIONS. Subject to the terms and conditions hereof, the Sponsor hereby agrees, (i) to cause the Company to fulfill all of the requirements needed to achieve Project Completion, (ii) up to the Completion Date, to unconditionally and irrevocably guarantee the payment of all of the Company's financial obligations as they become due and payable, including, without limitation, the Company's obligations under the Finance Agreement and the Notes, and (iii) upon a PCA Call from OPIC at any time or from time to time prior to the Completion Date, to make payment in full of the PCA Call Amount demanded from the Sponsor under the terms and conditions specified herein, PROVIDED the Sponsor shall not be required under this Section 3(a) to make any payment to the extent that the amount of such payment, when added to all other amounts paid by the Sponsor pursuant to this Section 3(a), exceeds the aggregate amount of Restricted Payments paid by the Company from March 31, 1995 through the date of such payment. Any such Restricted Payment, if paid in currency or assets other than Dollars, shall be valued at the amount of Dollars that the Sponsor could have obtained therewith if such currency or assets had been converted to Dollars at the rate available or that would have been available to the Sponsor on the date of such Restricted Payment was paid that would have yielded the greatest amount of Dollars. (b) In addition to its obligations under paragraph (a), the Sponsor agrees, up to the Completion Date, to unconditionally and irrevocably guaranty the payment of the Company's payment obligations under the Finance Agreement and the Notes as they become due and payable, 5 -3- PROVIDED that the Sponsor shall have no obligation to pay any part of any such payment obligation pursuant to this paragraph at any time to the extent that the amount due and payable exceeds the lesser of (x) the Cash Flow Deficit at such time MINUS the amount (if any) previously paid by the Sponsor pursuant to this paragraph during the fiscal quarter of the Company in which such date occurs and (y) $9,000,000 MINUS the sum of all amounts previously paid pursuant to this paragraph. For this purpose, the term, "Cash Flow Deficit" shall mean, on any date on which the Debt Service Coverage Ratio is less than 1.4:1, the additional Adjusted Net Income that would have been required during the four most recently completed fiscal quarters of the Company in order for the Debt Service Coverage Ratio on such date to equal 1.4:1. (c) Payments made by the Sponsor that would be payable either under paragraph (a) or paragraph (b) hereof shall be deemed to have been made first pursuant to paragraph (b) hereof, to the extent that the Sponsor at the time of payment was obligated to make such payment thereunder, and SECOND pursuant to paragraph (a) hereof, to the extent not deemed to have been made pursuant to paragraph (b) hereof. Payments made by the Sponsor that would be payable either under this Project Completion Agreement or under any other guaranty by the Sponsor of the Company's obligations to OPIC shall be deemed to have been made first pursuant to such other guaranty, to the extent the Sponsor at the time of payment was obligated to make such payment thereunder, and second pursuant to this Agreement, to the extent not deemed to have been made pursuant to such other guaranty. (d) PROJECT COMPLETION DEFINED. "PROJECT COMPLETION" shall be deemed to mean and to occur on the date (the "COMPLETION DATE") that OPIC notifies the Sponsor that the following conditions have been accomplished to the satisfaction of OPIC as of the date of the Completion Certificate: (i) PHYSICAL COMPLETION TESTS: all buildings, equipment, facilities, and necessary infrastructure for the Project shall have been procured, constructed and installed utilizing first-class standards of workmanship and materials and in accordance with the Project plans and specifications, shall be operational and in good working condition, and shall meet manufacturers' specifications and the terms of applicable construction agreements; (ii) OPERATIONAL COMPLETION TESTS: after satisfaction of the foregoing physical completion test the Company shall have demonstrated its production capabilities by producing 195,000 troy ounces of gold over a period of six consecutive months; (iii) LEGAL CONDITIONS: (a) the Company shall have good freehold title or valid leasehold interests free and clear of all Liens and encumbrances (except for Permitted Liens) to all of the land and all buildings, equipment, and facilities referred to above, and to all other facilities now or then known to be required for the Project; 6 -4- (b) the Company shall have granted Liens in favor of OPIC (x) with respect to all of the assets on which Liens were to have been granted as a condition to the first Disbursement of the Loan as contemplated by Section 4.03(b) of the Finance Agreement and (y) as required by the terms of the Security Documents and Section 6.12 of the Finance Agreement; (c) the Company shall have met all of its material obligations of any kind through the Completion Date (other than obligations that have been waived), including, without limitation, payment of all amounts at any time to become due under contracts for construction, procurement, installation, and improvement of land, buildings, equipment, and facilities for the Project; (d) each Financing Document remains in full force and effect; and (e) no Event of Default (or condition or event that, with the giving of notice, or lapse of time, or both, could constitute an Event of Default) under the Finance Agreement shall then exist; (iv) FINANCIAL TESTS: (A) the ratio of the Company's Indebtedness to its Tangible Net Worth shall not exceed 1.5 to 1; and (b) the Company shall have made at least one principal repayment on the Loan as and when due; (v) ENVIRONMENTAL TESTS: (A) the Company shall have provided OPIC with (x) a final plan, satisfactory to OPIC, including a schedule for implementation, to ensure that operations and waste rock disposal do not produce significant environmental impacts and (y) an erosion and sediment control plan, satisfactory to OPIC, including a schedule for implementation, that when implemented will cause the Company to be in compliance with the Environmental Standards for erosion and sediment control or otherwise includes significant conservation and mitigation measures satisfactory to OPIC; (b) the Company shall have caused SGS Environment: A Division of SGS Laboratory Services (Ghana) Limited to update the Environmental Impact Statement draft dated November, 1995, to confirm that the Company's revised plans for both pH levels and discharge of cyanide at final closure of the Teberebie Mine are consistent with the Environmental Standards; (c) the Company shall have revised the Environmental Action Plan dated April, 1996, to include a solid waste management plan satisfactory to OPIC, including a schedule for implementation; and (d) the Company shall have fully completed all aspects of implementation of the plans referred to in paragraphs (A) and (c) hereof; and 7 -5- (vi) COMPLETION CERTIFICATE DELIVERY: (A) the Sponsor shall have furnished OPIC with a certificate substantially in the form of Exhibit A (the "COMPLETION CERTIFICATE") certifying that each of the requirements set forth in clauses (i) through (v) above has been satisfied as of the date of the Completion Certificate; and (b) following receipt of the Completion Certificate, OPIC shall have determined that each of the requirements set forth in clauses (i) through (v) above has been satisfied and shall have so notified the Sponsor in writing; PROVIDED that: (1) OPIC may require confirmation, at the Sponsor's expense, of any provision of such Completion Certificate, including by requesting delivery to OPIC of an independent consultant's report or an opinion of counsel satisfactory to OPIC; and (2) OPIC shall have the right to make reasonable requests for additional information or documents from the Sponsor to substantiate the accuracy or completeness of the Completion Certificate. Unless within ninety (90) days following receipt by OPIC of the Completion Certificate, OPIC notifies the Sponsor that either OPIC objects to the Completion Certificate or that such Certificate is inaccurate or incomplete and sets forth the basis for such objection or determination (which determination shall not be unreasonable), as the case may be, OPIC shall be deemed to have notified the Sponsor that Project Completion and the Completion Date occurred on the last day of such ninety (90)-day period. (e) CALLS FOR COMPLETION FUNDS. (i) If, from time to time, prior to the Completion Date, in the opinion of OPIC, the Company has insufficient funds to achieve Project Completion or to meet its obligations as they become due and payable, whether at stated maturity, by acceleration or otherwise (including, without limitation, all obligations due under or with respect of the Finance Agreement or the Notes), and any expenses (including reasonable attorneys' fees and expenses) incurred by OPIC in enforcing any rights under this Agreement), OPIC shall have the right, subject to the proviso contained in Section 3(a), to give written notice (each such notice shall be referred to herein as a "PCA CALL") to the Sponsor demanding payment of the amount of such deficiency (the "PCA CALL AMOUNT"). (ii) The Sponsor agrees that it shall make payment, no later than ten (10) Business Days following the date of a PCA Call sent to it, of the full PCA Call Amount demanded from it in Dollars in immediately available funds. 8 -6- (iii) Payment of any PCA Call Amount shall be made as directed by OPIC in the PCA Call, whether to OPIC, or to the Company, or for application to any other obligations of the Company as OPIC may specify in its sole discretion. The Company hereby authorizes OPIC to establish an escrow account on the Company's behalf at a financial institution selected by OPIC for receipt of such funds to be advanced by the Sponsor, and the Sponsor agrees, if so directed by OPIC, to deposit the funds to be advanced by it in such escrow account. The Company hereby irrevocably authorizes and directs OPIC to charge from time to time such escrow account for amounts deemed necessary or desirable by OPIC, in its sole discretion, to be expended to cause the Company to achieve Project Completion or pay any or all debts or liabilities of the Company, including without limitation, principal, interest, or other amounts due under the Finance Agreement or the Notes, which have become due and payable (by stated maturity, acceleration, or otherwise) prior to the Completion Date or to protect OPIC's Liens. The Company hereby grants OPIC an irrevocable power of attorney, coupled with an interest, to execute all checks, drafts, receipts, instruments, instructions, or other documents to establish and operate such escrow account. The Sponsor and the Company agree that OPIC shall not incur any liability in connection with or arising from its exercise of such power of attorney or of the rights assigned to OPIC pursuant to this paragraph. (f) INVESTMENT OF FUNDS. (i) Each advance of funds directed by OPIC to be made to the Company hereunder by the Sponsor shall, at the Sponsor's option, be (i) an equity investment in cash (a "PCA SUBSCRIPTION"), (ii) a subordinated loan (a "PCA SUBORDINATED LOAN"), or (iii) any combination thereof. No later than the tenth (10th) Business Day following the date of a PCA Call, the Sponsor shall give notice to OPIC of which part of the PCA Call Amount shall be advanced as a PCA Subscription and which part as a PCA Subordinated Loan. If the Sponsor fails to specify the form in which such funds are to be provided to meet a PCA Call, such funds shall be provided as a PCA Subordinated Loan. (ii) Any PCA Subscription or PCA Subordinated Loan shall be upon such terms and conditions as shall be acceptable to OPIC and the documents evidencing such PCA Subscription or PCA Subordinated Loan shall be in form and substance satisfactory to OPIC. (iii) If made as a PCA Subordinated Loan, such advance shall be: (A) evidenced by promissory notes of the Company making express reference to this Agreement and to the Subordination Agreement and dated the date of such advance; and (B) if made on behalf of the Sponsor by another Person that is not a party to the Subordination Agreement, accompanied by an agreement of such Person that such PCA Subordinated Loan shall be subordinated in right of payment and in liquidation to the same extent as if such PCA Subordinated Loan were Subordinated Debt subject to the Subordination Agreement and such other Person were a Subordinated Creditor (as defined therein). 9 -7- (iv) The Sponsor and the Company hereby agree to take all actions and execute all documents required by OPIC to implement each PCA Subscription and PCA Subordinated Loan in accordance with this Agreement. (v) It is understood that a PCA Subordinated Loan, insofar as it is subordinated to the Loan on the terms set forth in the Subordination Agreement, constitutes Indebtedness described in Section 7.02(f) of the Finance Agreement and that the terms of this Agreement are not intended to impose any additional subordination requirements in respect of any such Indebtedness that is subject to the Subordination Agreement, beyond what is set forth therein. SECTION 4. NATURE OF OBLIGATIONS. (a) The obligations of the Sponsor under this Agreement are direct, absolute, unconditional, and irrevocable and shall not to any extent or in any way be reduced, limited, terminated, discharged, impaired, or otherwise affected by any of the following: (i) the Company's failure to pay a fee or provide other consideration to the Sponsor in consideration of its entering into this Agreement; (ii) the invalidity, lack of regularity, or unenforceability of any PCA Call or the absence of any action to enforce the same; (iii) the occurrence or continuance of any Event of Default under the Finance Agreement or the Notes or any acceleration or required prepayment of the Indebtedness of the Company under or in respect of the Finance Agreement or the Notes as a result thereof or otherwise; (iv) any lack of validity or enforceability of, or any misrepresentation, irregularity, or other defect in, the Finance Agreement, the Notes, or any other agreement entered into in connection therewith; (v) any failure by OPIC to take any steps to preserve its rights to any Lien or in any Security Document securing the Loan, or any failure by OPIC to perfect or keep perfected its Liens in any collateral relating to the Loan, the Finance Agreement, or the Notes; (vi) any right, claim or defense, waiver, surrender, or compromise that the Sponsor may have under or in respect of this Agreement or otherwise; (vii) any failure to pay Taxes that may have been payable in respect of the issuance or transfer of the Notes or to register the same with any governmental agency or instrumentality or to obtain any governmental order, license, or permit in connection with such issuance or transfer; 10 -8- (viii) any modification or amendment (whether material or otherwise) of, or waiver, or consent, or other action taken with respect to, the Finance Agreement, the Notes, or any other agreement or document delivered pursuant to the terms of the Finance Agreement, including, without limitation, any forbearance, indulgence in, or extension of time for the payment by the Company of any amount payable under or in connection with the Finance Agreement, or any Note, or for the performance of any of the other obligations of the Company thereunder (any of which modifications, amendments, waivers, or consents may be agreed to or granted without the approval or consent of the Sponsor); (ix) any law, regulation, decree, or judgment now or hereafter in effect which may in any manner affect any of the Company's obligations under the Finance Agreement or any Note or any of OPIC's rights thereunder, whether or not the Company has a defense valid against OPIC and whether or not other guarantors of such obligations, if any, contribute to such payments; (x) the voluntary or involuntary liquidation, sale, or other disposition of all or any portion of the Company's assets, or the receivership, insolvency, bankruptcy, reorganization, or similar proceedings affecting the Company or its assets, or the release or discharge of the Company from any of its obligations under the Finance Agreement, or any Note, or the consolidation or merger of the Company; (xi) the recovery of any judgment against the Sponsor or any action to enforce the same, the insolvency or bankruptcy of the Sponsor, or any discharge, stay, injunction, or modification of the obligation to pay a PCA Call; (xii) any change of circumstances, whether or not foreseeable, and whether or not any such change does or might vary the risk of the Sponsor hereunder; or (xiii) any other circumstances, whether similar or dissimilar to the foregoing, that might otherwise constitute a defense available to, or a legal or equitable discharge of, the Sponsor in respect of any of its obligations under this Agreement, the Company, or any guarantor or surety. (b) This Agreement is a guaranty of payment and not of collection. OPIC may require payment by the Sponsor and enforce the obligations of the Sponsor hereunder without first being required to: (i) enforce OPIC's claims against the Company or any other Person, firm, corporation, governmental authority, or other entity; or (ii) resort to any security or other guaranty for the Loan or the PCA Call Amount; or (iii) take any action except (in the case of obligations of the Sponsor pursuant to Section 3(a)) as provided in Section 3(e)(i) prior to receiving payment hereunder. 11 -9- (c) Notwithstanding anything to the contrary in this Agreement, the Sponsor agrees that OPIC may, at any time and from time to time, either before or after the maturity of the Loan, without notice to or further consent of such Sponsor, extend the time of payment of, exchange, or surrender any collateral for, or renew the Loan, and that OPIC may also make any agreement with the Company, or with any other party to or Person liable on the Loan or interested therein, for the extension, renewal, payment, compromise, discharge or release thereof, in whole or in part, or for any modification, waiver, discharge, release, or settlement of the terms thereof or of any agreement between OPIC, the Company, and the Sponsor (including, without limitation, this Agreement), or any other party or Person, without in any way impairing or affecting the obligations and liabilities of such Sponsor under this Agreement or requiring the written agreement or consent of such Sponsor and the Company, as the case may be. SECTION 5. WAIVER. The Sponsor hereby unconditionally waives presentment, demand, diligence, filing of claims with a court in the event of insolvency or bankruptcy of the Company, and any right to require a proceeding first against the Sponsor or the Company, and waives protest, notice (including notice of default of the Company), and all demands whatsoever of any kind to which such Sponsor might otherwise be entitled under applicable law with respect to the PCA Call Amounts. The Sponsor hereby unconditionally agrees that its guaranty hereunder will not be discharged except by complete performance of the obligations contemplated under Section 3. The Sponsor also waives all notices of the existence, creation, or incurring of any new or additional Indebtedness by the Company under the Financing Documents. SECTION 6. REINSTATEMENT OF GUARANTY. The payment obligations of the Sponsor pursuant to this Agreement shall remain in full force and effect or shall be reinstated, as the case may be, if and to the extent that at any time any payment by the Company of any amount due and guaranteed hereunder is rescinded or must be returned, in whole or in part, in case of the bankruptcy, insolvency, or reorganization of the Company or otherwise, as if such payment had never been made by the Company. SECTION 7. PAYMENTS FREE AND CLEAR OF TAXES, ETC. Any and all sums payable by the Sponsor hereunder shall be paid in full, free of any deductions or withholdings for any and all present and future Taxes. If the Sponsor shall be required by law to deduct any Taxes from or in respect of any sum payable to OPIC (i) the sum payable shall be increased as may be necessary so that after making all required deductions OPIC receives an amount equal to the sum it would have received had no such deductions been required, (ii) such Sponsor shall make such deductions, and (iii) such Sponsor shall pay tile full amount deducted to the 12 -10- relevant taxation authority or other authority in accordance with applicable law. If OPIC pays any Taxes, such Sponsor shall, upon demand from OPIC, promptly reimburse OPIC in full for such payments. SECTION 8. REPRESENTATIONS AND WARRANTIES. (a) The Sponsor represents and warrants to OPIC that: (i) As of the date hereof, the authorized capital of the Company consists of (a) 9,000,000 Class A ordinary shares of no par value (the "Class A Shares"), of which 1,860,000 shares are issued and outstanding; and (b) 1,000,000 Class B ordinary shares of no par value (the "Class B Shares"), of which 206,667 shares are issued and outstanding. All such issued and outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable. All of the issued and outstanding Class A Shares are owned beneficially and of record by PGL, and all of the issued and outstanding Class B Shares are owned beneficially and of record by the Government of the Republic of Ghana. Except as set forth in Schedule 3.05 to the Finance Agreement, there are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of the Company. (ii) One hundred percent (100%) of the issued and outstanding shares of PGL is owned beneficially and of record by PGH, and all such issued and outstanding shares of capital stock have been duly authorized and validly issued and are fully paid and non-assessable. Except as set forth in Schedule 3.05 to the Finance Agreement, there are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, requires the issuance of, or otherwise relate to any class of the capital stock of PGL. (iii) All of the issued and outstanding shares of capital stock of PGH are owned beneficially and of record by the Sponsor, and all such issued and outstanding shares of capital stock have been duly authorized and validly issued and are fully paid and non-assessable. Except as set forth in Schedule 3.05 to the Finance Agreement, there are no outstanding subscriptions, options, warrants, calls agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of PGH. (iv) It is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation referred to in the introductory paragraph of this Agreement, and has all requisite power and authority, corporate, partnership or otherwise, to execute, deliver and perform this Agreement in accordance with the terms hereof. 13 -11- (v) All necessary actions to authorize its execution, delivery, and performance of this Agreement have been taken. (vi) This Agreement has been duly executed and delivered by the Sponsor and constitutes its legal, valid, and binding obligation enforceable against it in accordance with the terms hereof, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally or general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). (vii) All governmental approvals that are necessary for the execution and delivery by it of this Agreement and the performance of its obligations hereunder have been duly obtained and are in full force and effect. (viii) Neither it nor any of its properties has any immunity (or right to claim that it has any immunity) from the jurisdiction of any court or from any legal process (whether through service, notice, attachment prior to judgment, attachment in aid of execution, or otherwise). (ix) The execution, delivery, and performance by it of this Agreement do not require the consent or approval of any of its creditors and will not conflict with or constitute a breach or default under or violate any provision of the Charter Documents of the Sponsor or any agreement, law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award applicable to it. (x) Its balance sheet as at December 31, 1995, and the related statement of its income and retained earnings for the fiscal year then ended, certified by independent public accountants, and its unaudited balance sheet as at June 30, 1996, and the related statement of its income and retained earnings for the fiscal year then ended, as certified by an Authorized Officer of the Sponsor copies of all of which have been furnished to OPIC, fairly present the financial condition of the Sponsor as at such date and the results of its operations for the period ended on such date, all in accordance with U.S. GAAP, and since such date, there has been no change in its financial condition or prospects that could have a Material Adverse Effect. (xi) Each representation and warranty made by the Company to OPIC in the Finance Agreement is true and correct. (xii) No Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default under the Finance Agreement or under any agreement or instrument evidencing any Indebtedness of the Sponsor that gives the holder thereof the right to accelerate payment of such Indebtedness prior to its scheduled maturity, has occurred and is continuing, and no such event will occur upon its execution, delivery, or performance of this Agreement. 14 -12- (xiii) No action, suit, other legal proceeding, arbitral proceeding, or investigation is pending by or before any domestic or foreign court or governmental authority or in any arbitral or other forum, or, to the best knowledge of the Sponsor, is threatened, against it or any of its properties or rights that (i) relates to any of the transactions contemplated by this Agreement or any other Financing Document, or (ii) has, or if adversely determined could have, a Material Adverse Effect. (b) The Sponsor further represents and warrants to OPIC, as follows, which representations and warranties shall survive the execution of the Finance Agreement and any expiration or termination of the Commitment: (i) The Sponsor and its respective officers, directors, employees, and agents have complied in all material respects with all applicable Corrupt Practices Laws in obtaining any consents, licenses, approvals, authorizations, rights or privileges in respect of the Project. (ii) The Company is otherwise conducting its business in compliance in all material respects with all applicable Corrupt Practices Laws. (iii) The internal management and accounting practices and controls of the Company and the Sponsor are adequate to ensure compliance with applicable Corrupt Practices Laws. SECTION 9. COVENANTS OF THE SPONSOR. Unless OPIC otherwise agrees in writing the Sponsor covenants and agrees, until the Completion Date, as follows: (a) The Sponsor shall promptly notify OPIC of each event that constitutes, or (in the case of events of which the Sponsor is aware) which with the lapse of time or the giving of notice or both could constitute, an Event of Default under the Finance Agreement, and of the occurrence of any other condition or event that could have a Material Adverse Effect. (b) The Sponsor shall, upon request of OPIC, give, or cause to be given to, any representatives of OPIC access during normal business hours, and permit them to examine, copy, and make extracts from, any and all records and documents in the possession or subject to the control of the Sponsor relating to its operations and financial affairs (to the extent related to the Company or to the credit standing of the Sponsor), and upon reasonable prior notice shall permit such representatives to inspect any of its facilities or properties during normal business hours. (c) The Sponsor shall furnish to OPIC on or before the 60th day after the close of each quarter of each of its fiscal years, its quarterly report on Form 10-Q or, if no such report shall be available, its consolidated and consolidating balance sheets as at the close of such quarter and its income statement and statement of changes in financial position for such quarter, prepared in accordance with U.S. GAAP, certified by its chief financial officer as being complete and correct in 15 -13- all material respects and fairly presenting the financial condition of the Sponsor as at the close of such quarter and the results of its operations for such quarter, PROVIDED that any such quarterly balance sheets, income statements or statements of changes in financial position will be subject to normal year-end audit adjustments and, to the extent that they will not include footnotes, need not be in accordance with U.S. GAAP. (d) The Sponsor shall furnish to OPIC on or before the 120th day after the end of each of its fiscal years, its consolidated and consolidating balance sheets as at the close of such fiscal year and its income statement and statement of changes in financial position for such fiscal year, prepared in accordance with U.S. GAAP, certified by a firm of independent accountants (selected by it and acceptable to OPIC) as fairly presenting the financial condition of the Sponsor as at the close of such fiscal year and the results of its operations for such fiscal year. (e) It shall maintain at all times a Tangible Net Worth at least equal to $104,000,000. (f) The Sponsor shall vote or cause to be voted all of the shares of the Company presently held by it, as well as any other shares that it may directly or indirectly acquire or control in the future, in such manner, and take or cause to be taken any actions, corporate or otherwise, as shall be necessary to achieve the prompt and effective implementation and performance of all of the provisions of this Agreement. (g) The Sponsor shall furnish to OPIC from time to time such other statements and information as OPIC may reasonably request. SECTION 10. SUBROGATION AND SUBORDINATION. The Sponsor shall be subrogated to all rights of OPIC in the Loan or any Note to the extent of any amounts paid by it under Section 3(a)(ii) or 3(b); PROVIDED that until all amounts due or that may become due under or in respect of the Finance Agreement or the Notes have been paid in full, the Sponsor shall not enforce such interest or accept any payment by the Company thereunder. In the event that the Sponsor receives any payment or distribution from the Company with respect to such interest, such Sponsor shall hold such payment or distribution in trust (as property of OPIC) and immediately pay over such amount or deliver to OPIC (with any necessary endorsement), such payment for application against the Loan. SECTION 11. PAYMENTS. Any payments hereunder directed by OPIC to be paid (a) to OPIC, shall be paid to OPIC at the address set forth in Section 2.10(b) of the Finance Agreement, and for application in accordance with Section 2.10(d) of the Finance Agreement, or (b) to any other Person, shall be paid as OPIC may direct in the PCA Call. 16 -14- SECTION 12. REMEDIES; NO WAIVER. (a) OPIC may proceed to protect and enforce its rights hereunder in any court or other tribunal by an action at law, suit in equity, or other appropriate proceedings, whether for damages, for the specific performance of any term hereof, or otherwise, or in aid of the exercise of any power granted hereby or by law. The Sponsor hereby agrees, jointly and severally, to pay to OPIC on demand such amount in Dollars as shall be sufficient to cover OPIC's costs and expenses of any action or such remedies, including, without limitation, reasonable attorneys' fees, expenses, and disbursements. (b) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers, or remedies. No single or partial exercise of any such right shall preclude any other or further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing. (c) The rights or remedies provided for herein are cumulative and are not exclusive of any other rights, powers, or remedies provided by law. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion of any other appropriate right or remedy. SECTION 13. TIME OF ESSENCE. The parties hereto agree that time shall be of the essence of this Agreement. SECTION 14. JURISDICTION AND CONSENT TO SUIT. (a) WITHOUT PREJUDICE TO THE RIGHTS OF OPIC OR THE COMPANY TO BRING SUIT IN ANY APPROPRIATE DOMESTIC OR FOREIGN JURISDICTION, ANY PROCEEDING TO ENFORCE THIS AGREEMENT MAY BE BROUGHT BY OPIC IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE DISTRICT OF COLUMBIA OF THE UNITED STATES OF AMERICA OR IN ANY OTHER JURISDICTION WHERE THE SPONSOR OR ANY OF ITS PROPERTY MAY BE FOUND. THE SPONSOR HEREBY IRREVOCABLY WAIVES ANY PRESENT OR FUTURE OBJECTION TO ANY SUCH VENUE, AND IRREVOCABLY CONSENTS AND SUBMITS UNCONDITIONALLY TO THE NON-EXCLUSIVE JURISDICTION FOR ITSELF AND IN RESPECT OF ANY OF ITS PROPERTY OF ANY SUCH COURT. THE SPONSOR HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION, SUIT, OR PROCEEDING BROUGHT THEREIN HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE SPONSOR FURTHER AGREES THAT FINAL JUDGMENT AGAINST IT IN ANY SUCH ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS 17 -15- AGREEMENT SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE UNITED STATES OF AMERICA BY SUIT ON THE JUDGMENT, A CERTIFIED OR EXEMPLIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ITS OBLIGATION. (b) PRIOR TO THE FIRST CLOSING DATE, THE SPONSOR SHALL IRREVOCABLY DESIGNATE AND APPOINT CT CORPORATION SYSTEM, 1025 VERMONT AVENUE, N.W., WASHINGTON, D.C. OR ANOTHER AGENT SATISFACTORY TO OPIC FOR SERVICE OF PROCESS IN THE DISTRICT OF COLUMBIA AS ITS AUTHORIZED AGENT TO RECEIVE AND FORWARD ON ITS BEHALF SERVICE OF PROCESS IN ANY SUCH PROCEEDING, AND SHALL PROVIDE OPIC WITH EVIDENCE OF THE PREPAYMENT IN FULL OF THE FEES OF SUCH AGENT. THE SPONSOR AGREES THAT SERVICE OF PROCESS UPON SAID AGENT SHALL BE DEEMED AND HELD IN EVERY RESPECT TO BE EFFECTIVE PERSONAL SERVICE UPON IT. THE SPONSOR SHALL MAINTAIN SUCH APPOINTMENT (OR THAT OF A SUCCESSOR SATISFACTORY TO OPIC) CONTINUOUSLY IN EFFECT AT ALL TIMES WHILE THE COMPANY IS OBLIGATED UNDER THE FINANCE AGREEMENT OR ANY NOTE. NOTHING HEREIN SHALL AFFECT OPIC'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. SECTION 15. SUCCESSORS AND ASSIGNS. This Agreement shall bind the successors and assigns of the Company and the Sponsor and shall inure to the benefit of OPIC, its successors, and assigns. Neither the Company nor the Sponsor may assign any of its obligations hereunder without the prior written consent of OPIC or its successors or assigns. SECTION 16. BENEFITS OF AGREEMENT. Nothing in this Agreement, express or implied, shall give to any Person, other than the parties hereto and their successors and permitted assigns hereunder and under the Finance Agreement, any benefit or any legal or equitable right or remedy under this Agreement. SECTION 17. NOTICES. Each notice, demand, report, or communication relating to this Agreement shall be in writing in the English language, shall be hand-delivered or sent by mail (postage prepaid), telegram, or facsimile transmission (with a copy by mail to follow, which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses, or to such other address or number as each party shall have last specified by notice to the other parties. 18 -16- To the Sponsor: The Pioneer Group, Inc. 60 State Street Boston, Massachusetts 02109 United States of America (Attention: Donald H. Hunter) (Telecopy: 617-422-4296) with copies to Hale and Dorr The Willard Office Building 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (Attention: David Sylvester, Esq.) (Facsimile: 202-942-8484) To Teberebie Goldfields Limited: Teberebie Goldfields Limited P.O. Box 6 Tarkwa Ghana (Attention: Lucien Girard) (Telecopy: 011-233-362-273) 19 -17- with copies to Hale and Dorr The Willard Office Building 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (Attention: David Sylvester, Esq.) (Facsimile: 202-942-8484) To OPIC: Overseas Private Investment Corporation 1100 New York Avenue, N.W. Washington, DC 20527 United States of America (Attention: Vice President for Finance (Telecopy: 202-408-9866) Re: Teberebie project)) SECTION 18. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. SECTION 19. JURY TRIAL WAIVER. THE SPONSOR AND OPIC EACH HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY OTHER FINANCING DOCUMENT, OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR THE TRANSACTIONS RELATED THERETO. 20 -18- SECTION 20. SEVERABILITY. If any provisions of this Agreement shall be invalid, illegal, or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent they may effectively do so that the validity, legality, and enforceability of such provision in other jurisdictions, and the validity, legality, and enforceability of the other provisions in such jurisdiction, shall not in any way, be affected or impaired thereby. SECTION 21. AMENDMENTS. The provisions hereof may be waived, supplemented, or amended only by an instrument in writing signed by a duly authorized representative of each of the parties hereto. SECTION 22. WAIVER OF LITIGATION PAYMENTS. In the event that any action or lawsuit is initiated by or on behalf of OPIC against the Company, the Sponsor, or any other party to any Financing Document, the Sponsor, to the fullest extent permissible under applicable law, irrevocably waives its right to, and agrees not to request, plead, or claim that an OPIC Plaintiff post, pay, or offer, any Litigation Payment, and the Sponsor further waives any objection it may now or hereafter have to an OPIC Plaintiff's claim that such OPIC Plaintiff should be exempt or immune from posting, making, or offering any such Litigation Payment. SECTION 23. INDEMNITY. The Sponsor shall indemnify and hold harmless OPIC and each of its directors, officers and employees (each, an "indemnified person") in connection with any losses, claims, damages, liabilities (or actions in respect thereof) or other expenses (including without limitation attorneys' fees and expenses as they are incurred in connection with investigating, preparing, or defending any such action or claim) (any of the foregoing being a "Loss" and collectively "Losses") to which such indemnified person may become subject arising out of or relating to this Agreement, the Financing Documents, or any of them or any of the transactions contemplated hereby or thereby; PROVIDED that such indemnity shall not apply to the extent that there is a final determination that the Loss resulted from (a) the gross negligence or willful misconduct of the indemnified person, (b) a failure by OPIC to fulfill its guarantee obligations with respect to the Loan or (c) a failure by the Company to pay its financial obligations under the Financing Documents (except to the extent arising from fraud or misrepresentation). This indemnity obligation shall survive the execution of the Finance Agreement and the expiration, termination or other modification of this Agreement or the Commitment. 21 SECTION 24. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which when so executed and delivered shall be deemed an original, and all of which together shall constitute one and the same instrument. SECTION 25. TERMINATION. Except as otherwise expressly set forth herein, the obligations of the Sponsor hereunder shall terminate upon the earlier of the Completion Date, or the date on which all principal, interest, fees, and expenses due pursuant to the Finance Agreement or under the Notes have been indefeasibly paid in full and the Company has no further right to request Disbursements of the Loan or to cause Notes to be issued. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered as of the day and year first above written. TEBEREBIE GOLDFIELDS LIMITED By: /s/ Lucien Girard ----------------------------------- Name: Lucien Girard Title: Managing Director THE PIONEER GROUP, INC. By: /s/ William H. Keough ---------------------------------- Name: William H. Keough Title: Senior Vice President, Treasurer, and Chief Financial Officer OVERSEAS PRIVATE INVESTMENT CORPORATION By: /s/ --------------------------------- Name: Title: 22 EXHIBIT A [FORM OF COMPLETION CERTIFICATE] DATE: __________________ TO: Overseas Private Investment Corporation ("OPIC") 1100 New York Avenue, N.W. Washington, D.C. 20527 Attn.: Vice President for Finance This Completion Certificate is submitted to OPIC pursuant to Section 3(d)(vi) of the Project Completion Agreement, dated as of __________, 1996 (the "Project Completion Agreement"), among The Pioneer Group Inc., a corporation organized and existing under the laws of Delaware ("the Sponsor"), Teberebie Goldfields Limited, a corporation organized and existing under the laws of the Republic of Ghana, and OPIC. All capitalized terms used herein and not otherwise defined shall have their respective meanings set forth in the Project Completion Agreement. The undersigned hereby certifies that [he][she] is an Authorized Officer of the Sponsor, and further certifies that as of the date hereof each of the requirements set forth below has been satisfied as of the date hereof: 1. As required by Section 3(d)(i) (PHYSICAL COMPLETION TESTS): all buildings, equipment, facilities, and necessary infrastructure for the Project have been procured, constructed, and installed utilizing first-class standards of workmanship and materials and in accordance with the Project plans and specifications, are operational and in good working condition, and meet manufacturers' specifications and the terms of applicable construction agreements; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 1 [attach relevant supporting evidence] [NOTE: Relevant supporting evidence might include an independent consultant's report, accountants' certificate, opinions of counsel, Authorized Officer's Certificate from the Sponsor(s) and/or the Company, audited Financial Statements, etc.]. 2. As required by Section 3(d)(ii) (OPERATIONAL COMPLETION TESTS), the Company has demonstrated its production capabilities by producing 195,000 troy ounces of gold over a period of six consecutive months; 23 -2- Evidence of the foregoing is attached hereto and made a part hereof as Schedule 2A [attach relevant supporting evidence]. 3. As required by Section 3(d)(iii)(A) (LEGAL CONDITIONS), the Company has good freehold title or valid leasehold interests free and clear of all Liens and encumbrances (except for Permitted Liens) to all of the land and all buildings, equipment, and facilities referred to above, and to all other facilities now known to be required for the Project; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 3A [attach relevant supporting evidence]. As required by Section 3(d)(iii)(B) (LEGAL CONDITIONS), the Company has granted Liens in favor of OPIC (x) with respect to all of the assets on which Liens were to have been granted as a condition to the first Disbursement of the Loan as contemplated by Section 4.03(b) of the Finance Agreement and (y) as required in accordance with the terms of the Security Documents and Section 6.12 of the Finance Agreement; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 3B [attach relevant supporting evidence]. As required by Section 3(d)(iii)(c) (LEGAL CONDITIONS), the Company has met all of its material obligations of any kind through the Completion Date (other than obligations that have been waived), including, without limitation, payment of all amounts at any time to become due under contracts for construction, procurement, installation, and improvement of land, buildings, equipment, and facilities for the Project; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 3C [attach relevant supporting evidence]. As required by Section 3(d)(iii) (D) (LEGAL CONDITIONS), each Financing Document remains in full force and effect; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 3D [attach relevant supporting evidence]. As required by Section 3(d)(iii) (E) (LEGAL CONDITIONS), no Event of Default (or condition or event that, with the giving of notice, or lapse of time, or both, could constitute an Event of Default) under the Finance Agreement exists as of the date hereof; and Evidence of the foregoing is attached hereto and made a part hereof as Schedule 3E [attach relevant supporting evidence]. 24 -3- 4. As required by Section 3(d)(iv)(A)(FINANCIAL TESTS), the ratio of the Company's Indebtedness to its Tangible Net Worth does not exceed 1.5 to 1; and Evidence of the foregoing is attached hereto and made a part hereof as Schedule 4A [attach relevant supporting evidence]. As required by Section 3(d)(iv)(B)(FINANCIAL TESTS), the Company has made at least one principal repayment on the Loan as and when due from cash flow generated from the Project. Evidence of the foregoing is attached hereto and made a part hereof as Schedule 4B [attach relevant supporting evidence]. 5. As required by Section 3(d)(v)(A)(ENVIRONMENTAL TESTS), the Company has provided OPIC with (x) a final plan, satisfactory to OPIC, including a schedule for implementation, to ensure that operations and waste rock disposal do not produce significant environmental impacts and (y) an erosion and sediment control plan, satisfactory to OPIC, including a schedule for implementation, that when implemented will cause the Company to be in compliance with the Environmental Standards for erosion and sediment control or otherwise includes significant conservation and mitigation measures satisfactory to OPIC; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 5A [attach relevant supporting evidence]. As required by Section 3(d)(v)(B)(ENVIRONMENTAL TESTS), the Company has caused SGS Environment: A Division of SGS Laboratory Services (Ghana) Limited to update the Environmental Impact Statement draft dated November, 1995, to confirm that the Company's revised plans for both pH levels and discharge of cyanide at final closure of the Teberebie Mine are consistent with the Environmental Standards; Evidence of the foregoing is attached hereto and made a part hereof as Schedule 5B [attach relevant supporting evidence]. As required by Section 3(d)(v)(C)(ENVIRONMENTAL TESTS), the Company has revised the Environmental Action Plan dated April, 1996, to include a solid waste management plan satisfactory to OPIC, including a schedule for implementation; and Evidence of the foregoing is attached hereto and made a part hereof as Schedule 5C [attach relevant supporting evidence]. As required by Section 3(d)(v)(D)(ENVIRONMENTAL TESTS), the Company has fully completed all aspects of implementation of the plans referred to in paragraphs (A) and (C) of Section 3(d)(v). 25 -4- Evidence of the foregoing is attached hereto and made a part hereof as Schedule 5D [attach relevant supporting evidence]. The undersigned further certifies that the documents and materials attached hereto as Schedules are true, correct, and complete originals or copies. The undersigned understands that Section 237(n) of the Foreign Assistance Act of 1961, as amended, provides for imprisonment, as well as fines, for knowingly submitting false statements or reports or willfully overvaluing any land, property, or security for the purpose of influencing in any way the actions of OPIC with respect to an OPIC-financed project. IN WITNESS WHEREOF, [each of] the undersigned has hereunto set [his][her] hand on this __ day of ____________,199__. __________________________________ [PRINTED NAME OF AUTHORIZED OFFICER] [TITLE OF AUTHORIZED OFFICER] The Pioneer Group, Inc. EX-10.71 11 OVERSEAS PRIVATE INVESTMENT CORP CONTRACT OF INS 1 EXHIBIT 10.71 Form 234 KGT 12-85 (Second Revised) NS OPIC Contract of Insurance No. E578 OVERSEAS PRIVATE INVESTMENT CORPORATION CONTRACT OF INSURANCE Against Inconvertibility Expropriation Political Violence as defined below, between the Overseas Private Investment Corporation ("OPIC") and Pioneer Omega, Inc. c/o The Pioneer Group, Inc. 60 State Street Boston, Massachusetts 02109 a corporation organized and existing under the laws of the State of Delaware, investing through one or more of its wholly- owned U.S. subsidiaries (the "Investor"). 2 TABLE OF CONTENTS Title Page ----- ---- Article I - Subject of Insurance and Exchange of Promises 1.01 Subject .......................................................I-1 1.02 Promises ......................................................I-2 1.03 Maximum Aggregate Compensation ................................I-2 1.04 Full Faith and Credit .........................................I-2 1.05 Term ..........................................................I-2 1.06 Premiums and Active Amount Elections ..........................I-2 1.07 Administrative Fee ............................................I-3 Article II - Inconvertibility - Scope of Coverage* 2.01 Inconvertibility of Local Currency ...........................II-1 2.02 Exclusions ...................................................II-1 Article III- Inconvertibility- Amount of Compensation* 3.01 Rate of Compensation for Inconvertibility ...................III-1 3.02 Limitation ..................................................III-1 Article IV - Expropriation - Scope of Coverage* 4.01 Total Expropriation ..........................................IV-1 4.02 Expropriation of Funds .......................................IV-1 4.03 Provocation Exclusion ........................................IV-1 Article V - Expropriation - Amount of Compensation* 5.01 Total Expropriation ...........................................V-1 5.02 Expropriation of Funds ........................................V-1 5.03 Adjustments ...................................................V-l 5.04 Limitations ...................................................V-2 Article VI - Political Violence - Scope of Coverage* 6.01 Loss Due to Political Violence ...............................VI-1 6.02 Exclusions ...................................................VI-1 - ----------- * This Table of Contents applies to all coverages offered by OPIC whether or not all of those coverages are provided in this contract. 3 Title Page ----- ---- Article VII - Political Violence - Amount of Compensation* 7.01 Basis of Compensation .......................................VII-1 7.02 Limitations .................................................VII-1 7.03 Investor's Share ............................................VII-2 7.04 Book Value of Insured Investment ............................VII-2 7.05 Appraisal ...................................................VII-3 7.06 Estimated Compensation ......................................VII-3 Article VIII - Procedures 8.01 Application for Compensation ...............................VIII-1 8.02 Assignment to OPIC .........................................VIII-1 8.03 Security ...................................................VIII-2 8.04 Excess Salvage Value .......................................VIII-2 8.05 Arbitration ................................................VIII-2 8.06 Election of Active Amounts and Coverage Ceilings ...........VIII-3 8.07 Termination ................................................VIII-3 8.08 Legal and Miscellaneous ....................................VIII-3 8.09 Notices ....................................................VIII-3 8.10 Refund of Premiums .........................................VIII-3 Article IX - Investor's Duties 9.01 Duties .......................................................IX-1 9.02 Default ......................................................IX-3 9.03 Non-Waiver ...................................................IX-3 9.04 Cure .........................................................IX-3 Article X - Amendments ...................................................X-1 -ii- 4 I-1 Article I - Subject of Insurance and Exchange of Promises. ---------------------------------------------------------- 1.01 SUBJECT. 1. INVESTMENT. The Investor promises that the Investor contributed or will contribute (a) $3,921,569 in United States dollars through its wholly-owned U.S. subsidiary Luscinia, Inc.; and (b) $6,078,431 in United States dollars through its wholly-owned U.S. subsidiary Theta Enterprises, Inc., to Open Joint Stock Company Specialized Closed Check Investment Privatization Fund "First Investment Voucher Fund" Trubnikovsky Pereulok 21/2 Moscow, Russia an open joint stock company organized under the laws of Russia (the "foreign enterprise") for which the Investor has acquired or will acquire (c) with respect to the investment component described in (a) above, 10,980,000 common registered shares, each such share consisting of 10 shares representing a 20 percent ownership interest in the foreign enterprise; and (d) with respect to the investment component described in (b) above, 17,020,000 common registered shares, each such share consisting of l0 shares, representing a 31 percent ownership interest in the foreign enterprise (together, "the investment"). Ninety percent of each of these interests acquired by the Investor is insured under this contract (the "insured investment"). 2. PROJECT. The investment will be applied to a voucher investment fund in Moscow, Russia (the "project"). 5 I-2 3. "Foreign governing" authority means the governmental authority(ies) in effective control in all or part of Russia. 1.02 PROMISES. OPIC promises that if acts occur during the term of this contact which satisfy the requirements for coverage in Article II, IV or VI, OPIC will pay the Investor the amount of compensation provided in Article III, V or VII, in accordance with the procedures in Article VIII. The Investor promises to comply with the duties in Article IX. If the Investor violates any of those duties, the Investor may lose rights, including the right to compensation. Amendments to Articles I through IX may be contained in Article X. 1.03 MAXIMUM AGGREGATE COMPENSATION. OPIC will not pay compensation under this contract in an aggregate amount that exceeds $54,000,000. 1.04 FULL FAITH AND CREDIT. The full faith and credit of the United States of America is pledged to secure the full payment by OPIC of its obligations under this contract. 1.05 TERM. This contract shall enter into force on the date it has been signed by OPIC and the Investor and shall terminate 20 years afterward unless terminated earlier (sec.8.07; sec.9.02). 1.06 PREMIUMS AND ACTIVE AMOUNT ELECTIONS. The Investor shall elect amounts of coverage (sec.8.06) and pay premiums on or before each annual anniversary of the effective date of the contract. The coverages and premiums for the first period shall be as follows: 6 I-3
Inconvertibility Expropriation Political Violence ---------------- ------------- ------------------ Coverage Ceiling $4,000,000 $54,000,000 $15,000,000 Active Amount $4,000,000 $18,200,000 $15,000,000 Premium Rate is x 0.40000% x 0.74000% x 0.63000% ----------- ------------ ------------ Total premium is: $16,000.00 + $134,680.00 + $94,500.00 = $245,180.00 ===========
1.07 ADMINISTRATIVE FEE. The Investor will pay an annual fee for contract administration of 0.25% of the Investment amount (sec.1.01.1) on or before the contract effective date and on or before each annual anniversary of the contract effective date, but only if the administrative fee exceeds the premium due for the contract for that period. If the administrative fee exceeds the premium due for that period, the premium will be waived. 7 II-1 Article II - Inconvertibility - Scope of Coverage. -------------------------------------------------- 2.01 INCONVERTIBILITY OF LOCAL CURRENCY. Local currency shall be deemed inconvertible and compensation shall be payable, subject to the exclusions (sec.2.02) and limitation (sec.3.02), if neither the Investor nor the foreign enterprise is able legally (a) to convert earnings from or returns of the insured investment into United States dollars through any channel during the 180 days immediately prior to a claim to OPIC, except at an exchange rate that is less favorable than the then-prevailing exchange rate described under sec.3.01.2, or (b) to transfer such converted earnings to the United States during such period. 2.02 EXCLUSIONS. No compensation for inconvertibility shall be payable if (a) PRE-EXISTING RESTRICTIONS. (1) An investor in comparable circumstances would have been unable legally (a) to convert local currency into United States dollars on the date of this contract or (b) to transfer such dollars to the United States on the date of this contract; and (2) The Investor knew or should have known about the restriction; or (b) INVESTOR DILIGENCE. The Investor has not made all reasonable efforts to convert the local currency into United States dollars or to transfer such dollars to the United States through all direct and indirect legal mechanisms reasonably available; or (c) RECONVERSIONS. The local currency represents funds which were previously converted into another currency; or (d) PROVOCATION. The preponderant cause is unreasonable action attributable to the Investor, including corrupt practices. (e) USE RESTRICTED BY EXPROPRIATION. The use of such local currency is restricted by an expropriatory action (sec.4.02). 8 III-1 Article III - Inconvertibility - Amount of Compensation. -------------------------------------------------------- 3.01 RATE OF COMPENSATION FOR INCONVERTIBILITY. 1. DATE. If the requirements of inconvertibility are satisfied (Article II), subject to the limitation (sec.3.02), OPIC shall pay compensation (a) against prior delivery of the inconvertible local currency, or (b) if the Investor is unable legally to deliver the local currency or if OPIC so requests, against prior assignment of the Investor's right to receive the payment that is the subject of the claim. If the Investor delivers local currency or an assignment of rights denominated in local currency, compensation shall be the United States dollar equivalent of the local currency at the exchange rate in effect 0 days before OPIC receives the completed application for compensation. If the Investor delivers an assignment of rights denominated in United States dollars, compensation shall be the United States dollar amount of the rights so assigned. 2. EXCHANGE RATE. (a) The exchange rate shall be the official exchange rate applicable to the type of remittance involved. (b) If, however, (1) United States dollars were not generally available at the applicable official exchange rate; and (2) exchanges of local currency for United States dollars were effected legally and customarily through another channel; then the exchange rate shall be the effective rate obtained through that channel. (c) In either case, the exchange rate shall be net of all deductions for governmentally imposed charges, such as taxes and commissions. 3.02 LIMITATION. Compensation shall not exceed the Active Amount (sec.8.06) in effect 180 days before OPIC receives tim application for compensation. 9 IV-1 Article IV - Expropriation - Scope of Coverage. ----------------------------------------------- 4.01 TOTAL EXPROPRIATION. Compensation is payable for total expropriation (sec.5.01), subject to the exclusions (sec.4.03) and limitations (sec.5.04), if an act or series of acts satisfies all of the following requirements: (a) the acts are attributable to a foreign governing authority which is in DE FACTO control of the part of the country in which the project is located; (b) the acts are violations of international law (without regard to the availability of local remedies) or material breaches of local law; (c) the acts directly deprive the Investor of fundamental rights in the insured investment (Rights are "fundamental" if without them the Investor is substantially deprived of the benefits of the investment.); and (d) the violations of law are not remedied (sec.9.01.9) and the expropriatory effect continues for six months. 4.02 EXPROPRIATION OF FUNDS. Compensation is payable for an expropriation of funds that constitute a return of the insured investment or earnings on the insured investment (sec.5.02) if an act or series of acts (a) satisfies the governmental action, illegality and duration requirements (sec.4.01(a), (b) and (d)); and (b) directly results in preventing the Investor from (1) repatriating the funds; and (2) effectively controlling the funds in the country in which the project is located. 4.03 EXCLUSIONS. Nocompensation for expropriation shall be payable it (a) PROVOCATION. The preponderant cause is unreasonable action attributable to the Investor, including corrupt practices. (b) GOVERNMENT ACTION. The action is taken by the foreign governing authority in its capacity or through its powers as a purchaser, supplier, creditor, shareholder, director or manager of the foreign enterprise. 10 V-1 Article V - Expropriation - Amount of Compensation. --------------------------------------------------- 5.01 TOTAL EXPROPRIATION. For total expropriation (sec.4.01), OPIC shall pay compensation in United States dollars in the amount of the book value of the insured investment, subject to adjustments (sec.5.03) and limitations (sec.5.04). Compensation is computed as of the date the expropriatory effect commences (sec.4.01(c)) and is based on financial statements maintained in accordance with sec.9.01.6 for the foreign enterprise. However, OPIC may (1) conform the financial statements to principles of accounting generally accepted in the United States; and (2) make adjustments ((sec.)5.03). OPIC shall be bound by the Investor's choice among generally accepted accounting principles, if the choice is consistent with the Investor's own accounting, unless such choice results in a substantial overstatement of the fair market value of the insured investment or the foreign enterprise as an independent entity. 5.02 EXPROPRIATION OF FUNDS. For expropriation of funds (sec.4.02), OPIC shall pay compensation in the amount of the United States dollar equivalent of the expropriated funds at the exchange rate determined in accordance with sec.3.01.2, computed as of the date the expropriation begins. Compensation for expropriation of funds shall be subject to the adjustments and limitations (sec.5.03 and sec.5.04). 5.03 ADJUSTMENTS. 1. INVESTMENTS OF PROPERTY. Non-cash items contributed as part of the investment shall be adjusted if necessary to reflect the fair market value of the items furnished at the time of contribution to the project, plus freight, installation and other reasonable direct costs incurred in furnishing the items to the project. 2. NON-INSURED CONTRIBUTION. Any direct or indirect contribution (and retained earnings thereon) by the Investor after the insured investment is made shall be deducted from the book value of the foreign enterprise. 3. SPECIAL ACCOUNTING RULES. Dealings among related parties shall be adjusted if necessary to reflect transactions as they would have occurred had they been at arm's length, and forgiveness of obligations shall be disregarded. Each entity shall be accounted for as if it were a separate person for income tax purposes, and the effect of tax shifting arrangements shall be disregarded. Obsolescence or 11 V-2 permanent reduction in recoverable values shall be recognized by adjusting the book value of assets to realizable value. OPIC may adjust financial statements to reflect the effect of events that occur before the expropriatory effect commences, such as events of loss which are later confirmed. 4. OTHER COMPENSATION AND RETAINED PROPERTY. OPIC may reduce compensation by the amount of (a) compensation received from other sources on account of the loss (excluding compensation payable under other insurance policies, except to the extent necessary to prevent the Investor from recovering more than the amount of the loss as recognized under any of the policies under which compensation is due, without regard to policy limits); and (b) the book value of commercially viable property which remains subject to the Investor's effective disposition and control after the expropriatory effect commences (unless OPIC requires the Investor to assign the property (sec.8.02)); and (c) any obligation the Investor is relieved of by the expropriation. The reduction shall be proportionate to the extent that these items are attributable to the insured investment. 5. START-UP EXPENSES. If the book value of the insured investment of a new foreign enterprise in the development stage is less than the insured amount originally contributed, the accumulated loss will be disregarded if (a) the foreign enterprise is newly formed for the principal purpose of undertaking the project, (b) the foreign enterprise is a going concern as of the date the expropriatory effect commences, (c) that date is within three years of the date this contract is issued, and (d) it is clear that no adjustment to book value is necessary by reason obsolescence or permanent reduction in recoverable values of productive facilities or assets. 5.04 LIMITATIONS. Compensation shall not exceed any of the following limitations: (a) ACTIVE AMOUNT. The Active Amount (sec.8.06) on the date the expropriatory effect commences; 12 V-3 (b) INSOLVENCY. If the liabilities of the foreign enterprise exceed its assets as of the date the expropriatory effect commences, the amount that the Investor would have been entitled to receive in insolvency proceedings with respect to the insured investment if assets had been liquidated at book value on that date; (c) SELF-INSURANCE. The maximum amount which could be received by the Investor from OPIC without breaching sec.9.01.3. 13 VI-1 Article VI - Political Violence - Scope of Coverage. ---------------------------------------------------- 6.01 LOSS DUE TO POLITICAL VIOLENCE. Compensation is payable, subject to the exclusions (sec.6.02) and limitations (sec.7.02), if political violence is the direct and immediate cause of the permanent loss (including loss of value by damage or destruction) of tangible property of the foreign enterprise used for the project. "Political violence" means a violent act undertaken with the primary intent of achieving a political objective, such as declared or undeclared war, hostile action by national or international armed forces, civil war, revolution, insurrection, civil strife, terrorism or sabotage. However. acts undertaken primarily to achieve labor or student objectives are not covered. 6.02 EXCLUSIONS. No compensation for political violence shall be payable (a) EXCLUDED PROPERTY. For loss of precious metals, gems, works of art, money or documents; (b) MINIMUM LOSS. If the amount of compensation payable would be less than $5,000; (c) REASONABLE PROTECTIVE MEASURES. If the loss results from the failure to take reasonable measures to protect or preserve the property; or (d) PROVOCATION. If the preponderant cause of the loss is unreasonable action attributable to the Investor, including corrupt practices. 14 VII-1 Article VII - Political Violence - Amount of Compensation. ---------------------------------------------------------- 7.01 BASIS OF COMPENSATION. If the requirements of Article VI are satisfied, and subject to the limitations (sec.7.02), OPIC shall pay compensation for a loss in United States dollars in the amount of (a) ADJUSTED COST. Adjusted cost is the Investor's share (sec.7.03) of the lowest of (1) the original cost; (2) fair market value; or (3) the reasonable cost of repair; less anything of value received by the Investor on account of the property lost and less the Investor's share of any such receipts by the foreign enterprise; or (b) REPLACEMENT COST. If the Investor so elects, OPIC will pay the reasonable cost to repair any item of lost property or to replace it with equivalent new property, less anything of value received by the Investor or the foreign enterprise on account of the property lost. Such compensation shall not exceed 200% of the original cost of the item. To receive such compensation, the Investor must repair or replace the lost property to the project within three years of the loss. OPIC shall not reduce the compensation payable under subsections (a) or (b) above by the amount of compensation payable under other insurance policies on account of the property lost, except to the extent necessary to prevent the Investor from recovering more than the amount of the loss as recognized under any of the policies under which compensation is due, without regard to policy limits. 7.02 LIMITATIONS. Compensation shall not exceed any of the following limitations: (a) ACTIVE AMOUNT. The Active Amount (sec.8.06) on the date of the loss. (b) SELF-INSURANCE. The maximum amount which could be recovered by the Investor from OPIC without breaching sec.9.01.3. (c) AGGREGATE ADJUSTED COST COMPENSATION. Aggregate compensation for property compensated at adjusted cost shall not exceed the book value of the insured investment (sec.7.04) at the time of loss. 15 VII-2 7.03 INVESTOR'S SHARE. "Investor's share" means the ratio that the equity owned by the Investor bears to the total equity of the foreign enterprise. 7.04 BOOK VALUE OF INSURED INVESTMENT. (a) BOOK VALUE. Book value is based on financial statements maintained by the Investor in accordance with sec.9.01.6 for the foreign enterprise. However, OPIC may (1) conform the financial statements to principles of accounting generally accepted in the United States; and (2) make adjustments (sec.7.04(b)). OPIC shall be bound by the Investor's choice among generally accepted accounting principles, if the choice is consistent with the Investor's own accounting, unless such choice results in a substantial overstatement of the fair market value of the insured investment or the foreign enterprise as an independent entity. (b) ADJUSTMENTS. (1) INVESTMENTS OF PROPERTY. Non-cash items contributed to the investment shall be adjusted if necessary to reflect the fair market value of the items furnished at the time of contribution to the project, plus freight, installation and other reasonable direct costs incurred in furnishing the items to the project. (2) NON-INSURED CONTRIBUTION. Any direct or indirect contribution (and retained earnings thereon) by the Investor after the insured investment is made shall be deducted from book value of the foreign enterprise. (3) SPECIAL ACCOUNTING RULES. Dealings among related parties shall be adjusted if necessary to reflect transactions as they would have occurred had they been at arm's length and forgiveness of obligations shall be disregarded. Each entity shall be accounted for as if it were a separate person for income tax purposes, and the effect of tax shifting arrangements shall be disregarded. Obsolescence or permanent reduction in recoverable values shall be recognized by adjusting the book value of assets to realizable value. OPIC may adjust financial statements to reflect the effect of events that occur before the loss of property, such as events of loss which are later confirmed. 16 VII-3 (4) START-UP EXPENSES. If the book value of the insured investment of a new foreign enterprise in the development stage is less than the insured amount originally contributed, the accumulated loss will be disregarded if (a) the foreign enterprise is newly formed for the principal purpose of undertaking the project, (b) the foreign enterprise is a going concern as of the date of the loss, (c) that date is within three years of the date this contract is issued, and (d) it is clear that no adjustment to book value is necessary by reason of obsolescence or permanent reduction in recoverable values of productive facilities or assets. (c) INSOLVENCY. If the liabilities of the enterprise exceed its assets as of the date of the loss, book value of the insured investment shall not exceed the amount that the Investor would have been entitled to receive in insolvency proceedings with respect to the insured investment if assets had been liquidated at book value on the day prior to the loss. 7.05 APPRAISAL. If OPIC determines that compensation is payable but OPIC and the Investor are unable to agree on a question of valuation, either may demand the appointment of an impartial appraiser. If the parties are unable to agree on the appraiser, the appointment shall be made by the American Arbitration Association. The appraiser's itemized appraisal shall be binding. Appraisal costs shall be borne equally by OPIC and the Investor. 7.06 ESTIMATED COMPENSATION. If OPIC determines that compensation is payable but conditions in the project country preclude reasonable efforts by OPIC to determine the precise amount due, OPIC may pay estimated compensation based on the information then available. OPIC may revise its estimate and recover any excess or pay any additional amount due upon receipt of additional information. 17 VIII-1 Article VIII - Procedures. -------------------------- 8.01 APPLICATION FOR COMPENSATION. An application for compensation shall demonstrate the Investor's right to compensation in the amount claimed. The Investor shall provide such additional information as OPIC may reasonably require to evaluate the application. The Investor may amend or withdraw an application for compensation at any time, but the right to recover compensation will be lost for any acts covered by a withdrawn application. (a) There is no time limit on application for inconvertibility compensation (Article III); however, compensation shall not exceed the Active Amount applicable in accordance with sec.3.02. (b) An application for expropriation compensation (Article V) must be filed within six months after the Investor has reason to believe that all requirements of Article IV have been satisfied. (c) A notice demonstrating the Investor's entitlement to political violence compensation for loss of assets (Article VI) must be filed within six months of the loss. The notice together with proof of the amount of compensation due will be considered a completed application, which must be filed within three years of the loss. The Investor may request adjusted cost compensation (sec.7.0l(a)) and later amend the application within three years of the loss to elect replacement cost compensation (sec.7.0 l(b)). (d) OPIC shall have a reasonable time in which to complete processing of any application for compensation. 8.02 ASSIGNMENT TO OPIC. Within sixty days after OPIC notifies the Investor of the amount of compensation OPIC will pay under expropriation or political violence coverage, and concurrent with payment, the Investor shall transfer to OPIC (a) for expropriation, all interests attributable to the insured investment (sec.4.0l) or funds (sec.4.02) as of the date the expropriatory effect commences, including claims arising out of the expropriation, or (b) for political violence, claims arising out of the loss due to political violence sec.6.01). The Investor shall transfer the interests and claims free and clear of, and shall agree to indemnify OPIC against, claims, defenses, counterclaims, rights of setoff and other encumbrances (except defenses relating to the expropriation). 18 VIII-2 In connection with an inconvertibility claim, immediately upon receipt of instructions from OPIC together with notification that it intends to pay such claim, the Investor shall deliver the local currency to OPIC by draft subject to collection (or, at OPIC's option, in cash), or, if the Investor is unable legally to deliver the local currency or if OPIC so requests, shall instead deliver an assignment of the Investor's rights with respect to the payment that is the subject of the claim. OPIC may decline all or any portion of the Investor's interests or claims; if so, the Investor's right to compensation shall be affected only as provided in sec.5.03.4(b). 8.03 SECURITY. As a condition for paying compensation (including estimated compensation (sec.7.06)) prior to a final determination of its liability, OPIC may require the Investor to provide security, satisfactory to OPIC in its reasonable judgment, for repayment pursuant to sec.9.02(b). 8.04 EXCESS SALVAGE VALUE. With respect to compensated expropriation and political violence claims, OPIC shall pay to the Investor any amounts OPIC realizes in United States dollars from the rights transferred (sec.8.02) in excess of (a) the compensation paid by OPIC; plus (b) reasonable interest; plus (c) OPIC's out-of-pocket expenses in maintaining and realizing funds from the transferred property. However, this provision shall not in any way restrict OPIC's discretion to deal with the rights transferred. OPIC shall have no obligation to take action with respect to the rights transferred and shall incur no liability to the Investor for any actions taken or not taken after the transfer. 8.05 ARBITRATION. Any controversy relating to this contract shall be settled by arbitration in Washington, D.C. according to the then prevailing Commercial Arbitration Rules of the American Arbitration Association. Unless the Investor initiates arbitration, OPIC's liability shall expire one year after OPIC notifies the Investor of its determination concerning an application for compensation. A decision by arbitrators shall be final and binding, and any court having jurisdiction may enter judgment on it. 19 VIII-3 8.06 ELECTION OF ACTIVE AMOUNTS AND COVERAGE CEILINGS. By prior notice to OPIC effective as of the next due date for premiums (sec.1.06), the Investor may increase or decrease the Active Amount for any coverage for the remainder of the contract term, subject to the following limitations; (a) Active Amount shall not exceed the Coverage Ceiling (sec.1.06); (b) The Coverage Ceiling shall be reduced automatically by compensation paid by OPIC; Active Amount shall also be reduced for the remainder of the annual election period to which the claim relates (sec.3.02, sec.5.04(a), or sec.7.02(a)); (c) For inconvertibility, expropriation, and political violence coverages, Active Amount shall not be less than the lesser of book value (sec.5.01) or the Coverage Ceiling for that coverage. 8.07 TERMINATION. The Investor may terminate this contract effective as of any premium due date unless the premium is already paid. However, termination shall not affect any rights or obligations of either party relating to prior periods. 8.08 LEGAL AND MISCELLANEOUS. This contract shall be governed by the law of the District of Columbia, its conflict of law rules excepted. This contract constitutes the complete agreement between the parties, superseding any prior understandings. This contract may be modified, or its terms waived, only in writing. 8.09 NOTICES. Notices must be in writing and shall be effective when received. Notices may be given to the Investor at the address on the title page (unless changed in writing), and to OPIC at Overseas Private Investment Corporation Washington, D.C. 20527 ATTENTION: Vice-President, Insurance. 8.10 REFUND OF PREMIUMS. Upon timely written request, OPIC will refund premiums PRO RATA if (a) excess coverage is elected while a valid claim for compensation is pending; or (b) the Investor becomes ineligible for coverage or ceases to hold all or a portion of the insured investment, in which case any refund shall be calculated from the later of (i) the date the Investor becomes ineligible or ceases to hold the insured investment, or (ii) the date OPiC receives such written request. 20 IX-1 Article IX - Investor's Duties. ------------------------------- 9.01 DUTIES. 1. REPRESENTATIONS AND PROJECT EXECUTION. The Investor understands that OPIC has issued this contract based on statutory policy goals (22 U.S.C. sec.2191) as well as underwriting considerations. All statements made by the Investor to OPIC in connection with this contract are true and complete, and the investment and the project shall be carried out as described. 2. OWNERSHIP AND ELIGIBILITY. The Investor shall at all times remain the beneficial owner of the insured investment and shall remain eligible for OPIC insurance as (a) a citizen of the United States; or (b) a corporation or other association created under the laws of the United States, its states or territories, of which more than 50% of both the total interest and of each class of shares is beneficially owned by citizens of the United States; or (c) an entity created under foreign law in which a 95% interest is owned by entities eligible under (a) or (b). 3. SELF-INSURANCE. The Investor shall continue to bear the risk of loss of at least 10% of the book value of its interest in the foreign enterprise. 4. ASSIGNMENMENT. The Investor shall not assign this contract, or any of its rights, without OPIC's written consent, which will not be withheld unreasonably. 5. PREMIUMS. The Investor shall pay the premiums for this contract in accordance with Article I. In the event that premiums are not paid when due, the Investor shall be in default but may cure this default within sixty days by paying the premiums plus interest at a rate of 12% per annum. 6. ACCOUNTING RECORDS. (a) The Investor shall maintain in the United States true and complete copies of the records, books of account and current financial statements for the foreign enterprise necessary to compute and substantiate compensation, including (1) records documenting the investment; (2) annual balance sheets; 21 IX-2 (3) annual statements of income, retained earnings, cash flow and related footnotes. (b) Accounting records shall be maintained and financial statements prepared in United States dollars in accordance with principles of accounting generally accepted in the United States (including principles of currency translation), as modified by the special accounting rules (sec.5.03.3 and sec.7.04(b)(3)). (c) Subject to the obligations of the investor under sec.9.01.6, the investor or the foreign enterprise shall retain all accounting records until (1) the deadline for filing an application for compensation has expired sec.8.01); or (2) final action has been taken on an application for compensation (including arbitration and judicial appeals). However, if compensation has been paid, the accounting records shall be retained for three years after the Investor receives the compensation. 7. REPORTS AND ACCESS TO INFORMATION. In order that OPIC may perform its statutory duties, including settling claims and reporting to the Congress (22 U.S.C. sec.2200a), the Investor shall furnish OPIC with such information as OPIC may reasonably request, including (a) making available for interviews any persons subject to the Investor's practical control (including employees of the project and independent accountants); (b) making available for inspection and copying all documents and accounting records relating to the project (including workpapers of independent accountants if available); (c) permitting OPIC to inspect the project; and (d) furnishing available information concerning the effects of the project on the economy of the United States, the environment, and the economic and social development of the country in which the project is located. The Investor's duties under this paragraph shall continue for the periods specified for retention of accounting records (sec.9.01.6(c)). 8. COMPULSORY NOTICE. The Investor shall notify OPIC promptly if it has reason to believe that the Investor or the foreign enterprise will not be able to convert or transfer local currency, during the waiting period (Article II). The Investor shall notify OPIC promptly of any acts or threats to act in a manner which may come within the scope of the expropriation or political violence coverage (Articles IV and VI and shall keep OPIC informed as to all relevant developments 22 IX-3 9. PRESERVATION, TRANSFER AND CONTINUING COOPERATION. At OPIC's request, the Investor shall promptly assign rights with respect to the investment, as required by sec.8.02. Prior to the assignment of rights required by sec.8.02, the Investor shall, in consultation with OPIC, take all reasonable measures to preserve property, to pursue available administrative and judicial remedies, and to negotiate in good faith with the governing authority of the country in which the project is located and other potential sources of compensation. After a transfer of rights or delivery of local currency, in exchange for reimbursement of reasonable out-of-pocket expenses, the Investor shall take all actions reasonably requested by OPIC to assist OPIC in preserving the property and rights transferred to OPIC and in prosecuting related claims. 10. OTHER AGREEMENTS. The Investor shall not enter into any agreement with any foreign governing authority with respect to compensation for any acts within the scope of coverage (Article II, IV or VI) without OPIC's prior written consent. 9.02 DEFAULT. Material breach or misrepresentation by the Investor shall constitute default, and OPIC (a) refuse to make payments to the Investor; (b) recover payments made; and (c) terminate this contract effective as of the date of the breach by giving notice to the Investor. 9.03 NON-WAIVER. Neither OPIC's failure to invoke its rights, nor its acceptance of premiums, shall constitute waiver of any of its rights, even though OPIC knows of the Investor's breach. 9.04 CURE. OPIC may permit the investor to cure a breach in a manner satisfactory too OPIC but shall have no obligation to allow breaches to be cured. 23 X-1 ARTICLE X - AMENDMENTS ---------------------- The following amendments are hereby incorporated as part of this Contract of Insurance No. E578: 10.01 Subsection 1.01.3 is amended by inserting at the end thereof the following: "The term 'foreign governing authority' includes not only the federal government of Russia and its agencies and instrumentalities exercising governmental (as distinguished from commercial) functions but also subordinate levels of government, local and municipal government, and agencies and instrumentalities through which they exercise such governmental functions. The term 'foreign governing authority' does not include any entity in which the foreign governing authority has an ownership interest if the entity performs commercial functions directly related to the project." 10.02 Subsection 3.01.1, "DATE", is amended by deleting the words "0 days before" from the ninth line thereof and substituting the words "on the day (or if such day is not a business day in the Russian Federation, the first following business day in the Russian Federation)". 10.03 Notwithstanding any other provision of this contract, the Investor shall not file applications for compensation under, and OPIC shall have no liability for claims under, inconvertibility coverage (Articles II and III) in excess of $250,000 in any 91-day period. 10.04 Subsection 4.01(b) is amended by deleting the words "or material breaches of local law". 10.05 Notwithstanding any other provision of this contract (including Section 4.01 (b) and (c)), any regulatory actions taken by Russian government authorities pursuant to their reasonable exercise of regulatory oversight of the securities sector that may impact the profitability of the project shall not constitute compensable acts under Article IV of this contract. 10.06 Section 9.01.2, "OWNERSHIP AND ELIBILITY", is amended by deleting paragraphs (a), (b) and (c) and inserting the following new paragraphs (a), (b), (c) and (d) therefor: "(a) a citizen of the United States; or (b) a corporation or other association created under the laws of the United States, its states, territories or the District of Columbia, of which more than 50% of both the total interest and of each class of shares is beneficially owned by citizens of the United States; or 24 X-2 (c) a corporation created under foreign law in which more than a 95% interest is owned by entities eligible under (a) or (b); or (d) an entity created under foreign law which is wholly owned by entities eligible under (a) or (b)." 10.07 Section 9.01, "DUTIES", shall be amended by adding the following new subsections "11. WORKER RIGHTS" and "12. LEGALITY", at the end thereof: "11. WORKER RIGHTS. The Investor agrees not to take actions to prevent employees of the foreign enterprise from lawfully exercising their right of free association and their right to organize and bargain collectively. The Investor agrees not to interfere with or coerce an employee of the foreign enterprise on the basis of trade union activities or membership. The Investor further agrees not to take any action on the basis of such activities or membership which may result in the termination, suspension, demotion, or transfer of said employee by the foreign enterprise, or by an officer, agent or other representative thereof. The Investor further agrees to observe applicable laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work, and occupational health and safety, and not to use forced labor. The Investor is not responsible under this paragraph for the actions of a foreign government. "12. LEGALITY. The Investor has implemented and shall implement the investment and the project in compliance in all material respects with all applicable and publicly available laws, decrees, regulations, administrative determinations and procedures of the foreign governing authority." 10.08 The issuance by OPIC of this contract shall not constitute an acknowledgment or assurance by OPIC of the validity of any agreement or arrangement constituting or relating to the investment under the laws of Russia. 10.09 The Investor hereby acknowledges that no individual investment made by the foreign enterprise shall be covered by this contract. PIONEER OMEGA, INC. By: /s/ William H. Keough, Treasurer Date: Aug. 19, 96 ------------------------------------- ---------------- William H. Keough, Treasurer - ----------------------------------------------------------------- Print Name and Title OVERSEAS PRIVATE INVESTMENT CORPORATION By: /s/ Julie A. Martin Date: 8/22/96 ------------------------------------- ---------------- Julie A. Martin, Deputy Vice President for Insurance - ----------------------------------------------------------------- Print Name and Title EX-11 12 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 THE PIONEER GROUP, INC. COMPUTATION OF EARNINGS PER SHARE (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
COMPUTATION FOR CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, - ------------------- ----------------------- 1996 1995 1994 ---- ---- ---- NET INCOME (1) $ 18,837 $ 22,811 $ 33,460 =========== =========== =========== SHARES Weighted average number of common shares outstanding (2) 24,949,000 24,806,000 24,666,000 Dilutive effect of stock options and restricted stock proceeds as common stock equivalents computed under the treasury stock method using the average price during the period (2) 511,000 505,000 688,000 ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES outstanding as adjusted (1) (2) 25,460,000 25,311,000 25,354,000 =========== =========== =========== EARNINGS PER SHARE (1) (2) $ 0.74 $ 0.90 $ 1.32 =========== =========== =========== (1) These amounts agree with the related amounts in the Consolidated Statement of Income. (2) Adjusted for December 1, 1994, 2-for-1 stock split effected in the form of 100% stock dividend.
EX-13 13 ANNUAL REPORT TO STOCKHOLDERS 1 Exhibit 13 THE PIONEER GROUP, INC. [photo of crowsnest] [photo of hull tallship] [photo of 4 triangle sails] A n n u a l R e p o r t '96 2 [photo of John F. Cogan, Jr.] Pioneer's domestic investment management business had its best year ever, with sales growth that exceeded the U.S. mutual fund industry average for the second year in a row... In 1996, we certainly faced challenges in our natural resource businesses. However, we remain as convinced as ever of Pioneer's profit potential as a global financial service and natural resource company. John F. Cogan, Jr. President Table of Contents Chairman's Letter 1 Pioneer at a Glance 2 U.S. Investment Management 4 International Investment Management 6 Natural Resource Development 8 Financial Snapshot 10 Management's Discussion & Analysis 12 3 [photo crossover from previous page of John F. Cogan, Jr.] Fellow Stockholders: For Pioneer, 1996 was a year of contrasts. Our domestic investment management business had its best year ever, while our principal natural resource business - our gold mining operations in Ghana - met with a variety of challenges. The net result was that Pioneer earned 74 cents a share, compared to 90 cents in 1995. Earnings from our domestic investment management business nearly doubled to 68 cents per share from 35 cents in 1995. This is particularly gratifying because Pioneer has devoted significant time and resources to this area, and sales growth exceeded the U.S. mutual fund industry average for the second year in a row. Overall revenues grew 20% to $239.1 million, including a 48% increase in revenues from financial services to $160.8 million. Several initiatives contributed to the strong earnings of our domestic investment management business: o The late-1995 launch of Pioneer Small Company Fund proved to be the most successful in the company's history, adding significantly to 1996 revenues. o We completed the introduction for most Pioneer funds of Class B and C Shares, which comprised 29% of domestic sales. o We have both broadened fund distribution among broker-dealers, banks, financial planners and insurance companies, and increased the number of dealers. These developments, along with a U.S. stock market that set record highs, helped increase assets under management by 24% to nearly $17 billion, excluding venture capital pools and foreign joint ventures. On an equally encouraging note, our U.S. venture capital operations posted a gain of 18 cents last year, doubling 1995's profits. Elsewhere, however, some of our younger emerging markets financial service businesses experienced some growing pains. While assets under management in our Polish operations increased markedly, 1996's financial results do not yet reflect the positive trend, with a loss of 3 cents per share versus a gain of 1 cent in 1995. It's also worth noting that Poland's results are more favorable measured in local currency; the reported loss, in part, reflects weakness in the Polish zloty versus the dollar in 1996. Our Eastern Europe venture capital operations lost 5 cents in 1996 versus a 3 cent loss in 1995. On a more positive note, our most recently acquired investment operations in Russia earned 5 cents, nearly matching a 6 cent gain in 1995. Our gold mining subsidiary - Teberebie Goldfields Limited (TGL) - had to contend with many of the adversities that periodically affect natural resource ventures. These adversities included bad weather and equipment maintenance problems. For 1996, TGL earned 10 cents a share, compared to 56 cents in 1995. Despite these difficulties, we do have considerable basis for optimism. The Phase III mine expansion is on schedule with the first gold pour from the new South Plant expected in April 1997. TGL is also changing its mining method from selective mining to bulk mining, and is developing a new mine plan. While the new mine plan will likely result in a reduction in proven and probable in situ mineable reserves, the change in mining method should increase operating efficiencies and improve ore grade control. Looking forward, we continue to broaden our horizons. We are pioneering the mutual fund industry in Russia with Pioneer First Fund. Launched in 1996, the Fund is the country's first open-end mutual fund, following similar "firsts" for Pioneer in Poland and India. In real estate, we are advising corporate and institutional clients in Poland and Russia, leveraging the experience we have gained as entrepreneurs and investment managers in those countries. Similarly, the launch of Pioneer World Equity Fund in late 1996 inaugurates a year-long 1997 campaign to bring Pioneer's global investment management expertise to the attention of the brokerage community and investors. While the dip in last year's earnings is certainly disappointing, we believe 1996's results validate Pioneer's fundamental diversification strategy: Strength in our domestic investment management business substantially moderated less favorable results from our gold mining operations and emerging markets financial service businesses. In previous years, the situation has been just the reverse. We remain as convinced as ever of Pioneer's profit potential as a global financial service and natural resource company. I hope you will take a few minutes to review the pages that follow for examples of how our numerous, and varied, commitments have borne fruit. Sincerely, /s/John F. Cogan, Jr. John F. Cogan, Jr. President March 25, 1997 1 4 P I O N E E R A T A G L A N C E In the 1990's, Pioneer has pursued a twofold strategy of building our core U.S. mutual fund business, while diversifying with a host of international, emerging markets, financial service and natural resource ventures. The charts show the progress Pioneer has made in building for the future. Earnings growth has naturally reflected the variability typical of some of our young, growing ventures. At the same time, the profit potential of The Pioneer Group, Inc., can be gauged from the steadily upward trends in sales, revenues, assets under management and stockholders' equity. These trends have helped support Pioneer's policy of prudent, steady increases in cash dividends. U.S. Mutual Fund Sales Dollars in Millions [graph] 1992 $723 1993 $1,076 1994 $1,499 1995 $1,752 1996 $2,602 [end graph] Assets Under Management Dollars in millions [graph] 1992 $7,591 1993 $10,766 1994 $11,103 1995 $13,745 1996 $16,981 [end graph] 2 5 Gold production Ounces [graph] 1992 126,200 1993 164,900 1994 176,400 1995 235,500 1996 203,100 [end graph] Stockholders' Equity Dollars in Thousands [graph] 1992 $92,814 1993 $107,174 1994 $134,422 1995 $150,343 1996 $162,473 [end graph] Earnings Per Share Dollars [graph] 1992 0.59 1993 0.72 1994 1.32 1995 0.90 1996 0.74 [end graph] Cash Dividends Dollars [graph] 1992 0.21 1993 0.225 1994 0.315 1995 0.40 1996 0.40 [end graph] 3 6 [photo of 4 triangle sail] Pioneer's roots in investment management date back to 1928, when Pioneer Fund was established as the fourth mutual fund in the U.S. Pioneer Fund is still going strong, now as part of a family of 23 mutual funds and eight variable annuity portfolios. By many measures, such as annual sales, 1996 was the most successful year in our history. Last year was also especially memorable with our celebration of the 100th birthday of Pioneer's founder, Philip L. Carret. 4 7 U . S . I N V E S T M E N T M A N A G E M E N T 1996 Overview: Pioneer's U.S. mutual fund sales grew by 50% to $2.6 billion in 1996. Redemptions increased by a smaller amount -- 36% to $1.4 billion -- and remained at about 10% of assets -- a ratio that continues to be below the U.S. fund industry average. Pioneer's record sales stemmed, in large part, from three initiatives: Pioneer Small Company Fund Introduced in late 1995, this Fund had the best reception of any mutual fund last year, with $403 million raised in five months. The Fund's success clearly stems from the attractive long-term performance of Pioneer Capital Growth Fund, and the growing recognition of Pioneer as a premier value money manager. Broader distribution A major initiative in recent years has been to broaden fund distribution among brokers, banks, financial planners and insurance companies -- particularly those with a national sales base. Through the continued diligence of Pioneer's sales and marketing team, the number of firms selling $1 million or more of Pioneer funds grew by one-third. Flexible pricing Class B and Class C Shares -- in which sales loads for fund shares are generally deferred over a number of years -- have become important forces in the fund industry. In 1996, Pioneer completed the introduction of these share classes on most funds. Class B and Class C Shares comprised 29% of Pioneer domestic sales last year, up from 24% in 1995. A number of other initiatives also contributed to last year's strong results, and also helped set the stage for significant future growth: [photo of double wheel] Pioneer Real Estate Shares Pioneer believes that commercial real estate, after years of decline, now represents an "emerging" market with great potential. This Fund was "relaunched" to introduce investors to Boston Financial Securities, Inc. (BFS), our new subadviser. BFS and its parent company, Boston Financial Group, supervise more than $5.5 billion worth of properties in 49 states for 37,000 investors. With the relaunch, and a strong market, assets of Pioneer Real Estate Shares nearly quadrupled in 1996. 8 401(k) Many small- and mid-sized businesses are inadequately served in the rapidly growing $800-billion market for 401(k) plans. To address this, Pioneer introduced a state-of-the-art 401(k) Sales Tool Kit that guides investment representatives from point-of-sale through employee enrollment. The combination of Pioneer's expertise and support, and the investment representative's personal attention, puts Pioneer small company 401(k) plans on a par with those offered by the Fortune 500. Assets held in 401(k) and similar retirement accounts grew by 36% in 1996. Pioneer Vision Variable Annuity Millions of Americans are looking for tax-advantaged ways to invest for retirement, and Pioneer Vision Variable Annuity is an excellent choice for many of them. In 1996, we introduced enhancements to the product -- now known as Pioneer Vision 2 -- that made it competitive with the industry's best. Assets in Pioneer Vision's eight variable annuity portfolios grew 500%. Direct Equity Pioneer Capital Corp. (PCC), our venture capital arm, was established in 1980 to provide early-stage, growth, acquisition, and recapitalization financing to leading New England-based companies in a variety of industries, including information, medical technologies, and consumer-oriented services. In 1996, PCC invested $13.8 million in five new companies and previously held firms. PCC's success can be gauged by the numerous ventures it helped develop that subsequently went public or attracted a merger partner. Such companies include: Cardiometrics, Inc., a manufacturer of intravascular medical devices for measuring blood flow impairment; Xircom, Inc., a manufacturer of adapters for connecting personal computers to local area networks; and Vivid Technology, Inc., a manufacturer of X-ray security systems. Pioneer Real Estate Advisors, Inc. In keeping with our view of real estate as an undervalued asset class, this subsidiary was newly formed in 1996. Pioneer Real Estate Advisors is now managing property and advising institutional clients on real estate in the U.S. and abroad. Pioneer's success is directly related to how well we satisfy the needs of our mutual fund shareowners and their investment representatives. We are proud to have gained recognition in two major surveys: DALBAR For the last two years, a survey of 3,200 brokers by industry consultant DALBAR ranked Pioneer among the top three of 22 mutual fund companies, based on overall marketing support. In addition, the survey ranked Pioneer #1 in 1996 in eight separate categories, from servicing investors to problem resolution. American Bankers Association An ABA survey that compared 72 mutual fund companies ranked Pioneer #1 in overall service to bankers, based on 10 categories, from quality of literature to product diversity. 5 9 [photo of rigging/flags] Pioneer has been investing internationally since 1928, when Pioneer Fund included Hungarian and German securities in its portfolio. Our overseas investment management and financial service ventures are natural extensions of this expertise. In 1968, recognizing the growing worldwide appeal of mutual funds, Pioneer began distributing our U.S. funds in Western Europe. Since then, we have broadened our operations to serve Poland, India, Russia and the Czech Republic. Pioneer initiatives in Poland, India and Russia were the first private, open-end mutual funds in those countries. 6 10 I N T E R N A T I O N A L I N V E S T M E N T M A N A G E M E N T 1996 Overview: As the international community has developed increasingly sophisticated financial needs, Pioneer has steadily increased both our sales distribution channels and the variety of products offered. In 1996, both trends were evident in the four major regions we currently serve: Western Europe Last year was the first full year of distribution of offshore funds based in Dublin, Ireland, the site of Pioneer's new international transaction processing facility. The offshore registration process gives Pioneer a platform for eventual wider distribution of these and other funds. The combination of U.S. and offshore funds sold in Western Europe has been an important component of our sales success. Eastern Europe Among former Eastern bloc nations, none has embraced free markets more rapidly than Poland, where Pioneer offers three domestic funds for individuals and institutions. In recognition of the growing demands of Polish citizens in a reinvigorated economy, the Pioneer fund family was expanded to include a wider range of equity and fixed-income funds, and a cash management program. In addition, we acquired a securities brokerage house. Assets under management in Poland grew 62% in 1996. Pioneer also offers institutional investors access to emerging Polish companies through a direct equity fund. And, Pioneer Real Estate Advisors--Poland expects to establish, within the next few months, an institutional Polish real estate fund, designed to invest in properties that Pioneer will manage. Last year was also the first full year of our mutual fund operations in the Czech Republic, where Pioneer offers an equity mutual fund for Czech citizens. [Photo of Ship's Mast] India Two trends in India command the attention of long-term investors: a burgeoning middle class, and a proven commitment to freeing the economy from government red tape. To capitalize on these trends, Pioneer, through our joint venture affiliate, expanded our product line in 1996 with new domestic fixed-income funds. These were designed to offer Indian citizens a range of alternatives to complement the equity funds offered there. With national elections resulting in a new coalition government, last year was a difficult one for the Indian market. Despite market uncertainty during the transition, the new government retains a strong commitment to economic reform. Pioneer believes the long-term fundamentals for India remain positive. Russia While not without significant risk, Pioneer believes Russia's evolution toward fully functional, open capital markets is firmly set in motion, and we have undertaken several initiatives to participate in that growth. Pioneer made history in 1996 with Pioneer First Fund, Russia's first open-end mutual fund. 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 the Fund'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 Russian economy. Pioneer believes that there is significant unrealized value in the assets included in FVF's portfolio. When we acquired our majority interest in FVF in 1995, one of its principal assets was the 220,000 square-foot Meridian office building in Moscow, which was partially complete at that time. At year end, the building was on its way to being fully leased. In 1996, Pioneer Real Estate Advisors established offices in Moscow and St. Petersburg to expand into Russian real estate advisory and management activities. Pioneer's Russian financial service companies also include a bank and a securities brokerage house. And, as with Poland, Pioneer is raising an offshore institutional fund to make direct equity investments in small- and mid-sized Russian companies. 7 11 [photo of hull tall ship] As global money managers, Pioneer has garnered a wealth of experience, a wide network of contacts, and an eye for ventures with long-term promise. These assets have been instrumental in uncovering natural resource projects that we believe offer the potential for high returns. As entrepreneurs, we add value to natural resource operations by virtue of technological improvements, cost efficiencies, and a commitment to long-term success. 8 12 N A T U R A L R E S O U R C E D E V E L O P M E N T 1996 Overview: Pioneer's Ghanaian gold mine produced more than 200,000 ounces for the second straight year, and closed in on production of its one-millionth ounce -- a milestone achieved in January 1997. Our timber operation in the Russian Far East, although still in the development phase at year end, completed its first full year of shipments. Pioneer Goldfields Limited Pioneer Goldfields owns 90% of Teberebie Goldfields Limited (TGL), our gold mine located in Tarkwa, Ghana, and is actively reviewing a range of potential natural resource projects in Africa and elsewhere. The Phase III mine expansion at TGL is well on its way to completion with the first gold pour expected in April 1997. The expansion, when fully operational, will include a further heap leach operation, a new near-pit gyratory crusher that will serve both the West Plant and the new South Plant, modifications to the West Plan conveyor systems, and a new and larger mining fleet. The Phase III expansion is expected to provide annual crushing capacity of 12 million tonnes of ore. In addition to the continued expansion, TGL is developing 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. We believe that these changes will increase operating efficiencies. [photo of sexton] Operating results for last year reflected the impact of excessive rainfall (which reduces gold recovery rates), lower-than-anticipated ore grade, and equipment maintenance problems. As a result, production decreased 14% to 203,100 ounces. Total per ounce production costs increased by $84 to $361, including an increase in cash costs of $70 to $268 per ounce. Average realized gold prices only edged up $2 to $385 per ounce. Despite last year's challenges, Pioneer recognizes the cyclical nature of mining operations, and believes firmly in the long-term profit potential of a world-class gold mine such as TGL. Pioneer Forest, Inc. The Russian Far East boasts an abundance of forests, but high quality timber is a scarce commodity in Japan -- less than 1,000 miles down the Pacific shipping lanes. 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, principally for export to Japan. While all three projects are still in the development phase, Forest-Starma has shipped 163,000 cubic meters of timber since the last half of 1995, including approximately 133,000 cubic meters shipped last year. The three timber companies, in the aggregate, hold long-term leaseholds to 816,300 hectares (2.0 million acres) and annual cutting rights of 895,000 cubic meters. Feasibility studies are currently being undertaken for both Amgun-Forest and Udinskoye. 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 believes that our diverse financial service and natural resource ventures are well positioned to benefit from a global economy that is expanding in size and sophistication. 9 13 F I N A N C I A L S N A P S H O T Assets Under Management at December 31: Dollars in Millions
1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- U.S. Registered Mutual Funds $15,704 $12,701 $ 9,925 $ 9,854 $ 7,330 Non-U.S. Registered Mutual Funds 502 280 589 388 - ------- ------- ------- ------- ------- Total Registered Mutual Funds 16,206 12,981 10,514 10,242 7,330 Closed-end and subadvised funds and private institutional accounts* 775 764 589 524 261 ------- ------- ------- ------- ------- Total $16,981 $13,745 $11,103 $10,766 $ 7,591 ======= ======= ======= ======= =======
* Excludes assets of funds managed by foreign joint ventures and venture capital pools. Assets Under Management Dollars in millions [graphic] 1992 $7,591 1993 $10,766 1994 $11,103 1995 $13,745 1996 $16,981 [end graphic] Sales of Mutual Fund Shares: Dollars in Millions Year Ended December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ----- U.S. Registered Mutual Funds: Sales* $2,602 $1,752 $1,499 $1,076 $ 723 Redemption of shares 1,431 1,050 860 714 784 ------ ------ ------ ------ ----- Net sales (redemptions) of shares $1,171 $ 702 $ 639 $ 362 $ (61) ====== ====== ====== ====== ===== Year Ended December 31, 1996 1995 1994 1993 1992 ----- ----- ----- ----- ---- Non-U.S. Registered Mutual Funds: Sales* $ 217 $ 25 $ 734 $ 429 - Redemption of shares 81 381 584 34 - ----- ----- ----- ----- ---- Net sales (redemptions) of shares $ 136 $(356) $ 150 $ 395 - ===== ===== ===== ===== ==== * Includes reinvestment of dividends, but excludes money market funds and funds managed by foreign joint ventures. Sales of U.S. Registered Mutual Fund Shares Dollars in Millions [graphic] 1992 $723 1993 $1,076 1994 $1,499 1995 $1,752 1996 $2,602 [end graphic] 10 14 Quarterly Results: Dollars in Thousands Except Per Share Amounts Total Net Earnings Revenues and Sales Income Per Share ------------------ ------ --------- 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 ========= ======== ====== 1995 by Quarter March 31 $ 45,679 $ 5,797 $ 0.23 June 30 46,553 7,329 0.29 September 30 51,240 6,273 0.25 December 31 55,245 3,412 0.13* --------- -------- ------ $ 198,717 $ 22,811 $ 0.90 ========= ======== ====== * Includes loss of 12 cents per share associated with expenses incurred by the Company in connection with its unsuccessful effort to sell in a global offering approximately 20% of its shares of Pioneer Goldfields Limited. Gross Revenues and Sales Dollars in Thousands [graphic] 1992 $101,802 1993 $129,403 1994 $171,702 1995 $198,717 1996 $239,112 [end graphic] Five Year Summary of Selected Financial Data: Dollars in Thousands Except Per Share Amounts
Year Ended December 31, 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Results of Operations Revenues and sales $ 239,112 $ 198,717 $ 171,702 $ 129,403 $ 101,802 Costs and expenses 211,962 158,908 119,568 94,142 73,616 Unrealized and realized (gains) losses on venture capital and marketable securities investments, net (12,279) (9,345) 946 (3,468) (2,657) Interest expense 3,318 1,024 1,305 2,388 1,427 Public offering costs - 4,863 - - - Other, net 2,446 735 112 480 712 ---------- ---------- ---------- ---------- ---------- Income before provision for federal, state and foreign income taxes and minority interest 33,665 42,532 49,771 35,861 28,704 Net provision for federal, state and foreign income taxes 11,548 16,598 14,182 16,322 12,937 ---------- ---------- ---------- ---------- ---------- Income before minority interest 22,117 25,934 35,589 19,539 15,767 Minority interest 3,280 3,123 2,129 1,409 1,169 ---------- ---------- ---------- ---------- ---------- Net income $ 18,837 $ 22,811 $ 33,460 $ 18,130 $ 14,598 ========== ========== ========== ========== ========== Earnings per share* $ 0.74 $ 0.90 $ 1.32 $ 0.72 $ 0.59 ---------- ---------- ---------- ---------- ---------- Cash dividends per share* $ 0.40 $ 0.40 $ 0.315 $ 0.225 $ 0.21 ========== ========== ========== ========== ========== Weighted average common and common equivalent shares outstanding* 25,460,000 25,311,000 25,354,000 24,976,000 24,824,000 Long-term notes payable $ 149,500 $ 11,048 $ 9,101 $ 13,306 $ 11,972 Total assets $ 493,212 $ 319,069 $ 202,085 $ 172,295 $ 134,705 Stockholders' equity $ 162,473 $ 150,343 $ 134,422 $ 107,174 $ 92,814 Stockholders' equity per share* $ 6.50 $ 6.05 $ 5.45 $ 4.36 $ 3.81 Return on average stockholders' equity 12% 16% 28% 18% 16% Return on revenues 8% 11% 19% 14% 14%
* Adjusted for December 1, 1994, and September 1, 1993, 2-for-1 stock splits effected in the form of 100% stock dividends. Cash Dividends Per Share Dollars [graphic] 1992 0.21 1993 0.225 1994 0.315 1995 0.40 1996 0.40 [end graphic] 11 15 M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N & R E S U L T S O F O P E R A T I O N S Summary of Operations The Pioneer Group, Inc. (the "Company") earned 74 cents per share in 1996, 16 cents lower than 1995's earnings of 90 cents and 58 cents lower than 1994's record earnings of $1.32 per share. Earnings per share have been adjusted for the 2-for-1 stock split, effected by the payment of a 100% stock dividend in December 1994. The Company's worldwide financial services businesses earned 72 cents in 1996, 24 cents, or 50%, higher than in 1995 and 13 cents, or 22%, higher than in 1994. Earnings from domestic mutual fund operations nearly doubled as they increased from 35 cents in 1995 to 68 cents in 1996. Domestic mutual fund operations earned 36 cents in 1994. Earnings from the Company's U.S. venture capital operations, net of operating expenses, doubled in 1996 to 18 cents. These operations lost 4 cents in 1994. The Company's Eastern European venture capital operations lost 5 cents in 1996, 3 cents in 1995 and 4 cents in 1994. The Company's Russian investment operations, which were acquired in 1995, earned 5 cents per share in 1996 and 6 cents in 1995. The Company's Polish investment operations lost 3 cents in 1996 compared to earnings of 1 cent in 1995 and 31 cents in 1994. The loss in 1996 was primarily attributable to the new Polish brokerage operations which were acquired in March 1996 and foreign currency exchange losses. Assets under management in the Polish mutual funds, which had peaked to nearly $1 billion in 1994, recovered in 1996 to nearly $450 million, after finishing 1995 at $275 million. The Company incurred costs and expenses of 11 cents per share in 1996 associated with the development of its mutual fund operations in the Czech Republic. The Company's gold mining operations, which consist of its wholly owned subsidiary, Pioneer Goldfields Limited ("PGL"), and PGL's 90% owned subsidiary, Teberebie Goldfields Limited ("TGL"), earned 10 cents per share in 1996, 56 cents in 1995, and 72 cents in 1994. Earnings for 1994 included a favorable one-time deferred income tax rate adjustment of 16 cents per share. Net of the deferred income tax adjustment, gold mining earnings in 1995 were unchanged from the 1994 level. Earnings in 1995 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. The Company's Russian natural resource operations, including powdered metals and timber, lost 4 cents in 1996 and 2 cents in 1995. These operations earned 1 cent in 1994. Financial Services Businesses 1996 Compared to 1995 Revenues. The Company's worldwide financial services businesses have three principal sources of revenues: fees derived from managing the 31 U. S. registered investment companies in the Pioneer Family of Mutual Funds and institutional accounts, fees from underwriting and distribution of mutual fund shares, and fees derived from acting as shareholder servicing agent. The Company earns similar revenues from its international investment operations in Poland, Russia, Ireland, the Czech Republic, and from its joint venture in India. The Company also earns securities and interest income from Pioneer Bank in Russia. The Company has a 57.7% interest in Pioneer Bank. Revenues from the worldwide financial services businesses of $160.8 million in 1996 were $52.4 million, or 48%, higher than revenues earned in 1995 as a result of increases in all revenue categories as discussed below. Management fees of $87.8 million in 1996 were $23.2 million, or 36%, higher than management fees in 1995. Virtually all of the increase resulted from higher management fees earned from the Company's U.S. registered mutual funds. The increase in management fees earned from the U.S. registered mutual funds resulted from an increase in Earnings per share Dollars [graphic] 1992 0.59 1993 0.72 1994 1.32 1995 0.90 1996 0.74 12 16 assets 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. Record assets under management of just under $17 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. registered mutual fund net sales. Assets under management increased to nearly $18 billion at March 14, 1997. Underwriting commissions and distribution fees of $16.6 million were $8.1 million, or almost double comparable commissions and fees earned in 1995. Underwriting commissions earned from sales of U.S. registered mutual funds increased by $1.2 million as a result of the significant increase in the sales of such funds. U.S. registered mutual fund sales of $2.6 billion in 1996 were 50% higher than sales in 1995, while redemptions of $1.4 billion increased by 36%. In 1996, the Company had net sales of $1.2 billion compared to $0.7 billion in 1995. Sales of the Company's three 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. Distribution fees increased by $5.2 million as a result of the increase in average assets under management of the Company's back-end load funds. Shareholder services fees of $25.3 million in 1996 increased by $2.9 million, or 13%, over 1995, as a result of an increase in the number of shareholder accounts and a cost-of-living fee increase for certain U.S. registered mutual funds effective January 1, 1996. Trustee fees and all other income of $16 million in 1996 increased by $3.1 million, principally from interest and dividend income from the Company's Russian investment operations. The Company reported securities and interest income from Pioneer Bank in Russia of approximately $15 million in 1996 as a result of the acquisition and subsequent sale of Russian government securities and interest income from loans. Costs and Expenses. Costs and expenses of the worldwide financial services businesses of $133.3 million increased by $39.3 million, or 42%, over 1995's level. Approximately one-half of the increase in expenses resulted from: (i) $12.4 million in expenses related to the Company's Russian investment operations, (ii) $3.2 million of costs associated with the Company's Czech Republic operations, and (iii) $4.1 million related to expenses associated with the amortization of dealer advances resulting from substantial increases in sales of back-end load mutual fund shares. The amortization expenses were more than offset by the $5.2 million increase in distribution fees. The other half of the increased expenses resulted from higher payroll costs, higher costs related to additional office space and 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). The Company also had interest expense on deposits and short-term debt of $6.1 million in 1996 related to Pioneer Bank in Russia. Other Income and Expense. The Company reported net venture capital investment portfolio gains of $10.7 million (excluding operating expenses) in 1996 compared to net gains of $5.1 million in 1995, from investments in the Company's U.S. venture capital portfolio. The Company's investments in its own mutual funds, principally during their startup phase, had net gains of $0.7 million in 1996 and $0.8 million in 1995. Additionally, the Company reported net gains of $0.9 million in 1996 and $3.5 million in 1995, from investments held by the First Voucher Fund (the "Voucher Fund"), the Russian voucher investment fund in which the Company owns a 51% interest. The Company's 13 17 M A N A G E M E N T ' S D I S C U S S I O N ( C O N T I N U E D ) U.S. venture capital and affiliated mutual fund investments are marked-to-market and thus the Company's results reflect both realized and unrealized gains and losses. In contrast, due to the developing nature of the Russian securities markets, the Company only reports the Voucher Fund's realized gains and losses. The Company believes, however, that there is significant unrealized value in the assets included in the Voucher Fund's portfolio. There can be no assurance that the Company will be able to realize these values. For a description of the risks associated with investments in foreign countries, including Russia, see "Future Operating Results" below. Interest expense of $3.3 million in 1996 increased by $2.3 million resulting from increased borrowings by the Company under its credit facility which is discussed below. Other expenses, net, of $2.4 million in 1996 increased by $1.7 million, principally as the result of expenses incurred by the Company with respect to its various Russian natural resource businesses. The Company incurred $4.9 million of costs in 1995 in connection with the unsuccessful PGL global offering. Taxes. The Company's effective tax rate for the worldwide financial services businesses was 35% in 1996 compared to 43% in 1995. The effective rate decreased as a result of the increase in tax-exempt securities and interest income associated with the Company's Russian investment operations. 1995 Compared to 1994 Revenues. Revenues from the worldwide financial services businesses of $108.5 million in 1995 were $4.4 million, or 4%, higher than the 1994 level, as increased shareholder services fees and revenues from the Company's new Russian investment operations more than offset the significantly lower underwriting commissions resulting from lower sales of the Company's Polish mutual funds in 1995. Management fees of $64.6 million in 1995 were $0.4 million, or 1%, higher than management fees in 1994. The $7 million increase in management fees earned from the U.S. registered mutual funds was more than offset by a $7.8 million decrease in management fees earned from the Company's Polish mutual funds. During 1995, the Company earned $1.2 million in management fees from its U.S. and Polish venture capital funds. Assets under management of $13.7 billion at December 31, 1995, increased by $2.6 billion since the beginning of 1995. The increase was principally attributable to strong stock market performance. Underwriting commissions and distribution fees of $8.5 million in 1995 were $4.3 million, or 33%, lower than underwriting commissions and distribution fees in 1994 as a result of significantly lower sales of the Company's Polish mutual funds. Sales of units of the Polish mutual funds were only $21 million while redemptions were $400 million in 1995, compared to sales of $700 million and redemptions of $600 million in 1994. Record U.S. registered mutual fund sales of $1.8 billion in 1995 were 17% higher than sales during 1994, while redemptions of $1.1 billion increased by 22%. The Company had net sales of U.S. registered mutual funds of $0.7 billion in 1995, compared to $0.6 billion in 1994. Shareholder services fees of $22.5 million in 1995 increased by $2.6 million, or 13%, over 1994, as a result of an increase in the number of shareholder accounts as well as a fee increase effective January 1, 1995. All other income of $12.9 million in 1995 increased by $5.6 million, or 77%, over 1994, principally from revenues related to interest and dividend income from the Company's new Russian investment operations. 14 18 Costs and Expenses. Costs and expenses of the worldwide financial services businesses increased by $17.1 million, or 22%, over 1994 to $94 million in 1995, of which $3.4 million was from the Company's new Russian investment operations accounted for on the consolidation method. Virtually all of the remaining increase of $13.7 million resulted from higher payroll costs in the investment management, marketing and shareholder servicing groups, higher costs related to additional office space, higher costs related to mutual fund distribution and higher expenses from the amortization of dealer advances. Other Income and Expense. The Company reported net venture capital investment portfolio gains (excluding operating expenses) of $5.1 million in 1995 compared to no portfolio gains or losses in 1994. All of the 1995 gains were generated from investments in the Company's U.S. venture capital portfolio. The Company's investments in its own mutual funds contributed net gains of $0.8 million in 1995 compared to net losses of $1 million in 1994. The Company realized gains of $3.5 million in 1995 from investments held by the Voucher Fund. The Company incurred $4.9 million of costs in 1995 in connection with the unsuccessful PGL global offering. Taxes. The Company's effective tax rate for the worldwide financial services businesses of 43% for 1995 was essentially unchanged from 1994. 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 yearend. At December 31, 1996, the Company served as trustee for $5.2 billion of qualified plan assets and the ratio of net worth to qualified assets was 3.1%. The Company's stockholders' equity of $162.5 million at December 31, 1996, would permit it to serve as trustee for up to $8.1 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 multi-class 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 multi-class 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 $763 million in 1996 versus $426 million in 1995 and Dealer Advances totaled $23.9 million in 1996 versus $14.9 million in 1995. Dealer Advances (which are amortized to operations over the life of the CDSC period), were $34.3 million at December 31, 1996. The Company intends to continue to finance this program, in part, through the credit facility described in the section entitled "General." In April 1995, the Company acquired approximately 51% of the shares of the 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, 15 19 M A N A G E M E N T ' S D I S C U S S I O N ( C O N T I N U E D ) acting through its 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 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. In April 1996, the Company exercised its option and purchased the first tranche of Omega shares for $2.1 million. The Company's Russian investment operations are consolidated under PFR. In September 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 18.4% equity interest. This transaction was completed in January 1997. 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 $68 million which would protect 90% of the Company's equity investment and a proportionate share of cumulative retained earnings. Natural Resource Development Businesses Gold Mining Business The results of the gold mining business are substantially attributable to the operations of TGL, the principal operating subsidiary of PGL. The Company's financial statements include an adjustment to TGL's earnings to give effect to the 10% minority interest in TGL held by the Government of Ghana. 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 cement, 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. 1996 Compared to 1995 In 1996, the gold mining business contributed $2.6 million, or 10 cents per share, to the Company's earnings compared with $14 million, or 56 cents per share, in 1995. 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 resulted in 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. Gold Production Ounces [graphic] 1992 126,200 1993 164,900 1994 176,400 1995 235,500 1996 203,100 [end graphic] 16 20 Table 1 Twelve months ended December 31, Increase/ 1996 1995 (Decrease) ------- ------- ------- Production (ounces) 203,100 235,500 (32,400) ======= ======= ======= Cash costs: Production costs $220 $160 $60 Royalties 12 11 1 General and administrative 36 27 9 ---- ---- --- Cash costs per ounce 268 198 70 ---- ---- --- Non-cash costs: Depreciation and amortization 81 67 14 Other 2 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 2 Twelve Months ended December 31, -------------------------------- 1996 1995 ----- ----- Tonnes mined (in thousands): Waste 21,068 14,174 Run-of-mine 6,209 5,223 ----- ----- Tonnes Waste and Run-of-Mine 27,227 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 Process Grade (grams/tonne) 1.26 1.28 Table 1 provides production results and compares TGL's cash costs and total costs per ounce for 1996 with the prior year. 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 influenced by ore grade, gold recovery rates, the waste to ore or "stripping" ratio, the age 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 1996, production costs increased by $60 per ounce to $220 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. In addition, TGL experienced unexpected increases in equipment maintenance costs and higher labor costs associated with TGL's collective bargaining agreement with the Ghana Mineworkers' Union ("GMU"). A comparison of key production statistics for the twelve months ended December 31, 1996 and 1995 is shown in Table 2. 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. The operating ratio represents the percentage that the operating profits bear to gold sales, after giving effect to capital allowances and interest expense (as permitted by TGL's Deed of Warranty). In 1996 and 1995, 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 increase in the cost per ounce was attributable, in part, to the 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 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 1996, these costs 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 commissioning of the West Plant run-of-mine leach pad in 1996 and increases in leach pad and pond depreciation aggregated approximately $4 per ounce. 17 21 M A N A G E M E N T ' S D I S C U S S I O N ( C O N T I N U E D ) Table 3 Twelve months ended December 31, Increase/ 1995 1994 (Decrease) ------- ------- ---------- Production (ounces) 235,500 176,400 59,100 ======= ======= ====== Cash costs: Production costs $160 $119 $41 Royalties 11 11 -- General and administrative costs 27 31 (4) ---- ---- --- Cash costs per ounce 198 161 37 ---- ---- --- Non-cash costs: Depreciation and amortization 67 73 (6) Other 3 2 1 ---- ---- --- Cost of production per ounce 268 236 32 ---- ---- --- Interest and other costs 9 12 (3) ---- ---- --- Total costs per ounce $277 $248 $29 ==== ==== === Table 4 Twelve Months ended December 31, 1995 1994 ------ ------ Tonnes mined (in thousands): Waste 14,174 7,233 Run-of-mine 5,223 1,903 ------ ------ Tonnes Waste and Run-of-Mine 19,397 9,136 Ore 7,061 5,035 ------ ------ Total Tonnes Mined 26,458 14,171 Stripping Ratio ((waste + run-of-mine)/ore) 2.75:1 1.81:1 Ore Processed 7,068 4,876 Process Grade (grams/tonne) 1.28 1.46 Other. Other costs represent a provision for future reclamation costs and costs related to exploration activities conducted by TGL at the Teberebie concession and in other parts of Ghana. The decrease of $1 per ounce in 1996 compared with 1995 was attributable to a decrease in exploration core drilling. Interest and Other Costs. Interest and other costs include interest expense, foreign exchange gains and losses, political risk insurance premiums, and goodwill amortization. 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%. The effective tax rates in 1996 and 1995 were 32% and 35%, respectively. 1995 Compared to 1994 In 1995, the gold mining business contributed $14 million, or 56 cents per share, to the Company's earnings compared with $18.3 million, or 72 cents per share, in 1994. Results in 1994 included a favorable adjustment to earnings of 16 cents per share as a result of a reduction in the applicable Ghanaian income tax rates for gold mines from 45% to 35% (the same rate for other Ghanaian industries), which reduced TGL's cumulative deferred income taxes accrued prior to January 1, 1994, by $4.4 million. Excluding this adjustment, 1995 earnings were essentially unchanged from 1994. Revenues increased by 34% to $90.2 million as gold shipments increased by 34% to 235,500 ounces. The average realized price of gold remained unchanged at $383 per ounce. The revenue increase was offset by higher production costs. Table 3 provides production results and compares TGL's cash costs and total costs per ounce for 1995 with the prior year. Production Costs. In 1995, production costs increased by $41 per ounce to $160 per ounce compared with 1994, principally because of the expected increase in the stripping ratio, from 1.81:1 to 2.75:1, and a decrease in the ore grade from 1.46 to 1.28 grams per tonne, which was greater than anticipated due to higher than expected mining dilution. In addition, the cost per ounce was adversely affected by the normal time lag in gold processing inherent in developing the new heap leach pads at the West Plant. A comparison of key production statistics for the twelve months ended December 31, 1995 and 1994 is shown in Table 4. Royalties. In 1995 and 1994, royalties were payable at approximately 3% of revenues, the minimum permitted by law, principally because of a sustained level of capital expenditures and associated capital allowances since inception of the project. General and Administrative Costs. General and administrative costs increased by 17%, primarily as a result of increases in salaries and benefits relating to the GMU collective bargaining agreement, commercial insurance premiums, 18 22 employee transportation costs, consulting expenses and bank charges. This increase in costs was more than offset by higher production levels, resulting in a net decrease in costs of $4 per ounce in 1995. Depreciation and Amortization. Development cost amortization decreased by $4 per ounce principally because development costs at the West Plant expansion were significantly lower than the original East Plant. Development costs at each of the East Plant and West Plant are amortized over 950,000 ounces of production. As a result, since the West Plant was commissioned in the third quarter of 1994, the weighted average amortization per ounce decreased slightly. Other. Other costs increased by $1 per ounce in 1995 compared with 1994 because of an increase in exploration core drilling. Interest and Other Costs. The $3 per ounce decrease in interest and other costs in 1995 compared with 1994 was attributable principally to lower interest expense and gold price floor program premiums, offset partially by an increase in foreign exchange losses. Since the beginning of 1994, outstanding loan principal balances decreased by $8.9 million resulting in a $2 per ounce decrease in interest expense. In addition, put option premiums incurred to maintain a gold price floor program of $310 per ounce decreased by approximately $2 per ounce, principally because of higher prevailing market prices when such options were purchased. In 1995, TGL experienced an increase in foreign exchange losses of less than $1 per ounce compared with the prior year. Income Taxes. The statutory rate for mining companies in Ghana in 1995 and 1994 was 35%. Exclusive of the $4.4 million adjustment of cumulative deferred income taxes accrued prior to 1994, the effective tax rates in 1995 and 1994 were 35% and 33%, respectively. Liquidity and Capital Resources Cash Flow. PGL's cash balances decreased by $1.3 million to $1 million during 1996. Sixty percent, or $0.6 million, of TGL's cash balances remain in escrow and are unavailable to pay short-term obligations. Cash generated from operating activities aggregated $25.5 million while capital expenditures and net financing proceeds were $78.2 million and $51.4 million, respectively. Major capital expenditures during 1996 included $29.7 million for crushing, electrical, and other processing equipment associated with the Phase III mine expansion, expansion and replacement mining equipment aggregating $30.5 million, capitalized interest of $1.6 million and financing costs of $2.8 million, and recurring processing equipment costs at the original East and West Plant of $7.8 million. Exclusive of expansion capital expenditures financed by third-party loans, TGL continued to generate sufficient operating cash flow to fund all of its third-party debt service payments. Third-Party Debt. At the end of 1996, TGL's third-party debt aggregated $54.4 million, including $19 million from OPIC for which the Company is subject to limited recourse (described under "Financing Facilities" below) and $1.3 million from other sources which is guaranteed by the Company. Scheduled third-party debt service for 1997 is expected to aggregate $10.3 million, all of which is expected to be funded by mining operations revenues. Phase III Mine Expansion. In July 1995, the Board of Directors of TGL approved the Phase III expansion of the Teberebie mine. Phase III will include a further heap leach operation and the construction of a near-pit gyratory crushing facility which will act as the primary crushing facility for both the existing West Plant and the new South Plant. The Phase III expansion is expected to provide annual crushing capacity of 12 million tonnes of ore. Construction work on the project has been substantially completed and the first gold pour at the South Plant is 19 23 M A N A G E M E N T ' S D I S C U S S I O N ( C O N T I N U E D ) targeted for April 1997. Modifications to the West Plant conveyor systems are expected to be completed in late March 1997. Ten CAT 785 trucks and three CAT 5230 hydraulic shovels have been delivered to the site and good progress has been made in training operators on the new equipment. The cost of the expansion is expected to aggregate approximately $57 million, including 1996 and 1995 expenditures of $48.1 million and $2.6 million, respectively. Expansion capital expenditures in 1997 are estimated at approximately $6 million, of which $4.1 million had been expended through February of 1997. Expansion capital expenditures in 1996 consisted of approximately $29.7 million for the purchase and installation of crushing and processing facilities, approximately $14 million for incremental mining equipment, and $4.4 million for capitalized interest and third-party financing fees. Financing Facilities. At inception, financing requirements for the Phase III mine expansion were estimated at $54 million. During 1996, third-party financings of approximately $54.2 million were secured, of which $53.6 million was drawn down, and $52.2 million remained outstanding at December 31, 1996. 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, 1996, TGL had drawn down SEK 93.8 million (or approximately $14.1 million). In April 1996, TGL obtained credit approval from CAT Financial Services Corporation, a wholly owned subsidiary of Caterpillar Inc. (collectively, "Caterpillar"), pursuant to which Caterpillar agreed to provide a revolving credit facility of up to $21 million to finance the purchase of Caterpillar and other mining equipment. The revolving credit facility was subject to annual renewal in January 1997 and currently is under review. In the event the credit facility is not renewed at maturity, outstanding loan balances will continue to be repaid over a five year term. At December 31, 1996, Caterpillar had issued disbursements, at TGL's request, for $20.5 million of such facility, bearing interest at fixed rates ranging from 7.85% to 8.25%, of which $1.4 million had been repaid. On October 25, 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. Disbursement under this facility occurred in early 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 or 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 to the extent that 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 government restrictions, TGL is unable to convert such proceeds to dollars to satisfy its debt service obligations to OPIC, the Company shall guarantee up to $10 million of such obligations. The Company secured insurance for this potential obligation in the beginning of 1997. In addition to third-party financing facilities, the Company provided $9.1 million in bridge financing to TGL during the first nine months of 1996, all of which has been repaid to the Company. 20 24 Risk Management. In the fourth quarter of 1996, the Company purchased put options to cover 1997 estimated production. The price of gold decreased significantly during the first quarter of 1997 reaching the price level of slightly below $340 per ounce. Should the market price of gold decline below $340 per ounce, TGL would continue to ship gold to refineries and exercise the put options, receiving payment for the difference between the market price of gold and approximately $340 per ounce. The Company maintains $65.9 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. This insurance is presently limited to a ceiling of $64.4 million; however, the Company intends to apply to increase the ceiling in 1997. There can be no assurance that such OPIC insurance will become available in 1997. The Company has also secured $9 million in foreign exchange exposure insurance from another source to hedge its 90% owned 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 TGL is changing its mining method from selective mining to bulk mining. TGL believes that this change will increase operating efficiencies and improve ore control. TGL is currently developing a new mine plan using a more sophisticated mine model and historical production data. The new mine plan will: (i) incorporate a new, modified pit design, (ii) facilitate the change in mining method, and (iii) address the previously disclosed slope instability problem. Until the new mine plan is complete, TGL cannot quantify the effect that the new mine plan will have on the calculation of previously reported proven and probable in situ mineable reserves of 9.1 million ounces. TGL anticipates, however, that proven and probable in situ mineable reserves will be reduced. TGL produced its one millionth ounce of gold in January 1997, and estimates production of approximately 300,000 ounces in 1997. The 1997 production estimate assumes the successful implementation of TGL's Phase III mine expansion, including the start-up of the new gyratory crusher and South Plant, and the timely completion of scheduled modifications to the West Plant. There can be no assurance that events beyond the control of TGL will not negatively affect the current timetable. Timber Business Liquidity and Capital Resources The Company's Russian venture, Forest-Starma, in which the Company has a 76% direct interest and a 2.1% indirect interest, is pursuing the development of timber production under a long-term lease comprising 129,900 hectares in the aggregate with annual cutting rights of 245,000 cubic meters awarded to the venture in the Khabarovsk Territory of Russia. The Company is in the process of confirming with governmental authorities that it has been granted additional annual cutting rights of approximately 450,000 cubic meters and additional hectarage. Forest-Starma has developed a site, including a jetty, from which it exports timber for markets in the Pacific Rim, primarily Japan. Timber harvesting commenced in the first quarter of 1995 and the first shipments of timber totaling approximately 30,000 cubic meters occurred in the third and fourth quarters 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 were used to offset capitalized development costs. During the first quarter of 1997, the Company commenced commercial production of timber and amortization of deferred development costs. 21 25 M A N A G E M E N T ' S D I S C U S S I O N ( C O N T I N U E D ) Capital required by this venture is now projected at approximately $49 million through the end of 1997, including $41.5 million in subordinated debt and accrued interest provided by the Company and $7.4 million in third-party outstanding financing. Forest-Starma completed a $9.3 million project financing, guaranteed by OPIC, in early July 1996, of which $8.7 million was outstanding at December 31, 1996. The underlying note is payable in fourteen 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. By the end of 1997, $1.9 million of principal will be paid on this third-party financing, leaving an outstanding balance of $7.4 million. During the second half of 1996, Forest-Starma applied for $6.5 million in additional OPIC guaranteed financing for an expansion planned in 1997. These funds will offset, in part, the subordinated debt provided by the Company for the 1997 expansion. Direct investments by the Company in Forest-Starma aggregated $27.1 million at December 31, 1996. Forest-Starma is expected to produce in excess of 300,000 cubic meters of timber in 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 1995, Amgun-Forest and 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. The Company has a 75.6% direct interest and 1.3% indirect interest in Amgun-Forest and a 62% direct 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. Preliminary estimates for these two projects are that, prior to securing third-party financing, the Company will provide funding of approximately $1 million in 1997. General The Company's liquid assets consisting of cash and marketable securities (exclusive of gold mining operations) increased by $24.3 million in 1996 to $57.4 million principally from increased cash and investments in certain Russian government securities by Pioneer Bank. The Company entered into an agreement in June 1996 with a syndicate of commercial banks for a senior credit facility (the "Credit Facility") in the amount of $115 million. Under the Credit Facility, the Company may borrow up to $35 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 22 26 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 1.25%, 1.50%, or 1.75% in the first year of the agreement and 0.75%, 1.25%, 1.50% or 1.75% for the remaining term as defined under the agreement. 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 March 14, 1997, the Company had borrowed $34 million under the B-share Revolver and $56 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, 1996, 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, 1996, the Company had entered into five 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 $90 million. Under these agreements, the Company will pay the bank a weighted average fixed rate of 6.79%, plus the applicable margin (1.25%), 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 $1.9 million at December 31, 1996, which amount represents the estimated amount the Company would be obligated to pay to terminate the agreements. In order to accommodate projected mutual fund sales, the Company is currently negotiating to increase the B-share Revolver by $25 million. There can be no assurance that the Company will be successful in increasing the borrowing availability under the B-share Revolver. In December 1996, the Company's wholly owned subsidiary, Pioneer Real Estate Advisors, Inc. ("PREA"), entered into an agreement with a bank providing for a $2.6 million line of credit to finance property development activities in Russia. Advances under the line bear interest at the rate of LIBOR (3 months) plus 6%. The credit facility, which expires on January 5, 1999, provides for an arrangement fee of 0.25% of the total commitment and an annual commitment fee of 0.50% of the unused portion of the facility. At March 14, 1997, PREA had borrowed $1.5 million under the facility. 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 23 27 M A N A G E M E N T ' S D I S C U S S I O N ( C O N T I N U E D ) 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 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 generate higher management fees and distribution fees (which are based on assets of the funds). 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 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 were 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 and net income 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 24 28 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 electricity, explosives, diesel fuel, 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 the 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. 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 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 commenced commercial production of timber at Forest-Starma during the first quarter of 1997. 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 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 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. 25 29 [photo of texture] 26 30 R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts, February 21, 1997 27 31 Consolidated Statements of Income Dollars in Thousands Except Per Share Amounts
Year Ended December 31, 1996 1995 1994 ---------- ---------- ---------- Revenues and sales: Investment management fees $87,843 $ 64,604 $ 64,251 Underwriting commissions and distribution fees 16,636 8,515 12,768 Shareholder services fees 25,340 22,447 19,820 Securities and interest income--banking activities 14,966 -- -- Trustee fees and other income 16,048 12,909 7,279 ---------- ---------- ---------- Revenues from financial services businesses 160,833 108,475 104,118 Gold sales 78,279 90,242 67,584 ---------- ---------- ---------- Total revenues and sales 239,112 198,717 171,702 ---------- ---------- ---------- Costs and expenses: Management, distribution, shareholder service and administrative expenses 133,331 94,003 76,885 Interest expense--banking activities 6,068 -- -- Gold mining operating costs and expenses 72,563 64,905 42,683 ---------- ---------- ---------- Total costs and expenses 211,962 158,908 119,568 ---------- ---------- ---------- Other (income) expense: Unrealized and realized (gains) losses on venture capital and marketable securities investments, net (12,279) (9,345) 946 Interest expense 3,318 1,024 1,305 Public offering costs -- 4,863 -- Other, net 2,446 735 112 ---------- ---------- ---------- Total other (income) expense (6,515) (2,723) 2,363 ---------- ---------- ---------- Income before provision for federal, state and foreign income taxes and minority interest 33,665 42,532 49,771 Provision for federal, state and foreign income taxes 11,548 16,598 18,613 Cumulative deferred foreign income tax adjustment -- -- (4,431) ---------- ---------- ---------- Net provision for federal, state and foreign income taxes 11,548 16,598 14,182 ---------- ---------- ---------- Income before minority interest 22,117 25,934 35,589 ---------- ---------- ---------- Minority interest 3,280 3,123 2,129 ---------- ---------- ---------- Net income $18,837 $ 22,811 $ 33,460 ========== ========== ========== Earnings per share $0.74 $0.90 $1.32 ========== ========== ========== Weighted average common and common equivalent shares outstanding 25,460,000 25,311,000 25,354,000 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 28 32 Consolidated Balance Sheets Dollars in Thousands Except Per Share Amount
December 31, 1996 1995 -------- -------- Assets Current assets: Cash and cash equivalents, at cost which approximates fair value $ 30,813 $ 27,809 Restricted cash 1,664 -- Investment in marketable securities, at fair value 27,542 7,630 Receivables: From securities brokers and dealers for sales of mutual fund shares 9,010 12,385 From Pioneer Family of Mutual Funds 13,978 4,754 For securities sold 2,600 -- For gold shipments 2,686 5,410 Other 14,912 9,331 Mining inventory 23,502 15,605 Other current assets 12,607 8,295 -------- -------- Total current assets 139,314 91,219 -------- -------- Noncurrent assets: Mining operations: Mining equipment and facilities (net of accumulated depreciation of $56,143 in 1996 and $42,631 in 1995) 107,807 46,980 Deferred mining development costs (net of accumulated amortization of $13,455 in 1996 and $11,420 in 1995) 10,675 9,622 Cost of acquisition in excess of net assets acquired (net of accumulated amortization of $9,268 in 1996 and $6,501 in 1995) 22,945 24,784 Long-term venture capital investments, at fair value (cost $46,651 in 1996 and $38,802 in 1995) 59,872 44,520 Long-term investments, at cost 15,996 16,934 Timber project in development: Timber equipment and facilities 11,852 11,486 Deferred timber development costs 25,713 16,297 Timber inventory 1,406 1,487 Building in progress 22,340 12,239 Furniture, equipment and leasehold improvements (net of accumulated depreciation and amortization of $13,293 in 1996 and $10,558 in 1995) 14,368 13,766 Loans to bank customers 6,632 -- Dealer advances (net of accumulated amortization of $8,613 in 1996 and $2,563 in 1995) 34,293 17,095 Other noncurrent assets 19,999 12,640 -------- -------- Total noncurrent assets 353,898 227,850 -------- -------- $493,212 $319,069 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Payable to funds for shares sold $ 8,996 $ 12,369 Accounts payable 25,633 9,534 Accrued expenses 24,751 19,413 Customer deposits 15,328 -- Payable for securities purchased 2,040 -- Short-term borrowings--banking activities 5,573 -- Accrued income taxes 1,690 1,169 Current portion of notes payable 10,002 56,053 -------- -------- Total current liabilities 94,013 98,538 -------- -------- Noncurrent liabilities: Notes payable, net of current portion 149,500 11,048 Deferred income taxes, net 25,569 14,503 -------- -------- Total noncurrent liabilities 175,069 25,551 -------- -------- Total liabilities 269,082 124,089 -------- -------- Minority Interest 61,657 44,637 -------- -------- Commitments and Contingencies (Note 10) Stockholders' Equity: Common stock, $0.10 par value; authorized 60,000,000 shares; issued 25,013,763 in 1996 and 24,833,508 shares in 1995 2,501 2,483 Paid-in capital 11,450 7,660 Retained earnings 152,457 143,603 Treasury stock at cost, 910 shares in 1996 and 0 shares in 1995 (16) -- -------- -------- 166,392 153,746 Less--Deferred cost of restricted common stock issued (3,919) (3,403) -------- -------- Total stockholders' equity 162,473 150,343 -------- -------- $493,212 $319,069 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 29 33 Consolidated Statements of Changes in Stockholders' Equity Dollars in Thousands Except Per Share Amounts
Deferred Common Stock Cost Total ------------------------------ of Stock- Shares Paid-in Retained Treasury Restricted holders' Issued Amount Capital Earnings Stock Stock Equity ------ ------ ------- -------- ----- ----- ------ Balance, December 31, 1993 12,348,980 $1,235 $ 3,708 $105,026 $(693) $(2,102) $107,174 ---------- ------ ------- -------- ----- ------- -------- Add (Deduct): Net income -- -- -- 33,460 -- -- 33,460 Dividends paid--$0.315 per share -- -- -- (7,771) -- -- (7,771) Stock split in the form of a 100% stock dividend 12,348,980 1,235 (1,235) -- -- -- -- Shares awarded under the 1990 restricted stock plan, (101,460 shares) -- -- 736 -- 551 (1,282) 5 Amortization of deferred cost of restricted common stock issued -- -- -- -- -- 991 991 Additional tax benefits from stock plans -- -- 429 -- -- -- 429 Forfeitures of shares awarded under the 1981 and 1990 restricted stock plans (34,720 shares) -- -- -- -- (198) 198 -- Exercise of stock options awarded under the 1988 stock option plan (32,000 shares) -- -- (39) -- 173 -- 134 ---------- ------ ------- -------- ----- ------- -------- Balance, December 31, 1994 24,697,960 $2,470 $ 3,599 $130,715 $(167) $(2,195) $134,422 ---------- ------ ------- -------- ----- ------- -------- Add (Deduct): Net income -- -- -- 22,811 -- -- 22,811 Dividends paid--$0.40 per share -- -- -- (9,923) -- -- (9,923) Shares awarded under the 1990 and 1995 restricted stock plans, (127,337 shares) 94,003 9 2,468 -- 220 (2,609) 88 Shares purchased under the 1995 employee stock purchase plan (18,228 shares) 16,880 1 398 -- 17 -- 416 Amortization of deferred cost of restricted common stock issued -- -- -- -- -- 1,329 1,329 Additional tax benefits from stock plans -- -- 1,049 -- -- -- 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) 24,665 3 146 -- 2 -- 151 ---------- ------ ------- -------- ----- ------- -------- Balance, December 31, 1995 24,833,508 $2,483 $ 7,660 $143,603 $ -- $(3,403) $150,343 ---------- ------ ------- -------- ----- ------- -------- Add (Deduct) Net income -- -- -- 18,837 -- -- 18,837 Dividends paid--$0.40 per share -- -- -- (9,983) -- -- (9,983) Shares awarded under the 1995 restricted stock plan (78,137 shares) 74,667 8 2,041 -- 66 (1,951) 164 Shares purchased under the 1995 employee stock purchase plan (33,433 shares) 17,368 2 351 -- 365 -- 718 Amortization of deferred cost of restricted common stock issued -- -- -- -- -- 1,221 1,221 Additional tax benefits from stock plans -- -- 664 -- -- -- 664 Forfeiture of shares awarded under the 1990 and 1995 restricted stock plans (12,225 shares) -- -- -- -- (214) 214 -- Shares issued and returned to treasury 10,070 -- 273 -- (273) -- -- Exercise of stock options awarded under the 1988 stock option plan (80,000 shares) 78,150 8 461 -- 40 -- 509 ---------- ------ ------- -------- ----- ------- -------- Balance, December 31, 1996 25,013,763 $2,501 $11,450 $152,457 $ (16) $(3,919) $162,473 ========== ====== ======= ======== ===== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 30 34 Consolidated Statements of Cash Flows Dollars in Thousands
Year Ended December 31, 1996 1995 1994 --------- -------- -------- Cash flows from operating activities: Net income $ 18,837 $ 22,811 $ 33,460 --------- -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,952 23,667 17,689 Unrealized and realized (gains) losses on venture capital and marketable securities investments, net (12,279) (9,345) 946 (Equity in earnings of) provision on other investments 107 (438) (1,010) Restricted stock plan expense 1,221 1,329 991 (Prepaid) deferred income taxes 11,066 (2,404) (1,256) Minority interest 3,280 3,123 2,129 Changes in operating assets and liabilities: Investments in marketable securities, net (19,216) (422) 8,350 Receivable from securities brokers and dealers for sales of mutual fund shares 3,375 (4,979) 800 Receivables for securities sold (2,600) -- -- Receivables for gold shipments 2,724 (1,017) (2,586) Receivables from Pioneer Family of Mutual Funds and other (14,805) (2,547) 1 Mining inventory (7,897) (3,724) (6,665) Other current assets (4,626) (2,163) (1,800) Other noncurrent assets (5,642) (898) (143) Payable to funds for shares sold (3,373) 5,294 (794) Accrued expenses and accounts payable 21,437 6,853 2,260 Payable for securities purchased 2,040 -- -- Accrued income taxes 1,185 1,470 (1,038) --------- -------- -------- Total adjustments 5,949 13,799 17,874 --------- -------- -------- Net cash provided by operating activities 24,786 36,610 51,334 --------- -------- -------- Cash flows from investing activities: Purchase of mining equipment and facilities (74,789) (15,601) (16,147) Deferred mining development costs (3,088) (959) (2,274) Additions to furniture, equipment and leasehold improvements (5,309) (6,592) (6,195) Building in progress (10,101) (7,909) -- Long-term venture capital investments (14,256) (26,564) (4,134) Proceeds from sale of long-term venture capital investments 9,576 6,985 3,569 Loans to bank customers (6,632) -- -- Deferred timber development costs (9,532) (8,633) (7,388) Timber equipment and facilities (366) (7,001) (4,485) Timber inventory 81 (1,487) -- Other investments (1,824) (4,086) (3,130) Cost of acquisition in excess of net assets acquired (928) (96) (470) Acquisition of Russian investment operations, net of cash acquired -- 4,180 -- Long-term investments (5,353) (7,791) -- Proceeds from sale of long-term investments 7,200 8,935 -- --------- -------- -------- Net cash used in investing activities (115,321) (66,619) (40,654) --------- -------- -------- Cash flows from financing activities: Dividends paid (9,983) (9,923) (7,771) Distributions to minority interestholders subsidiary (354) (350) -- Distributions to limited partners of venture capital subsidiary (23) (11) (62) Additional minority interest capital raised by foreign subsidiaries 6,269 -- -- Employee stock purchase plan 718 416 -- Exercise of stock options 509 151 134 Restricted stock plan award 164 88 5 Dealer advances (23,247) (14,913) (4,745) Customer deposits 15,328 -- -- Short-term borrowings--banking activities 5,573 -- -- Borrowings 174,460 53,000 10,000 Amounts raised by venture capital investment partnerships 7,848 20,839 -- Repayments of notes payable (82,059) (14,597) (6,592) Reclassification of restricted cash (1,664) -- 2,227 --------- -------- -------- Net cash provided by (used in) financing activities 93,539 34,700 (6,804) --------- -------- -------- Net increase in cash and cash equivalents 3,004 4,691 3,876 Cash and cash equivalents at beginning of year 27,809 23,118 19,242 --------- -------- -------- Cash and cash equivalents at end of year $ 30,813 $ 27,809 $ 23,118 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 31 35 Notes to Consolidated Financial Statements December 31, 1996 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 31 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 three 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 three 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 ("PFR"). In 1996, PFR entered into a subscription agreement with the International Finance Commission ("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, and is reflected in other accounts receivable. The entire commitment is included in minority interest liability. Adjustments will be 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. The Company also participates in several natural resource development ventures in Russia, including a project pursuing the development of timber production in the Russian Far East, in which the Company has a 76% direct interest and a 2.1% indirect interest. 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 mining reclamation costs, as discussed herein. Certain reclassifications have been made to 1995 and 1994 amounts to conform with the 1996 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. Income taxes paid were approximately $1,149,000, $16,617,000 and $16,440,000 in 1996, 1995 and 1994, respectively. In addition, $7,263,000, $2,587,000 and $1,329,000 of interest was paid in 1996, 1995 and 1994, respectively. The amounts paid in 1996 and 1995 include approximately $4,800,000 and $1,800,000, respectively, of interest that was capitalized related to the development of the Company's building in progress, Russian timber operations and the mining Phase III expansion operations. 32 36 Notes to Consolidated Financial Statements (Continued) 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: Fair value of assets acquired $ 42,899 Cash paid (14,004) -------- Liabilities assumed $ 28,895 ======== 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. 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 the caption Securities and interest income from banking 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. Securities and interest income from banking activities is related to the Bank's securities dealing and lending activities. The Bank is a principal dealer of certain Russian Government securities including GKO and OFZ bonds, and also conducts a modest amount of commercial lending. Securities and interest income includes interest earned on the bonds while they are held, net realized gains on the sale of the bonds to third parties, net unrealized gains 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 $340 per ounce. Prior to 1996, the Company purchased put options to protect against declines in the market price of gold below $310 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 300,000 ounces in 1997. The put options only require an initial cash outlay (the premium amount), which amounted to approximately $255,000, $150,000 and $405,000 for the years ended December 31, 1996, 1995 and 1994, 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. Should the market price of gold decline below $340 per ounce, the Company would continue to ship gold to refineries and exercise the put options, receiving payment for the difference between the market price of gold and $340. These receipts would be included as gold sales in the accompanying consolidated statements of income. As of December 31, 1996, no put options have been exercised. 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 in Progress Building in progress represents the construction of the Meridian Commercial Tower in Russia. The Meridian Commercial Tower is an office building which will be leased upon completion and is wholly owned by the First Voucher Fund. The Company owns a 51% interest in the First Voucher Fund. At December 31, 1996 and 1995, included in the building in progress balance is capitalized interest of approximately $1.4 and $0.5 million, respectively. 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. 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. 33 37 Notes to Consolidated Financial Statements (Continued) 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 (approximately $1.6 million in 1996) 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 (approximately $3.7 million and $1.4 million at December 31, 1996 and 1995, respectively), 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. Timber Equipment and Facilities Timber equipment and facilities consist of logging machinery and building and housing units. 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 13), 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: December 31, 1996 1995 ---- ---- (Dollars in thousands) Mutual of Omaha Fund Management Company $18,649 $20,768 Russian investment operations 2,458 2,050 Gold mining operations 1,592 1,966 Polish brokerage operations 246 -- ------- ------- $22,945 $24,784 ======= ======= Valuation of Long-Term Venture Capital Investments The Company's long-term venture capital investments consist of the following (in thousands): December 31, 1996 1995 ---- ---- Domestic $47,354 $30,564 Non-U.S. 12,518 13,956 ------- ------- $59,872 $44,520 ======= ======= 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. 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, 1996, the value of securities for which market quotes are not available was $36,105,000. In addition, total domestic venture capital investments included cash that has been restricted for the future purchase of venture capital investments of $2,583,000. 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, 1996, the value of securities for which market quotes are not available was $10,926,000. In addition, total non-U.S. venture capital investments included cash that has been restricted for the future purchase of venture capital investments of $1,592,000. In determining fair value, investments are initially stated at cost until significant subsequent events require a change in 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. Given the fact that the markets in which these investments are made and traded are not of the breadth and scope of the U.S. or other mature markets, fair values are not readily determinable. Accordingly, the Company values these investments at cost with adjustments for impairment, if needed. 34 38 Notes to Consolidated Financial Statements (Continued) 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, carrying values of the Company's financial instruments approximate fair value. Earnings Per Share Earnings per share ("EPS") are based on the weighted average number of common and common equivalent shares outstanding. Fully diluted EPS were not materially different from primary EPS. Stockholders' Equity In 1994, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock payable in the form of a 100% stock dividend for stockholders of record on December 1, 1994. A total of 12,348,980 shares of common stock were issued in connection with this split. The stated par value of each share was not changed from $0.10. A total of approximately $1,235,000 was reclassified from the Company's additional paid-in capital account to the Company's common stock account. All share and per share amounts have been restated to retroactively reflect the stock split. Foreign Currency Translation In accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," the "functional currency" for translating the accounts of the Company's operations outside the U.S. is the U.S. dollar. This includes the Company owned operations in highly inflationary economies. As a result, all foreign currency gains and losses of these operations are included in the consolidated statements of income. The impact on the consolidated statements of income was a loss of approximately $1.3 million in 1996. The impact in the previous two years was immaterial. Long-Lived Assets On January 1, 1996, the Company adopted Financial Accounting Standards Board ("FASB") SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 in progress 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 this asset. There was no impact upon the adoption of SFAS 121. 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: December 31, 1996 1995 ---- ---- (Dollars in Thousands) Gold-in-process $ 1,658 $ 1,485 Materials and supplies 21,844 14,120 ------- ------- $23,502 $15,605 ======= ======= Note 4--Mining Equipment and Facilities December 31, 1996 1995 -------- -------- (Dollars in Thousands) Mobile mine equipment $ 62,177 $ 31,482 Crusher 22,550 18,460 Processing plant and laboratory 5,040 4,911 Leach pads and ponds 19,318 15,726 Building and civil works 10,813 10,595 Office furniture and equipment 1,798 1,731 Motor vehicles 2,307 1,756 Construction in progress 37,937 3,161 Other assets 2,010 1,789 -------- -------- Total cost 163,950 89,611 Accumulated depreciation (56,143) (42,631) -------- -------- $107,807 $ 46,980 ======== ======== 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: 1996 1995 1994 ---------- ---------- --------- (Dollars in Thousands) Domestic $26,484 $10,824 $ 9,417 Foreign 7,181 31,708 40,354 ---------- ---------- --------- $33,665 $42,532 $49,771 ========== ========== ========= The components of the provision for federal, state and foreign income taxes consist of: 1996 1995 1994 ---------- ---------- ---------- (Dollars in Thousands) Current: Federal $ 1,197 $ 260 $ 3,076 State 376 68 1,246 Foreign (1,091) 18,674 12,228 Deferred (Prepaid): Federal 6,326 4,072 93 State 2,531 1,438 46 Foreign 2,209 (7,914) (2,507) ---------- ---------- ---------- $11,548 $16,598 $14,182 ========== ========== ========== 35 39 Notes to Consolidated Financial Statements (Continued) Income taxes, as stated as a percentage of income before provision for federal, state and foreign income taxes, are comprised of the following: 1996 1995 1994 -------- -------- --------- Federal statutory tax rate 35.0% 35.0% 34.0% Increases (decreases) in tax rate resulting from: State income tax (net of effect on federal income tax) 5.6 2.3 2.1 Foreign income taxes (3.6) 2.5 (7.2) Tax exempt income (4.2) -- -- Other, net 1.5 (0.8) (0.4) -------- -------- --------- Effective tax rate 34.3% 39.0% 28.5% ======== ======== ========= In 1994, the Republic of Ghana reduced the income tax rate for mining companies from 45% to 35%. As a result, the Company's 1994 earnings were enhanced by 16 cents per share, on 90% of a $4.4 million reduction in income taxes deferred since the commencement of TGL's commercial operations in April, 1991 through December 31, 1993. The approximate income tax effect of each type of temporary difference is as follows: 1996 1995 ------------ ----------- (Dollars in Thousands) Deferred taxes related to foreign mining operations $ (9,628) $ (7,472) Deferred development costs -- 218 Foreign tax credit -- 491 Deferred rent 464 426 Restricted stock 848 658 Reserves 1,669 264 Dealer advances (14,244) (7,040) Prepaid insurance (104) (109) Venture capital and other investments (5,206) (2,336) Other temporary differences, net 632 397 ------------ ----------- $(25,569) $(14,503) ============ =========== 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 $40,061,000 at December 31, 1996. Note 6--Stock Plans The Company has a Restricted Stock Plan ("the 1995 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 600,000 shares of the Company's stock may be awarded to participants under the 1995 Plan at a price to be determined by the Board of Directors, generally $0.10 per share. The 1995 Plan expires in 2005. The Company's 1990 Restricted Stock Plan (the "1990 Plan") expired in January 1995. The 1995 Plan and the 1990 Plan are collectively referred to as the "Plans." The following tables summarize restricted stock plan activity for the Plans in 1996. Unvested Shares -------------------------------------- 1995 Plan 1990 Plan Total ------------ ------------ ------------ Balance at 12/31/95 600 401,969 402,569 Awarded 78,137 -- 78,137 Vested (6,752) (132,208) (138,960) Forfeited (2,305) (9,920) (12,225) ------------ ------------ ------------ Balance at 12/31/96 69,680 259,841 329,521 ============ ============ ============ Vested Shares ------------------------------------ 1995 Plan 1990 Plan Total ------------ ------------ ---------- Balance at 12/31/95 3,337 353,450 356,787 Vested 6,752 132,208 138,960 ------------ ------------ ---------- Balance at 12/31/96 10,089 485,658 495,747 ============ ============ ========== The Company awarded 3,937 shares in 1995 under the 1995 Plan. The Company awarded 123,400 shares in 1995 and 101,460 shares in 1994 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, less the applicable tax benefit, is being amortized on a straight-line basis over a five-year period. The Company also maintains the 1988 Stock Option Plan ("the Option Plan"), pursuant to which options on the Company's stock may be granted to key employees of the Company. The Company has reserved an aggregate of 2,400,000 shares for issuance under the Option Plan. Both incentive stock options intended to qualify under Section 422A of the Internal Revenue Code of 1986 and non-statutory options not intended to qualify for incentive stock option treatment ("non-statutory options") may be granted under the Option Plan. The Option Plan is administered by the Board of Directors or a committee of disinterested directors designated by the Board ("the Committee"), and unless the Option Plan is terminated earlier, no option may be granted after August 1, 1998. The option price per share is determined by the Board of Directors or the Committee, but (i) in the case of incentive stock options, may not be less than 100% of the fair market value of such shares on the date of option grant, and (ii) in the case of non-statutory options, may not be less than 90% of the fair market value on the date of option grant. Options issuable under the Option Plan become exercisable as determined by the Board of Directors or the Committee over a period 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. On May 4, 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 36 40 Notes to Consolidated Financial Statements (Continued) 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 1996 and 1995, the Company issued 33,433 shares and 18,228 shares under the 1995 Purchase Plan, respectively. The Company records stock compensation in accordance with APB 25. Had the compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123 (Accounting for Stock-Based Compensation), the Company's net income and earnings per share would have been the following pro forma amounts: 1996 1995 ---------- ---------- Net income: As reported $18,837 $22,811 Pro forma $18,369 $22,718 Primary EPS: As reported $ 0.74 $ 0.90 Pro forma $ 0.72 $ 0.90 The weighted-average grant-date fair value of options granted during 1996 and 1995 was approximately $3,086,000 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: 1996 1995 ------------ ----------- Volatility 34% 36% Risk-Free interest rate 6.6% 5.6% Dividend yield 1.71% 1.71% Expected life of options 9 years 9 years 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: 1996 1995 ------------- ------------ Volatility 18% 28% Risk-Free interest rate 5.8% 5.6% Dividend yield 1.71% 1.71% Expected life of options 6 months 6 months Because the Statement 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 Plan activity for the three years ended December 31, 1996. Weighted Average Number of Exercise price shares per share ----------------------------- Outstanding at December 31, 1993 1,635,000 $ 5.76 Granted 191,500 $20.38 Exercised (32,000) $4.188 ----------------------------- 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 281,000 $24.85 Exercised (80,000) $ 6.34 ----------------------------- Outstanding at December 31, 1996 2,178,000 $11.58 Exercisable at year end 1,482,500 $ 6.96 1,482,500 of the 2,178,000 options outstanding at December 31, 1996 have exercise prices between $4.1875 and $27.50, with a weighted average exercise price of $6.96 and a weighted average remaining contractual life of 4.6 years. All of these options are exercisable. The remaining 695,500 options have exercise prices between $6.125 and $28.625, with a weighted average exercise price of $21.42 and a weighted average remaining contractual life of 8.7 years. Note 7--Net Capital As a broker-dealer, the Company is subject to the Securities and Exchange Commission's ("SEC") regulations and operating guidelines which, among other things, require the Company 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. The Company's net capital, as computed under Rule 15c3-1, was $3,793,302 at December 31, 1996 and $3,155,294 at December 31, 1995, which exceeded required net capital of $830,909 by $2,962,393 at December 31, 1996 and $979,036 by $2,176,258 at December 31, 1995. The ratio of aggregate indebtedness to net capital at December 31, 1996 was 3.29 to 1 and at December 31, 1995 was 4.65 to 1. The Company is exempt from the reserve requirements of Rule 15c3-3, since its 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. The Company 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 benefit 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 $2,531,000 in 1996, $1,930,000 in 1995 and $1,562,000 in 1994. 37 41 Notes to Consolidated Financial Statements (Continued) 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 $84,178,000 in 1996, $60,832,000 in 1995 and $62,206,000 in 1994. Underwriting commissions and distribution fees earned from the sales of mutual fund shares were approximately $16,636,000 in 1996, $8,515,000 in 1995 and $12,768,000 in 1994. Shareholder services fees earned from the mutual funds were approximately $25,340,000 in 1996, $22,447,000 in 1995 and $19,820,000 in 1994. Within the Pioneer Family of Mutual Funds, total revenues from Pioneer II were approximately $39,102,000 in 1996, $32,244,000 in 1995 and $31,237,000 in 1994. Certain partners of Hale and Dorr, the Company's legal counsel, are officers and/or directors of the Company and its subsidiaries. Amounts paid to Hale and Dorr consist of legal fees of approximately $1,189,000 in 1996, $1,587,000 in 1995 and $1,461,000 in 1994. Hale and Dorr is a partner in the law firm Brobeck Hale and Dorr International. The Company paid legal fees in the amount of approximately $188,000 in 1996 and $1,355,000 in 1995 to Brobeck Hale and Dorr International. Legal fees for 1994 paid to Hale and Dorr include immaterial legal fees paid to Brobeck Hale and Dorr International. At December 31, 1994, the Company had a receivable from an officer for $109,000. This receivable was fully paid in 1995. Note 10--Commitments U.S. rental expense for 1996, 1995 and 1994 amounted to approximately $2,977,000, $3,007,000 and $2,571,000, respectively. Future minimum payments under the leases amount to $3,495,000 in 1997, $3,591,000 in 1998, $3,516,000 in 1999, $3,371,000 in 2000, $3,448,000 in 2001 and $2,185,000 thereafter. These future minimum rental payments include estimated annual operating and tax expenses of approximately $1,527,000. Rental expense for the Polish Mutual Fund operations amounted to approximately $963,000, $863,000 and $562,000 in 1996, 1995 and 1994, respectively. The lease is open-ended and can be terminated by either the Company or the lessor upon 90 days notice. In February 1997, a dividend of $0.10 per share was declared (aggregating approximately $2,500,000) to each shareholder of record on March 10, 1997, paid on March 17, 1997. The Company is contingently liable to the Investment Company Institute Mutual Insurance Company for unanticipated expenses or losses 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 guaranteed a custody bank account in Poland in the amount of $600,000, in order to enable its broker-dealer subsidiary in Poland, to fulfill certain regulatory requirements. The Company is committed to additional capital contributions of $1.8 million to Pioneer Poland U.S. L.P. and $1.8 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, 1996, the Company was committed to additional capital contributions of $1.9 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, 1996, the Company's net worth of $162.5 million was 3.1% of the net assets of fiduciary accounts. Note 11--Notes Payable Notes payable of the Company consist of the following: December 31, 1996 1995 ---- ---- (Dollars in Thousands) Revolving Credit Agreement $87,500 -- Lines of Credit -- $52,000 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% 4,000 6,000 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, guaranteed by the Swedish Exports Credits Guarantee Board, principal payable on March 31, 1997, interest payable at 5.77%, secured by equipment 812 2,436 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 1,286 1,715 Note payable to a bank, guaranteed by the Swedish Exports Credits Guarantee Board, principal payable in ten semi-annual installments of $1,415,000 beginning no later than July 31, 1997, interest payable at 6.42% secured by equipment 14,147 -- 38 42 Notes to Consolidated Financial Statements (Continued) December 31, 1996 1995 ---- ---- (Dollars in Thousands) 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 6,042 -- 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 1,535 -- 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 5,128 -- Note payable to a supplier, principal payable in quarterly installments of $338,000 through September 15, 2001, interest payable at 8.25% secured by equipment 6,422 -- 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 a fixed rate of 6.37% 19,000 -- Project financing, guaranteed by OPIC, payable in fourteen equal semiannual installments of $620,000 through December 15, 2003, bearing interest at a fixed rate of 7.20% 8,680 -- ----------- ----------- 159,502 67,101 Less: Current portion (10,002) (56,053) ----------- ----------- $149,500 $ 11,048 =========== =========== In June 1996, the Company entered into an agreement with a syndicate of commercial banks for a senior credit facility (the "Credit Facility") in the amount of $115 million. Under the Credit Facility, the Company may borrow up to $35 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 14 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 1.25%, 1.50% or 1.75% in the first year of the agreement and 0.75%, 1.25%, 1.50% or 1.75% for the remaining term as defined under the agreement. 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, 1996, the Company had borrowed $54.5 million under the Corporate Revolver and $33 million under the B-share Revolver. The Company used the proceeds from the borrowings under the new credit facility to repay in full amounts previously borrowed under the lines of credit with a commercial bank. For the years ended December 31, 1996 and 1995, the weighted average interest rate on the borrowings under the Credit Facility and lines of credit outstanding was 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, 1996, 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, 1996, the Company entered into five five-year interest rate swap agreements with a member of the Company's banking group which has effectively fixed the interest rate on notional amounts totaling $90 million. Under these agreements, the Company will pay the bank a weighted average fixed rate of 6.79%, plus the applicable margin (1.25%), 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 $499,000 of interest expense on these swap agreements at December 31, 1996. The fair value of these agreements was $1,930,000, at December 31, 1996, which amount represents the estimated amount the Company would be obligated to pay to terminate the agreements. In order to accommodate projected mutual fund sales, the Company is currently negotiating to increase the B-share Revolver by $25 million. 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, 1996, TGL has drawn down SEK 93.8 million (or approximately $14.1 million). In April 1996, TGL obtained credit approval from Caterpillar Financial Services Corporation, a wholly owned subsidiary of Caterpillar Inc. (collectively, "Caterpillar"), pursuant to which Caterpillar agreed, subject to the fulfillment of certain conditions, to provide a revolving credit facility of up to $21 million to finance the purchase 39 43 Notes to Consolidated Financial Statements (Continued) of Caterpillar and other mining equipment. The revolving credit facility was subject to annual renewal in January of 1997 and is currently under review. In the event the credit facility is not renewed at maturity, outstanding loan balances will continue to be repaid over a five year term. At December 31, 1996, Caterpillar had issued net disbursements, at TGL's request, for $19.1 million of such facility bearing interest at fixed rates ranging from 7.85% to 8.25%. On October 25, 1996, TGL and the Company executed definitive loan agreements with OPIC pursuant to which OPIC agreed, subject to the fulfillment of certain conditions, to guarantee financing up to $19 million with respect to the Phase III expansion. Disbursement under this facility occurred in early 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 and 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 $9.0 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 to the extent that the percentage of gold proceeds that TGL must retain in Ghana increases above a certain threshold, and, as a result of regulatory or other government restrictions, TGL is unable to convert such proceeds to satisfy its debt service obligations to OPIC, the Company shall guarantee up to $10.0 million of such obligations. The Company insured this obligation in January 1997. In addition to third party financing facilities, the Company provided $9.1 million in bridge financing to TGL during the first nine months of 1996, all of which has been repaid to the Company. Forest-Starma completed a $9.3 million project financing, guaranteed by OPIC, in early July 1996, of which $8.7 million was outstanding at December 31, 1996. The underlying note is payable in fourteen 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. By the end of 1997, $1.9 million of principal will be paid on this third party financing leaving a $7.4 million outstanding balance. During the second half of 1996, Forest-Starma applied for $6.5 million in additional OPIC guaranteed financing for an expansion planned in 1997. On December 19, 1996, Pioneer Real Estate Advisors ("PREA") entered into an agreement with a bank providing for a $2.6 million line of credit to finance property development activities in Russia. Advances under the line bear interest at the 3 month LIBOR rate plus 6%. The line, which expires on January 5, 1999, provides for an arrangement fee of 0.25% of the total commitment and a commitment fee of 0.50% of the unused portion of the line. The first drawdown on the line of credit occurred in March 1997, in the amount of $1.5 million. Maturities of notes payable at December 31, 1996 for each of the next five years and thereafter are as follows (dollars in thousands): 1997 $ 10,002 1998 14,876 1999 11,845 2000 12,945 2001 98,106 Thereafter 11,728 -------- $159,502 ======== Note 12--Major Customers 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. During the year ended December 31, 1994, gold sales aggregated $67.6 million. During 1994, gold shipments from TGL in Ghana to two unaffiliated European refiners accounted for $43.6 million and $24.0 million, respectively, representing 100% of such total sales. Note 13--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 14--Dealer Advances Certain of the Pioneer Family of Mutual Funds maintain a multi-class share structure, whereby the participating funds offer both the 40 44 Notes to Consolidated Financial Statements (Continued) traditional front-end load shares (Class A) 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 and service 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 1996, 1995 and 1994, the Company paid B-share dealer advances in the amount of $23.2 million, $14.9 million and $4.7 million, respectively. Note 15--Financial Information by Business Segment Total revenues and income (loss) before income taxes and minority interest by business segment, excluding intersegment transactions, were as follows (dollars in thousands):
Mutual Fund Venture Investment Underwriting Capital Management and Other Banking Investments ---------- --------- ------- ----------- Year ended December 31, 1996: Revenues and sales $91,710 $ 25,767 $14,966 $ 2,582 ======= ======== ======= ======= Income (loss) before income taxes and minority interest $58,066 $(40,186)(1) $ 5,564(2) $ 5,895(3) ======= ======== ======= ======= Depreciation and amortization $ 1,600 $ 10,638 $ 76 $ 124 ======= ======== ======= ======= Capital expenditures $11,016 $ 2,604 $ 271 $ 38 ======= ======== ======= ======= Identifiable assets at December 31, 1996 $93,415 $ 86,333 $33,930 $74,050 ======= ======== ======= ======= Year ended December 31, 1995: Revenues and sales $66,874 $ 17,261 -- $ 1,833 ======= ======== ======= ======= Income (loss) before income taxes and minority interest $43,624 $(24,525)(1) -- $ 2,881(3) ======= ======== ======= ======= Depreciation and amortization $ 1,444 $ 5,917 -- $ 109 ======= ======== ======= ======= Capital expenditures $ 8,259 $ 3,068 -- $ 63 ======= ======== ======= ======= Identifiable assets at December 31, 1995 $73,103 $ 63,772 -- $56,430 ======= ======== ======= ======= Year ended December 31, 1994: Revenues and sales $64,677 $ 18,983 -- $ 574 ======= ======== ======= ======= Income (loss) before income taxes and minority interest $44,465 $(19,363) -- $(2,353)(3) ======= ======== ======= ======= Depreciation and amortization $ 870 $ 3,721 -- $ 86 ======= ======== ======= ======= Capital expenditures $ 245 $ 3,095 -- $ 11 ======= ======== ======= ======= Identifiable assets at December 31, 1994 $33,456 $ 36,164 -- $26,408 ======= ======== ======= =======
Shareholder Services Gold Mining Other Consolidated -------- ----------- ----- ------------ Year ended December 31, 1996: Revenues and sales $25,808 $ 78,279 -- $239,112 ======= ======== ======= ======== Income (loss) before income taxes and minority interest $ 2,034 $ 4,738(4) $(2,446)(5) $ 33,665 ======= ======== ======= ======== Depreciation and amortization $ 2,248 $ 16,371 $ 116 $ 31,173 ======= ======== ======= ======== Capital expenditures $ 1,481 $ 74,789 $ 366 $ 90,565 ======= ======== ======= ======== Identifiable assets at December 31, 1996 $ 7,700 $148,318 $49,466 $493,212 ======= ======== ======= ======== Year ended December 31, 1995: Revenues and sales $22,507 $ 90,242 -- $198,717 ======= ======== ======= ======== Income (loss) before income taxes and minority interest $ 1,785 $ 24,365(4) $(5,598)(5) $ 42,532 ======= ======== ======= ======== Depreciation and amortization $ 1,782 $ 15,744 -- $ 24,996 ======= ======== ======= ======== Capital expenditures $ 3,111 $ 15,601 $ 7,001 $ 37,103 ======= ======== ======= ======== Identifiable assets at December 31, 1995 $ 7,819 $ 81,512 $36,433 $319,069 ======= ======== ======= ======== Year ended December 31, 1994: Revenues and sales $19,884 $ 67,584 -- $171,702 ======= ======== ======= ======== Income (loss) before income taxes and minority interest $ 3,601 $ 23,833(4) $ (412)(5) $ 49,771 ======= ======== ======= ======== Depreciation and amortization $ 1,029 $ 12,961 $ 13 $ 18,680 ======= ======== ======= ======== Capital expenditures $ 2,575 $ 16,147 $ 4,754 $ 26,827 ======= ======== ======= ======== Identifiable assets at December 31, 1994 $ 5,656 $ 75,666 $24,735 $202,085 ======= ======== ======= ========
(1) Net of interest expense of approximately $2,778 for the year ended December 31, 1996 and $344 for the year ended December 31, 1995. (2) Net of interest expense of approximately $6,068 for the year ended December 31, 1996. (3) Net of interest expense of approximately $403, $402 and $457 for the years ended December 31, 1996, 1995 and 1994, respectively. (4) Net of interest expense of approximately $137, $278 and $548 for the years ended December 31, 1996, 1995 and 1994, respectively. (5) Net of expense related to the Company of $1,477 in 1996. Net of public offering costs of approximately $4,863 in 1995; net of interest expense related to third parties and expenses related to the Company of $300 and $977 for the year ended December 31, 1994. These expenses, excluding the public offering costs, were related to the Company's Russian ventures. 41 45 Notes to Consolidated Financial Statements (Continued) The following table details for the mutual fund underwriting and other business segment and investment management business segment total revenues and income (loss) before income taxes and minority interest by geographical region, excluding intersegment transactions (dollars in thousands):
Investment Management Eastern Europe & Russia United States - --------------------- ----------------------- ------------- Year ended 12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94 - ---------- -------- -------- -------- -------- -------- -------- Revenues and sales $12,038 $10,458 $14,886 $79,672 $56,416 $49,791 ======= ======= ======= ======= ======= ======= Income (loss) before income taxes and minority interest $ 5,718 $ 9,666 $13,680 $52,348 $33,958 $30,785 ======= ======= ======= ======= ======= ======= Depreciation and amortization $ 456 $ 218 -- $ 1,144 $ 1,226 $ 870 ======= ======= ======= ======= ======= ======= Capital expenditures $10,201 $ 7,909 -- $ 815 $ 350 $ 245 ======= ======= ======= ======= ======= ======= Identifiable assets at year end $44,169 $39,730 -- $49,246 $33,373 $33,456 ======= ======= ======= ======= ======= =======
Investment Management Consolidated - --------------------- ------------ Year ended 12/31/96 12/31/95 12/31/94 - ---------- -------- -------- -------- Revenues and sales $91,710 $66,874 $64,677 ======= ======= ======= Income (loss) before income taxes and minority interest $58,066 $43,624 $44,465 ======= ======= ======= Depreciation and amortization $ 1,600 $ 1,444 $ 870 ======= ======= ======= Capital expenditures $11,016 $ 8,259 $ 245 ======= ======= ======= Identifiable assets at year end $93,415 $73,103 $33,456 ======= ======= =======
Mutual Fund Underwriting and Other Eastern Europe & Russia United States - ---------------------------------- ----------------------- ------------- Year ended 12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94 - ---------- -------- -------- -------- -------- -------- -------- Revenues and sales $ 4,735 $ 3,953 $ 8,320 $ 21,032 $ 13,308 $ 10,663 ======== ======= ======= ======== ======== ======== Income (loss) before income taxes and minority interest $(12,370) $(4,050) $ (204) $(27,816)(1) $(20,475)(1) $(19,159) ======== ======= ======= ======== ======== ======== Depreciation and amortization $ 629 $ 268 $ 358 $ 10,009 $ 5,649 $ 3,363 ======== ======= ======= ======== ======== ======== Capital expenditures $ 931 $ 546 $ 1,262 $ 1,673 $ 2,522 $ 1,833 ======== ======= ======= ======== ======== ======== Identifiable assets at year end $ 48,345 $ 5,432 $12,785 $ 37,988 $ 58,340 $ 23,379 ======== ======= ======= ======== ======== ========
Mutual Fund Underwriting and Other Consolidated - ---------------------------------- ------------ Year ended 12/31/96 12/31/95 12/31/94 - ---------- -------- -------- -------- Revenues and sales $ 25,767 $ 17,261 $ 18,983 ======== ======== ======== Income (loss) before income taxes and minority interest $(40,186)(1) $(24,525)(1) $(19,363) ======== ======== ======== Depreciation and amortization $ 10,638 $ 5,917 $ 3,721 ======== ======== ======== Capital expenditures $ 2,604 $ 3,068 $ 3,095 ======== ======== ======== Identifiable assets at year end $ 86,333 $ 63,772 $ 36,164 ======== ======== ======== (1) Net of interest expense of approximately $2,778 for the year ended December 31, 1996 and $344 for the year ended December 31, 1995 42 46 Information Relating to Shares The Company's common stock is quoted on the NASDAQ National Market under the symbol PIOG. At March 1, 1997, the Company had approximately 4,800 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* 1996 1995 ------------------ ------------------- High Low High Low ---- --- ---- --- January--March $30-1/2 $ 26-3/8 $21-11/16 $18-1/4 April--June 28-3/4 26-1/4 28-3/4 20-7/8 July--September 27 25-3/4 29-1/4 26-7/8 October--December 26-3/4 21-3/4 29-3/8 23-1/4 * Prices reflect the closing price of the Company's common stock on the NASDAQ National Market. Dividends on Common Stock Per Share Record Date Payable Date Amount - ----------- ------------ ------ March 1, 1995 March 9, 1995 $ .10 June 1, 1995 June 9, 1995 .10 September 1, 1995 September 8, 1995 .10 December 1, 1995 December 8, 1995 .10 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 43 47 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 Trust 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 Trust Fund Joint Stock Company S.A. and Pioneer Czech Investment Company, A.S. Maurice Engleman, Director President of E.T. Software, 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; President 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 Trust 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; and 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 Trust 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. 44 60 State Street, Boston, Massachusetts 02109 48 T H E C O M P A N Y 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, 1996. 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. 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 three 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 three 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 also participates in several natural resource development ventures in Russia, including a project pursuing the development of timber productions in the Russian Far East, in which the Company has a 76% direct interest and a 2.1% indirect interest. 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 Trust 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 "Management Company (KUIF)," "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, ITI Pioneer AMC Ltd., Core Pacific Securities Investment Trust Co., Ltd., International Joint-Stock Company "Starma Holding," Closed Joint-Stock Company "Tas-Yurjah Mining Company." 49 [PIONEER LOGO] The Pioneer Group, Inc. 60 State Street 0397-3971 Boston, MA 02109 (C) The Pioneer Group, Inc. EX-21 14 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 ---------- Subsidiaries ------------ Pioneering Management Corporation Pioneer Funds Distributor, Inc. Pioneering Services Corporation Pioneer Capital Corporation Pioneer SBIC Corporation Pioneer Associates, Inc. Pioneer Plans Corporation PIOGlobal Corporation Pioneer Metals and Technology, Inc. Pioneer Investments Corporation Pioneer International Corporation Pioneer Fund Management Company, Inc. Pioneer Ventures Limited Partnership Pioneer Real Estate Advisors, Inc. Pioneer Exploration Limited Pioneer Explorer, Inc. Pioneer Omega, Inc. Pioneer First Russia, Inc. Luscinia, Inc. Theta Enterprises, Inc. 2 Pioneer Forest, Inc. Pioneer Goldfields Holdings, Inc. Pioneer Goldfields Limited Pioneer Goldfields Trustees Limited Teberebie Goldfields Limited Lobenguela Exploration and Mining Company (Private) Limited PIOGlobal Insurance Company Limited Pioneer Fonds Marketing GmbH Pioneer Management (Ireland) Limited Pioneer First Polish Trust Fund Joint-Stock Company, s.a. Pioneer Real Estate Advisors Sp z.o.o. Financial Services Limited Pioneer Polski Dom Maklerski, S.A. Pioneer Czech Investment Company, a.s. Closed Joint-Stock Company "Pioneer Metals International" Closed Joint-Stock Company "Forest-Starma" Closed Joint-Stock Company "Amgun-Forest" Closed Joint-Stock Company "Udinskoye" Closed Joint-Stock Company "Tas-Yurjah Mining Company" Closed Joint-Stock Company "Pioneer Starma Equipment" "Pioneer Investments" Closed Joint-Stock Company "Pioneer Securities" 3 Closed Joint-Stock Company "Management Company (KUIF)" First Voucher Fund Pioneer Bank (Joint-Stock Company) Closed Joint-Stock Company "Pioneer Services" Pioneering Management (Jersey) Limited Pioneer Poland U.S. (Jersey) Limited Pioneer Poland U.K. Limited Pioneer Investment Poland Limited UKS Securities Ltd. AS Holdings, Inc. EX-23 15 CONSENT OF ARTHUR ANDERSEN, LLP 1 Exhibit 23 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the incorporation of our report, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-61932, 33-59185, 33-59183. March 27, 1997 ARTHUR ANDERSEN LLP EX-27 16 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 32,477 27,542 43,186 0 23,502 139,314 225,803 (69,436) 493,212 94,013 149,500 0 0 2,501 159,972 493,212 0 239,112 0 211,962 2,446 0 3,318 30,385 11,548 0 0 0 0 18,837 .74 .74
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