-----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, THZNmO2oDRIYpCPyGu8UYQqAf98iKpAY4p3c3dbkW9uxMiLoZwbW3QF7jQGaHbe8 w7ryMxp5dZgejHkGRA21fw== 0000950135-98-002036.txt : 19980401 0000950135-98-002036.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950135-98-002036 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 000-08841 FILM NUMBER: 98580076 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 THE PIONEER GROUP, INC. 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, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From ____________ to ____________ Commission File Number 0-8841 The Pioneer Group, Inc. (Exact name of Registrant as specified in its charter) 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. [ ]. Based on the last sale price of the Registrant's Common Stock on the Nasdaq National Market of $28.875 on March 24, 1998, the aggregate market value of the shares of voting stock held by non-affiliates of the Registrant on that date was $621,603,011. As of March 24, 1998, 25,391,170 shares of the Registrant's Common Stock, $0.10 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the 1997 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV (as indicated in such parts). (2) Certain information called for by Part III (as indicated therein) is incorporated from the Registrant's definitive proxy materials for use in connection with the 1998 Annual Meeting of Stockholders. ================================================================================ 2 PART I ITEM 1. BUSINESS. OVERVIEW WORLDWIDE FINANCIAL SERVICES. The Pioneer Group, Inc., a corporation organized under the laws of the State of Delaware in 1956 (the "Company"), and its wholly owned subsidiaries, are engaged in four lines of financial services businesses in the United States: (i) investment manager to 33 open-end U.S. registered investment companies and one closed-end U.S. registered investment company (collectively, the "mutual funds") and six institutional accounts, (ii) distributor of shares of open-end mutual funds, (iii) shareholder servicing agent for open-end mutual funds, and (iv) venture capital investor and manager. The Company also provides global real estate management and advisory services to institutions and corporations in the U.S., Russia and Poland. The Company's international financial services businesses include investment operations in: (i) Warsaw, Poland, where the Company manages and distributes units of four mutual funds available to Polish Citizens, owns 98% of a brokerage company and 50% of a unitholder servicing agent and manages an institutional venture capital fund, (ii) Dublin, Ireland, where the Company distributes shares of, manages and services six offshore investment funds sold primarily in Western Europe, and (iii) Moscow, Russia, where the Company provides financial services, including investment advisory, investment banking, brokerage and transfer agency services, distributes shares of, manages and services two open-end mutual funds available to Russian citizens and owns 51% of the First Voucher Fund, the largest Russian voucher investment fund. In addition, the Company has investment management operations in the Czech Republic and has invested in investment management operations in India and Taiwan. NATURAL RESOURCE DEVELOPMENT. The Company's indirect wholly owned subsidiary, Pioneer Goldfields Limited ("Pioneer Goldfields"), conducts mining and exploration activities in the Republic of Ghana and exploration activities elsewhere in Africa. Pioneer Goldfields' principal asset is its ownership of 90% of the outstanding shares of Teberebie Goldfields Limited, which operates a gold mine in the western region of the Republic of Ghana. The Company also participates in several natural resource development ventures in Russia. The Company's subsidiary, Pioneer Forest, Inc. ("Pioneer Forest"), conducts (through three Russian subsidiaries) timber harvesting and timber development activities in the Russian Far East. Pioneer Forest's principal asset is its ownership of 95% of the outstanding shares of Closed Joint-Stock Company "Forest-Starma," which commenced commercial timber operations in January 1997. The Company also is conducting a gold exploration project in the same region. WORLDWIDE FINANCIAL SERVICES DOMESTIC INVESTMENT MANAGEMENT The Company's domestic investment management business includes the U.S. registered mutual funds, the offshore funds registered in Ireland and private institutional accounts, all of which are advised by the Company's wholly owned subsidiary, Pioneering Management Corporation ("Pioneering Management"). This business also includes distribution, shareholder servicing and transfer agency activities related to these investment products. U.S. Mutual Funds. Pioneering Management serves as investment manager to 33 domestic open-end mutual funds and one domestic closed-end mutual fund, consisting of eight domestic growth portfolios, seven international growth portfolios, nine growth and income portfolios, six income portfolios, two tax-free income portfolios and two money market portfolios. These portfolios include Pioneer Independence Fund which commenced operations in March 1998. All of these funds (hereinafter referred to collectively as the "Funds") are registered under the Investment Company Act of 1940, as amended (the "1940 Act"). 1 3 At March 15, 1998, the Funds had aggregate net assets of approximately $21.7 billion. In managing such assets, Pioneering Management employed at March 1, 1998, 135 persons on a full-time basis, including 20 fund managers and 46 investment analysts and support staff. Pioneering Management manages each Fund pursuant to a management contract which is renewable annually by vote of either the Fund's Board of Trustees (including a majority of members who are not "interested persons" as defined under the 1940 Act) or the Fund's shareholders. All management contracts terminate if assigned and may be terminated by either party without penalty on 60 days' written notice. The management contracts for the Funds (other than Funds that were established in 1997 or 1998) were all renewed for an additional year in 1997. Under these contracts, Pioneering Management is authorized in its discretion to buy and sell securities for the accounts of the Funds, subject to certain limitations. In addition, the management contracts between the Funds and Pioneering Management define the ordinary operating expenses to be assumed by each. As compensation for its management services, Pioneering Management receives management fees from the Funds that range from 0.40% to 1.25% per year of average daily net assets depending on the Fund. Three of the Funds (including the two largest Funds) have a management fee that is adjusted based upon the Fund's performance relative to the performance of an established index ("performance fees"). The Board of Trustees of three additional funds has recently approved fee increases, which, if approved by shareholders, will add performance fees to two of these three funds. For 1997, 1996 and 1995, Pioneering Management received revenues from management fees from the Funds of approximately $107 million, $76 million and $54 million, respectively. On an interim basis, Pioneering Management has agreed not to impose a portion of its management fees and to make other arrangements, if necessary, to limit operating expenses of selected Funds. Pursuant to this policy, Pioneering Management limited management fees or otherwise incurred expenses of approximately $1.8 million, $2.4 million and $3.6 million pursuant to expense limitation agreements with selected Funds during 1997, 1996 and 1995, respectively. Management fees from Pioneer II, the Company's largest Fund, were approximately $40 million, $29 million and $22 million in 1997, 1996 and 1995, respectively. Irish Offshore Funds. In 1995, subsidiaries of the Company organized three offshore funds incorporated under the laws of the Republic of Ireland, Pioneer Global Equity Fund Plc (the "Global Equity Fund"), Pioneer Global Bond Fund Plc (the "Global Bond Fund") and Pioneer DM Cashfonds Plc ("Cashfonds"). In 1997, three additional funds, Pioneer European Equity Fund Plc (the "European Equity Fund"), Pioneer U.S. Real Estate Fund Plc (the "U.S. Real Estate Fund") and Pioneer Central & Eastern European Fund Plc (the "C&E Fund"), began operations. Global Equity Fund, European Equity Fund, U.S. Real Estate Fund, C&E Fund, Global Bond Fund and Cashfonds are referred to collectively as the "Irish Funds." Pioneer Management (Ireland) Limited ("Pioneer Ireland"), a wholly owned subsidiary of the Company, serves as investment adviser, distributor and shareholder servicing agent of the Irish Funds. Pioneering Management serves as a subadvisor for the Irish Funds. As compensation for its advisory services, Pioneer Ireland receives annual management fees from each of Global Equity Fund, European Equity Fund and U.S. Real Estate Fund of 1.25% of average daily net assets. Pioneer Ireland receives annual management fees from the C&E Fund, Global Bond Fund and Cashfonds of 1.50%, 0.85% and 0.60% of average daily net assets, respectively. Pioneering Management receives a portion (not to exceed 75%) of the management fee paid to Pioneer Ireland. The Irish Funds are currently sold in Germany and Austria, but the Company anticipates that they eventually will be sold in other foreign markets. At March 15, 1998, the Irish Funds had aggregate net assets of approximately $283 million. Pioneer Ireland's main office is located in Dublin, Ireland. It also maintains an office in Hamburg, Germany. At March 1, 1998, Pioneer Ireland had 103 employees, including management and support staff. Institutional Accounts. Pioneering Management acts as an investment manager to three private institutional accounts and two collective investment vehicles for institutional investors and acts as a subadvisor to one of a series of portfolios utilized as funding vehicles for a variable life insurance fund (hereinafter referred to collectively as the "Institutional Accounts"). The Institutional Accounts had aggregate assets of 2 4 approximately $ 636 million at March 15, 1998. In 1997, the Company formed Pioneer Global Institutional Advisors to coordinate the Company's global institutional investment management initiatives. DISTRIBUTION ACTIVITIES The Company's indirect wholly owned subsidiary, Pioneer Funds Distributor, Inc. ("Pioneer Distributor"), acts as principal underwriter and distributor of the shares of the Funds (except Pioneer Interest Shares, a closed-end fund which does not continuously offer its shares). In 1997, Pioneer Distributor sold shares of the Funds with an aggregate offering price of $2.9 billion, including Class A Shares (as defined below) with an aggregate offering price of $2.0 billion, Class B Shares (as defined below) with an aggregate offering price of $558 million, Class C Shares (as defined below) with an aggregate offering price of $141 million and shares of Pioneer Variable Contracts Trust with an aggregate offering price of $211 million. In connection therewith, Pioneer Distributor received aggregate commissions of $60.9 million, of which $53.8 million was reallowed to approximately 1,400 independent broker-dealers throughout the United States and in several foreign countries. In 1996, Pioneer Distributor received aggregate commissions of $66.2 million, of which $59.1 million was reallowed to broker-dealers. In 1995, Pioneer Distributor received aggregate commissions of $58.7 million, of which $53.1 million was reallowed to broker-dealers. One broker-dealer was responsible for approximately 10% of sales in 1997, 9% of sales in 1996 and 7% of sales in 1995. Underwriting Contracts. Pioneer Distributor provides its underwriting and distribution services pursuant to underwriting contracts, which are substantially identical, with each of the Funds. These one-year contracts are renewable annually by vote of the Fund's Board of Trustees (including a majority of those Trustees who are not "interested persons" as defined under the 1940 Act) or shareholders. Each contract terminates if assigned and may be terminated by either party on 60 days' written notice without penalty. The underwriting contracts for each of the Funds (other than Funds that were established in 1997 and 1998) were all renewed for an additional year in 1997. Sales Charges. Generally, purchasers of shares of the Funds pay a sales charge at the time of purchase which is the difference between the offering price of the shares and the net asset value of the shares, and which varies generally as a percentage of the offering price. These are referred to as front-end load shares ("Class A Shares"). Sales charges on Class A Shares range from zero to 5.75% depending on the Fund and the amount invested. Most of the sales charge on Class A Shares is reallowed by Pioneer Distributor to broker-dealers through whom the shares are sold. This reallowance varies generally as a percentage of the offering price on sales under $1 million. Reallowances range from 1.0% to 5.0% depending on the Fund and the amount of the sale. Broker-dealer reallowances on new funds and during certain short-term promotions may be increased to 100% or more of the sales charge. The Company also offers a multi-class share structure for the Funds (except Pioneer Interest Shares and Pioneer Variable Contracts Trust) (the "multi-class funds") pursuant to which the multi-class funds offer both the traditional front-end load shares, or Class A Shares, as well as two classes of back-end load shares ("Class B Shares" and "Class C Shares"). On Class B Shares, the investor does not pay any sales charge unless he or she redeems before the expiration of the minimum holding period, which ranges from three to six years. These early redemptions are subject to a contingent deferred sales charge (a "CDSC"), which ranges from 2.0% to 4.0%. On Class C Shares, the investor does not pay any sales charge unless he or she redeems within one year of purchase in which event a CDSC of 1.0% is imposed. The Company began offering Class B Shares in April 1994 and Class C Shares in January 1996. Class C Shares are not available on all multi-class funds. With respect to sales of Class A Shares, Pioneer Distributor may, in its discretion, pay a commission to broker-dealers that initiate and are responsible for sales of $1 million but less than $50 million, ranging from 0.10% to 1.0%, depending on the Fund, and the amount of the sale. Certain purchases not subject to an initial sales charge may be subject to a CDSC of 1.0% in the event of certain redemption transactions within one year. With respect to sales of Class B Shares, Pioneer Distributor will generally pay commissions to broker-dealers related to sales and service of such shares ranging from 2% to 4% of the sales transaction amount (including a service fee of 0.25% for the first year). With respect to sales of Class C Shares, Pioneer 3 5 Distributor will pay commissions to broker-dealers related to sales and service of such shares of 1% of the sales transaction amount (including a service fee of 0.25% for the first year). During 1997, 1996 and 1995, in connection with sales of Class B Shares, Pioneer Distributor paid commissions to broker-dealers of $16.3 million, $23.2 million and $14.9 million, respectively. Pioneer Distributor's cash flow may be adversely affected by vigorous sales of back-end load shares because its recovery of the cost of commissions paid up front to dealers is spread over a period of years. During this period, the Company bears the costs of financing and the risk of market decline. Pioneer Distributor is reimbursed for such commissions from payments by the Funds under distribution plans (see "Distribution Plans" below) and from CDSCs paid by redeeming investors before the expiration of the holding periods. Distribution Plans. Each of the Funds (except Pioneer Interest Shares and Pioneer Variable Contracts Trust) has one or more distribution plans pursuant to Rule 12b-1 under the 1940 Act which provides for certain payments to be made to Pioneer Distributor. With respect to Class A Shares, the distribution plans (the "Class A Plans") provide for payments by such Funds of certain expenses up to 0.25% per annum of average daily net assets (0.15% for Pioneer Cash Reserves Fund, a money market fund). With respect to Class B and Class C Shares, the distribution plans (the "Class B Plans" and "Class C Plans," respectively) provide for payments by such funds of fees relating to (a) distribution services in an amount not to exceed 0.75% per annum of the average daily net assets of the Class B or Class C Shares and (b) personal and account maintenance services in an amount not to exceed 0.25% of the average daily net assets of the Class B or Class C Shares. The distribution plans are subject to annual renewals which require the approval of the Funds' Board of Trustees, including a majority of Trustees who are not "interested persons" of the Funds. In 1997, the Trustees of the Funds (other than Funds that were established in 1997 and 1998) renewed the Class A, Class B and Class C Plans. In 1997, 1996 and 1995, Pioneer Distributor received distribution fees of $13.1 million, $7.7 million and $2.5 million, respectively. Domestic Sales of Shares of the Funds. Pioneer Distributor is a registered broker-dealer (see "Regulation" below), employing approximately 120 full-time personnel, including 22 regional sales representatives who are responsible for territories comprising most of the United States and Puerto Rico and who work with broker-dealers to promote sales of Fund shares in their respective territories. Substantially all of the Funds' shares are sold to the public by securities sales persons registered with the National Association of Securities Dealers, Inc. (the "NASD") who act as representatives of broker-dealer firms, which are members of the NASD and which have signed sales agreements with Pioneer Distributor. Shares of the Funds may be sold in all states, by broker-dealers and registered representatives licensed in those states. International Sales of Shares of the Funds. Pioneer Distributor's wholly owned subsidiary, Pioneer Fonds Marketing GmbH ("Pioneer Fonds Marketing"), a company registered under the laws of the Republic of Germany, performs marketing and sales activities with respect to sales of shares of certain of the Funds in Europe, primarily Germany, Austria and Switzerland. Pioneer Fonds Marketing currently has 20 full-time employees. In 1997, approximately 16% of the total sales of the Funds' shares were sold outside of the United States. Pioneer Fonds Marketing also performs marketing and sales activities with respect to sales of the Irish Funds in Western Europe. In 1998, Pioneer Distributor established Pioneer Global Funds Distributor, Ltd. ("Global Funds Distributor") to serve as the exclusive worldwide distributor of the Irish Funds. Global Funds Distributor, a wholly owned subsidiary of Pioneer Distributor, is registered under the laws of Bermuda and maintains its registered office in that country. Global Funds Distributor will enter into an agreement with Pioneer Fonds Marketing with respect to sales of the Irish Funds in Western Europe. Additional Information. For more information on sales of mutual fund shares for the five years ended December 31, 1997, see "Sales of Mutual Fund Shares" in the 1997 Annual Report to Stockholders, which information is incorporated herein by reference. 4 6 SHAREHOLDER AND RELATED SERVICES Pioneering Services Corporation. At December 31, 1997, the Funds had approximately 1,117,000 active shareholder accounts, including approximately 386,000 Individual Retirement Accounts ("IRAs") and other tax-qualified retirement accounts. Mutual fund shareholders accounts and, in particular, qualified accounts, require an exceptional amount of shareholder communications and transfer agency services. The Company's wholly owned subsidiary, Pioneering Services Corporation ("Pioneering Services"), has been providing transfer agent and shareholder services to the Funds since in 1985. At March 1, 1998, Pioneering Services employed 308 full-time personnel, including 53 employees who are located at its processing facility in Omaha, Nebraska. As shareholder servicing agent for the Funds, Pioneering Services has entered into agreements with each Fund (except Pioneer Interest Shares) pursuant to which it received in 1997 an annual active account fee of $22.75 for equity fund accounts, $30.00 for fixed-income fund accounts and $28.00 for money market fund accounts. Such agreements are subject to annual renewals which require the approval of the Funds' Boards, including a majority of members who are not "interested persons," and may be canceled by either party on 60 days' notice. For 1997, 1996 and 1995, Pioneering Services received revenues from service fees from the Funds and Pioneer Interest Shares (in 1996 and 1995) of approximately $27 million, $25 million and $22 million, respectively. In February 1997, Pioneer Ireland assumed responsibilities as sub-shareholder servicing agent for certain of the Funds. In that capacity, Pioneer Ireland provides, under the direction of Pioneering Services, shareholder and transfer agency services to Fund shareholders who are citizens of Germany, Austria and Switzerland. Pioneer Ireland also provides similar services to the shareholders of the Irish Funds. Trustee/Custodian. The Company acts as the trustee/custodian for accounts which are IRAs or other qualified retirement accounts and receives an annual fee of $10 for each such account, payable by shareholders with such accounts, up to maximum annual fees of $20 for shareholders with multiple accounts of one plan type. Shareholders also have the option of paying a one-time fee of $100 in lieu of the annual account fee. During 1997, 1996 and 1995, the Company received fees in connection with its services as trustee/custodian of $4.4 million, $3.9 million and $3.7 million, respectively. ------------------------ For more information on assets under management and sales of mutual fund shares for the five years ended December 31, 1997, and other industry segment information for the three years ended December 31, 1997, see "Assets Under Management at December 31," "Sales of Mutual Fund Shares" and Note 16-Financial Information by Business Segment included under Notes to Consolidated Financial Statements, all of which are included in the 1997 Annual Report to Stockholders and are incorporated herein by reference. U.S. AND CENTRAL AND EASTERN EUROPE VENTURE CAPITAL U. S. VENTURE CAPITAL OPERATIONS In 1981, the Company organized a wholly owned subsidiary, Pioneer Capital Corporation ("Pioneer Capital"), for the purpose of making venture capital investments and managing venture capital funds. In 1986, Pioneer Capital organized a wholly owned subsidiary, Pioneer SBIC Corp. ("PSBIC"), which is the general partner of Pioneer Ventures Limited Partnership ("PVLP"). PVLP is a Small Business Investment Company ("SBIC") licensed by the U.S. Small Business Administration (the "SBA"). PSBIC is the general partner of PVLP and has an approximate 99% interest in PVLP. The limited partnership interests in PVLP represent a less than 1% interest in PVLP and are owned by the four officers of Pioneer Capital (the "Pioneer Capital Principals") who are responsible for the operations and overall success of PVLP. In 1995, Pioneer Capital formed Pioneer Ventures Limited Partnership II ("PVLP II"), a new SBIC. Pioneer Ventures Management L.P. ("PVM") serves as the general partner of PVLP II. PVM's general partner is Pioneer Management SBIC Corp., a corporation the shareholders of which are the Pioneer Capital Principals. PVM's limited partners are the Company and the Pioneer Capital Principals. The Company holds 5 7 an 11.7% limited partnership interest in PVLP II and a 99% limited partnership interest in PVM, which owns 2.3% of PVLP II. At March 15, 1998, PVLP II had $10.7 million of unfunded commitments from investors. At December 31, 1997, Pioneer Capital and PVLP held approximately $17.6 million of investments (at cost) in 20 privately held companies and $2.7 million (at cost) in nine publicly held companies. The aggregate value of these investments as of December 31, 1997, was $41.0 million. During 1997, Pioneer Capital and PVLP had net realized and unrealized gains of $13.8 million from their venture capital investment portfolio. At December 31, 1997, Pioneer Capital and PVLP had a total of $10.2 million in cash available for additional investments. Additional capital for investments is available to PVLP through the sale of SBA guaranteed debentures. Through December 31, 1997, PVLP had availed itself of a total of $4.95 million of SBA guaranteed debentures that mature at various times between 1998 and 2003 and bear interest at rates between 6.12% and 9.8%. At December 31, 1997, PVLP II held approximately $20.6 million of investments (at cost) in 13 privately held companies. The aggregate value of these investments as of December 31, 1997, was $24.3 million. During 1997, PVLP II had net realized and unrealized gains of $2.4 million from its venture capital investment portfolio. At December 31, 1997, PVLP II had a total of $3.7 million in cash available for additional investments. Pioneer Capital and its affiliates utilize a diversified approach to venture capital investing. Investments are in early-stage businesses seeking initial financing as well as more mature businesses in need of capital for expansion, acquisitions, management buyouts or recapitalizations. In general, Pioneer Capital, PVLP and PVLP II invest in New England-based companies in a variety of industries. At March 1, 1998, Pioneer Capital had eight employees. Venture capital investment portfolio valuations are reviewed quarterly by the Company's Board of Directors and the values of such investments are adjusted when circumstances require. As a general rule, an investment is adjusted up or down, as the case may be, to conform to the price paid by a sophisticated new third-party investor in any subsequent round of financing. An investment may also be written down if the venture company is substantially behind its business plan and may be written up if there is some other compelling reason for doing so. For PVLP and PVLP II, securities that are publicly traded are valued on a valuation date at the average of the last bid price on the valuation date and the preceding two days in the principal market in which such securities are traded, with an appropriate discount if such securities are restricted or thinly traded. For Pioneer Capital, securities that are publicly traded are valued on the valuation date at the closing price on the principal market on which such securities are traded, with an appropriate discount if such securities are restricted or thinly traded. POLISH VENTURE CAPITAL OPERATIONS In 1995, the Company's wholly owned subsidiary, Pioneer International Corporation ("Pioneer International"), organized two limited partnerships, Pioneer Poland U.S. L.P. ("PPUSLP") and Pioneer Poland U.K. L.P. ("PPUKLP"), for the purpose of raising funds for venture capital investment in Poland. Pioneer International's wholly owned subsidiaries, Pioneer Poland U.S. (Jersey) Ltd. and Pioneer Poland U.K. Ltd., are the general partners of PPUSLP and PPUKLP, respectively. During 1995, PPUSLP and PPUKLP (collectively, the "Pioneer Poland Fund") raised $60 million in commitments from U.S. and European investors. The Company has committed approximately $2.5 million to each limited partnership, of which 75% has been drawn down by the Pioneer Poland Fund. This commitment provides the Company with a 7% indirect interest in PPUSLP and a 9% indirect interest in PPUKLP. At December 31, 1997, Pioneer Poland Fund held approximately $16.4 million of investments (at cost) in eight privately held Polish companies, had committed contractually to invest an additional $7.1 million in these companies and had reserved an additional $15.6 million for future financing rounds of the existing portfolio. The value of these investments as of December 31, 1997, pursuant to the valuation guidelines established by the European Venture Capital Association, was approximately $15.7 million, exclusive of further commitments and reserves. The responsibilities for managing the Pioneer Polish Fund are shared by Pioneering Management (Jersey) Ltd. and Pioneer Investment Poland Ltd., each of which is a wholly owned subsidiary of Pioneer International. 6 8 RUSSIAN VENTURE CAPITAL OPERATIONS The Company is in the process of establishing the Pioneer Russia Direct Equity Fund, L.P. (the "Direct Equity Fund"), a fund focused on venture capital investment in Russia. The Direct Equity Fund will make investments in small- to medium- sized Russian companies that are in a position to respond to the growing consumer demand for products and services in Russia. The Company's 81.7%-owned subsidiary, Pioneer First Russia, Inc. ("PFR"), will serve as the Direct Equity Fund's investment advisor. PFR's Russian subsidiary, Pioneer Investments, will serve as the Direct Equity Fund's investment manager. The Direct Equity Fund intends to raise $150 million, primarily from U.S. and European institutional investors, during 1998. The Company will commit to invest $4.5 million in the Direct Equity Fund. See "Financial Services -- Russia" below. FINANCIAL SERVICES -- POLAND Polish Mutual Funds. In 1992, subsidiaries of the Company organized and began distributing units of Pioneer First Polish Trust Fund (the "First Polish Fund"), the first mutual fund in Poland, and organized a related joint venture unitholder services business, Financial Services Limited ("FSL"). In 1995, two additional funds, Pioneer Aggressive Investment Trust Fund (the "Aggressive Investment Fund") and Pioneer Interest Bearing Securities Trust (the "Interest Bearing Fund"), began operations. In 1997, an additional fund, Pioneer Privatization Trust Fund (the "Privatization Fund"), began operations. Pioneer First Polish Investment Fund Joint Stock Company ("Pioneer First Polish") serves as an investment manager and distributor of units of the First Polish Fund, Aggressive Investment Fund, Interest Bearing Fund and Privatization Fund (collectively, the "Polish Funds"). As compensation for its management services, Pioneer First Polish receives management fees of 2.00% per annum of average daily net assets. At March 1, 1998, Pioneer First Polish employed 109 full-time persons, including management and support staff. Pioneer First Polish is a wholly owned subsidiary of Pioneer International. At March 15, 1998, the Polish Funds had aggregate net assets of approximately $494 million. Sales of units of the Polish Funds were $203 million, $169 million and $21 million in 1997, 1996 and 1995, respectively. Financial Services Limited. In January 1992, the Company's subsidiary, Pioneer International, established FSL, which is 50% owned by Pioneer International and 50% owned by Bank Polska Kasa Opieki, S.A. FSL acts as the unitholder servicing agent for the Company's Polish mutual funds. Under the terms of the agreements with the funds, FSL receives annual fees equal to the Polish zloty ("PLN") equivalent of $21.00 per account. In 1997, such fees aggregated approximately PLN 15.1 million (approximately $4.5 million). FSL provides similar unitholder services to an unaffiliated fund group. At December 31, 1997, FSL serviced approximately 222,000 unitholder accounts. FSL employs 116 full-time persons. Polish Brokerage Operations. In March 1996, Pioneer International acquired approximately 86% of Pioneer Polski Dom Maklerski, S.A., a Polish brokerage operation ("PPDM"). Pioneer International now holds 98% of PPDM. PPDM provides brokerage services to Polish and U.S. institutions and Polish citizens. PPDM also provides investment advice and analysis and portfolio management services. FINANCIAL SERVICES -- RUSSIA In April 1995, the Company acquired approximately 51% of the shares of First Voucher Fund (the "Voucher Fund"), the largest voucher investment fund established in Russia in connection with that country's privatization program. The Voucher Fund has over 2 million shareholders and 125 portfolio investments as of March 15, 1998. The shares were issued by the Voucher Fund to two newly formed subsidiaries of Pioneer Omega, Inc. ("Pioneer Omega"), a Delaware corporation in which the Company owns 90% of the outstanding stock. The Company's Russian investment operations, which include Pioneer First (Company for the Management of Investment Funds), Pioneer Securities, Pioneer Services, Pioneer Investments and Pioneer Bank, are consolidated under Pioneer Omega's subsidiary, Pioneer First Russia, Inc. ("PFR"). In October 1996, PFR executed agreements with the International Finance Corporation ("IFC"), a member of the World Bank Group, pursuant to which IFC agreed to invest $4 million in PFR to acquire an 18.3% equity interest. This 7 9 transaction was completed in January 1997. At March 1, 1998, PFR and its subsidiaries employed 373 persons. Pioneer First serves as investment manager to the Voucher Fund and Pioneer First Unit Investment Fund, Russia's first open-ended unit investment fund. Pioneer First Unit Investment Fund, which invests mainly in Russian government bonds, was launched in November 1996. The Company launched its second open-ended unit investment fund, Pioneer First Liquid Shares, in November 1997. Pioneer Securities provides brokerage services, corporate financing and financial advisory services to Russian and western corporations and institutional investors. Pioneer Securities is a member of the National Association of Securities Market Participants (NAUFOR), the self regulatory organization for Russian brokers. Pioneer Services, a domestic registrar and shareholder services company, serves as the registrar for the Voucher Fund and the unit investment funds. Pioneer Investments will serve as investment manager to a direct equity fund to be sold to western institutional investors. See "U.S. and Central and Eastern Europe Venture Capital -- Russian Venture Capital Operations" above. Pioneer Bank, in which the Company has a 57.7% interest, is a medium-sized Russian bank with a full currency license that provides a variety of payment services in rubles and hard currency. Pioneer Bank also participates in the Russian government debt market. In February 1998, subsidiaries of the Company signed agreements pursuant to which AS Eesti Forekspank ("Forekspank"), a banking institution based in Tallinn, Estonia, agreed to acquire a 35% ownership interest in Pioneer Bank. This ownership percentage may increase depending on the earnings of the bank over the next three years. Forekspank will also participate significantly in the management of Pioneer Bank. In 1997, Russian financial services had revenues and net income of $54.5 million and $5.3 million, respectively. In 1996, this segment had revenues and net income of $21.1 million and $1.3 million, respectively. In 1995, this segment had revenues and net income of $5.8 million and $1.4 million, respectively. In 1997 and 1996, Pioneer Securities had revenues from its brokerage operations of approximately $34.2 million and $1.6 million, respectively. In 1997 and 1996, Pioneer Bank had revenues of approximately $12.3 million and $15 million, respectively, from its banking activities. FINANCIAL SERVICES -- CZECH REPUBLIC In 1995, subsidiaries of the Company organized and began distributing Pioneer Czech Investment Company Trust Fund (the "Pioneer Czech Fund") in the Czech Republic. Pioneer Czech Investment Company, a.s., a wholly owned subsidiary of Pioneer International ("Pioneer Czech"), serves as investment adviser and distributor of participation certificates in the Pioneer Czech Fund. As compensation for its management services, Pioneer Czech receives management fees of 2% of average daily net assets. Pioneer Czech employs 26 full-time persons. As of March 15, 1998, the Pioneer Czech Fund had net assets with a market value of approximately $50 million. REAL ESTATE MANAGEMENT AND ADVISORY SERVICES In 1996, the Company established Pioneer Real Estate Advisors, Inc. ("Pioneer Real Estate") to provide real estate advisory and management services to institutional investors and corporations in the U.S. and in Central and Eastern Europe, primarily Russia and Poland. Pioneer Real Estate is based in Boston and conducts its operations in Russia through representative offices in Moscow and St. Petersburg and a 65%-owned Russian subsidiary and in Poland through a wholly owned subsidiary. Pioneer Real Estate is currently pursuing two primary objectives. First, it seeks to invest and manage capital in the commercial real estate markets of Central and Eastern Europe on behalf of pooled investment vehicles, individual institutional investors and the Company. Second, it seeks to provide advisory services, including property management, facilities management, development management and feasibility and valuation analysis, to the pooled investment vehicles it manages and to third parties. In Poland, Pioneer Real Estate is developing a $60 million Polish real property fund (the "Polish Real Estate Fund") to be sold to Polish and Western institutional investors. At March 15, 1998, the Polish Real Estate Fund had received investor commitments in the aggregate amount of $22 million and significant negotiations are underway for the balance of the equity commitments. Pioneer Real Estate will commit to invest $2 million in the Polish Real Estate Fund. Pioneer Real Estate, together with its joint venture partner, 8 10 Banc One Capital Corporation, has been selected by the Overseas Private Investment Corporation ("OPIC") to operate and manage a $240 million pooled investment vehicle (the "Pioneer -- Banc One Real Estate Fund") which will invest in commercial property projects in Central and Eastern Europe, primarily Russia and the newly independent states of the former Soviet Union. The Pioneer - -- Banc One Real Estate Fund will be funded with $80 million of equity investments from Western institutional investors and $160 million of debt financing guaranteed by OPIC. Pioneer Real Estate will commit to invest $4 million in the Pioneer -- Banc One Real Estate Fund. Pioneer Real Estate expects that the Pioneer -- Banc One Real Estate Fund will become operational in the second quarter of 1998 and the balance of 1998 will be devoted to seeking capital commitments. Pioneer Real Estate also manages the real estate activities of the Company's worldwide subsidiaries. In that connection, Pioneer Real Estate, through its representative office in Moscow, manages the Meridian Commercial Towers, an 18 story office tower located in Northern Moscow, which is owned by the Voucher Fund. Pioneer Real Estate currently has 38 employees. OTHER INVESTMENT MANAGEMENT INITIATIVES India. Kothari Pioneer AMC Ltd. ("Kothari Pioneer"), an Indian company of which Pioneering Management owns 45%, Investment Trust of India Limited, an Indian corporation, owns 49%, and the employees of Kothari Pioneer own 6%, serves as investment adviser to 10 private sector mutual funds for Indian citizens. These funds had aggregate net assets of approximately $61 million at March 15, 1998. Taiwan. The Company is a 10% participant in a joint venture in Taiwan, which was organized to manage and distribute investments in Taiwanese investment companies. COMPETITION Management and Distribution Services. The mutual fund industry is intensely competitive. Many organizations in this industry are attempting to sell and service the same clients and customers, not only with mutual fund investments but also with other financial products. Some of the Company's competitors have more products and product lines and substantially greater assets under management and financial resources. The Company believes it is competitive in terms of price and performance with other firms providing similar advisory services to investment companies and to pension plans and endowment funds and with firms engaged in distributing investment company shares. The distribution of mutual fund shares has been significantly affected by (i) the growth in the number of funds available for sale, in particular, no-load funds, the shares of which are sold primarily through direct sales approaches without any sales charge, (ii) the evolution of service fees payable to broker-dealers that provide continuous services to their clients in connection with their investments in a mutual fund, (iii) the aggressive entry of banks and investment banking firms into the industry, and (iv) the development and implementation of complex distribution systems employing multiple classes of shares and master-feeder fund structures. Typically, the underwriter or distributor that pays a service fee is reimbursed by the mutual fund under a plan of distribution pursuant to Rule 12b-1 under the 1940 Act. All of the Funds distributed by Pioneer Distributor now pay such service fees to broker-dealers. See "Domestic Investment Management -- Distribution Activities -- Distribution Plans" above. Success in the investment advisory and mutual fund share distribution businesses is substantially dependent on the Funds' investment performance. Good performance stimulates sales of the Funds' shares and tends to keep redemptions low. Sales of Funds' shares generate higher management fees and distribution revenues (which are based on assets of the Funds). Good performance also attracts private institutional accounts to Pioneering Management. Conversely, relatively poor performance results in decreased sales and increased redemptions of the Funds' shares and the loss of private accounts, with corresponding decreases in revenues to the Company. In 1997, the performance of the Funds managed by Pioneering Management was generally competitive with comparable mutual funds offered by others and with relevant indices and benchmarks approved by the Funds' Boards. 9 11 Shareholder Services. The shareholder services industry is extremely competitive. Pioneering Services believes that it is providing high quality shareholder services for the Funds and their shareholders at rates that are competitive in the industry. The Company believes that effective shareholder services are vital to success in this industry. While these services have historically been provided by banks and other institutions with greater resources than Pioneering Services, the Company believes that Pioneering Services generally outperforms such competitors because it is dedicated exclusively to the provision of such services to the Funds and their shareholders, rather than to a number of different customers. Venture Capital. The venture capital industry both in the United States and abroad is extremely competitive. In the process of investing and attempting to raise funds from entities other than the Company, Pioneer Capital and the Company's foreign venture capital subsidiaries must compete with a large number of venture capital firms, many of which have substantially larger staffs, more experience in raising funds, and more capital to invest. Real Estate Management and Advisory Business. The real estate management and advisory business both in the United States and abroad is extremely competitive. Pioneer Real Estate must compete with a large number of real estate firms, many of which have been in existence for many years and have substantially more resources than those available to Pioneer Real Estate. REGULATION Each of the Funds is registered under the 1940 Act and the Securities Act of 1933, as amended. As registered investment companies, the Funds are subject to extensive regulation governing all aspects of their operations. In addition to being subject to the regulatory authority of the U.S. Securities and Exchange Commission (the "SEC"), the Funds are also subject to certain limited regulation by the securities regulators in all 50 states and in the foreign jurisdictions in which certain of the Funds are registered. Pioneer Distributor, as a registered broker-dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"), is required, among other things, to maintain certain records, file reports with the SEC, supervise employees and deal fairly with customers, all in accordance with the 1934 Act and the rules and regulations promulgated thereunder. Pioneer Distributor is also registered as a broker-dealer in all 50 states and, as such, is subject to regulation by the state securities regulators in all such states. Pioneer Distributor is a member of the NASD, a securities industry self-regulatory body which is itself regulated by the SEC under the 1934 Act. As a member of the NASD, Pioneer Distributor is required to abide by the standards, including pricing practices, set forth in the Articles of Incorporation, the By-Laws and the Rules of Fair Practice of the NASD. Pioneering Management, as investment manager of the Funds, adviser to the Institutional Accounts and investment adviser to the Irish Funds, is registered pursuant to the Investment Advisers Act of 1940, as amended, and as such is subject to certain recordkeeping, SEC reporting, compensation and supervisory rules and regulations. Each of Pioneering Services and Pioneer Ireland, as transfer agent and sub-transfer agent, respectively, for the Funds, is registered as a transfer agent pursuant to the 1934 Act and as such is subject to SEC recordkeeping and reporting requirements and certain other rules and regulations. The SEC has jurisdiction over registered investment companies, registered investment advisers, broker-dealers and transfer agents and, in the event of a violation of applicable rules or regulations, may take action which could have a serious effect on Pioneering Management's, Pioneer Distributor's, Pioneering Services' or Pioneer Ireland's businesses. The Polish Funds were established under, and are regulated by, the Public Trading in Securities and Trust Funds Act of March 22, 1991, as amended. Pioneer Global Bond Fund Plc, Pioneer Global Equity Fund Plc, Pioneer U.S. Real Estate Fund Plc, Pioneer European Equity Fund Plc and Pioneer Central and Eastern European Fund Plc are each authorized by The Central Bank of Ireland under the European Communities (Undertakings for Collective Investment in 10 12 Transferable Securities) Regulations, 1989 (S.I. No. 78 of 1989) of Ireland. Pioneer DM Cashfonds Plc is authorized by The Central Bank of Ireland as an investment company with "designated" status pursuant to Part XIII of the Companies Act, 1990. CONTRACTUAL RELATIONSHIPS The businesses of the Company, Pioneering Management, Pioneer Distributor, Pioneering Services, Pioneer First Polish, FSL and Pioneer Ireland are dependent upon their associations and contractual relationships with the funds they serve. In the event any of the management contracts, underwriting contracts or service agreements were canceled or not renewed pursuant to the terms thereof, the Company may be substantially adversely affected. The Company, Pioneering Management, Pioneer Distributor, Pioneering Services, Pioneer First Polish, FSL and Pioneer Ireland consider their respective relationships with such funds to be good and they have no reason to believe that their respective management, underwriting and service contracts will not be negotiated on a reasonable basis in the future; however, there is no assurance that such funds will continue these relationships. RELATIONSHIP WITH INSTITUTIONAL ACCOUNTS Pioneering Management's advisory agreements with its institutional investors are generally terminable on short notice. The trustees or corporate officials who control such accounts are usually free to change investment advisers without cumbersome legal procedures. In the past, private accounts have terminated their agreements with Pioneering Management for various reasons such as performance, business combinations which result in the merging of accounts advised by Pioneering Management into accounts managed by other investment advisers, or changes in the structure or funding of pension plans. 11 13 NATURAL RESOURCE DEVELOPMENT GOLD MINING The results of the gold mining business are substantially attributable to the operations of Teberebie Goldfields Limited ("TGL"), the principal operating subsidiary of the Company's indirect wholly owned subsidiary, Pioneer Goldfields, a corporation organized under the laws of Guernsey, Channel Islands, which conducts mining and exploration activities in the Republic of Ghana and exploration activities elsewhere in Africa. Pioneer Goldfields' principal asset is its ownership of 90% of the outstanding shares of Teberebie Goldfields Limited, a corporation organized under the laws of the Republic of Ghana. TGL is engaged in the exploration, mining, and processing of gold ore on a mining concession located in the Western Region of the Republic of Ghana. The Republic of Ghana holds the remaining 10% ownership interest in TGL. Gold mining results are also affected by the exploration activities in the Russian Far East of Closed Joint-Stock Company "Tas-Yurjah Mining Company," a Russian Company in which the Company has a 52.5% beneficial interest. Exploration costs are charged to operations as incurred. TGL shipped approximately 263,000 ounces of gold in 1997, contributing $89.5 million to the Company's revenues. In 1996 and 1995, TGL shipped approximately 203,000 and 236,000 ounces of gold, respectively. A three-year financial summary for the gold mining business segment is shown below:
1997 1996 1995 (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) ------------- ------------- ------------- Revenues................................ $ 89.5 $ 78.3 $90.2 Net Income.............................. $ (2.8) $ 2.6 $14.0 Total Assets............................ $152.9 $149.6 $82.8
The effective tax rate (credit) (U.S., Russia and Ghana combined) for the gold mining segment in 1997, 1996 and 1995 was (15%), 32% and 35%, respectively. TEBEREBIE GOLDFIELDS LIMITED Organization and Mining Lease. In 1986, the Company and a joint venture partner organized TGL for the purpose of evaluating the feasibility of mining gold on several tracts of land in the Teberebie concession area ("Teberebie") in the Republic of Ghana. In February 1988, TGL entered into a mining lease with the Republic of Ghana (the "Government") pursuant to which TGL received exclusive gold mining rights for a term of 30 years. Under this lease, the Government is entitled to annual royalties of between 3.0% and 12.0% of TGL revenue, which rate will vary based on TGL's operating profit margin and its level of capital expenditures, and is assured a continuing 10% equity interest in TGL. In April 1989, the Company purchased the joint venture partner's interest for $3.7 million, primarily in cash. In 1992, TGL was granted a second 26-year mining lease over two contiguous areas to the north and west of the original lease area, the terms of which are substantially similar to the original lease. Since the commencement of commercial production in 1991, TGL has paid royalties to the Government in the amount of 3.0% of TGL's annual revenue. Teberebie Mine Site. The Teberebie mine site consists of mining concessions covering an area of approximately 42 square kilometers. It is located in the Western Region of the Republic of Ghana and is approximately six kilometers south of the town of Tarkwa. The Teberebie mine is geographically approximately 200 kilometers west of, and 330 kilometers by road from, Accra, the capital of the Republic of Ghana. It is approximately 95 kilometers by road from Takoradi, which is one of Ghana's two major ports and the point of entry for most of the imported equipment used at the Teberebie mine. Geology. The basement rocks of Ghana are precambrian in age and form part of a regional structure known as the West African Shield. The rocks that constitute the West African Shield are both sedimentary and igneous in origin. These rocks have been subjected to pressure and temperature alteration and deformation. Some of the altered rocks (metamorphic rocks) have a greenish coloration, and areas exhibiting these features are known as greenstone belts. There are a number of greenstone belts around the world. They attract the attention of commercial geologists because various minerals, particularly gold, are associated with them. In Ghana, the major gold producers operate along various prominent gold-bearing belts that extend for 12 14 a distance of some 300 kilometers in a trend from northeast to southwest. These gold-bearing belts consist of both greenstone and sedimentary formations. TGL mines the sedimentary formations. Locally, the thick sedimentary sequence is called the Tarkwaian system and gold is found in the upper, coarser horizons. At Teberebie, gold occurs in a sedimentary sequence known as the Banket formation. This formation consists of a series of sedimentary strata with siltstones, mudstones and sandstones interspersed with some coarser pebble horizons. Where the well-rounded pebbles are particularly large, the horizon is known as a conglomerate. Gold is found in the matrix that binds these pebbles together. The Banket formation has broad similarities to the Witwatersrand reef conglomerate in South Africa. As such, it is younger than the Birimian greenstone rocks that underlie it. The region has been subject to folding, faulting and shearing. Structurally, the Banket formation consists of a gently folded syncline, trending from northeast to southwest. The western limb of the syncline extends over 6.5 kilometers on the property, with the eastern limb reaching the surface just beyond the eastern boundary of the mining concession. The western and eastern limbs outcrop on the surface about four kilometers apart. At the center of the syncline at Teberebie, the mineralized horizons are some 400 meters below surface. In the south, the western limb dips to the east at about 35 degrees. This dip flattens toward the north where it is approximately only ten degrees. The deposit at the Teberebie mine is a paleoplacer where gold occurs in free-milling state with other heavy minerals in a matrix of a quartz pebble conglomerate. The gold particles are fine-grained, ranging from two to 280 microns, averaging approximately 100 microns in diameter. The origin of the gold has not been identified, although it may have been derived from the underlying Birimian basement rocks. Gold Reserves. The earliest known exploration on the Teberebie property was conducted in the early 1890's when several adits were driven into the ridge. Records indicate that approximately 15,000 tonnes of ore was extracted from adits and drifts prior to World War II. Four of these adits were cleared and systematically sampled. At the end of 1992, TGL had drilled a total of 18,545 meters in 296 holes on the property. Holes were drilled on 74 cross-sections perpendicular to the gold bearing ridge along a strike length of 6,050 meters, with three to five drill holes per section. Sections were 50 to 100 meters apart, and drill hole spacing on each section was 50 to 100 meters. In 1993, TGL drilled 16 in-fill ore holes advancing 930 meters on one ridge designed to move reserves from the possible to proven and probable categories. In 1994, TGL drilled 5,090 meters in 39 holes on the property. Contiguous with this, 2,551.5 meters of exploratory drilling in 11 holes was completed. In 1995, TGL drilled 3,420 meters in 18 holes on the property. In addition, TGL drilled a total of 2,568 meters in seven exploration drill holes and 765 meters in 12 site investigations and geotechnical holes. In 1996, TGL drilled a total of 8,648 meters in 53 holes on the property. Reserves (proven and probable categories) represent that portion of TGL's resource which can be reasonably assumed to be economically and legally extracted based on demonstrated practice or detailed tests and studies. The contained ounces are the product of the estimated ore tonnes multiplied by the grade. These reserves have been adjusted for anticipated losses resulting from mining activities, but do not reflect recovered product. TGL's proven and probable gold reserves as of December 31, 1997 are set forth in the table below. The design cut-off grade used to delineate the reserves is 0.58 grams per tonne (g/t) of ore at a gold price of $340 per ounce. An independent mining consultant has certified these reserves. PROVEN AND PROBABLE RESERVES ($340/OZ.)
CONTAINED GOLD, TONNES (ORE) GRADE (G/T) OUNCES ------------ ----------- --------------- Total Reserves........................ 159,180,000 1.19 6,090,000
TGL's last reported proven and probable reserve estimate was 9.1 million ounces as of December 31, 1995. Approximately 1.7 million ounces of the decrease in proven and probable reserves is attributable primarily to the use in the mine model of a lower gold price ($340 per ounce versus $385 per ounce) and normal reduction for mine production during 1996 and 1997. The balance of the difference is attributable to allowances for previously reported slope instability issues, haul road refinements and physical mine design 13 15 parameters, and miscellaneous refinements associated with the transition to more comprehensive mine modeling software. Based on the current mining method (bulk mining and heap leaching) at TGL, it is estimated that recoverable gold from these open pit reserves will aggregate approximately 4.9 million ounces. Reported gold reserves are estimates. As such, no assurance can be given that the indicated quantities of gold will be produced. In addition, gold price fluctuations may render ore reserves containing relatively lower grades of gold mineralization uneconomic to mine. At December 31, 1997 and March 1, 1998, the market price of gold was $290 per ounce and $297 per ounce, respectively. Mining and Processing. The Teberebie mine is a conventional open pit, heap leach operation. Mining at Teberebie is a technically simple drill and blast, load and haul operation, carried out on three contiguous ridges along a strike length of some 6.5 kilometers. The ridges, running from south to north, are named Teberebie, Awunaben and Mantraim. The mine is currently an open pit mine operating from two pits, the Teberebie/Awunaben pit and the Mantraim pit. TGL processes its ore using a conventional heap leach operation at three locations on the Teberebie concession: the East, West, and South Plants. Each plant was developed during successive phases of project development (see "Development and Expansion" below). The recently completed Phase III mine expansion, increased annual crushing capacity to approximately 12 million tonnes of ore. Ore is crushed in the near-pit gyratory crusher which serves as the primary crusher for the West Plant and the new South Plant. A jaw crusher, with a capacity of 3.0 million tonnes per year, continues to be the primary crusher for the original East Plant. Cement is added to the crushed ore to bind the ore and to raise its alkalinity to a level conducive to cyanide leaching. The agglomerate of ore and cement is then placed on a heap leach and is then treated with a diluted cyanide solution that percolates through the material dissolving the gold. The diluted cyanide solution containing the dissolved gold drains into collection ponds. From there, the solution is pumped to an adjacent adsorption desorption refinery plant (the "ADR Plant") where it passes through a series of activated carbon adsorption columns. The gold contained in the solution is adsorbed onto the carbon and the solution is then recirculated to the barren solution pond where it is refortified with sodium cyanide. Gold is then chemically stripped from the carbon adsorption columns and recovered from the stripper solution by electrowinning onto stainless steel cathodes. The cathodes are removed approximately every two weeks at each ADR Plant, at which time the gold sludge is washed off and dried. The sludge is then mixed with flux and smelted to produce dore. Gold Production and Sales. TGL began shipping gold in October 1990. In the second quarter of 1991, the mine reached then commercially feasible production levels (about 1,000 ounces per week), and reached full production levels (about 2,000 ounces per week) during the fourth quarter of 1991. Set forth below is a chart showing TGL's gold shipments for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 (OUNCES) (OUNCES) (OUNCES) -------- -------- -------- TGL Gold Shipments........................... 263,000 203,000 235,000
During 1997, gold production increased to 263,000 ounces of gold or 5,100 ounces per week. During the year, TGL implemented its Phase III mine expansion, including the start-up of the new gyratory crusher and South Plant and modifications to the West Plant. Also, TGL produced its one-millionth ounce of gold in January 1997. Gold production in 1998 is estimated to be approximately 340,000 ounces. The average realized price of gold sold by TGL during 1997, 1996 and 1995 was $340, $385 and $383 per ounce, respectively. With the exception of 1997, the average realized price was based on the market spot price of gold at the time of sale. In 1997, the average realized price of gold includes proceeds from the sale of floor program options of $15 per ounce. Spot prices of gold fluctuate widely and are affected by a number of factors including supply and demand, inflation expectations, the strength of the U.S. dollar and interest rates. At present, TGL does not enter into forward gold sales or otherwise engage in gold price hedging. In the fourth quarter of 1996, TGL entered into a series of put options which secured a minimum selling price of $340 per ounce to cover 1997 estimated production. When the market price of gold declined below $340 per ounce between February and December 1997, the Company continued to ship gold to the refineries and sold 14 16 the put options, receiving payment for the difference between the market price of gold and approximately $340 per ounce. In May 1997, TGL purchased additional options at an exercise price of $320 per ounce to cover estimated production for the first four months of 1998. The Company may consider additional hedging strategies if and when it deems circumstances appropriate. TGL's cash costs per ounce and total costs per ounce for 1997, 1996 and 1995 are summarized on the following table:
1997 1996 1995 ---- ---- ---- Cash Costs Per Ounce................................... $230 $266 $198 Total Costs Per Ounce.................................. $337 $361 $277
Development and Expansion. TGL has completed three major capital expenditure programs at the Teberebie mine to date, designated Phase I, Phase II and Phase III. Phase I included the development of the mine site and the construction of the crushing and processing facility known as the East plant. Phase II, which was completed in 1994, included the construction of a crushing and processing facility that replicated the East plant and is known as the West plant. Phase III, which was completed in 1997, included a further heap leach operation and a near-pit gyratory crushing facility which acts as a primary crushing facility for both the existing West Plant and the new South Plant. The Phase III mine expansion increased annual crushing capacity to 12 million tonnes of ore. The Phase III expansion plan did not require the construction of a third ADR Plant to support the South Plant. Instead, the existing ADR Plant at the West Plant was upgraded with a second carbon absorption train and a modified stripping circuit. The first gold pour associated with the South Plant occurred in April 1997, but the plant was not fully operational until the fourth quarter. The cost of the Phase III mine expansion aggregated approximately $56 million, including 1997, 1996 and 1995 capital expenditures of $5.4 million, $48.1 million and $2.6 million, respectively. Customers. During the year ended December 31, 1997, gold sales aggregated $89.5 million. During 1997, gold shipments from TGL in Ghana to two unaffiliated European refiners accounted for $43.9 million and $41 million, respectively, of total sales, or 95% of such sales. Because of the worldwide demand for gold, the Company does not believe that the loss of such customers would have a material adverse effect on the Company or its subsidiaries. The remaining 5% of sales related to the sales of put options associated with TGL's gold price floor program and the sale of carbon residue with gold value to a Ghanaian firm. Employees. At March 1, 1998, TGL had 1,469 employees, 1,433 of which are Ghanaians. The terms of employment and compensation for junior TGL staff, known as monthly rated employees, are determined pursuant to a collective bargaining agreement between TGL and the Ghana Mineworkers' Union. The terms of the collective agreement (other than pay levels) are negotiated every three years. Pay levels are negotiated annually. The current collective bargaining agreement expires in January 1999. TGL experienced a two-day work stoppage in each of 1994 and 1996. The 1994 work stoppage was related to the annual pay level negotiations under the union contract. The 1996 work stoppage was related to two employee dismissals resulting from a determination by TGL and local union officials that the employees had violated the disciplinary code. The union did not organize the 1996 work stoppage. Neither work stoppage had a material effect on TGL's operations and TGL continues to believe that its relations with its employees are excellent. There is, however, a shortage of available labor with the requisite skills and experience necessary to operate large-scale mining equipment. TGL has experienced and continues to experience some difficulty in recruiting employees with the necessary skills. With the continued development of mines in Ghana, and in the vicinity of the Teberebie mine, in particular, the shortage will likely continue and perhaps become more acute. Regulation and Taxation. Mining activities in the Republic of Ghana are governed by PNDCL 153, the Minerals and Mining Law of 1986 (the "MML"). The Republic of Ghana is currently developing a system of environmental regulation that applies to TGL's operations. However, it has always been a strategic objective of the Company to minimize the effects of its subsidiaries' mining operations on the environment. TGL has developed an overall environmental action plan, a reagent spill management plan, a decommissioning plan and has initiated site rehabilitation and revegetation studies. 15 17 In 1994, the Ghana Environmental Protection Agency (the "GEPA") was established to regulate environmental matters to ensure implementation of government policies concerning the environment. In May 1994, the Minister of the Environment, through the Minerals Commission, produced legislative proposals relating to the environmental regulation of mines and the GEPA produced draft guidelines relating to air and water quality. The management of TGL regarded these guidelines as satisfactory and workable. These guidelines were followed by the publication for consultation of draft regulations that provoked considerable controversy among the mining community in Ghana and were subsequently withdrawn. In January 1997, the GEPA published for comment revised draft effluent water quality water regulations. The comment period has expired, and the draft effluent water quality regulations are being implemented as guidelines. It is not possible at this time to determine the effect, if any, the new regulations may have on TGL's operations. In the first quarter of 1994, the Republic of Ghana enacted the Minerals and Mining (Amendment) Act of 1994 which reduced the income tax rate for mining companies from 45% to 35%. Pursuant to the terms of the MML, income taxes may be deferred until recovery of capital investment. Accordingly, deferred taxes at December 31, 1997, 1996 and 1995, were $7.6 million, $9.6 million and $7.5 million, respectively. Income taxes were deferred during all of 1996 and 1997. Income tax payments to the Republic of Ghana during 1995 were $14.1 million. Of such taxes paid in 1995, $5.5 million was attributable to the tax year ended December 31, 1994. Insurance. The Company maintains $65.5 million of "political risk" insurance principally from OPIC, covering 90% of its equity and loan guarantees. This insurance also covers 90% of the Company's proportionate share of TGL's cumulative retained earnings. The OPIC equity and retained earnings coverage is presently limited to a ceiling of $63.1 million; however, the Company intends to apply to increase the ceiling in 1998. There can be no assurance that such OPIC insurance will become available in 1998. The Company also secured $9 million foreign exchange exposure insurance from another source to hedge 90% if its exposure to a limited recourse provision contained in the OPIC Phase III expansion financing. In addition to other commercial insurance coverage, TGL has secured business interruption coverage of up to $19.0 million for losses associated with machinery breakdown and property damage and to defray continuing infrastructure and interest costs. Recent Developments. TGL estimates 1998 gold production at approximately 340,000 ounces. The estimate has been decreased by 20,000 ounces from TGL's previously reported target of 360,000 ounces reflecting lower than expected crushing equipment availability in the first quarter of 1998. TGL's gold production is dependent upon a number of factors that could cause actual gold production to differ materially from projections, including obtaining and maintaining necessary equipment, accessing key supplies, including electrical power and fuel, and hiring and training supervisory personnel and skilled workers. Gold production is also affected by the time lag inherent in heap leaching technology, subject to changing weather conditions and dependent on the continued political stability in the Republic of Ghana. In early 1998, the Republic of Ghana experienced power shortages which adversely affected TGL's ability to crush and process ore. Presently, certain processes at the mine are supported by back-up power generation equipment. TGL is in the process of leasing additional equipment to support all of its power generation requirements. The use of such equipment will increase the power costs per tonne processed. EXPLORATION ACTIVITIES OF PIONEER GOLDFIELDS Since the end of 1993, in addition to continuing to develop the Teberebie mine, Pioneer Goldfields has increased its exploration activities in the Republic of Ghana and in other African countries. These activities are currently conducted by TGL in Ghana and by Pioneer Goldfields in Niger. In 1997, Pioneer Goldfields discontinued exploration activities in Zimbabwe. As a result, Pioneer Goldfields is in the process of dissolving its Zimbabwe-registered company, Lobengula Exploration and Mining Company, Ltd. In 1997, Pioneer Goldfields incurred exploration costs of approximately $1.9 million, approximately $1.7 million of which related to exploration activities outside of Ghana. In 1996, Pioneer Goldfields incurred exploration costs of approximately $1.3 million, approximately $1.2 million of which related to exploration activities outside of Ghana. 16 18 EXPLORATION ACTIVITIES OF TAS-YURJAH MINING COMPANY In 1994, the Company entered into a joint venture, Closed Joint-Stock Company "Tas-Yurjah Mining Company" ("Tas-Yurjah"), with a Russian company to explore potential gold mining properties in the Khabarovsk Territory of the Russian Far East. The Company currently owns a 50% direct interest and a 2.5% indirect interest in Tas-Yurjah. In 1995, Tas-Yurjah secured a license to conduct exploration activities over a 240 square kilometer area (the "licensed area"). Tas-Yurjah plans to conduct drilling and geochemical and geological surveys to further examine anomalies located in the licensed area during 1998. At December 31, 1997, the Company had expended approximately $3.9 million for exploration work related to Tas-Yurjah, of which $1.7 million had been expended in 1997. The Company expects to spend approximately $2.1 million for exploratory work at Tas-Yurjah in 1998. TIMBER VENTURES The Company holds a majority controlling interest in three companies located in the Khabarovsk Territory of the Russian Far East, Closed Joint-Stock Company "Forest-Starma" ("Forest-Starma"), Closed Joint-Stock Company "Amgun-Forest" ("Amgun-Forest") and Closed Joint-Stock Company "Udinskoye" (Udinskoye"). The Company has consolidated its ownership of these three companies under its wholly owned subsidiary, Pioneer Forest, Inc. ("Pioneer Forest"). Of the three companies, Forest-Starma is the only company which is operational. Forest-Starma, which is located on Siziman Bay in the Vanino district of the Khabarovsk Territory, has developed a modern logging camp, including a harbor facility, from which it exports timber to markets in the Pacific Rim, primarily Japan and South Korea. Leasehold and Cutting Rights. Forest-Starma, Amgun-Forest and Udinskoye have each entered into long-term lease arrangements that provide significant leasehold acreage and annual cutting rights. In the aggregate, the three subsidiaries have leasehold rights in the Russian Far East comprising 926,400 hectares (approximately 2.3 million acres), with annual cutting rights of approximately 1.0 million cubic meters. Forest-Starma is actively engaged in negotiations to expand its existing leasehold. The current leasehold rights of each of the projects are set forth below:
FOREST-STARMA AMGUN-FOREST UDINSKOYE ------------- ------------ --------- Hectares (acres)................... 240,000* 485,400 201,000 (593,000)* (1,200,000) (497,000) Annual Cutting Rights (m(3))....... 361,000* 350,000 300,000
- --------------- * Forest-Starma is in the process of finalizing lease agreements for additional leasehold rights that will give it total cutting rights of approximately 555,000 cubic meters over a territory of 390,100 hectares (approximately 964,000 acres). Ownership Structure. Pioneer Forest currently has a 95% direct interest in Forest-Starma. The Company has signed an agreement to acquire an additional 2% direct interest in Forest-Starma. The transfer is currently awaiting regulatory approvals. Pioneer Forest also has an 80.6% direct interest and 7.1% indirect interest in Amgun-Forest and a 72% direct interest and 4.2% indirect interest in Udinskoye. Timber Operations. Timber is harvested at Forest-Starma according to international sustainable development standards using advanced planning and implementation of the best available management practices as defined in the U. S. Forest Service stewardship guidelines and the United Nations Conference on Environment and Development principles. Five production crews consisting, in aggregate, of four harvesters, eight skidders, and five processors form the backbone of the logging operation. The harvesters cut the trees which are then skidded to five processors which delimb and buck the timber into logs. The logs are hauled on company constructed roads by log trucks approximately 50 kilometers to a lower landing log yard for sorting and scaling prior to shipment. The lower landing is equipped with log loaders and other equipment necessary for maintaining the log yard and delivering sorted logs to the harbor for shipment. Sorted logs are delivered to the harbor based upon a manifest received from Forest-Starma's marketing agent, Rayonier, Inc. The logs are then delivered to the dock and placed on ships by crane. Forest-Starma has constructed and maintains a self-contained camp with living quarters for between 250 and 300 workers, a modern maintenance and parts facility, on site offices and advanced communications equipment. 17 19 Timber Production. Timber harvesting commenced in the first quarter of 1995 and the first shipments of timber (acquired in the development phase) totaling approximately 30,000 cubic meters occurred in the third and fourth quarter of 1995. In 1996, Forest-Starma shipped approximately 133,000 cubic meters of timber (acquired in the development phase). Since the project was still in the development phase, the related revenues of $10.1 million were used to offset capitalized interest and development costs. In January 1997, Forest-Starma commenced commercial production of timber and amortization of deferred development costs. During 1997, Forest-Starma produced and shipped 257,000 cubic meters and 194,000 cubic meters of timber, respectively. Forest-Starma is expected to produce approximately 360,000 cubic meters of timber in 1998. A three-year financial summary for the timber business segment is shown below:
1997 1996 1995 (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) ------------- ------------- ------------- Revenues................................ $11.9 $ -0- $ -0- Net Income.............................. $(6.7) $(0.5) $ -0- Total Assets............................ $51.0 $43.4 $33.2
Customers. In 1997, Forest-Starma shipped 57% of its timber to six unaffiliated customers in Japan and 43% of its timber to eight unaffiliated customers in South Korea. Employees. At March 1, 1998, Forest-Starma had 543 Russian employees. In addition, 14 expatriate employees and consultants of the Company's employment company subsidiary are seconded to Forest-Starma. At Amgun-Forest and Udinskoye, there are 20 and 10 employees, respectively, all of whom are Russians. Such employees are not unionized nor are they a party to a collective bargaining agreement. Salaries are determined annually based on the prevailing market prices for timber industry employees within the region. Capital Structure. Capital required by this venture is now projected at approximately $59.9 million through the end of 1998. At December 31, 1997, project financing aggregated $54.3 million, including $38.2 million in subordinated debt and accrued interest provided by the Company, $8.7 million in unpaid liabilities to the Company for ongoing operating expenses and $7.4 million in outstanding third party financing. The Company expects to convert approximately $15 million of subordinated debt to equity in 1998. Forest-Starma completed a $9.3 million project financing with OPIC in July 1996, of which $7.4 million remained outstanding at December 31, 1997. As a condition to the OPIC financing, the Company was required to execute a Project Completion Agreement pursuant to which the Company would advance funds to Forest-Starma, as necessary, to permit Forest-Starma to fulfill all of its financial obligations, including cost overruns related to project development, until such time as Forest-Starma satisfies a production test and certain financial and project development benchmarks. Scheduled third-party debt service for 1998 is expected to aggregate $2 million. Direct investment in Forest-Starma by the Company aggregated $38.3 million at December 31, 1997. Insurance. In connection with its investment in Forest-Starma, the Company has secured OPIC political risk insurance in an amount of up to $47 million which would protect 90% of the Company's equity investment and loans and a proportionate share of cumulative retained earnings. In addition, the Company has secured OPIC business income loss insurance of up to $5 million for Forest-Starma. Amgun-Forest and Udinskoye. The Amgun-Forest timber project is located in the Polina Osipenko District of the Khabarovsk Territory, approximately 150 kilometers northwest of the city of Komsomolsk-on-Amur and further inland than Forest-Starma. Duharian Larch, Yeddo Spruce and Amur Fir are the principal commercial tree species in the project area, with larch constituting approximately 67% of the exportable product and whitewood (Yeddo Spruce and Amur Fir together) constituting the balance. The Udinskoye timber project is also located in the Polina Osipenko District of the Khabarovsk Territory, west of the Amgun-Forest timber project. The project area encompasses the towns of Kherpuchi, Oglongi and Udinsk. Duharian Larch is the principal commercial tree species in the project area, with a small component of Yeddo Spruce. Pioneer is considering developing Amgun-Forest and Udinskoye, and both projects are currently undergoing feasibility analysis. Depending upon factors such as capital availability, management resources, market demand and the stabilization of larch prices, Pioneer may elect to develop these projects in the future. Since inception, the Company provided funding and services to Amgun-Forest and Udinskoye aggregating $3.8 million, including $1 million in 1997. 18 20 METALS VENTURES Since 1991, a subsidiary of the Company, Pioneer Metals and Technology, Inc., has been involved in a development-stage business in Russia, through its subsidiary, for the manufacture, production and sale of powdered metals, permanent magnets and various trading endeavors. FUTURE OPERATING RESULTS Certain of the information contained in this Annual Report on Form 10-K, including information with respect to the Company's plans and strategies for its worldwide financial services and natural resource development businesses, consists of forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "projects," "estimates" and similar expressions are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in the 1997 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" which is hereby incorporated by reference. ITEM 2. DESCRIPTION OF PROPERTY. The Company and its subsidiaries conduct their principal operations from leased premises with approximately 157,000 square feet at 60 State Street, Boston, Massachusetts, under two leases. The first to expire of these leases (which covers substantially all of the space) expires in 2002, with two five-year renewal options. The rent expense for these premises was approximately $3.5 million in 1997. The Company believes that its facilities are adequate for its current needs and that additional space will be available as needed. Teberebie Goldfields Limited, conducts mining operations in Tarkwa, Ghana. The Republic of Ghana has granted TGL land concessions of approximately 42 square kilometers. The operating facilities included on the Teberebie mine site include approximately 48 housing and office buildings, one gyratory crusher, two three-stage crushing plants, one four-stage crushing plant, heap leaching facilities and ponds, two processing plants and refineries, a clinic, a laboratory, a warehouse and an eight-bay maintenance shop for heavy equipment. TGL believes that its facilities are generally in a state of good repair and adequate for its current needs and that additional facilities will be constructed as needed. In December 1992, Pioneer First Polish purchased a 38-year capital lease, convertible to perpetual use, on a two-year-old, 373-square-meter office building in Warsaw. Pioneer First Polish is currently subleasing the property to an unaffiliated corporation for a three-year term that commenced on March 1, 1995. Through March 1999, the Company's Polish subsidiaries have leased approximately 2,000 square meters of office space in Warsaw. FSL also leases approximately 1,400 square meters of office space and 502 square meters of storage space in Warsaw. The terms of the leases range from one to five years. The Company's 95%-owned subsidiary, Forest-Starma, is pursuing the development of timber production in the Khabarovsk Territory of Russia under two long term leases comprising 340,000 hectares (approximately 593,000 acres) in the aggregate with annual cutting rights of 361,000 cubic meters. Forest-Starma is in the process of finalizing lease agreements for additional leasehold rights that will give Forest-Starma total cutting rights of approximately 555,000 cubic meters over a territory of 390,100 hectares (approximately 964,000 acres). Amgun-Forest and Udinskoye, the Company's other majority-owned Russian timber ventures, each have a long-term lease (50 years) relating to timber harvesting. The Amgun-Forest lease covers 485,400 hectares (approximately 1,200,000 acres) with annual cutting rights of 350,000 cubic meters. The Udinskoye lease covers 201,000 hectares (approximately 497,000 acres) with annual cutting rights of 300,000 cubic meters. ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Company or its subsidiaries is a party or of which any of their property is subject, other than ordinary routine litigation incidental to the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 19 21 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names and ages of the executive officers of the Company, and a description of the positions and offices each holds with the Company and its significant subsidiaries.
NAME AGE POSITIONS WITH THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES ---- --- ----------------------------------------------------------- John F. Cogan, Jr. .................. 71 President, Chief Executive Officer and Chairman of the Board of the Company since 1962. Chairman of Pioneering Management since 1993 and President of Pioneering Management from 1962 to 1993. Director of Pioneering Management since 1962. Chairman and Director of Pioneer Distributor. Chairman, President and Trustee of each of the registered investment companies in the Pioneer Family of Mutual Funds. President and Director of Pioneer International, Pioneer Omega and Pioneer First Russia. Director of Pioneering Services, Pioneer Capital, Pioneer Real Estate and Pioneer Forest. Chairman and Director of Pioneer Goldfields, TGL, Closed Joint Stock Company Company "Pioneer Metals International", Forest-Starma, Pioneer Investments ("Pioneer Investments"), Amgun-Forest and Udinskoye. Chairman of Supervisory Board of Pioneer First Polish, Pioneer Czech and Pioneer Fonds Marketing. Director of Pioneer Ireland and each of the Irish Funds. Chairman of Global Funds Distributor. Senior Partner of the Boston law firm, Hale and Dorr LLP, counsel to the Company. Robert L. Butler..................... 57 Executive Vice President of the Company since 1985. Director of the Company since 1988. President and Director of Pioneer Distributor since 1989. Director of Pioneering Management, Pioneering Services, Pioneer International and Pioneer Real Estate. Member of Supervisory Board of Pioneer First Polish and Pioneer Czech. Vice Chairman of the Supervisory Board of Pioneer Fonds Marketing. Director of Pioneer Ireland and each of the Irish Funds. Deputy Chairman and Managing Director of Global Funds Distributor. Previously, Vice President of the NASD. David D. Tripple..................... 54 Executive Vice President of the Company since 1986. President of Pioneering Management since 1993 and Chief Investment officer and Director of Pioneering Management since 1986. Executive Vice President of Pioneering Management from 1986 to 1993. Executive Vice President and trustee of each of the registered investment companies in the Pioneer Family of Mutual Funds. Director of Pioneer Distributor, Pioneer Capital, Pioneer International, Pioneer Investments, Pioneer Real Estate, Pioneer Omega, Pioneer First Russia, Pioneer Ireland and each of the Irish Funds. Member of Supervisory Board of Pioneer First Polish and Pioneer Czech. William H. Keough.................... 60 Senior Vice President and Chief Financial Officer of the Company since 1986. Treasurer of the Company, Pioneer Distributor, Pioneering Management, Pioneering Services, Pioneer Capital, Pioneer International, Pioneer Real Estate, Pioneer Omega and Pioneer First Russia. Treasurer of each of the registered investment companies in the Pioneer Family of Mutual Funds. Timothy T. Frost..................... 42 Vice President of the Company since 1995. Director and Vice President of Pioneer Omega and Pioneer First Russia. Senior Vice President of Pioneer International. Vice President of Pioneer Real Estate. Previously, Managing Director of Financial Services Volunteer Corps.
20 22
NAME AGE POSITIONS WITH THE COMPANY AND ITS SIGNIFICANT SUBSIDIARIES ---- --- ----------------------------------------------------------- Lucien Girard, III................... 64 Vice President of the Company. Managing Director and Chief Executive of Pioneer Goldfields and TGL. Director of Pioneer Metals and Technology, Inc. ("Pioneer Metals"). Stephen G. Kasnet.................... 52 Vice President of the Company since 1995. President of Pioneer Real Estate since January 1996. Trustee and Vice President of Pioneer Real Estate Shares and Vice President of Pioneer Variable Contracts Trust. Previously, Managing Director, First Winthrop Corporation and Winthrop Financial Associates. Chairman of the Board of Warren Bancorp and Warren Five Cents Savings Bank and Director of Bradley Real Estate, Inc. John F. Lawlor....................... 64 Vice President of the Company and Pioneering Management. Director of Pioneer Goldfields, TGL, Forest-Starma, Amgun- Forest, Udinskoye Closed Joint Stock Company "Pioneer Metals International", Pioneer Forest, Pioneer Ireland and each of the Irish Funds. Director and Vice President of Pioneer Metals. Alicja K. Malecka.................... 51 Vice President of the Company and Pioneer Real Estate. Senior Vice President of Pioneer International. President of Pioneer First Polish, the Polish Funds and Pioneer Investment Poland, Sp.zo.o. Member of the Supervisory Board of FSL and Pioneer Czech. Frank M. Polestra.................... 72 Vice President of the Company since 1975. President and Director of Pioneer Capital since 1981. President and Director of Pioneer SBIC Corp. William H. Smith, Jr................. 62 Vice President of the Company and President and Director of Pioneering Services since 1985. Vice President and Director of Pioneer International. Director of Pioneer Ireland and each of the Irish Funds. Member of the Supervisory Board of FSL. Previously, President of Securities Fund Services, Inc. between 1981 and 1985. Joseph P. Barri...................... 51 Secretary of the Company since 1978. Secretary of each of the registered investment companies in the Pioneer Family of Mutual Funds, Pioneering Management, Pioneer Capital, Pioneer Distributor, Pioneering Services, Pioneer Omega, Pioneer First Russia and Pioneer International. Senior Partner of the Boston law firm, Hale and Dorr LLP, counsel to the Company. Robert P. Nault...................... 34 General Counsel and Assistant Secretary of the Company since 1995. Assistant Secretary of each of the registered investment companies in the Pioneer Family of Mutual Funds, Pioneering Management, Pioneer Capital, Pioneer Distributor, Pioneering Services, Pioneer International, Pioneer Omega, Pioneer First Russia and Pioneer Goldfields. Secretary of Pioneer Real Estate and Pioneer Forest. Previously, Junior Partner of the Boston law firm, Hale and Dorr LLP, counsel to the Company.
21 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Incorporated by reference from the 1997 Annual Report to Stockholders under the captions "Information Relating to Shares," "Dividends on Common Stock" and "Price Range of Common Stock." ITEM 6. SELECTED FINANCIAL DATA. Incorporated by reference from the 1997 Annual Report to Stockholders under the caption "Five Year Summary of Selected Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from the 1997 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The quantitative and qualitative disclosures about market risk are not effective for the Company for this filing. The accounting policy disclosures have been included in the Notes to the Consolidated Financial Statements which are included in the 1997 Annual Report to Stockholders and incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated by reference from the 1997 Annual Report to Stockholders under the caption "Consolidated Financial Statements and Notes to Consolidated Financial Statements" and "Report of Independent Public Accountants." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEMS 10-13. The information required for Part III in this Annual Report on Form 10-K is incorporated by reference from the Company's definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders. Such information will be contained in the sections of such proxy statement captioned "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers," "Election of Directors," "Directors' Meetings and Fees," "Committee Meetings," "Executive Compensation," "Stock Option Grants and Exercises," "Certain Transactions" and "Compliance with Section 16 of the Securities Exchange Act of 1934." Information regarding executive officers of the Company is also furnished in Part I of this Annual Report on Form 10-K under the heading "Executive Officers of the Company." 22 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are included as part of this Annual Report on Form 10-K. 1. FINANCIAL STATEMENTS: Report of Independent Public Accountants.................... 33* Consolidated Statements of Income for the Three years Ended December 31, 1997......................................... 34* Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 35* Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1997............... 36* Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997................................... 37* Notes to Consolidated Financial Statements.................. 38*
- --------------- * Refers to page number in 1997 Annual Report to Stockholders. Each such financial statement or report is hereby incorporated herein by reference to the 1997 Annual Report to Stockholders which is filed as an exhibit to this report. 2. FINANCIAL STATEMENT SCHEDULES: All financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto. 3. EXHIBITS: The exhibits filed with or incorporated into this Annual Report on Form 10-K are listed on the "Index to Exhibits" below. (b) Reports on Form 8-K: None. 23 25 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 1998. THE PIONEER GROUP, INC. BY: /s/ JOHN F. COGAN, JR. ---------------------------------- JOHN F. COGAN, JR., President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN F. COGAN, JR. Principal Executive Officer and March 30, 1998 - --------------------------------------------------- Director JOHN F. COGAN, JR. /s/ WILLIAM H. KEOUGH Principal Financial Officer and March 30, 1998 - --------------------------------------------------- Principal Accounting Officer WILLIAM H. KEOUGH /s/ ROBERT L. BUTLER Director March 30, 1998 - --------------------------------------------------- ROBERT L. BUTLER /s/ MAURICE ENGLEMAN Director March 30, 1998 - --------------------------------------------------- MAURICE ENGLEMAN /s/ ALAN J. STRASSMAN Director March 30, 1998 - --------------------------------------------------- ALAN J. STRASSMAN /s/ JASKARAN S. TEJA Director March 30, 1998 - --------------------------------------------------- JASKARAN S. TEJA /s/ DAVID D. TRIPPLE Director March 30, 1998 - --------------------------------------------------- DAVID D. TRIPPLE /s/ JOHN H. VALENTINE Director March 30, 1998 - --------------------------------------------------- JOHN H. VALENTINE
24 26 INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT ----------- ------- 3.1(17) -- Certificate of Incorporation, as amended 3.2(1) -- By-Laws, as amended 10.1(15) -- Form of Management Contract with Pioneer Mutual Funds 10.2(15) -- Form of Investment Company Service Agreement with Pioneer Mutual Funds 10.3(1)(7) -- Retirement Benefit Plan and Trust 10.4(5)(7) -- 1988 Stock Option Plan, as amended 10.5(5) -- Lease, dated as of July 3, 1991, between the Trustees of 60 State Street and the Company 10.6(2)(7) -- Form of Employment Agreements with Regional Vice Presidents 10.7(15) -- Revised Form of Underwriting Contract with Pioneer Funds 10.8(3)(7) -- 1990 Restricted Stock Plan 10.9(4) -- Deed of Warranty, dated December 3, 1987, between the Government of Republic of Ghana, Teberebie Goldfields Limited and The Pioneer Group, Inc. 10.10(4) -- Lease, dated February 2, 1988, between the Government of the Republic of Ghana and Teberebie Goldfields Limited 10.11(4) -- Map of Mining Operations in Tarkwa, Ghana 10.12(6) -- Refining Agreement, dated as of August 23, 1993, between Teberebie Goldfields Limited and Metalor 10.13(6) -- OPIC Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between OPIC and Pioneer Goldfields Limited, dated August 12, 1993 10.14(6) -- Credit Agreement, dated as of June 1, 1993, between Teberebie Goldfields Limited and Skandinaviska Enskilda Banken 10.15(8) -- Agreement, dated May 10, 1994, between Teberebie Goldfields Limited and Johnson Matthey PLC 10.16(8) -- Contract, dated May 30, 1994, among Timber Harvesting Equipment Sales, Inc., Joint-Stock Company "Forest-Starma" and the Company 10.17(8) -- Contract, dated August 4, 1994, among Morbark Northwest, Inc., Joint-Stock Company "Forest-Starma" and the Company 10.18(8) -- Contract, dated May 25, 1994, among Caterpillar Overseas S.A., Joint-Stock Company "Forest Starma" and the Company 10.19(8) -- OPIC Contract of Insurance Against Business Income Loss between OPIC and the Company, effective September 30, 1992, as amended (No. D581) 10.20(8) -- OPIC Contract of Insurance Against Business Income Loss between OPIC and the Company, effective September 30, 1992, as amended (No. D582) 10.21(8) -- OPIC Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between OPIC and the Company, effective September 30, 1992 as amended (No. D547) 10.22(8) -- OPIC Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between OPIC and the Company, effective September 30, 1992 (No. D545) 10.23(8) -- Consulting Agreement, dated as of January 2, 1995, between the Company and Pioneer First Polish Trust Fund Joint Stock Company ("Pioneer Poland") 10.24(8) -- Services Contract, dated January 1, 1994, between Pioneering Services Corporation and Financial Services Limited 10.25(8) -- Agreement, dated June 25, 1992, between Pioneer Poland and Bank Polska Kasa Opieka S.A. ("Bank Pekao") 10.26(8) -- Agreement, dated as of June 25, 1992, between Bank Pekao and Pioneer International Corporation 10.27(8) -- Agreement, dated June 25, 1992, between Bank Pekao and Pioneer Poland 10.28(8) -- Agreement, dated September 24, 1992, between Pioneer Poland and Financial Services Limited
27
EXHIBIT NO. EXHIBIT ----------- ------- 10.29(9) -- Master Share Purchase Agreement dated as of April 7, 1995 by and among Pioneer Omega, Inc. and First Voucher Fund 10.30(9) -- Agreement dated as of April 7, 1995 by and among Pioneer Omega, Inc. and DOM Investment Company 10.31(9) -- Agreement dated as of April 7, 1995 by and among Pioneer Omega, Inc. and Moscow International Business Centre Limited 10.32(9) -- Stockholders Agreement dated as of April 11, 1995 by and among the Company and Moscow International Business Centre Limited 10.33(10) -- Collective Agreement dated as of July 3, 1995 between Teberebie Goldfields Limited and the Ghana MineworkerI Union of T.U.C. 10.34(11) -- Contract of Insurance Against Incontrovertibility, Expropriation and Political Violence dated September 29, 1995 between the Overseas Private Investment Corporation and the Company 10.35(7)(12) -- 1995 Restricted Stock Plan 10.36(12) -- Credit Agreement between Teberebie Goldfields Limited and Skandinaviska Enskilda Banken AB dated as of March 11, 1996 10.37(7)(13) -- 1995 Employee Stock Purchase Plan 10.38(13) -- Loan Agreement dated as of April 23, 1996, by and between Teberebie Goldfields Limited and Caterpillar Financial Services Corporation. 10.39(13) -- Chattel Mortgage dated as of April 23, 1996, by and between Teberebie Goldfields Limited and Caterpillar Financial Services Corporation. 10.40(13) -- Credit Agreement dated as of June 6, 1996, by and among the Company, Certain of its subsidiaries, the Lenders and The First National Bank of Boston, as agent for itself and the other Lenders. 10.41(13) -- Loan Agreement dated as of May 16, 1996, by and between Teberebie Goldfields Limited and Caterpillar Financial Corporation. 10.42(14) -- Sublease dated as of August 15, 1996, between the Company and Citizens Financial Group, Inc. 10.43(16) -- Subscription Agreement dated as of October 16, 1996, between Pioneer First Russia, Inc. and International Finance Corporation. 10.44(16) -- Shareholders Agreement dated as of October 16, 1996, among Pioneer Omega, Inc. and Pioneer First Russia, Inc. and International Finance Corporation. 10.45(16) -- Put and Call Agreement dated as of October 16, 1996, among Pioneer First Russia, Inc. and Pioneer Omega, Inc. and International Finance Corporation. 10.46(16) -- Credit Facility Agreement dated 19th December, 1996, for Pioneer Real Estate Advisors, Inc. provided by Banque Societe Generale Vostok. 10.47(16) -- First Amendment to Lease dated as of the 31st day of January 1994, by and between the Trustees of 60 State Street Trust and the Company. 10.48(16) -- Second Amendment to Lease dated as of September 30, 1996, by and between The Trustees of 60 State Street Trust and the Company. 10.49(16) -- Third Amendment to Lease dated as of November 15, 1996, by and between The Trustees of 60 State Street Trust and the Company. 10.50(16) -- Finance Agreement dated as of October 25, 1996, between Teberebie Goldfields Limited and the Overseas Private Investment Corporation. 10.51(16) -- Project Completion Agreement dated as of October 28, 1996, among Teberebie Goldfields Limited, the Company and Overseas Private Investment Corporation. 10.52(16) -- Overseas Private Investment Corporation Contract of Insurance Against Inconvertibility, Expropriation and Political Violence between the Overseas Private Investment Corporation and Pioneer Omega, Inc. 10.53(17) -- Finance Agreement between Closed Joint-Stock Company "Forest-Starma" and Overseas Private Investment Corporation dated as of December 21, 1995. 10.54(17) -- Project Completion Agreement among Closed Joint-Stock Company "Forest-Starma", the Company, International Joint-Stock Company "Starma Holding" and Overseas Private Investment Corporation dated as of December 21, 1995. 10.55(17) -- Closed Joint-Stock Company "Forest-Starma" Promissory Note in the principal amount of $9.3 million dated as of July 1, 1996.
28
EXHIBIT NO. EXHIBIT ----------- ------- 10.56(17) -- Amendment to Finance Agreement dated as of June 24, 1996 between Closed Joint-Stock Company "Forest-Starma" and Overseas Private Investment Corporation. 10.57(17) -- Amendment No. 1 to Credit Agreement dated as of April 23, 1997, among the Company, certain of its subsidiaries, the Lenders and The First National Bank of Boston. 10.58(18) -- Amendment No. 2 to Credit Agreement dated as of June 30, 1997, by and among the Company, certain of its subsidiaries, the Lenders and BankBoston, N.A. f/k/a/ The First National Bank of Boston. 10.59(18)(7) -- 1997 Stock Incentive Plan 10.60(19) -- Note Agreement dated as of August 14, 1997 by and between the Company and The Travelers Insurance Company. 10.61* -- Amendment No. 3 to Credit Agreement dated as of June 30, 1997, by and among the Company, certain of its subsidiaries, the Lenders and BankBoston, N.A. f/k/a/ The First National Bank of Boston 10.62* -- Investment Agreement dated as of February 11, 1998 by and between AS Eesti Forekspank and ZAO Pioneer Bank. 10.63* -- Fourth Amendment to Lease dated as of September 11, 1997, by and between The Trustees of 60 State Street Trust and the Company. 11* -- Computation of Earnings Per Share. 13* -- 1997 Annual Report to Stockholders (which is not deemed "filed" except with respect to the portions specifically incorporated herein by reference) 21(16) -- Subsidiaries 23* -- Consent of Arthur Andersen LLP 27.97* -- Financial Data Schedule (1997) 27.96* -- Financial Data Schedule (1996) 27.95* -- Financial Data Schedule (1995)
- --------------- * Filed herewith (1) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1986. (2) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. (3) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1989. (4) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. (5) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. (6) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (7) Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K. (8) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (9) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (10) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. 29 (11) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (12) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (13) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (14) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (15) Incorporated herein by reference to the exhibits to the Registration Statement on Form N-1A for the Pioneer Micro Cap Fund (File Nos. 333-18639, 811-07985) filed December 23, 1996. (16) Incorporated herein by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (17) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (18) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (19) Incorporated herein by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. EX-10.61 2 PIONEER GROUP CREDIT AGREEMENT AMEND #3 1 Exhibit 10.61 THE PIONEER GROUP, INC. CREDIT AGREEMENT AMENDMENT NO. 3 This Agreement, dated as of August 14, 1997, is among The Pioneer Group, Inc., a Delaware corporation (the "Company"), certain of its subsidiaries listed on the signature pages hereto, the Lenders (as defined in the Credit Agreement referenced below) and BankBoston, N.A., f/k/a The First National Bank of Boston, as agent (the "Agent") for itself and the other Lenders. The parties agree as follows: 1. REFERENCE TO CREDIT AGREEMENT: DEFINITIONS. Reference is made to the Credit Agreement dated as of June 6, 1996, among the Company, certain of its subsidiaries, the Lenders and the Agent (as amended, modified and in effect prior to giving effect to this Agreement, the "Credit Agreement"). Terms defined in the Credit Agreement as amended hereby (the "Amended Credit Agreement") and not otherwise defined herein are used herein with the meanings so defined. Except as the context otherwise explicitly requires, the capitalized terms "Section" and "Exhibit" refer to sections hereof and exhibits hereto. 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to all of the terms and conditions hereof and in reliance upon the representations and warranties set forth in Section 3, the Credit Agreement is amended as follows, effective upon the date (the "Amendment Date") that the conditions specified in Section 4 are satisfied, which conditions must be satisfied no later than August 25, 1997 or this Agreement shall be of no force or effect: a. AMENDMENT OF SECTION 1.44. Section 1.44 of the Credit Agreement is amended to read in its entirety as follows: "1.44. "COMPANY TOTAL DEBT" means, at any date, the following indebtedness of the Company and the Core Mutual Fund Subsidiaries (excluding the B Share Loan): (a) Indebtedness in respect of borrowed money; (b) Indebtedness evidenced by notes, debentures or similar instruments; (c) Indebtedness in respect of Capitalized Leases; (d) Indebtedness in respect of the deferred purchase price of assets (other than normal trade accounts payable in the ordinary course of business); (e) Indebtedness in respect of mandatory redemption or dividend rights on capital stock (or other equity); 2 (f) Indebtedness in respect of unfunded pension liabilities. (g) Indebtedness in respect of financial Guarantees (other than the OPIC Guarantee to the extent such OPIC Guarantee is financially insured under the Lloyds Policy) and letters of credit; and (h) Indebtedness calculated in accordance with GAAP in respect of tax deficiencies asserted in a notice of deficiency from the IRS issued pursuant to Section 6212 (or similar or successor provisions) of the Code. For purposes of this Section 1.44 only, "Indebtedness" shall be calculated on a Combined basis for the Company and the Core Mutual Fund Subsidiaries only, and the amount of any Guarantee under this Section 1.44 and the amount of Indebtedness resulting from such Guarantee shall be the stated or potential maximum amount for which the Company is or may be directly or indirectly liable." b. AMENDMENT OF SECTION 1.47. Section 1.47 of the Credit Agreement is amended to read in its entirety as follows: "1.47. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum of: (a) the aggregate amount of interest, including payments in the nature of interest under Capitalized Leases, accrued by the Company or the Core Mutual Fund Subsidiaries (whether such interest is reflected as an item of expense or capitalized), or other interest in respect of other Indebtedness for which the Company or any Core Mutual Fund Subsidiary may be liable directly or as a Guarantor (but only to the extent of the Company's stated or potential maximum liability in respect of such Indebtedness), calculated in accordance with GAAP on a Combined basis for the Company and the Core Mutual Fund Subsidiaries only, pills (b) the aggregate amount of all required or mandatory scheduled payments, prepayments and sinking fund payments with respect to principal paid or accrued by the Company or any Core Mutual Fund Subsidiary in respect of Financing Debt other than the B Share Loan and the Revolving Loan, (c) only for periods after the B Share Conversion Date, the extent to which the prepayments on the B Share Term Loan required by Section 4.3 exceed the B Share Collection Amount." c. AMENDMENT OF SECTION 1.52. Section 1.52 of the Credit Agreement is amended to read in its entirety as follows: -2- 3 "1.52. "CREDIT DOCUMENTS" means: (a) this Agreement and the Notes, each as from time to time in effect; (b) all financial statements, reports, notices and certificates delivered to any of the Lenders by the Company or any Subsidiary in connection herewith or therewith; (c) the Intercreditor Agreement, dated August 25, 1997, by and among the Company, the Agent on behalf of the Lenders and The Travelers Insurance Company, as amended and in effect from time to time; and (d) any other present or future agreement or instrument from time to time entered into among the Company or any Subsidiary on the one hand, and the Agent or all the Lenders, on the other hand, relating to, amending or modifying this Agreement or any other Credit Document referred to above or which is stated to be a Credit Document (including the separate letter agreement between the Company and the Agent relating to certain fees of the Agent), each as from time to time in effect." d. ADDITION OF SECTION 1.123A. A new Section 1.123A is added to the Credit Agreement immediately after Section 1.123 of the Credit Agreement to read in its entirety as follows: "1.123A. "SENIOR NOTE AGREEMENT" means the Note Agreement, dated August 25, 1997, between the Company and The Travelers Insurance Company, relating to the Senior Notes of the Company, as amended from time to time in accordance with Section 7.18." e. ADDITION OF SECTION 1.123B. A new Section 1.123B is added to the Credit Agreement immediately after Section 1.123A of the Credit Agreement to read in its entirety as follows: "1.123B. "SENIOR NOTES" means the 7.95% Senior Notes due 2004 of the Company, as amended from time to time in accordance with Section 7.18." f. AMENDMENT OF SECTION 4.2.3, Section 4.2.3 of the Credit Agreement is amended to read in its entirety as follows: "4.2.3. PREPAYMENT OF REVOLVING LOAN. Within five Banking Days after the consummation of any underwritten public offering or other sale of any equity interest in any of the Pioneer Goldfields Entities pursuant to Section 7.11.5, the Company shall apply to the prepayment of the Revolving Loan and the permanent reduction of the Maximum Amount of Revolving Credit an amount equal to the sum of (i) the product of (x) the ratio which the Maximum Amount of Revolving Credit in effect at such time bears to -3- 4 the sum of such Maximum Amount of Revolving Credit plus $20,000,000, multiplied by (y) an amount equal to fifty percent (50%) of the net cash proceeds received by the Company or any of its Subsidiaries in such offering or sale, plus (ii) an amount of cash equal to the aggregate amount of Senior Notes not so purchased pursuant to Section 7.11.5 of the Senior Note Agreement. For purposes of this Section 4.2.3, "net cash proceeds" shall reflect the deduction of any federal, state or local tax obligations which the Company or any Subsidiary may have as a result of such public offering or sale." g. AMENDMENT TO SECTION 7.6.2. Section 7.6.2 of the Credit Agreement is amended to read in its entirety as follows: "7.6.2. Indebtedness of the Company and each Subsidiary of the Company which is not a Core Mutual Fund Subsidiary, including Indebtedness in respect of the Senior Note Agreement, PROVIDED, that immediately before and after giving effect to the incurrence of such Indebtedness, no Default exists." h. ADDITION OF SECTION 7.7.3. A new Section 7.7.3 is added to the Credit Agreement immediately after Section 7.7.2 of the Credit Agreement to read in its entirety as follows: "7.7.3. Guarantees by the Core Mutual Fund Subsidiaries pursuant to Section 6 of the Senior Note Agreement." i. ADDITION OF SECTION 7.8.14. A new Section 7.8.14 is added to the Credit Agreement immediately after Section 7.8.13 to read in its entirety as follows: "7.8.14. The agreement by the Company and the Core Mutual Fund Subsidiaries contained in Section 7.8 of the Senior Note Agreement not to create, incur or enter into, or suffer to be created or incurred or to exist, any Lien other than as permitted in such Section 7.8." j. ADDITION OF SECTION 7.18. A new Section 7.18 is added to the Credit Agreement immediately after Section 7.17 of the Credit Agreement to read in its entirety as follows: "7.18 SENIOR NOTE AGREEMENT MATTERS. 7.18.1. The Company will not, and will not permit any Subsidiary to, without the prior written consent of the Required Lenders, (i) voluntarily repay or prepay any Indebtedness outstanding under the Senior Note Agreement, (ii) consent to any amendment of the amount or -4- 5 date of any required repayment or prepayment of any Indebtedness outstanding under the Senior Note Agreement except for an amendment of any such date to a date on or after the earlier of (x) the date of such required repayment or prepayment as in effect prior to such amendment and (y) the ninety-first day after the termination of this Agreement. 7.18.2. The Company will not, and will not permit any Subsidiary to, enter into any amendment, modification or supplement to the Senior Note Agreement that contains conditions, covenants or events of default that are more burdensome or restrictive to the Company or such Subsidiary than those contained in the Senior Note Agreement are to the Company on the date hereof." k. AMENDMENT TO EXHIBIT 1.126. Exhibit 1.126 of the Credit Agreement is amended to read in its entirety as set forth on Exhibit 1.126 hereto. 3. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders to enter into this Agreement, the Company represents and warrants to each of the Lenders that: a. LEGAL EXISTENCE, ORGANIZATION. Each of the Company and its Subsidiaries is duly organized and validly existing and in good standing under the laws of the jurisdiction of its incorporation, with all power and authority, corporate or otherwise, necessary to (a) enter into and perform this Agreement, the Amended Credit Agreement and each other Credit Document to which it is party and (b) own its properties and carry on the business now conducted or proposed to be conducted by it. Each of the Company and its subsidiaries has taken, or shall have taken on or prior to the Amendment Date, all corporate or other action required to make the provisions of this Agreement, the Amended Credit Agreement and each other Credit Document to which it is party the valid and enforceable obligations they purport to be. b. ENFORCEABILITY. The Company and each of its Subsidiaries which are signatories hereto have duly executed and delivered this Agreement. Each of this Agreement and the Amended Credit Agreement is the legal, valid and binding obligation of the Company and such Subsidiaries and is enforceable in accordance with its terms. c. NO LEGAL OBSTACLE TO AGREEMENTS. Neither the execution, delivery or performance of this Agreement, nor the performance of the Amended Credit Agreement, nor the consummation of any other transaction referred to in or contemplated by this Agreement, nor the fulfillment of the terms hereof or thereof, has constituted or resulted in or will constitute or result in: (1) any breach or termination of the provisions of any agreement, instrument, deed or lease to which the Company or any Subsidiary is a party or -5- 6 by which it is bound, or of the Charter or By-laws of the Company or any Subsidiary; (2) the violation of any law, judgment, decree or governmental order, rule or regulation applicable to the Company or any Subsidiary; (3) the creation under any agreement, instrument, deed or lease of any Lien upon any of the assets of the Company or any Subsidiary; or (4) any redemption, retirement or other repurchase obligation of the Company or any Subsidiary under any Charter, By-law, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement or the performance of the Amended Credit Agreement, or the consummation of the transactions contemplated hereby or thereby. d. NO DEFAULT. Immediately before and after giving effect to the amendments set forth in Section 2, no Default will exist. e. INCORPORATION OF REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Section 8 of the Credit Agreement are true and correct on the date hereof as if originally made on and as of the date hereof (except to the extent any representation or warranty refers to a specific earlier date). 4. CONDITIONS. The effectiveness of this Agreement shall be subject to the satisfaction of the following conditions: a. OFFICER'S CERTIFICATE. The representations and warranties contained in Section 3 shall be true and correct as of the Amendment Date with the same force and effect as though originally made on and as of such date; no Default shall exist on the Amendment Date prior to or immediately after giving effect to this Agreement; as of the Amendment Date, no Material Adverse Change shall have occurred; and the Company shall have furnished to the Agent on the Amendment Date a certificate to these effects, in substantially the form of Exhibit 4.1, signed by an Executive Officer or a Financial Officer. b. PROPER PROCEEDINGS. All proper corporate proceedings shall have been taken by each of the Company and the Subsidiaries to authorize this Agreement, the Amended Credit Agreement and the transactions contemplated hereby and thereby. The Agent shall have received copies of all documents, including records of corporate proceedings which the Agent may have requested in connection therewith, such -6- 7 documents, where appropriate, to be certified by proper corporate or governmental authorities. c. EXECUTION BY LENDERS. Each of the Lenders shall have executed and delivered this Agreement to the Company. 5. FURTHER ASSURANCES. Each of the Company and the Subsidiaries will, promptly upon request of the Agent from time to time, execute, acknowledge and deliver, and file and record, all such instruments and notices, and take all such action, as the Agent deems necessary or advisable to carry out the intent and purposes of this Agreement. 6. GENERAL. The Amended Credit Agreement and all of the other Credit Documents are each confirmed as being in full force and effect. This Agreement, the Amended Credit Agreement and the other Credit Documents referred to herein or therein constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter, limit or otherwise affect the meaning hereof. Each of this Agreement and the Amended Credit Agreement is a Credit Document and may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective successors and assigns, including as such successors and assigns all holders of any Note. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE COMMONWEALTH OF MASSACHUSETTS. Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. THE PIONEER GROUP, INC. PIONEERING SERVICES CORP. By: /s/ By: /s/ ----------------------------- --------------------------------- Title: Title: 60 State Street 60 State Street Boston, Massachusetts 02109-1820 Boston, Massachusetts 02109-1820 -7- 8 PIONEERING MANAGEMENT CORPORATION By: /s/ ----------------------------- Title: 60 State Street Boston, Massachusetts 02109-1820 PIONEERING MANAGEMENT (IRELAND) LTD. By: /s/ ----------------------------- Title: 60 State Street Boston, Massachusetts 02109-1820 PIONEER FUNDS DISTRIBUTOR, INC. By: /s/ ----------------------------- Title: 60 State Street Boston, Massachusetts 02109-1820 -8- 9 BANKBOSTON, N.A. By: /s/ ----------------------------- Title: Vice President Financial Institutions Division 100 Federal Street - 15th Floor Boston, Massachusetts 02110 Telecopy: (617) 434-1537 Telex: 940581 THE BANK OF NEW YORK By: /s/ ----------------------------- Title: One Wall Street, OWS-1 Securities Industry Division New York, NY 10286 Telecopy: (212) 809-9566 Telex: SOCIETE GENERALE By: /s/ ----------------------------- Title: 1221 Avenue of the Americas New York, New York 10020 Telecopy: (212) 278-7153 -9- 10 STATE STREET BANK & TRUST COMPANY By: /s/ ----------------------------- Title: 225 Franklin Street, 8th Floor Asset-Based Finance Boston, MA 02110 Telecopy: (617) 338-4041 BANQUE NATIONALE DE PARIS By: /s/ ----------------------------- Title: 499 Park Avenue, 7th Floor New York, 10022 Telecopy: (212) 415-9707 MELLON BANK, N.A. By: /s/ ----------------------------- Title: One Mellon Bank Center Mail Code: 1510270 Pittsburgh, PA 15258 Telecopy: (412) 234-8087 -10- 11 QUARTERLY "B" SHARE BORROWING BASE CALCULATION TOTAL ESTIMATED COLLECTIBLE AMOUNT 1. Calculate the Average Asset Under Management (AAUM) by averaging the prior six months daily net asset values by Fund 2. Eight Year Projection of Assets Under Management by Quarterly Bucket a. Calculate the six month average redemption rate by dividing the total dollars redeemed over the prior six months by the AAUM calculated in (1) above b. Reduce the Assets Under Management calculated in (1) by the calculated redemption rate (2.a.) to determine the projected AUM each year 3. Projected Annual Collection of CDSC (backend sales charge) a. Calculate the historical six month redemptions charged a CDSC and use this to determine the percentage of assets redeemed in (2.b.) which are subject to a backend charge vs. those which are not b. Apply the percentage (calculated in 3.a.) to each of the quarterly buckets to determine the total assets redeemed each year. c. Apply the applicable CDSC rate (from Pioneer's sales fee schedule) to the redemptions calculated in (3.b.) to determine the total collectible CDSC amount 4. Projected Collection of Asset Based Sales Charges (ABSC) a. Multiply 75 bpts each year to the projected AUM calculated in 2 above 5. Sum Projected CDSC and ABSC collections in 3 and 4 above for the eight year period to determine the total collectible amount 6. Subtract from the total collectible amount in (5) the product of (i) the percentage which the aggregate amount of Senior Notes outstanding comprises of the sum of (x) the aggregate amount of Senior Notes outstanding plus (y) the aggregate amount of the B Share an and Revolving Loan outstanding, multiplied by (ii) the aggregate amount of the B Share Loan outstanding, to determine the Total Estimated Collectible Amount. -11- 12 7. Determine the Net Dealer Advances adjusted for ABSCs collected at original cost for sales prior to the loan agreement. 8. Compare the Total Estimated Collectible Amount in (6) to the net dealer advances in (7) to determine the coverage ratio -12- 13 OFFICER'S CERTIFICATE Pursuant to Section 4.1 of Amendment No. 3 to Credit Agreement dated as of August __ 1997 (the "Amendment") among The Pioneer Group, Inc., a Delaware corporation (the "Company"), certain of its subsidiaries signatories thereto, the Lenders and BankBoston, N.A., f/k/a The First National Bank of Boston, as agent (the "Agent") for itself and the other Lenders, which amends the Credit Agreement dated as of June 6, 1996 (as amended, modified and in effect prior to giving effect to the Amendment, the "Credit Agreement"), among the Company, certain of its subsidiaries signatories thereto, the Lenders and the Agent, the Company hereby certifies that the representations and warranties contained in Section 3 of the Amendment are true and correct on and as of the Amendment Date with the same force and effect as though originally made on and as of the Amendment Date; no Default exists on the Amendment Date or will exist immediately after giving effect to the Amendment; and as of the Amendment Date, no Material Adverse Change has occurred. Terms defined in the Amendment and not otherwise defined herein are used herein with the meanings so defined. This certificate has been executed by a duly authorized Executive Officer or Financial Officer this ____ day of August, 1997. THE PIONEER GROUP, INC. By:________________________________ Name: Title: -13- 14 INTERCREDITOR AGREEMENT INTERCREDITOR AGREEMENT dated as of August 14, 1997 between: (x) the institutional investor listed first on the Signature Pages hereof (herein, together with the holders from time to time of the Senior Notes referred to below, the "SENIOR NOTEHOLDERS"), and (y) the lenders (including the agent bank) listed on the Signature Pages hereof (herein, together with any other institution which may become a lender under the Credit Agreement referred to below, the "BANKS"). WHEREAS, the Senior Noteholder listed on the Signature Pages hereof proposes to purchase 7.95% Senior Notes due 2004 (the "SENIOR NOTES") of The Pioneer Group, Inc. (the "Company"), issued in an aggregate original principal amount of $20,000,000 pursuant to the Note Agreement dated as of August 14, 1997 (as hereafter amended, modified or supplemented from time to time, the "NOTE AGREEMENT") entered into by such Senior Noteholder with the Company and certain of its Subsidiaries designated therein as Guarantors; WHEREAS, the Company is a party to the Credit Agreement dated as of June 6, 1996 among the Company, certain of its Subsidiaries which are signatories thereto, including Subsidiaries designated therein as Borrower Subsidiaries or Guarantors, each Bank and the Agent (as amended, modified or supplemented and in effect from time to time, the "CREDIT AGREEMENT"), pursuant to which certain revolving credit and term loan facilities have been made available to the Company and said Borrower Subsidiaries; WHEREAS, pursuant to the Note Agreement the existing Subsidiaries of the Company designated as Guarantors therein have jointly and severally guaranteed the payment of all obligations of the Company under the Note Agreement and the Senior Notes and all other Credit Obligations referred to in the Note Agreement and certain other Subsidiaries may hereafter guarantee such obligations by joining the Note Agreement pursuant to Section 9.6 thereof (such existing and future guarantees are collectively the "SENIOR NOTE GUARANTEES"), and pursuant to the Credit Agreement the Company and said Subsidiaries also have jointly and severally guaranteed the payment of all obligations of the Company and said Borrower Subsidiaries in respect of such revolving credit and term loan facilities and all other Credit Obligations referred to in the Credit Agreement and certain other Subsidiaries may hereafter guarantee such obligations by joining the Credit Agreement pursuant to Section 6.9 thereof (such existing and future guarantees are collectively the "CREDIT AGREEMENT GUARANTEES"); and WHEREAS, it is a condition precedent to the purchase of the Senior Notes under the Note Agreement that the Banks enter into this Agreement; and NOW, THEREFORE, the parties hereto agree as follows: -14- 15 1. DEFINED TERMS. The following terms shall have the following respective meanings: "BANKS" has the meaning specified in the Introduction hereof. "COMPANY" has the meaning specified in the first "Whereas" hereof. "CREDIT AGREEMENT" has the meaning specified in the second "Whereas" hereof. "CREDIT AGREEMENT GUARANTEES" has the meaning specified in the third "Whereas" hereof. "CREDIT AGREEMENT OBLIGATIONS" means the Credit Obligations as defined in the Credit Agreement. "EXPOSURE PERCENTAGE" means, with respect to any Senior Noteholder or Bank at any particular time, the result of dividing (i) the sum of the aggregate principal amount of all Senior Obligations then outstanding and held by such Senior Noteholder or Bank plus accrued interest then due and payable in respect of such aggregate principal amount by (ii) the sum of the aggregate principal amount of all Senior Obligations then outstanding plus all accrued interest then due and payable in respect thereof as aforesaid. "GUARANTOR" means any Guarantor under the Note Agreement and any Guarantor under the Credit Agreement. "GUARANTOR'S OBLIGATIONS" means, as to any Guarantor, the obligations of such Guarantor with respect to principal and interest under the Senior Note Guarantees and the Credit Agreement Guarantees. "NOTE AGREEMENT" has the meaning specified in the first "Whereas" hereof. "PERSON" means and includes an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "REQUIRED HOLDERS" means the holders of at least 66-2/3% in aggregate principal amount of the outstanding Senior Notes. "REQUIRED LENDERS" has the meaning specified in the Credit Agreement. "SENIOR NOTE GUARANTEES" has the meaning specified in the third "Whereas" hereof. -15- 16 "SENIOR NOTEHOLDERS" has the meaning specified in the Introduction hereof. "SENIOR NOTE OBLIGATIONS" means the Credit Agreement Obligations as defined in the Note Agreement. "SENIOR OBLIGATIONS" means the Senior Note Obligations and the Credit Agreement Obligations. 2. PARI PASSU NATURE OF GUARANTOR'S OBLIGATIONS. The Senior Noteholders and the Banks acknowledge and agree that they intend that all Guarantor's Obligations will rank PARI PASSU in right of payment (including without limitation equal in seniority) to each other, notwithstanding any claim or proceeding relating to or affecting any Guarantor asserted by or on behalf of the Company or such Guarantor, the bankruptcy estate of such Guarantor, the Banks, the Senior Noteholders or any of their respective successors or assigns under any law relating to bankruptcy, insolvency, reorganization or fraudulent conveyance and without regard to any differences between the consideration received or other benefits, if any, respectively derived by such Guarantor from or in exchange for its Senior Note Guarantee and its Credit Agreement Guarantee and from or in exchange for the incurrence of the Guarantor's Obligations of such Guarantor. In furtherance of the foregoing, the Senior Noteholders and the Banks acknowledge and agree that they shall not assert or in any way claim that a Guarantor did not derive equal and ratable benefits from and in exchange for its Senior Note Guarantee and its Credit Agreement Guarantee. 3. PRO RATA SHARING OF CERTAIN PAYMENTS. (a) In the event that, at any time after the commencement and continuance (or within the applicable preference period in a bankruptcy case) of any such claim or proceeding referred to in Section 2 above relating to the Company or any Guarantor, any holder of Senior Obligations realizes any amount in any manner inconsistent with the intent expressed in Section 2 above, including without limitation by the exercise of the right of setoff or banker's lien in respect of any account or against any other asset maintained by the Company or any Guarantor in respect of any Senior Obligations, then, subject to the limitations of subsection (b) below: (i) such holder of Senior Obligations (the "PURCHASING HOLDER") shall purchase (for cash or, if any such consideration realized is other than cash, then at the Purchasing Holder's option, such other consideration or cash equivalent to the fair market value of such consideration) without recourse or warranty, from each other holder of Senior Obligations, an interest in all of the Senior Obligations held by such other holder in an aggregate amount equal to the amount so realized by the Purchasing Holder multiplied by such other holder's Exposure Percentage before giving effect to such realized amount and (ii) such other adjustments shall be made from time to time as shall be equitable to ensure that all holders of Senior Obligations share such payment ratably; provided that if all or any portion of the amount so realized is thereafter recovered from the Purchasing Holder, such purchase -16- 17 from each other holder of Senior Obligations shall be rescinded and the purchase price restored (pro rata, based on each holder's Exposure Percentage immediately before the purchase was made) to the extent of such recovery, but without interest. For purposes of this Section all amounts realized by a Purchasing Holder in respect of the Senior Obligations at any time prior to the payment in full of all Senior Obligations held by such Purchasing Holder shall be deemed to be applied by such Purchasing Holder to such Senior Obligations. (b) No Purchasing Holder shall be obligated to purchase any interest in the Senior Obligations held by any other holder of Senior Obligations if such other holder's willful misconduct (unrelated to questions of consideration or benefits as described in subsection (a) above) is determined in the applicable proceeding to be the basis for avoidance or subordination, in whole or in part, of such other holder's Senior Obligations. 4. AMENDMENT OR WAIVER OF THIS AGREEMENT. None of the terms and conditions of this Agreement may be amended or waived in any manner whatsoever unless in writing duly signed by the Required Holders and the Required Banks. 5. TERMINATION. This Agreement shall terminate on the date upon which either one of the following conditions is satisfied: (a) all Senior Note Obligations have been indefeasibly paid in full, or (b) all commitments to lend under the Credit Agreement have been terminated and all Credit Agreement Obligations have been indefeasibly paid in full. 6. INTERCREDITOR AGREEMENT CONTROLS. If any provision of this Agreement shall be inconsistent with, or contrary to, any provision in the Note Agreement, the Credit Agreement, any instrument evidencing any Senior Note Obligation or any Credit Agreement Obligation, any Senior Note Guarantee or any Credit Agreement Guarantee, the provision in this Agreement shall be controlling and shall supersede such inconsistent provision to the extent necessary to give full effect to all provisions contained in this Agreement. 7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. 8. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be given to the parties hereto at the following addresses (or at such other address as any party, including any subsequent holder from time to time of the Senior Notes or any subsequent agent under the Credit Agreement, may hereafter designate by notice to the other parties hereto at the time) -17- 18 SENIOR NOTEHOLDER: The Travelers Insurance Company One Tower Square Hartford, CT 06183-2030 Attention: Securities Department Private Placements Telecopy: 860-954-5243 BANKS: BankBoston, N.A. Financial Institutions Division 100 Federal Street - 15th Floor Boston, Massachusetts 02110 Telecopy: 617-434-1537 The Bank of New York One Wall Street, OWS-l Securities Industry Division New York, New York 10286 Telecopy: 212-809-9566 Societe Generale 1221 Avenue of the Americas New York, New York 10020 Telecopy: 212-278-7153 State Street Bank & Trust Company 225 Franklin Street, 8th Floor Asst-Based Finance Boston, Massachusetts 02110 Telecopy: 617-338-4041 Banque Nationale de Paris 499 Park Avenue, 7th Floor New York, New York 10022 Telecopy: 212-415-9707 Mellon Bank, N.A. One Mellon Bank Center Mail Code: 1510370 Pittsburgh, Pennsylvania 15258 Telecopy: 412-234-8087 -18- 19 9. FURTHER ASSURANCES. Each of the parties hereto agrees to execute and deliver all such further documents and instruments and to use its best efforts to take all such further action as may be reasonably necessary or advisable to implement and give effect to the transactions contemplated hereby. 10. MISCELLANEOUS. (a) This Agreement shall be binding upon the parties and the holders from time to time of any Senior Obligations and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. The rights and obligations of any Bank or Senior Noteholder under this Agreement shall be assigned automatically, without the need for the execution of any document or any other action, to (and the term "Bank" or "Senior Noteholder" as used in this Agreement shall include) any assignee, transferee or successor of such Bank or Senior Noteholder under the Credit Agreement or the Note Agreement, as the case may be, in accordance with the terms of and upon the effectiveness of an assignment pursuant to the Credit Agreement or a transfer of Notes pursuant to Section 12.2 of the Note Agreement, as the case may be, and any such assignee, transferee or successor shall automatically become a party to this Agreement. If required by any party to this Agreement, such assignee, transferee or successor shall execute and deliver to the other parties to this Agreement a written confirmation of its assumption of the obligations of the assignor or transferor hereunder. Each of the Banks and the Senior Noteholder listed on the Signature Pages hereof agrees that it shall deliver a complete copy of this Agreement to any potential assignee, transferee or successor of such Bank or Senior Noteholder prior to the execution of any such assignment or transfer. (b) The headings in this Agreement are for purposes of reference only and shall not limit or expand the meaning hereof. (c) The provisions of this Agreement are intended solely for the purposes of defining the rights of the holders of Senior Obligations relative to one another. Nothing contained in this Agreement is intended to or shall impair, as between the Guarantors and their respective creditors, the unconditional and absolute obligations of the Guarantors under the Senior Note Guarantees and the Credit Agreement Guarantees as and when the same shall become due and payable; nor shall anything herein prevent any holder of Senior Obligations from accepting any payment with respect to such Senior Obligations or exercising all remedies permitted by applicable law upon any event of default in respect thereof. (d) Agreement shall be interpreted in such a way as to be fully effective and valid under applicable law. If any provision of this Agreement shall be held or deemed to be or shall in fact be inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all cases because it conflicts with any other provision or provisions hereof or any constitution or statute or rule of public policy, or -19- 20 for any other reason, such circumstance shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatever. Upon the determination that any term or other provision of this Agreement is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the maximum extent possible. 11. COUNTERPARTS. This Agreement may be executed in as many counterparts as the parties hereto may deem necessary or convenient and by different parties on separate counterparts, and each of which, when so executed, shall be deemed to be an original, but all such counterparts shall constitute but one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. SENIOR NOTEHOLDER: THE TRAVELERS INSURANCE COMPANY By: ------------------------------------ Title: BANKS: BANKBOSTON, N.A. By: ------------------------------------ Title: THE BANK OF NEW YORK By: ------------------------------------ Title: -20- 21 SOCIETE GENERALE By: ------------------------------------ Title: STATE STREET BANK & TRUST COMPANY By: ------------------------------------ Title: BANQUE NATIONALE DE PARIS By: ------------------------------------ Title: MELLON BANK, N.A. By: ------------------------------------ Title: ACKNOWLEDGED: THE PIONEER GROUP, INC. By:_________________________ Title: gratm/barri/719.78.100/credit.wpf -21- EX-10.62 3 INVESTMENT AGREEMENT 1 Exhibit 10.62 INVESTMENT AGREEMENT City of Moscow February 11, 1998 This Investment Agreement (hereinafter, "Agreement") is entered into by and between: AS EESTI FOREKSPANK, a credit institution organized under the laws of Estonia (hereinafter, "Investor"), with its legal address at Narva maantee 9A, Tallinn, Estonia, represented by its Chairman of the Board, Ivar Lukk, acting as a legal representative on the basis of applicable law and its Charter; and ZAO PIONEER BANK, a closed stock company organized under the laws of the Russian Federation (hereinafter, "Bank"), with its legal address at 2nd Krasnoprudny per., 7, Moscow 107140, Russian Federation, represented by Mikhail Rubinchik, its Chairman, acting on the basis of its Charter. Investor and Bank are collectively referred to below as the "Parties", and each of them is individually referred to below as a "Party". RECITALS The Parties hereby acknowledge that: 1. Investor wishes to subscribe for and purchase a new emission of the common stock of Bank, equal to 35% of the total common stock of Bank after the subscription; 2. Bank wishes to issue such new emission to Investor. Bank's General Assembly of Shareholders has approved such emission and subscription by Investor, and this Agreement, in Protocol No. 24, dated February 5, 1998; and 3. Prior to Investor's purchase of the shares, the Parties wish to cooperate to obtain the necessary governmental and regulatory approvals and complete certain legal procedures as described below. NOW THEREFORE, the Parties have agreed as follows: 1. SUBJECT OF AGREEMENT 1.1 In accordance with this Agreement, Investor hereby agrees to subscribe for and purchase from Bank, and Bank hereby agrees to issue and sell to Investor, 80,769 common registered shares of Bank (the "Shares") in Bank's sixth emission of shares, 2 which shall amount to 35% of the total number of common voting shares issued by Bank after completion of such emission. Upon such purchase, Investor shall own 35% of the total voting shares issued by Bank. 1.2 At the Closing (as defined in Article 3 below), the Parties shall execute a separate Agreement on Purchase and Sale of Additional Shares (the "Principal Contract") to document the issuance and sale of the Shares to Investor. 1.3 The Principal Contract shall include the following terms, and such other terms as may be required by law to implement the issuance and sale of the Shares to Investor: 1.3.1 The number of Shares -- 80,769 shares. 1.3.2 The type of Shares -- common registered shares. 1.3.3 The form of Shares-- non-documentary. 1.3.4 The nominal value of a Share shall be one hundred (100) Russian Rubles ("RUR"). (All Ruble amounts in this Agreement are set forth in redenominated "new" Rubles. The Parties anticipate that Bank's Charter will be amended accordingly.) 1.3.5 The price per share, and the aggregate price of all Shares to be sold under the Principal Contract, shall be as stated in Article 1.4 below. 1.3.6 Settlements between the Parties shall be made in RUR in accordance with the exchange rate established by the Central Bank of the Russian Federation and effective on the date of payment. 1.4 The aggregate purchase price for the Shares shall be equal to the product of 1.20 multiplied by the Final Adjusted Book Value (as defined below) per common share of Bank, multiplied by the number of Shares purchased, calculated in the manner and at the time hereinafter described (the "Purchase Price"). 1.4.1 The preliminary Purchase Price is US$5,085,862.39, based on the adjusted book value of Bank as at November 30, 1997 ("Preliminary Adjusted Book Value"), calculated in U.S. Dollars under United States Generally Accepted Accounting Principles ("GAAP"). 1.4.2 The final Purchase Price shall be calculated and agreed upon using the Final Adjusted Book Value. "Final Adjusted Book Value" shall mean Preliminary Adjusted Book Value adjusted for: (a) changes during the period from November 30, 1997, through the last day of the month immediately prior to the Closing (or such other date as may be agreed by the Parties); -2- 3 (b) resolution of any differences of opinion between the Parties concerning any assets or liabilities of Bank; and (c) any discrepancies due to technical differences between the methodologies used by the Parties, Arthur Andersen and/or Price Waterhouse pursuant to their activities under Article 1.4.3. 1.4.3 To determine Final Adjusted Book Value, prior to the Closing, Bank shall cause its outside auditor, Arthur Andersen, to prepare an analysis and calculate book value through the last day of the month immediately prior to the Closing (or such other date as may be agreed by the Parties) in U.S. Dollars under GAAP. Bank shall report the results of such calculation to Investor, including the analysis of Arthur Andersen, and any other data on which such results are based. Such calculation shall be subject to review and reasonable approval by Investor (who may be assisted for this purpose by Price Waterhouse, which will conduct its review on the basis of International Accounting Standards ("IAS")). If Investor does not agree with Arthur Andersen's calculation, then the Parties shall discuss and endeavor in good faith to resolve any differences of opinion. 1.5 In addition to paying the Purchase Price for the Shares, as a separate and essential condition of the purchase, Investor shall be required to provide certain license rights to software and management services to Bank, in a manner to be agreed. 1.6 The other terms of such purchase, sale and issuance shall be as set forth in this Agreement. 2. OBLIGATIONS OF THE PARTIES 2.1 Investor shall: 2.1.1 Subscribe for the Shares by executing the Principal Contract, and such other documents as may be required by applicable Russian legislation. 2.1.2 At the Closing, make payment for the Shares by paying the Purchase Price to Bank in the manner required by applicable legislation. 2.1.3 Prior to the Closing, refrain from entertaining, soliciting, or discussing with any prospective sellers, or agreeing to participate in, any sale or offer to sell to Investor, directly or indirectly, another Russian bank or any part thereof or interest therein. -3- 4 2.2 Bank shall: 2.2.1 At the Closing, execute the Principal Contract, and in accordance therewith issue and sell the Shares to Investor. Bank shall register Investor in the share register of Bank as a shareholder, immediately after Investor has duly paid the Purchase Price for the Shares. Bank shall deliver to Investor an extract from the share register of Bank immediately after the aforementioned registration, confirming the transfer of ownership of and shareholder rights connected with the Shares to Investor. 2.2.2 Prior to the Closing, refrain from: (a) issuing any common or preferred shares, or securities convertible into such shares, to any third party or parties, without the prior written consent of Investor; or (b) entertaining, soliciting, or discussing with any prospective purchasers, or agreeing to participate in, any purchase or offer to purchase, directly or indirectly, any shares of Bank. 2.2.3 Pay all Russian Federation taxes which may be assessed in connection with Investor's purchase of the Shares under this Agreement, including any securities taxes. 2.3 Both Parties shall: 2.3.1 Promptly upon execution of this Agreement, cooperate in good faith to undertake all necessary steps to obtain the following approvals (the "Approvals") for the transaction contemplated by this Agreement (the "Transaction"): (a) A decision of Investor's Supervisory Board of Directors, approving this Agreement and Investor's performance of its obligations hereunder; (b) Approval of the State Anti-Monopoly Committee of the Russian Federation; (c) Approval of the Central Bank of Estonia; (d) Approval of the Central Bank of the Russian Federation for Investor's purchase of the Shares as contemplated by this Agreement; (e) Approval of the Central Bank of the Russian Federation for the increase of share capital and adoption of a restated Charter of Bank, as set forth in EXHIBIT 1 to this Agreement (with such modifications to the text of the Charter as may be requested by the Central Bank and agreed by the Parties); and -4- 5 (f) Registration of an appropriate Emission Prospectus and the Shares by the Central Bank of the Russian Federation. 2.3.2 Promptly upon execution of this Agreement, cooperate in good faith to effect the re-registration of the Charter of Bank to permit the issuance and sale of the Shares, and otherwise as needed to implement the provisions of this Agreement. 3. CLOSING; CONDITIONS TO CLOSING 3.1 The funding of the purchase and sale of the Shares (the "Closing") shall occur as follows. 3.2 Neither Party shall be obliged to complete the Closing until all of the following conditions precedent have been satisfied (or waived by written agreement, in the discretion of both Parties): 3.2.1 Both Parties shall have completed all due diligence regarding each other and the Transaction, to their satisfaction, as described in Article 4. 3.2.2 Both Parties shall have agreed on any adjustments to the Purchase Price pursuant to Article 1.4. 3.2.3 All Approvals shall have been obtained and remain in effect. 3.2.4 There shall not have been a material, adverse change of circumstances with respect to Bank and to which Investor objects; nor with respect to Investor and to which Bank objects. 3.2.5 Investor shall have demonstrated to the satisfaction of Bank the availability of funds necessary to pay the Purchase Price to Bank, in a manner reasonably acceptable to Bank, not later than April 15, 1998. 3.2.6 Investor and Bank shall have agreed upon Bank's warranties pursuant to Article 5.1 below, and any qualifications or modifications thereto, or deletions therefrom. 3.3 At the Closing: 3.3.1 The Parties shall execute the Principal Contract as described in Articles 2.1.1 and 2.2.1. 3.3.2 Investor shall pay the Purchase Price as described in Article 2.12. 3.3.3 Bank shall issue the Shares to Investor as described in Article 2.2.1. -5- 6 3.4 The Parties shall complete the Closing as promptly as possible, and in any event within ten (10) business days after obtaining all of the Approvals. 3.5 If the Closing has not occurred by July 31, 1998, then this Agreement shall terminate automatically pursuant to Article 6.2, unless the Parties have first agreed in writing to extend such deadline. 4. DUE DILIGENCE 4.1 Each Party shall cooperate in good faith, and shall cause its respective management, employees and key shareholders to cooperate in good faith, to facilitate the other Party's due diligence efforts as described below. 4.2 Promptly upon obtaining all of the Approvals, each Party shall be entitled to conduct due diligence regarding the other Party for the following period of ten (10) business days. The purpose shall be for each Party to determine whether there has been a material, adverse change of circumstances with respect to the other Party (including, without limitation, any legal proceedings or other events materially and adversely affecting such Party's ability to perform its obligations under this Agreement, or such Party's reputation) during the period between the date of this Agreement and the date that all of the Approvals were obtained. 5. WARRANTIES OF PARTIES 5.1 Bank hereby makes the warranties set forth in Articles 5.1.1 through 5.1.11 below to Investor; SUBJECT, HOWEVER, to (a) information that Bank has shared with Investor prior to the date of this Agreement, and (b) such further qualifications, modifications and/or deletions regarding any matter described in Articles 5.1.5 through 5.1.11 as Bank deems necessary and shall have notified to Investor at least thirty (30) days prior to the Closing. 5.1.1 Bank is a legal entity duly formed and legally existing under the laws of the Russian Federation. Bank holds License No. 3108 for the conduct of banking operations, issued by the Central Bank of the Russian Federation on October 5, 1994. 5.1.2 The authorized capital stock of Bank consists of 610,000 shares of common stock, 100 RUR par value; 150,000 of such shares are issued and outstanding. There is no other capital stock authorized for issuance, except as otherwise stated in this Agreement. No shares of common stock are held in Bank treasury, and no shares are reserved for issuance, nor are there outstanding any options, warrants, convertible instruments or other rights, agreements or commitments to acquire common stock of Bank, except for the rights of Investor as set forth in this Agreement. -6- 7 5.1.3 This Agreement has been duly and validly executed and delivered by Bank and constitutes a valid and binding Agreement of Bank enforceable in accordance with its terms. Bank's General Assembly of Shareholders has approved the Transaction contemplated by this Agreement in Protocol No. 24, dated February 5, 1998. Bank has all requisite corporate power and authority to enter into this Agreement and to carry out the Transaction contemplated hereby, and its doing so has been duly and sufficiently authorized, subject only to the Approvals. 5.1.4 The execution, delivery and performance of this Agreement, and the performance by Bank of its obligations hereunder do not (1) conflict with or result in a breach of any of the provisions of the Charter of Bank; (2) contravene any law, ordinance, rule or regulation of the Russian Federation or any order, writ, judgment, injunction, decree, determination, or award of any court or other authority having jurisdiction, or cause the suspension or revocation of any authorization, consent, approval, or license, presently in effect, which affects or binds, Bank, and will not have a material adverse effect on the validity of this Agreement; (3) conflict with or result in a material breach of or default under any material indenture or loan or credit agreement or any other material agreement or instrument to which Bank is a party; or (4) constitute grounds for the loss or suspension of any material permits, licenses or other authorizations used in the business of Bank. 5.1.5 Bank has no liabilities which are not adequately reflected or reserved against on Bank's most recent balance sheet furnished to Investor, except liabilities incurred since the date of such balance sheet in the ordinary course of business. Without limiting the foregoing, (a) there are no material unpaid leasehold improvements at any of Bank's facilities or locations for which Bank is or will be responsible, and Co) there are no material deferred rents due to lessors at or with respect to any of such facilities or locations. 5.1.6 Since the date of Bank's most recent balance sheet furnished to Investor, except in the ordinary course of business there has not been (a) any material adverse change in the business, condition (financial or otherwise), operations, or prospects of Bank; (b) any material damage, destruction, or loss, whether covered by insurance or not, having a material adverse effect on the business, condition (financial or otherwise), operations, or prospects of Bank; (c) any entry into or termination of any material commitment, contract, agreement, or transaction (including, without limitation, any material borrowing or capital expenditure or sale or other disposition of any material asset or assets) of or involving Bank other than this Agreement; (d) any redemption, repurchase, or other acquisition for value of its capital stock by Bank, or any issuance of capital stock of Bank or of securities convertible into or rights to acquire any such capital stock or any dividend or distribution declared, set aside, or paid on capital stock of Bank; (e) any transfer of or right granted under any material lease, license, agreement, patent, trademark, trade name, or copyright of Bank; (f) any sale or other disposition of any material asset of Bank, or any mortgage, -7- 8 pledge, or imposition of any material lien or other encumbrance on any asset of Bank, or any agreement relating to any of the foregoing; or (g) any default or breach by Bank in any material respect under any material contract, license or permit. Since the date of such balance sheet, Bank has conducted its business in the ordinary and usual course, and, without limiting the foregoing, no material changes have been made in (a) executive compensation levels, (b) the manner in which other employees of Bank are compensated, or (c) supplemental benefits provided to any such executives or other employees. 5.1.7 Bank has properly filed or caused to be filed all federal, local, and foreign income and other tax returns, material reports and declarations that are required by applicable law to be filed by it, and has paid, or made full and adequate provision for the payment of, all federal, local, and foreign income and other taxes properly and finally due. 5.1.8 To the best knowledge of Bank, no material investigation or review by any governmental entity with respect to Bank is pending or threatened, nor has any governmental entity indicated in writing to Bank an intention to conduct the same, and there is no material action, suit, or proceeding pending or, to the best of the knowledge of Bank, threatened against Bank. 5.1.9 There are no collective bargaining, bonus, profit sharing, special compensation, or other trusts, funds, or special arrangements maintained by Bank for the benefit of its directors, officers, or employees, except for normal salary adjustments and bonuses determined in the ordinary course of business. 5.1.10 Bank has good title, or effective and continuing leasehold rights in the case of leased property, to all real property and all personal property owned or leased by it or used by it in the conduct of its business in such a manner as to create the appearance or reasonable expectation that the same is owned or leased by it, free and clear of all material liens, claims, encumbrances and charges which could materially impair the use thereof. 5.1.11 Bank is in substantial compliance with all, and has received no written notice of any substantial violation of any, laws or regulations applicable to its operations. 5.2 Investor hereby warrants to Bank that: 5.2.1 Investor is a legal entity duly formed and legally existing under the laws of Estonia. 5.2.2 This Agreement has been duly and validly executed and delivered by Investor and constitutes a valid and binding agreement of Investor enforceable in accordance with its terms. Investor's Supervisory Board has authorized Investor to enter into the Transaction and this Agreement by Resolution No. 4/97 on November 17, 1997. Investor has all requisite corporate power and authority to enter into this Agreement and to carry out the Transaction -8- 9 contemplated hereby, and its doing so has been duly and sufficiently authorized, subject only to the Approvals. 5.2.3 The execution, delivery and performance of this Agreement, and the performance by Investor of its obligations hereunder do not, (1) conflict with or result in a breach of any of the provisions of the Articles of Association of Investor; (2) contravene any law, ordinance, rule or regulation of Estonia or any order, writ, judgment, injunction, decree, determination, or award of any court or other authority having jurisdiction, or cause the suspension or revocation of any authorization, consent, approval, or license, presently in effect, which affects or binds, Investor, and will not have a material adverse effect on the validity of this Agreement; (3) conflict with or result in a material breach of or default under any material indenture or loan or credit agreement or any other material agreement or instrument to which Investor is a party; or (4) constitute grounds for the loss or suspension of any material permits, licenses or other authorizations used in the business of Investor. 5.2.4 There is no ongoing, pending or threatened legal action or proceeding before any court, governmental agency or arbitrator, which may materially and adversely affect Bank's rights under this Agreement or Investor's performance of its obligations under this Agreement. 5.2.5 Investor has complied with all applicable laws and regulations in entering into this Agreement and acquiring the Shares. 5.2.6 Prior to the Closing, Investor shall have obtained sufficient funds necessary for payment of the Purchase Price. 5.3 Each Party shall bear civil liability to the other Party for any errors or inaccuracies in its warranties as set forth above, and shall indemnify the other Party for any damages or losses caused by such errors or inaccuracies, including due to any failure to complete the Transaction or the Closing directly caused thereby. 6. TERM AND TERMINATION 6.1 The term of this Agreement shall commence on the date hereof and shall expire upon the full performance by the Parties of their obligations hereunder. 6.2 Notwithstanding Article 6.1 above: 6.2.1 This Agreement shall terminate automatically as described in Article 3.5 above. 6.2.2 This Agreement may be terminated by a Party as described in Article 8.2 below. 6.2.3 At the option of Investor, this Agreement may be terminated if the Parties are -9- 10 unable to agree on Bank's qualifications, modifications and/or deletions to its warranties in Article 5. l, within thirty (30) days after notice thereof as described in Article 5.l(b). 6.2.4 At the option of Investor, this Agreement may be terminated if Investor has duly paid the Purchase Price for the Shares as described in this Agreement and the Principal Contract, but within 180 days thereafter the Central Bank of the Russian Federation has failed to register the Shares or the Report on the Results of the Emission, and as a result of such failure the emission of the Shares is deemed invalid under Russian law; PROVIDED, that prior to such termination, Bank shall have an additional 180 days after notice from Investor in which to cure any such failure. In case of any early termination as listed above, neither Party shall have any liability to the other in respect of this Agreement or such termination; PROVIDED, that in the case of termination under Article 6.2.4, promptly after termination Investor shall return the Shares to Bank, and Bank shall refund the Purchase Price to Investor. 6.3 The obligations of the Parties under Articles 6.2, 7, 9 and 10 shall survive the expiration or earlier termination of this Agreement. 7. CONFIDENTIALITY; DISCLOSURES 7.1 The Parties agree that their due diligence activities under Article 4, negotiation and execution of this Agreement and completion of the Closing as described herein may involve the exchange of oral or written information between the Parties that is deemed confidential and proprietary by the disclosing Party ("confidential information"), including (for example) written materials that are clearly marked as confidential. Any Party who receives such confidential information will refrain from disclosing it to any third party without the advance written consent of the Party who disclosed such information; PROVIDED, that each Party may share such information with its professional advisors (upon written agreement by such advisors, in form reasonably acceptable to the other Party, to comply with the provisions of this Article). 7.2 Each Party that receives confidential information will use it for the sole purpose of pursuing the due diligence activities, negotiation and execution of Agreements, and completion of the Closing and the Transaction as described herein. 7.3 Each Party will also cause its employees, agents, representatives and professional advisors to comply with the provisions of this Article. 7.4 Upon the earlier of (a) termination of this Agreement, or (b) the Closing, each Party shall destroy or return to the other Party all documents or tangible materials containing confidential information of the other Party which is covered by this Article, and shall retain no copies thereof. -10- 11 7.5 In its discretion, a disclosing Party may elect to disclose certain information under this Article by allowing the receiving Party to review such information in a secure location on the disclosing Party's premises. The receiving Party may make notes regarding such information, but shall not make or retain any copies thereof. 7.6 If disclosure of any confidential information obtained by a receiving Party is sought by any governmental authority, then such receiving Party shall promptly notify the disclosing Party, and shall use its best efforts to cooperate fully with the disclosing party's pursuit of any or all available legal remedies that may be selected by the disclosing Party to maintain the confidentiality of the information, prior to any disclosure to such governmental authority. However, notwithstanding the foregoing, after reasonable consultation with the disclosing Party, the receiving Party shall be entitled to undertake any disclosure to a governmental authority that is mandatory under applicable law. 7.7 The preceding paragraphs of this Article 7 are not applicable to any information that: 7.7.1 Was already known to a receiving Party at the time of receipt, and such Party can provide written confirmation that this information was at its disposal on the date of receipt; 7.7.2 Is or becomes public not through any act or failure to act of the Party who received it; or 7.7.3 Later is disclosed without restriction to the receiving Party by a third party fully authorized to do so. 7.8 Neither Party shall make any public announcements or statements regarding this Agreement, the Transaction or any matters relating directly thereto without the prior, written consent of the other, which shall not be unreasonably withheld where a Party has a legal obligation to make such announcement or statement under its national securities or banking laws or the regulations of any applicable public stock exchange (subject to necessary precautions being taken to protect confidential information as described under Article 7.6 and otherwise above). All such announcements, statements, press releases or the like shall be discussed and their texts agreed upon by both Parties, in advance. 8. FORCE MAJEURE 8.1 In the event of any occurrence of Force Majeure circumstances making it impossible for a Party to perform completely or in material part its obligations under this Agreement, including, without limitation: fire, natural calamity, military actions, decrees of state power or other unforeseen circumstances, which do not depend on the action of the Parties, then the required time for performance of such Party's obligations under this Agreement shall be postponed for the period during which such circumstances continue. -11- 12 8.2 In the event that such circumstances continue for a period of time exceeding six (6) months, then each of the Parties shall be entitled to terminate this Agreement by written notice to the other. In such case, neither Party shall be held liable to the other Party for any damage inflicted as a result of the occurrence of the Force Majeure circumstances. 8.3 A Party that by virtue of any Force Majeure circumstances becomes unable to fulfill obligations as described above, shall promptly notify the other Party in writing about the occurrence of such circumstances. 9. FINAL PROVISIONS 9.1 This Agreement may be amended or modified only upon written consent of the Parties. 9.2 Each Party shall pay its own fees and expenses incurred in connection with this Agreement and the Transaction. Each Party shall bear the cost of any brokers, advisors or finders retained by it in connection with the Transaction. 9.3 For purposes of coordination between the Parties in performing their obligations hereunder, the authorized representative of Investor shall be Raivo Erik, and the authorized representative of Bank shall be John Tierney. A Party may change such designated person by written notice to the other Party. 9.4 Notices or responses required by this Agreement shall be given in writing, and shall be deemed delivered upon the earlier of (a) the date actually received, or (b) the date ten (10) days after dispatch by overnight courier (DHL or Federal Express). Notices or responses shall be addressed and sent by personal delivery, registered mail or fax (with a copy by registered airmail) to the address of the intended recipient set forth below. The addresses and bank accounts of the Parties are: To Investor: AS Eesti Forekspank Narva maantee 11 Tallinn, EE0001 Estonia Attn: Mr. Ivar Lukk, Chairman of the Board Facsimile: +372-630-2506 Bank Account: Mezhcombank, Moscow Account No.: 40805810100000000025 Corr. Account No. :30101810100000000143 with a copy to: ZAO Pioneer Bank 2nd Krasnoprudny per., 7 Moscow 107140 Russian Federation Attn: Mr. Raivo Erik Facsimile: +7 (095) 975-2964 -12- 13 To Bank: ZAO Pioneer Bank 2nd Krasnoprudny per., 7 Moscow 107140 Russian Federation Attn: Mr. Mikhail Rubinchik, Chairman Facsimile: +7 (095) 975-2964 Bank Account: Corr. Account No.: 30101810400000000231 BIC 044579231 OKPO 29307376 OKONH 96120 with a copy to: Pioneer First Investment Group Gazetny 5, Room 255 Moscow 103918 Russian Federation Attn: Mr. John L. Tierney Facsimile: +7 (095) 234-1608 9.5 This Agreement sets forth the entire agreement between the Parties relating to the subject matter contained herein and replaces all other prior agreements or understandings, whether written or oral (including without limitation the Term Sheet dated December 5, 1997). 10. ARBITRATION AND APPLICABLE LAW 10.1 The Parties will use their best efforts to resolve any disputes or controversies arising out of this Agreement by negotiations in good faith. 10.2 If such a dispute or controversy has not been settled by negotiations within thirty (30) days, then the Parties hereby agree to resolve the dispute by binding arbitration, under the auspices of and pursuant to the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration proceedings will be conducted in London, England. The language of the arbitration will be English. The arbitration tribunal will consist of three (3) arbitrators. Investor will be entitled to appoint one arbitrator and Bank will be entitled to appoint one arbitrator. The two arbitrators so appointed will choose the third arbitrator. The decision and award of the arbitrators may, in their discretion, require the losing Party to pay the legal fees and expenses of the prevailing Party. The decisions of such arbitral tribunal will be final and binding on both Parties, and enforceable by all courts with jurisdiction. 10.3 This Agreement shall be construed in accordance with the laws of the Russian Federation. -13- 14 This Agreement has been signed on February 11, 1998, in the City of Moscow, in four(4) originals, two (2) in English and two (2) in Russian, each equally binding and valid, with both language versions intended to be identical in meaning. ON BEHALF OF BANK ON BEHALF OF INVESTOR /s/ Mikhail Rubinchik /s/ Ivar Lukk - ----------------------------- ------------------------------- Mikhail Rubinchik Ivar Lukk Chairman Chairman of the Board Pioneer Bank AS Eesti Forekspank [SEAL] [SEAL] -14- 15 EXHIBIT 1 RESTATED CHARTER [to follow] -15- EX-10.63 4 FOURTH AMENDMENT TO LEASE 1 Exhibit 10.63 FOURTH AMENDMENT TO LEASE This FOURTH AMENDMENT TO LEASE ("Fourth Amendment") is made as of September 11, 1997 by and between the TRUSTEES OF 60 STATE STREET TRUST under Declaration of Trust dated September 10, 1970, recorded with Suffolk Deeds, Book 8389, Page 286, as amended, with an address of c/o Koll Management Services, 60 State Street, Boston, Massachusetts 02109 ("Landlord"), and THE PIONEER GROUP, INC., having a mailing address of 60 State Street, Boston, Massachusetts 02109 ("Tenant"). RECITALS WHEREAS, Landlord and Tenant entered into a lease dated as of July 3, 1991, as amended by a certain First Amendment to Lease dated as of January 31, 1994, as further amended by a certain Second Amendment to Lease dated September 30, 1996, and as further amended by a certain Third Amendment to Lease dated November 15, 1996 (collectively, the "Lease"), for certain space ("Premises") on the 3rd, 4th, 5th, 6th, 17th, 18th and 19th floors of the building commonly known as 60 State Street, Boston, Massachusetts (the "Building"); WHEREAS, by Memorandum of Understanding dated as of August 28, 1997, Landlord and Tenant have agreed that Tenant shall lease certain additional space consisting of approximately 11,850 rentable square feet of space on the 14th Floor of the Building, shown as the "Floor 14 Premises" on the floor plan attached hereto as Fourth Amendment Exhibit A and incorporated herein; and WHEREAS, Landlord and Tenant desire to amend the Lease to include the Floor 14 Premises within the Premises and to amend certain terms and conditions of the Lease as described below. AGREEMENT NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are acknowledged and agreed, Landlord and Tenant hereby agree that Landlord shall lease to Tenant, and Tenant shall lease from Landlord, the Floor 14 Premises on the following terms and conditions: 1. TERM: The Term for the Floor 14 Premises shall commence on January 1, 1998 and shall expire on December 30, 2003, unless earlier terminated as set forth in the Lease. Tenant shall have no option to renew the Lease with respect to the Floor 14 Premises. 2. ANNUAL FIXED RENT FOR INITIAL TERM AND ADDITIONAL RENT. Annual Fixed Rent for the Floor 14 Premises shall be $22.65 per rentable square foot. Tenant shall pay additional rent for the Floor 14 Premises on the same terms and conditions as provided in the Lease for the initial Premises, which additional rent is currently estimated at $12.35 per rentable square foot. 3. LANDLORD'S WORK ON THE FLOOR 14 PREMISES. Notwithstanding any provisions of the Lease to the contrary, without limitation, Sections 3.1 and 3.6, the Floor 14 Premises shall be delivered to Tenant broom-clean and in their then "AS IS" condition. 1 2 4. TENANT'S WORK ON THE FLOOR 14 PREMISES. Commencing on January 1, 1998, Tenant shall have the right to construct improvements to the Floor 14 Premises, either on its behalf or on behalf of a subtenant as set forth below, subject to Landlord's approval of Tenant's plans and specifications, which approval shall not be unreasonably withheld or delayed, and subject to the other terms and conditions of the Lease including Section 3.5. All Tenant improvements to the Floor 14 Premises shall be performed at Tenant's sole cost and expense, and Landlord shall not be obligated to reimburse or othrewise compensate Tenant for such improvements. 5. ADDITIONAL PARKING SPACES. Commencing on January 1, 1998, Tenant shall be entitled to occupy three (3) additional non-reserved parking spaces in the Building garage at the then current market rates charged by the garage operator. Tenant shall enter into a separate parking agreement with the garage operator with respect to the foregoing three additional parking spaces. 6. SUBLETTING THE FLOOR 14 PREMISES. Subject to the terms and conditions herein set forth and set forth in the Lease, Tenant shall have the right to sublet all or a portion of the Floor 14 Premises, provided (i) the proposed subtenant and the proposed use of the Floor 14 Premises is not inconsistent with the first-class character and quality of the Building, and (ii) Tenant gives Landlord written notice of the name of the proposed subtenant, the term of the proposed subletting and any leasehold improvements to be made in connection therewith. Notwithstanding any such subletting, Tenant shall remain primarily liable under the Lease with respect to the Floor 14 Premises. 7. NO EFFECT ON PRIORITY OF TENANT'S RIGHTS. It is hereby understood and agreed that the leasing of the Floor 14 Premises by Tenant shall in no way affect the priority of Tenant's rights with respect to any other space in the Building set forth in the Lease. 8. CAPITALIZED TERMS. Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Lease. 9. RATIFICATION. Except as amended hereby, the terms and conditions of the Lease shall remain unaffected and the Lease shall remain in full force and effect. 10. CONTINGENCIES. This Fourth Amendment to Lease is specifically contingent upon (i) the receipt by Landlord of a written waiver by Hale and Dorr of its superior rights to the Floor 14 Premises, and (ii) the delivery of the Floor 14 Premises from ITT/Sheraton Corporation to Landlord on or before January 1, 1998. [SIGNATURES ON FOLLOWING PAGE] 2 3 EXECUTED under seal as of the date first set forth above. LANDLORD: TRUSTEES OF 60 STATE STREET TRUST By: /s/ John A. Pirovano ---------------------------------------- John A. Pirovano, as Trustee of 60 State Street Trust, for self and co-Trustees but not individually TENANT: THE PIONEER GROUP, INC. By: /s/ ---------------------------------------- its VICE PRESIDENT hereunto duly authorized 3 4 FOURTH AMENDMENT EXHIBIT A Plan of Floor 14 Premises [FLOOR LAYOUT] 5 CONSENT OF LENDERS The undersigned hereby acknowledge notice of the Fourth Amendment to Lease between the Trustees of 60 State Street Trust and The Pioneer Group, Inc. dated as of September __, 1997 and consent thereto. TRUST COMPANY OF THE WEST, a California corporation, as trustee for TCW REALTY FUND VA, as tenant in common By /s/ ------------------------------------------- Authorized Signatory By: /s/ ------------------------------------------- Authorized Signatory TCW REALTY FUND VB, a California limited partnership, as tenant in common By: TCW ASSET MANAGEMENT COMPANY, a California corporation, as General Partner BY: /s/ -------------------------------------- Authorized Signatory BY: /s/ -------------------------------------- Authorized Signatory By: WESTMARK REALTY ADVISORS L.L.C., a Delaware limited liability company, as General Partner BY: /s/ -------------------------------------- Authorized Signatory BY: /s/ -------------------------------------- Authorized Signatory 5 6 TEACHERS INSURANCE AND ANNUITY ASSOCIATION JOAN HERMAN COLLEGE RETIREMENT EQUITIES FUND Sr. Investment Analyst 730 Third Avenue Telephone: (212) 916-4474 New York, NY 10017 Fax: (212) 916-6102 December 4, 1997 Brenda Y. Sheridan Koll Real Estate Service 60 State Street Suite 3600 Boston, Massachusetts 02109 Re: TIAA Appl. #MA-438 Mortgage #000386700,01 Sixty State Street Boston, Massachusetts Dear Brenda: Please be advised that TIAA hereby approves the following lease amendment for the captioned property: FOURTH AMENDMENT TO LEASE, DATED SEPTEMBER 11, 1997, BETWEEN THE TRUSTEES OF 60 STATE STREET TRUST AND THE PIONEER GROUP. Please feel free to call if you have any questions. Sincerely, /s/ Joan Herman Joan Herman EX-11 5 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, - ------------------- -------------------------------------- 1997 1996 1995 ---- ----- ---- NET INCOME (1) $ 29,166 $ 18,837 $ 22,811 =========== =========== =========== BASIC EARNINGS PER SHARE CALCULATION: Weighted average number of common shares outstanding 24,873,000 24,620,000 24,407,000 BASIC EARNINGS PER SHARE $1.17 $0.77 $0.93 =========== =========== =========== DILUTED EARNINGS PER SHARE CALCULATION: Weighted average number of common shares outstanding 24,873,000 24,620,000 24,407,000 Dilutive effect of stock options as common stock equivalents 692,000 745,000 750,000 Dilutive effect of restricted stock proceeds as common stock equivalents 65,000 95,000 154,000 Weighted average number of shares outstanding as adjusted 25,630,000 25,460,000 25,311,000 ----------- ----------- ----------- DILUTED EARNINGS PER SHARE $1.14 $0.74 $0.90 =========== =========== ===========
(1) These amounts agree with the related amounts in the Consolidated Statement of Income. EX-13 6 ANNUAL REPORT 1 Exhibit 13 [back cover] [Pioneer Logo] The Pioneer Group, Inc. 60 State Street 0398-4750 Boston, MA 02109 (C) The Pioneer Group, Inc. [front cover] [Photo: ship lantern] [Photo: elaborate globe] [Photo: compass] THE PIONEER GROUP, INC. '97 ANNUAL REPORT 2 THE COMPANY The Pioneer Group, Inc., and its subsidiaries (collectively, the "Company"), are engaged in financial services businesses in both the United States and in many foreign countries and in a number of natural resource development projects in locales as diverse as the Republic of Ghana and the Russian Far East. In the United States, the Company conducts four lines of financial services businesses: (i) investment manager to the U.S. registered investment companies comprising the Pioneer Family of Mutual Funds, and institutional accounts, (ii) distributor of shares of the Pioneer Family of Mutual Funds, (iii) venture capital investor and manager, and (iv) shareholder servicing agent for the Pioneer Family of Mutual Funds. The Company's international financial services businesses include investment operations in: (i) Warsaw, Poland, where the Company manages and distributes units of four mutual funds, owns 50% of a unitholder servicing agent, manages an institutional venture capital fund and owns a majority interest in a brokerage operation, (ii) Dublin, Ireland, where the Company distributes shares of, manages and services six offshore investment funds, sold primarily in Western Europe, and (iii) Moscow, Russia, where the Company provides financial services, including investment advisory, investment banking, brokerage and transfer agency services, distributes shares of, manages, and services, Pioneer First, one of the first open-end mutual funds available to Russian citizens, and owns 51% of the First Voucher Fund, the largest Russian voucher investment fund. In addition, the Company has investment operations in the Czech Republic and has invested in investment management operations in India and Taiwan. The Company's subsidiary, Pioneer Goldfields Limited (PGL), conducts mining and exploration activities in the Republic of Ghana and exploration activities elsewhere in Africa. PGL's principal asset is its ownership of 90% of the outstanding shares of Teberebie Goldfields Limited, which operates a gold mine in the western region of the Republic of Ghana. The Company's subsidiary, Pioneer Forest, Inc. (Pioneer Forest), conducts timber harvesting and timber development activities in the Russian Far East. Pioneer Forest's principal asset is its ownership of 95% of the outstanding shares of Closed Joint-Stock Company "Forest-Starma," which harvests timber in the Russian Far East and which commenced commercial production on January 1, 1997. Wholly and Majority Owned Subsidiaries Pioneering Management Corporation, Pioneer Funds Distributor, Inc., Pioneering Services Corporation, Pioneer Capital Corporation, Pioneer SBIC Corp., Pioneer Associates, Inc., Pioneer Fonds Marketing GmbH, Pioneer International Corporation, Pioneer First Polish Investment Fund Joint Stock Company S.A., Pioneer Polski Dom Maklerski, S.A. Pioneer Investment Poland Ltd., Pioneer Management (Ireland) Limited, Pioneer Omega, Inc., Pioneer First Russia, Inc., "First Voucher Fund," "Pioneer Bank" (Joint Stock Company), Closed Joint Stock Company "Pioneer Securities," UKS Securities Limited, Closed Joint Stock Company "Pioneer Services," Closed Joint Stock Company "Pioneer First," "Pioneer Investments," Pioneer Czech Investment Company, A.S., Pioneer Goldfields Holdings, Inc., Pioneer Goldfields Limited, Teberebie Goldfields Limited, Pioneer Forest, Inc., Closed Joint-Stock Company "Forest-Starma," Closed Joint-Stock Company "Amgun-Forest," Closed Joint-Stock Company "Udinskoye," Closed Joint-Stock Company "Pioneer Starma Equipment," Pioneer Metals and Technology, Inc., Closed Joint-Stock Company "Pioneer Metals International," PIOGlobal Corporation, Pioneer Real Estate Advisors, Inc., Pioneer Investments Corporation, PIOGlobal Insurance Company Ltd., Pioneer Explorer, Inc., Pioneer Real Estate Advisors, sp Z.O.O. Joint Ventures Financial Services Limited, Kothari Pioneer AMC Ltd., Core Pacific Securities Investment Trust Co., Ltd., International Joint-Stock Company "Starma Holding," Closed Joint-Stock Company "Tas-Yurjah Mining Company." Legal Counsel Hale and Dorr LLP Boston, Massachusetts Transfer Agent State Street Bank and Trust Company Boston, Massachusetts Independent Public Accountants Arthur Andersen LLP Boston, Massachusetts The Company has filed an Annual Report on Form 10-K with the Securities and Exchange Commission for the year ended December 31, 1997. A copy of that Report is available, free of charge, to stockholders of the Company, upon request to William H. Keough, Senior Vice President and Chief Financial Officer, 60 State Street, Boston, MA 02109. 3 [Photo: compass] Pioneer's commitment to expanding and improving our financial services businesses, both in the U.S. and abroad, served us well in 1997: It was the second-most profitable year ever, despite disappointing results from our natural resource businesses. New ventures are important, but the further development of our core investment management business must continue apace -- both are crucial if we are to succeed in the next century. John F. Cogan, Jr. President Table of Contents Chairman's Letter 2 Pioneer at a Glance 4 U.S. Investment Management 6 International Investment Management 8 Natural Resource Development 10 Financial Snapshot 12 Management's Discussion & Analysis 14 1 4 [photo: John F. Cogan, Jr.] FELLOW STOCKHOLDERS: The major earnings trends reported in our 1996 annual report continued through 1997, as our U.S. investment management business again nearly doubled its earnings while declining earnings from our natural resource operations turned into losses. Reflected in our results is the positive contribution of our more mature businesses, such as the U.S. mutual fund and venture capital businesses, both of which required significant investments in prior years, contrasted with the struggles experienced by our more recent ventures in emerging markets overseas. The favorable trends carried far more weight than the difficulties, however, resulting in earnings of $1.14 per share, compared to 74 cents per share in 1996. Overall revenues grew 43% to $342.8 million, including a 50% gain from financial services revenues to $241.5 million. 1997 Overview Here are the main components of Pioneer's earnings picture in 1997: Earnings from the domestic investment management business were $1.25 per share, compared to 68 cents in 1996. These earnings stemmed principally from a 24% increase in assets under management to $21 billion as of December 31, 1997. Asset growth was buoyed by another strong year on Wall Street and a 10% increase in sales of U.S. mutual funds. Assets continued to grow in early 1998 and were over $23 billion at this writing. Our U.S. venture capital unit, Pioneer Capital Corp. (PCC), earned 25 cents per share, up from 18 cents in 1996. Pioneer's other venture capital operations in Central and Eastern Europe lost 5 cents per share. Unlike PCC, which has been enjoying profits from maturing investments, these are relatively new operations whose start-up and infrastructure costs weigh more heavily on results. Our financial services operations in Russia and Central Europe, for the most part, showed favorable trends. Russian financial services earned 21 cents per share, compared to 5 cents in 1996, principally from our brokerage operations there. In Poland, financial services posted profits of 4 cents per share, compared to a loss of 3 cents per share in 1996. Operations in the 2 5 Czech Republic lost 5 cents per share, improving significantly from an 11 cents loss in 1996. Lastly, our relatively young real estate management arm, which operates in Warsaw, St. Petersburg, and Moscow, lost 7 cents per share, compared to a loss of 1 cent in 1996. Gold mining lost 11 cents per share in 1997, compared to earnings of 10 cents in 1996. Gold mining operations at Teberebie Goldfields Ltd. ("TGL") were break-even (versus earnings of 13 cents in 1996), as the 1997 losses represented exploration costs. In 1997 the prior mine expansion began to produce results: production was boosted by 29% to 263,000 ounces, cash production costs per ounce were cut by more than 13%, to $230 per ounce, and revenues increased by 14% to $89.5 million. Unfortunately, increased production could not make up for the impact of materially lower gold prices. One of 1997's biggest disappointments came from Forest-Starma, our timber operation in the Russian Far East. This operation, which completed its first full year of commercial production, was hindered by economic weakness in Japan, our primary market. Severely depressed timber prices in Japan, combined with lower-than-anticipated productivity, led to a loss for Forest-Starma of 26 cents per share, compared to a loss of 2 cents in 1996. A Look Ahead Our focus in 1998 will be to maintain the momentum of our investment management businesses, continue to improve the results from our emerging markets financial services operations and do all we can to return the natural resource operations to profitability. New projects will be focused primarily on leveraging resources and opportunities related to existing operations. For example, this year we expect to move forward with plans developed in 1997 for increased institutional activity in Central and Eastern Europe, including venture capital and real estate funds. Closer to home, in 1998 we are devoting significant efforts to building our presence in the institutional marketplace, and to "re-launching" Pioneer Fund, which celebrates its 70th birthday this year, having achieved exceptional performance over the last several years. We also expect to introduce our offshore fund family to new markets. New ventures are important, but the further development of our core investment management business must continue apace -- both are crucial if we are to succeed in the next century. We are optimistic that the combination of established and emerging businesses we have developed will produce continued growth in stockholder value. The pages that follow describe in more detail the results of various business segments. Sincerely, /s/ John F. Cogan, Jr. John F. Cogan, Jr. President March 25, 1998 3 6 PIONEER AT A GLANCE The profit potential of The Pioneer Group, Inc., can be gauged by any number of measures. We are pleased to report steadily upward trends in sales, revenues, assets under management and stockholders' equity. The charts also show significant resumption of earnings growth in 1997. It's worth noting that the sharp earnings peak of 1994 was due, in part, to a one-time tax gain of 16 cents a share. - ------------------------------[BAR CHARTS]--------------------------------------
U.S. Mutual Fund Sales Dollars in Millions 1993 $1,076 1994 $1,499 1995 $1,752 1996 $2,602 1997 $2,866
Assets Under Management Dollars in Millions 1993 $10,766 1994 $11,103 1995 $13,745 1996 $16,981 1997 $21,041
4 7 - ------------------------------[BAR CHARTS]--------------------------------------
Gold Production Ounces 1993 164,900 1994 176,400 1995 235,500 1996 203,100 1997 263,000
Earnings Per Share Dollars 1993 0.72 1994 1.32 1995 0.90 1996 0.74 1997 1.14
Stockholders' Equity Dollars in Thousands 1993 $107,174 1994 $134,422 1995 $150,343 1996 $162,473 1997 $183,687
Cash Dividends Dollars 1993 0.225 1994 0.315 1995 0.40 1996 0.40 1997 0.40
- -------------------------------------------------------------------------------- 5 8 [Photo: ship lantern] Pioneer's core U.S. operations involve managing more than $21 billion for more than a million investors through 24 mutual funds, 10 variable annuity portfolios, and institutional accounts. Mutual fund sales grew by 10% to a record $2.9 billion, while redemptions edged up 2 percentage points to 12% of assets, substantially below the industry average of about 15%. 6 9 U.S. INVESTMENT MANAGEMENT 1997 Overview: In 1997, Pioneer began or built upon several initiatives that contributed to the year's record mutual fund sales levels and strong profitability. These initiatives include: Investment Management Depth. For 70 years, proprietary fundamental research has been a Pioneer hallmark. In 1997, we continued to add depth and expertise to our investment staff, bringing our global total to more than 75 professionals. As Pioneer has grown, we have also reconfigured the professional staff to ensure that maximum resources are brought to bear on every portfolio we manage. Our investment professionals perform in teams, composed of analysts and portfolio managers, which support the manager of each portfolio. We currently have four teams covering the U.S. equity markets -- core value, aggressive value, core growth and a specialized funds group -- along with international equity and global fixed income teams. An excellent example of the team approach is Pioneer Micro-Cap Fund, which joined Pioneer's line-up of "aggressive value" funds in 1997. Micro- and small-capitalization stocks represent the most research-intensive sector of the U.S. capital markets. Pioneer Micro-Cap Fund and Pioneer Small Company Fund are backed by a dedicated team of analysts and portfolio managers experienced at working with smaller companies. Both funds contribute to Pioneer's stature as a premier value manager. Technology. The intelligent use of technology is critical to all of our investment operations, from analysis, to decision-making, to implementation. In 1997, we made considerable progress in introducing technology across the investment landscape. We are developing a state of the art internal management system to deliver global information rapidly to our professional teams and to provide advanced tools for stock analysis and portfolio management. We are installing an electronic trading system that will link portfolio managers, traders and fund accountants to help us lower costs, eliminate errors and trade more effectively. Pioneer's investments in staffing and technological resources contributed to excellent performance in 1997 of five Pioneer funds, which finished within the top 20% of their fund categories. Institutional Investment Management. Pension fund assets in the U.S. total in excess of $6 trillion, with another $7 trillion in assets outside this country. In 1997, we sharpened our focus on this growing, worldwide market with the formation of Pioneer Global Institutional Advisors (PGIA). Pioneer's investment resources are dedicated to serving a range of institutional investors, including pension funds, municipalities, endowments and corporations. PGIA is expanding Pioneer's sales force, coordinating investment management responsibilities, and identifying areas of opportunity within the institutional marketplace. We believe that Pioneer's strengths as an investment manager -- our reputation for integrity, consistent style, value orientation, and team approach - -- are in great demand in this marketplace. Venture Capital. Pioneer Capital Corp., our venture capital arm, has successfully built a portfolio of New England-based companies, several of which have recently had initial public offerings. In 1997, PCC invested $15 million in its portfolio of companies. [Photo: ship's charts] Mutual Fund Distribution. A major initiative in recent years has been to broaden mutual fund distribution among brokers, banks, financial planners and insurance companies -- particularly those with a national distribution base. In 1997, for the fourth year in a row, sales among national brokers and banks increased, as did the number of dealers selling $1 million or more. One benefit of our wider sales base was that our record mutual fund sales in 1997 were much more evenly distributed than in previous years. Retirement plans. Pioneer offers a range of retirement services, including 401(k), SIMPLE, and age-weighted profit sharing plans, principally to small- and mid-size companies. Pioneer provides our corporate clients the highest levels of expertise and support. Assets held in 401(k) and similar retirement accounts grew by 25% in 1997. Pioneer Vision Variable Annuity. Pioneer Vision offers individuals more than a tax-advantaged way to invest for retirement -- it allows them to do so through 10 investment portfolios that are patterned after Pioneer funds with which they may already be comfortable. In 1997, two new investment portfolios were added. Assets in Pioneer Vision's portfolios more than doubled in 1997. Roth IRA. Created by Congress in August 1997, Roth IRAs offer another attractive way to save for retirement on a tax-advantaged basis. After enactment, Pioneer moved quickly to present the merits of Roth, Traditional, and Education IRAs to our investment professional clients. Roth IRAs proved to be extremely popular, and they will remain a significant focus for Pioneer in 1998. 7 10 Pioneer's international financial services continue to play a growing role in the success of our business. In 1997, we increased both the volume of business conducted internationally and variety of products and services offered at both the retail and institutional level. [Photo: elaborate globe] 8 11 INTERNATIONAL INVESTMENT MANAGEMENT 1997 Overview: Institutional Investment Management. Pioneer's global institutional offerings include a direct equity fund in Russia and a real estate fund in Poland. In 1998, we will continue our focus on new opportunities in Central and Eastern Europe. Pioneer Real Estate Advisors (PREA) was formed in 1996 to manage properties and real estate investment portfolios for institutional and corporate clients worldwide. In addition to Pioneer's home office in Boston, PREA currently has offices in Moscow, St. Petersburg and Warsaw. Pioneer's Meridian office building in Moscow, discussed in more detail below, is an example of the kinds of properties PREA will develop and manage. Western Europe. Pioneer introduced three new offshore funds in 1997, bringing to six the number of Dublin-based funds. Dublin is the site of Pioneer's international processing facility that began operations in 1995. Our offshore funds provide excellent examples of how we seek to leverage our investment management expertise on a global scale. Along with these offshore products, Western Europe remains an important sales channel for our U.S.-registered mutual funds. Central Europe. Pioneer established the first mutual fund in Poland in 1992, and we have steadily increased our presence as Poland's capital markets have grown and matured, offering financial services for individuals, institutions and corporations. In 1997, we expanded our offerings to include a wider range of equity and fixed-income funds, and a cash management program. Pioneer also manages a local mutual fund in the Czech Republic. Russia. Pioneer made history in 1996 with Pioneer First Fund, Russia's first open-end mutual fund, which invests principally in government bonds. We began work on another mutual fund in 1997, focusing on blue-chip Russian companies. This product joins Pioneer's First Voucher Fund (FVF), Russia's largest privatization fund with 2.1 million shareowners. Pioneer, through a subsidiary, is majority owner of FVF, and our Russian investment management company serves as FVF's adviser. FVF is a unique business venture in several respects. For example, Pioneer is represented on the boards of about 30 of the 125 companies held by FVF. This role affords Pioneer an invaluable position from which to expand our expertise about the dynamics of the emerging capitalist Russian economy. Pioneer believes that there is significant unrealized value in the assets included in FVF's portfolio, based on available market quotations. Although FVF's assets are carried on our books at cost, we believe that as of the end of 1997, our stake was worth approximately four times the price we purchased it for in 1995. Through FVF, Pioneer also acquired the Meridian office building in Moscow, a 220,000 square-foot structure that was partially complete when purchased in 1995. At the end of 1997, the building was completed and approaching fully leased status, with a roster of tenants that include Lucent, Halliburton, and Mary Kay Cosmetics. Pioneer's Russian financial services companies also include a bank and a securities brokerage house. Securities trading proved to be very active and profitable in 1997, buoyed by strong increases in the Russian market throughout most of the year. 9 12 Pioneer's Ghanaian gold mine produced 263,000 ounces in 1997, and achieved a significant milestone with production of its one-millionth ounce -- a threshold achieved in January 1997. Our timber operation in the Russian Far East completed its first full year of commercial operations, with shipment of 194,000 cubic meters of timber. [Photo: ship bell] 10 13 NATURAL RESOURCE DEVELOPMENT 1997 Overview: Pioneer Goldfields Limited. Pioneer Goldfields Limited (PGL) owns 90% of Teberebie Goldfields Limited (TGL), our gold mine located in Tarkwa, Ghana, and is carrying out exploration in West Africa and Russia. The TGL Phase III mine expansion reached operating capacity, with the first gold pour in April 1997. The expansion included a further heap leach operation, a new near-pit gyratory crusher that serves both the West Plant and the new South Plant, modifications to the West Plant conveyer systems, and a new and larger mining fleet. We are pleased to report that the Phase III mine expansion, along with increases in operating efficiency, helped boost production by 29% to 263,000 ounces. Cash production costs per ounce were cut by more than 14% to $230 per ounce and revenues were increased by 14% to $89.5 million. As a result, TGL broke even (compared to a 13 cent gain in 1996) despite last year's major decline in gold prices. TGL's increases in production were partially offset by a 12% decrease in average realized gold prices to $340 per ounce. Overall, gold mining lost 11 cents a share in 1997, compared to a gain of 10 cents in 1996. Although TGL broke even in 1997, gold mining had losses due to exploration costs in West Africa and Russia. [Photo: old flying goggles] In 1997, TGL began implementing a new mine plan, utilizing a more sophisticated operating model based on historical production data. This plan implements a change in fundamental mining method from selective mining to bulk mining. As a result of the new mine plan, combined with lower gold prices, and the normal reduction for gold produced in the last two years, TGL's proven and probable reserve estimates have been reduced to 6.1 million ounces. Please refer to the detailed explanation in the Management's Discussion and Analysis section of this report. Pioneer recognizes the variable nature of gold prices, and believes firmly in the long-term profit potential of a world-class gold mine like TGL. Pioneer Forest, Inc. Pioneer Forest was established to hold majority interests in three companies in the Russian Far East's Khabarovsk Territory: Forest-Starma, Amgun-Forest, and Udinskoye, which were formed to develop timber production. Forest-Starma, in its first full year of commercial production, shipped FOB Siziman 194,000 cubic meters of timber, at an average realized price of $61 per cubic meter. Results for Forest-Starma were disappointing for two reasons: economic weakness in Japan, our principal market for timber, which led to very weak log prices, particularly in the fourth quarter of 1997, and lower-than-anticipated productivity. The three timber companies, in the aggregate, hold long-term leaseholds to 926,400 hectares (2.3 million acres) and annual cutting rights of 1,011,000 cubic meters. Feasibility studies are underway for both Amgun-Forest and Udinskoye, which are still in their development stage. For a number of reasons, but principally due to current depressed market prices for the larch species of timber that predominates these two concessions, we are not likely to commence full-scale development of them in the near term. Increasing productivity is Pioneer's key goal for Forest-Starma in 1998. We are optimistic about the long-term potential of this operation. Pioneer Metals International. High technology metal alloys and powders are one of the strengths of Russian industry. Pioneer Metals International collaborates with Russian metallurgical concerns, providing them with marketing skills and financing necessary to compete in Western markets. Pioneer continues to look for the opportunities served by a growing global economy, building on a diverse array of financial services and natural resource ventures. 11 14 FINANCIAL SNAPSHOT - -----------------------------[BAR CHART]----------------------------------------
Assets Under Management Dollars in millions 1993 $10,766 1994 $11,103 1995 $13,745 1996 $16,981 1997 $21,041
- -------------------------------------------------------------------------------- Assets Under Management at December 31: Dollars in Millions
1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- U.S. Registered Mutual Funds .............. $19,635 $15,704 $12,701 $ 9,925 $ 9,854 Non-U.S. Registered Mutual Funds .......... 715 502 280 589 388 ------- ------- ------- ------- ------- Total Registered Mutual Funds ............. 20,350 16,206 12,981 10,514 10,242 Closed-end and subadvised funds and private institutional accounts* 691 775 764 589 524 ------- ------- ------- ------- ------- Total ..................................... $21,041 $16,981 $13,745 $11,103 $10,766 ======= ======= ======= ======= =======
* Excludes assets of funds managed by foreign joint ventures and venture capital pools. Sales of Mutual Fund Shares: Dollars in Millions
Year Ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ U.S. Registered Mutual Funds: Sales* ..................................... $2,866 $2,602 $1,752 $1,499 $1,076 Redemption of shares ....................... 2,106 1,431 1,050 860 714 ------ ------ ------ ------ ------ Net sales of shares ....................... $ 760 $1,171 $ 702 $ 639 $ 362 ====== ====== ====== ====== ====== Year Ended December 31, 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Non-U.S. Registered Mutual Funds: Sales* ..................................... $ 410 $ 217 $ 25 $ 734 $ 429 Redemption of shares ....................... 147 81 381 584 34 ------ ------ ------ ------ ------ Net sales (redemptions) of shares ......... $ 263 $ 136 $ (356) $ 150 $ 395 ====== ====== ====== ====== ======
* Includes reinvestment of dividends, but excludes money market funds and funds managed by foreign joint ventures. - -----------------------------[BAR CHART]----------------------------------------
Sales of U.S. Registered Mutual Fund Shares Dollars in Millions 1993 $1,076 1994 $1,499 1995 $1,752 1996 $2,602 1997 $2,866
- -------------------------------------------------------------------------------- 12 15 - -----------------------------[BAR CHART]----------------------------------------
Gross Revenues and Sales Dollars in Thousands 1993 $129,403 1994 $171,702 1995 $198,717 1996 $239,112 1997 $342,840
- -------------------------------------------------------------------------------- Quarterly Results:
Dollars in Thousands Except Per Share Amounts Total and Sales Net Earnings Revenues Income Per Share 1997 by Quarter March 31 ............ $ 70,111 $ 7,309 $0.29 June 30 ............. 80,030 4,975 0.19 September 30 ........ 98,820 9,522 0.37 December 31 ......... 93,879 7,360 0.29 -------- ------- ----- $342,840 $29,166 $1.14 ======== ======= ===== 1996 by Quarter March 31 ............ $ 56,475 $ 5,114 $0.20 June 30 ............. 56,911 3,520 0.14 September 30 ........ 62,500 5,091 0.20 December 31 ......... 63,226 5,112 0.20 -------- ------- ----- $239,112 $18,837 $0.74 ======== ======= =====
- ---------------------------[BAR CHART]------------------------------------------
Cash Dividends Per Share 1993 $0.225 1994 $0.315 1995 $0.40 1996 $0.40 1997 $0.40
- -------------------------------------------------------------------------------- Five Year Summary of Selected Financial Data: Dollars in Thousands Except Per Share Amounts
Year Ended December 31, 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Results of Operations Revenues and sales ........................ $ 342,840 $ 239,112 $ 198,717 $ 171,702 $ 129,403 Costs and expenses ........................ 296,489 212,692 158,908 119,568 94,142 Unrealized and realized (gains) losses on venture capital and marketable securities investments, net ............. (27,460) (12,279) (9,345) 946 (3,468) Interest expense .......................... 11,395 3,318 1,024 1,305 2,388 Public offering costs ..................... -- -- 4,863 -- -- Other, net ................................ 606 1,716 735 112 480 ---------- ---------- ---------- ---------- ---------- Income before provision for federal, state and foreign income taxes and minority interest ............. 61,810 33,665 42,532 49,771 35,861 Net provision for federal, state and foreign income taxes ................... 27,547 11,548 16,598 14,182 16,322 ---------- ---------- ---------- ---------- ---------- Income before minority interest ........... 34,263 22,117 25,934 35,589 19,539 Minority interest ......................... 5,097 3,280 3,123 2,129 1,409 ---------- ---------- ---------- ---------- ---------- Net income ................................ $ 29,166 $ 18,837 $ 22,811 $ 33,460 $ 18,130 ========== ========== ========== ========== ========== Diluted earnings per share* ............... $ 1.14 $ 0.74 $ 0.90 $ 1.32 $ 0.72 ========== ========== ========== ========== ========== Cash dividends per share* ................. $ 0.40 $ 0.40 $ 0.40 $ 0.315 $ 0.225 ========== ========== ========== ========== ========== Diluted shares outstanding* ............... 25,630,000 25,460,000 25,311,000 25,354,000 24,976,000 Long-term notes payable ................... $ 168,424 $ 149,500 $ 11,048 $ 9,101 $ 13,306 Total assets .............................. $ 603,793 $ 490,712 $ 319,069 $ 202,085 $ 172,295 Stockholders' equity ...................... $ 183,687 $ 162,473 $ 150,343 $ 134,422 $ 107,174 Stockholders' equity per share* ........... $ 7.28 $ 6.50 $ 6.05 $ 5.45 $ 4.36 Return on average stockholders' equity .... 17% 12% 16% 28% 18% Return on revenues ........................ 9% 8% 11% 19% 14%
* Adjusted for December 1, 1994, and September 1, 1993, 2-for-1 stock splits effected in the form of 100% stock dividends. 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS - -----------------------------[BAR CHART]----------------------------------------
Earnings Per Share Dollars 1993 0.72 1994 1.32 1995 0.90 1996 0.74 1997 1.14
- -------------------------------------------------------------------------------- Overview The consolidated financial statements of The Pioneer Group, Inc. (the "Company") include the Company's worldwide financial services businesses and natural resource development businesses. Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in three sections: Results of Operations, Liquidity and Capital Resources-General, and Future Operating Results. Results of Operations Consolidated Operations The Company achieved record revenues and its second highest earnings in 1997. The year's performance reflected significant gains from the Company's worldwide financial services operations, which more than offset losses suffered in its natural resources operations. Revenues rose to $342.8 million in 1997, up 43% over 1996 and 73% over 1995. This growth resulted from increases in both the domestic investment management business and the Russian financial services operations together with timber revenues, which were included in the Company's results for the first time in 1997 as the timber project went into commercial production. Net income in 1997 was $29.2 million. Earnings per share of $1.14 in 1997 increased by 40 cents over 1996 and by 24 cents over 1995. The earnings in both 1997 and 1996 reflected significantly higher earnings from worldwide financial services operations. In both years, the higher worldwide financial services earnings were partially offset by declining earnings and/or losses in the Company's natural resources operations: (i) gold mining operations earned 56 cents per share in 1995, 10 cents in 1996 and lost 11 cents in 1997; and (ii) Russian timber operations incurred significant losses in 1997. Table 1 details earnings per share by business segment for 1997 versus 1996 and for 1996 versus 1995. Worldwide Financial Services Businesses 1997 Compared to 1996 The Company's worldwide financial services businesses have three principal sources of revenues: fees from managing the 34 U. S. registered investment companies (mutual funds) in the Pioneer Family of Mutual Funds and institutional accounts, fees from underwriting and distributing mutual fund shares, and fees from acting as mutual fund shareholder servicing agent. The Company earns similar revenues from its international investment operations in Poland, Russia, Ireland, and the Czech Republic, and from its joint venture in India. The Company also earns revenues from its Russian and Polish brokerage operations and from Pioneer Bank in Russia, in which the Company had a 57.7% interest at December 31, 1997. Table 1 - Total Year Earnings Per Share
Business Segment 1997 1996 1995 1997 vs 1996 1996 vs 1995 ---- ---- ---- ------------ ------------ Inc./(Dec.) Inc./(Dec.) ----------- ----------- Domestic investment management ....... $1.25 $0.68 $0.35 $0.57 $0.33 Venture capital: U.S. ............................... 0.25 0.18 0.09 0.07 0.09 Central and Eastern Europe ......... (0.05) (0.05) (0.03) -- (0.02) Financial services: Russia ............................. 0.21 0.05 0.06 0.16 (0.01) Poland ............................. 0.04 (0.03) 0.01 0.07 (0.04) Czech Republic ..................... (0.05) (0.11) -- 0.06 (0.11) Real estate services ................. (0.07) (0.01) -- (0.06) (0.01) ----- ----- ----- ----- ------ Worldwide financial services ....... 1.58 0.71 0.48 0.87 0.23 ----- ----- ----- ----- ------ Gold mining .......................... (0.11) 0.10 0.56 (0.21) (0.46) Russian timber ....................... (0.26) (0.02) -- (0.24) (0.02) Miscellaneous-other .................. (0.07) (0.05) (0.14) (0.02) 0.09 ----- ----- ----- ----- ------ Total .............................. $1.14 $0.74 $0.90 $0.40 $(0.16) ===== ===== ===== ===== ======
14 17 In 1997, the Company's worldwide financial services businesses had revenues of $241.5 million, $80.7 million, or 50%, higher than revenues of $160.8 million in 1996. Net income of $40.5 million in 1997, or $1.58 per share, was more than double 1996 net income and earnings per share of $18.0 million and 71 cents, respectively. Worldwide assets under management were $21.0 billion at December 31, 1997, compared to $17.0 billion at December 31, 1996. The increase in assets under management was principally attributable to a higher U.S. stock market. Assets under management have further increased to approximately $23.2 billion at March 15, 1998. Table 2 details revenues and net income in 1997 and 1996 for the various segments of the Company's worldwide financial services businesses. Table 2 - Revenues and Net Income (Dollars in Millions)
Business Segment Revenues Net income -------- ---------- 1997 1996 1997 1996 ------ ------ ----- ----- Domestic investment management ....... $168.5 $126.4 $32.1 $17.4 Venture capital: U.S ................................ 1.8 2.0 6.3 4.5 Central and Eastern Europe ......... 0.5 0.6 (1.4) (1.4) Financial services: Russia ............................. 54.5 21.1 5.3 1.3 Poland ............................. 14.5 10.4 1.3 (0.7) Czech Republic ..................... 1.0 0.2 (1.2) (2.9) Real estate services ................. 0.5 0.1 (1.9) (0.2) Other ................................ 0.2 -- -- -- ------ ------ ----- ----- Total worldwide financial services .... $241.5 $160.8 $40.5 $18.0 ====== ====== ===== =====
Domestic Investment Management Revenues from the Company's domestic investment management business of $168.5 million in 1997 increased by $42.1 million. Net income nearly doubled in 1997 versus 1996, increasing by $14.7 million, or 57 cents per share, to $32.1 million, or $1.25 per share. Management fee revenues of $110.9 million increased by $31.4 million, principally reflecting higher assets under management resulting from strong U.S. stock market performance. For 1997, distribution fees and underwriting commissions of $20.8 million were $6.0 million, or 40%, higher than comparable fees and commissions earned in 1996. A significant majority of the increase related to distribution fees which increased by $5.3 million as a result of the increase in average assets under management of mutual funds which offer back-end load shares. In 1997, the Company had U.S. registered mutual fund sales (including reinvested dividends) of $2.9 billion (up 10%), and net sales of $0.8 billion compared to net sales of $1.2 billion in 1996. Shareholder services fee revenues of $27.3 million in 1997 increased by $2.0 million, as a result of an increase in the number of shareholder accounts. Trustee fee revenues increased by $0.5 million to $4.3 million in 1997, as a result of an increase in the number of qualified plan shareholder accounts. Costs and expenses increased by $20.0 million in 1997 to $116.3 million. Nearly half of the increase in expenses, or $9.9 million, resulted from higher payroll costs, part of which related to the Company's efforts to strengthen its investment management staff. An additional 15% of the increase in expenses, or $3.1 million, resulted from higher expenses associated with the amortization of dealer advances resulting from sales of back-end load mutual fund shares. These amortization expenses were more than offset by the increase in distribution fees of $5.3 million. Another 5% of the increase in expenses, or $1.1 million, resulted from higher office space costs. The domestic investment management business segment includes net gains from the Company's investments in its own mutual funds, principally during start-up, which were $0.5 million in 1997 versus $0.2 million in 1996. Venture Capital Net income from the Company's U.S. venture capital operations increased by $1.8 million, or 7 cents per share, to $6.3 million, or 25 cents per share, in 1997 versus 1996, resulting from significant gains 15 18 MANAGEMENT'S DISCUSSION (CONTINUED) recorded from two of the Company's portfolio companies, one of which conducted a public offering in late 1996 and one in late 1997. The Company had net venture capital investment portfolio gains (excluding operating expenses) of $16.3 million in 1997 compared to net gains of $11.4 million in 1996. The Company's Central and Eastern Europe venture capital operations lost $1.4 million, or 5 cents per share, in each of 1997 and 1996, principally associated with development costs of the Company's venture capital funds. Russian Financial Services Revenues from the Company's Russian financial services operations of $54.5 million in 1997 increased by $33.4 million. These operations reported net income of $5.3 million, or 21 cents per share, in 1997, principally from brokerage operations. In 1996, the Company earned $1.3 million, or 5 cents per share, in the same segment, primarily from banking activities. In 1997, the Company's Russian brokerage activities had revenues of $34.2 million, principally derived from trading activities, compared to $1.6 million in 1996. Over the course of the year, the Company benefited from the record volume experienced in the Russian stock market. Costs and expenses associated with the Russian brokerage business were $19.1 million in 1997, compared to $1.3 million in 1996. Approximately two-thirds of the increased expenses, or $11.2 million, represented commissions paid to traders. The Company reported revenues from Pioneer Bank of approximately $12.3 million in 1997, compared to nearly $15.0 million in 1996. These revenues are derived from (i) interest earned on Russian government and corporate debt securities, (ii) realized and unrealized gains and losses on debt and equity securities and (iii) interest income from loans. Decreases in revenues principally reflect the impact of less favorable interest rates which affect the realized and unrealized gains earned on the Russian government securities. In the second quarter of 1997, Pioneer Bank did not renew its license with the Russian Central Bank to deal in these government securities. Interest expenses of $7.7 million in 1997 increased by $1.6 million. The Company reported net realized gains of $9.5 million in 1997 and $0.9 million in 1996, respectively, from investments sold by the First Voucher Fund (the "Voucher Fund"), the Russian voucher investment fund in which the Company has a 51% interest. Polish Financial Services Revenues from the Company's Polish financial services operations of $14.5 million in 1997 increased by $4.1 million. These operations had net income of $1.3 million, or 4 cents per share, in 1997, compared to losses of $0.7 million, or 3 cents, in 1996. Management fee revenues increased by $2.5 million to $10.0 million, as a result of higher average assets under management. Losses from the brokerage business increased as a result of a $1.3 million increase in expenses offset partially by a $1.0 million increase in revenues. At December 31, 1997, assets under management in the Company's four Polish mutual funds were $446 million, virtually unchanged from the December 31, 1996 level. Although Polish mutual fund sales increased from $169 million in 1996 to $203 million in 1997, net sales were $74 million in 1997 compared to $90 million in 1996. Czech Republic Financial Services The Company's Czech Republic financial services operations reported losses of $1.2 million, or 5 cents per share, in 1997, compared to losses of $2.9 million, or 11 cents per share, in 1996. Revenues from management fees and underwriting commissions increased by $0.8 million in 1997 and costs and 16 19 expenses decreased by $1.0 million. The Company incurred significant start-up costs in 1996 associated with this operation. The Czech Republic mutual fund had $43 million of assets under management at December 31, 1997, an increase of $36 million over the 1996 year-end level. The Company believes that this operation will reach break-even status in the second half of 1998. Real Estate Services The Company's real estate services operations reported losses of $1.9 million, or 7 cents per share, in 1997, compared to losses of $0.2 million or 1 cent in 1996. Most of the losses were attributable to costs associated with the development of the Company's Polish and Russian real estate investment, and property and facilities management operations. Taxes The Company's effective tax rate for 1997 for the worldwide financial services businesses was 40% compared to 34% in 1996. The 1996 results included significant tax exempt income associated with Pioneer Bank in Russia. 1996 Compared to 1995 In 1996, the Company's worldwide financial services businesses had revenues of $160.8 million, $52.3 million, or 48%, higher than revenues of $108.5 million in 1995. Net income was $18 million in 1996, or 71 cents per share, compared to $12.2 million, or 48 cents in 1995. Worldwide assets under management of just under $17.0 billion at December 31, 1996, increased by $3.2 billion over the 1995 year-end level. The increase in assets under management was principally attributable to a higher stock market and strong U.S. mutual fund net sales. Table 3 details revenues and net income in 1996 and 1995 for the various segments of the Company's worldwide financial services businesses. Table 3 - Revenues and Net Income (Dollars in Millions)
Business Segment Revenues Net income -------- ---------- 1996 1995 1996 1995 ------ ------ ----- ----- Domestic investment management $126.4 $92.2 $17.4 $8.9 Venture capital: U.S 2.0 1.0 4.5 2.3 Central and Eastern Europe 0.6 0.8 (1.4) (0.6) Financial services: Russia 21.1 5.8 1.3 1.4 Poland 10.4 8.7 (0.7) 0.2 Czech Republic 0.2 -- (2.9) -- Real estate services 0.1 -- (0.2) -- ------ ------ ----- ----- Total worldwide financial services $160.8 $108.5 $18.0 $12.2 ====== ====== ===== =====
Domestic Investment Management Revenues from the Company's domestic investment management business of $126.4 million in 1996 increased by $34.2 million. Net income nearly doubled in 1996 versus 1995, increasing by $8.5 million, or 33 cents per share, to $17.4 million, or 68 cents. Management fee revenues increased by $23.1 million to $79.5 million. The increase in management fees earned from the U.S. registered mutual funds resulted from an increase in assets under management and a management fee rate increase for the Company's two largest mutual funds. The shareholders of the Company's two largest U.S. registered mutual funds approved management fee rate increases effective May 1, 1996. As a result, the Company earned an additional $5.9 million of management fees. For 1996, distribution fees and underwriting commissions of $14.8 million were $6.4 million, or 76%, higher than comparable fees and commissions earned in 1995. Distribution fees increased by $5.2 million as a result of the increase in average assets under management of the Company's mutual funds which offer back-end load shares. In 1996, the Company had U.S. registered mutual fund sales (including reinvested dividends) of $2.6 billion (up 50%), and net sales of $1.2 billion compared to net sales of $0.7 billion in 1995. 17 20 MANAGEMENT'S DISCUSSION (CONTINUED) Shareholder services fee revenues of $25.3 million in 1996 increased by $2.9 million, as a result of an increase in the number of shareholder accounts and a cost-of-living service fee increase for certain U.S. registered mutual funds effective January 1, 1996. Trustee fee revenues increased by $0.2 million to $3.9 million in 1996, as a result of an increase in the number of qualified plan shareholder accounts. Costs and expenses increased by $19.1 million in 1996 to $96.3 million. Approximately 30% of the increase in expenses, or $5.9 million, resulted from higher payroll costs. In addition, approximately 10% of the increase in expenses, or $2.4 million, resulted from higher costs related to mutual fund distribution (including printing and mailing of sales literature, paying commissions earned by the sales force, mutual fund advertising, and public relations). Approximately 20%, or $4.1 million, of the increase resulted from higher expenses associated with the amortization of dealer advances resulting from sales of back-end load mutual fund shares. These amortization expenses were more than offset by the increase in distribution fees of $5.2 million. Another approximately 5% of the increase in expenses, or $0.9 million, resulted from higher office space costs. Net gains from the Company's investments in its own mutual funds, were $0.2 million in 1996 versus $0.7 million in 1995. Venture Capital Net income from the Company's U.S. venture capital operations increased by $2.2 million, or 9 cents per share, to $4.5 million, or 18 cents per share, in 1996 versus 1995. The Company reported net venture capital investment portfolio gains of $11.4 million (excluding operating expenses) in 1996 compared to net gains of $5.1 million in 1995. The Company's Central and Eastern Europe venture capital operations lost $1.4 million, or 5 cents per share, in 1996, and $0.6 million, or 2 cents, in 1995, principally associated with infrastructure development costs of the Company's venture capital funds. Russian Financial Services Revenues from the Company's Russian financial services operations of $21.1 million in 1996 increased by $15.3 million. These operations reported net income of $1.3 million, or 5 cents per share, in 1996, principally from its banking activities. In 1995, the Company earned $1.4 million, or 6 cents per share. The Company reported revenues from Pioneer Bank of approximately $15.0 million in 1996 as a result of the acquisition and subsequent sale of Russian government securities and interest income from loans. Revenues from Pioneer Bank in 1995 were $2.4 million and were included in other income. The Company also had interest expense on deposits and short-term debt of $6.1 million in 1996 related to Pioneer Bank. The Company reported net realized gains of $0.9 million in 1996 and $3.5 million in 1995 from investments sold by the Voucher Fund. Polish Financial Services Revenues from the Company's Polish financial services operations of $10.4 million in 1996 increased by $1.7 million. These operations had losses of $0.7 million, or 3 cents per share, in 1996, compared to net income of $0.2 million or 1 cent in 1995. Sales of the Company's Polish mutual funds were $169 million in 1996 versus $21 million in 1995. As a result of the increase in Polish mutual fund sales, underwriting commissions increased by $1.6 million. 18 21 Czech Republic Financial Services The Company's Czech Republic financial services operations, which commenced commercial operations in January 1996, reported losses of $2.9 million, or 11 cents per share, in 1996, principally from start-up costs. Taxes The Company's effective tax rate for 1996 for the worldwide financial services businesses was 34% compared to 43% in 1995. The 1996 results included significant tax exempt income associated with Pioneer Bank in Russia. - -----------------------------[BAR CHART]----------------------------------------
Stockholders' Equity Dollars in Thousands 1993 $107,174 1994 $134,422 1995 $150,343 1996 $162,473 1997 $183,687
- -------------------------------------------------------------------------------- Liquidity and Capital Resources IRS regulations require that, in order to serve as trustee, the Company must maintain a net worth of at least 2% of the assets of Individual Retirement Accounts and other qualified retirement plan accounts at year end. At December 31, 1997, the Company served as trustee for $6.3 billion of qualified plan assets and the ratio of net worth to qualified assets was 2.9%. The Company's stockholders' equity of $183.7 million at December 31, 1997, would permit it to serve as trustee for up to $9.2 billion of qualified plan assets. The Company has established a multi-class share structure for the Pioneer Family of Mutual Funds. Under this arrangement, the funds offer both traditional front-end load shares (Class A shares) and back-end load shares (Class B and C shares). On back-end load shares, the investor does not pay any sales charge unless there is a redemption before the expiration of the minimum holding period (which ranges from three to six years in the case of Class B shares and is one year in the case of Class C shares), in which case the shareholder would pay a contingent deferred sales charge ("CDSC"). The Company, however, pays "up-front" commissions to broker-dealers ("Dealer Advances") related to sales and service of the back-end load shares ranging from 2% to 4% of the sales transaction amount on Class B shares and of 1% on Class C shares. The funds pay the Company distribution fees of 0.75%, and service fees of 0.25%, per annum of their respective net assets invested in Class B and Class C shares, subject to annual renewal by the trustees of the funds. Class B shares were introduced in April 1994 and Class C shares were introduced in January 1996. Sales of back-end load shares were $699 million in 1997 versus $763 million in 1996. Dealer Advances totaled $17.2 million in 1997 versus $23.9 million in 1996. Dealer Advances related to Class B shares (which are amortized to operations over the life of the CDSC period) were $41.9 million at December 31, 1997. The Company intends to continue to finance this program, in part, through the credit facilities described in the section entitled "Liquidity and Capital Resources - General." In April 1995, the Company acquired approximately 51% of the shares of Voucher Fund, the largest voucher investment fund established in Russia in connection with that country's privatization program. The shares were issued by the Voucher Fund to two newly-formed subsidiaries of Pioneer Omega, Inc. ("Pioneer Omega"), a subsidiary of the Company. In addition to acquiring shares in the Voucher Fund, Pioneer Omega, acting through a subsidiary, Pioneer First Russia, Inc. ("PFR"), acquired a Russian company that holds the right to manage the Voucher Fund's investments. Pioneer Omega paid $2 million in cash and issued preferred shares (the "Omega shares") valued at $6 million as consideration for the acquisition of the management company and related rights. The holder of the Omega shares has the right to cause the Company to purchase such shares (the "put option") and the Company has a corresponding right to purchase such shares from the holder (the "call option"). The put and call options are each exercisable with respect to one-third of the Omega shares on the first, second and 19 22 MANAGEMENT'S DISCUSSION (CONTINUED) third anniversaries of the closing of the transaction. The put and call option exercise price is $2 million per tranche, plus a 5% per annum premium on the option exercise price. The Company will pay a total of $6.6 million for the Omega shares over a three-year period as the put and/or call options are exercised. The Company has exercised its options and purchased the first two tranches of Omega shares for $4.3 million and intends to exercise the final option in April 1998. The Company, through Pioneer Omega, has secured Overseas Private Investment Corporation ("OPIC") "political risk" insurance covering the Voucher Fund and PFR's subsidiaries subject to annual elections up to a ceiling amount of $75 million which would protect 90% of the Company's equity investment and a proportionate share of cumulative retained earnings. Recent Developments The Company believes that there is significant unrealized value in the assets included in the Voucher Fund's securities portfolio. In accordance with Generally Accepted Accounting Principles (FAS 115 -- Accounting for Certain Investments in Debt and Equity Securities), the securities in the Voucher Fund reflect the cost rather than "fair value" until such time as the breadth and scope of the Russian securities markets develop to certain quantifiable levels. The Company believes that these markets are rapidly approaching this point, at which time the "fair value" of securities held by the Voucher Fund would be reflected in the Company's financial statements. The Voucher Fund's assets consist of cash and cash equivalents, securities (both liquid and illiquid), real estate holdings and other miscellaneous assets. The cost of the securities portion of the portfolio on the Company's balance sheet at December 31, 1997, was approximately $16 million. At January 29, 1998, the value of these securities (based on market quotations if available) was approximately $67 million, which represents an increase of approximately $51 million. The Company's pre-tax interest in this increase, at 51%, would be approximately $26 million. The cost of the cash and cash equivalents, real estate and miscellaneous assets of the Voucher Fund on the Company's balance sheet at December 31, 1997, was approximately $2 million, $24 million and $3 million, respectively. Currently, the Company recognizes realized gains or losses on its income statement only when Voucher Fund securities are sold. Once the Russian securities market develops to the requisite level, unrealized gains and losses (such as the $51 million described above) would be reflected in long-term investments in the Company's balance sheet with a corresponding after-tax increase or decrease in stockholders' equity for the Company's 51% interest with the remainder recorded as minority interest. The Company will continue to recognize realized gains and losses in income upon the sale of such securities. The Russian securities markets are significantly smaller and less liquid than the securities markets in the United States. Liquidity and volumes fluctuate significantly and are strongly influenced by global market trends. In 1997, the number of issues actively traded on the Russian Trading System increased substantially until the end of October when, after the Asian crisis, meaningful trading was confined to four to five blue chip stocks. The market in 1998 has been volatile. The relative lack of liquidity may result in the Voucher Fund selling a portfolio security at a price that does not reflect its underlying value. Accordingly, fair values are not necessarily indicative of the amount that could be realized in a short period of time on large volumes of transactions. In addition, the securities investments in the Voucher Fund may be negatively affected by adverse economic, political and social developments in Russia including changes in government and government policies, taxation, currency instability, interest rates and inflation levels and developments in law and regulations affecting securities issuers and their shareholders and securities markets. As a result of the foregoing, there can be no assurance that the Company will be able to realize the values described above. 20 23 Natural Resource Development Businesses - -----------------------------[BAR CHART]----------------------------------------
Gold production Ounces 1993 164,900 1994 176,400 1995 235,500 1996 203,100 1997 263,000
- -------------------------------------------------------------------------------- Gold Mining Business The results of the gold mining business are substantially attributable to the operations of Teberebie Goldfields Limited ("TGL"), the principal operating subsidiary of the Company's wholly owned subsidiary, Pioneer Goldfields Limited ("PGL"). The Company's reported earnings give effect to the 10% minority interest in TGL held by the Government of Ghana. Gold mining results are also affected by PGL's exploration activity in Africa and by the exploration activities in the Russian Far East of Closed Joint-Stock Company, "Tas-Yurjah Mining Company" ("Tas-Yurjah"), the Company's majority owned (52.5%) Russian subsidiary. Exploration costs are charged to operations as incurred. Financial Results In 1997, the gold mining segment lost $2.9 million, or 11 cents per share, a decrease of 21 cents compared with 1996 earnings of 10 cents. In 1995, the gold mining business earned 56 cents per share. The effective tax rates for the segment in 1997, 1996 and 1995 were a 15% benefit, a 32% provision and a 35% provision, respectively. Table 4 details the earnings per share for the gold mining segment for 1997 versus 1996 and for 1996 versus 1995. TGL earns all of its revenues in U. S. dollars and the majority of its transactions and costs are denominated in U. S. dollars or are based in U. S. dollars. Consequently, Ghanaian inflation has not had a material effect on TGL's operations. Ghanaian cedi denominated costs such as fuel, wages, power and local purchases are affected, in dollar terms, when currency devaluation does not offset changes in the relative inflation rates in the U.S. and Ghana. Since Ghana has experienced significant inflation over the last three years, the cedi has devalued continuously against the dollar. Table 4
Twelve months ended December 31 ------------------------------- 1997 vs 1996 1996 vs 1995 1997 1996 1995 Incr./(Decr.) Incr./(Decr.) ---- ---- ---- ------------- ------------- African Operations (TGL). $-- $0.13 $0.57 $(0.13) $(0.44) African Exploration ..... (0.04) (0.03) (0.01) (0.01) (0.02) ----- ---- ---- ----- ----- PGL Total ............... (0.04) 0.10 0.56 (0.14) (0.46) ----- ---- ---- ----- ----- Russian Exploration ..... (0.07) -- -- (0.07) -- ----- ---- ---- ----- ----- Total ............... $(0.11) $0.10 $0.56 $(0.21) $(0.46)
TGL - 1997 Compared to 1996 Gold Sales. Revenues increased by $11 million to $89.5 million as gold shipments increased by 59,900, or 29%, to 263,000 ounces. The average realized price of gold decreased by $45 to $340 per ounce. In 1997, the average realized price of gold includes proceeds of $4.0 million, or $15 per ounce, from the sale of floor program options. During 1997, TGL experienced several negative factors which caused production to fall short of the forecasted level. The most significant was the delay in commissioning the Phase III expansion and achieving design throughputs at the new South and modified West crushing plants. These delays added to the time lag inherent in bringing new heaps into full production. Other contributing items include a shortage of diesel fuel early in the year and heavy rains in June. Issues which adversely affected TGL's 1996 production are described in detail below in the section entitled "TGL -- 1996 compared to 1995." 21 24 MANAGEMENT'S DISCUSSION (CONTINUED) Table 5 provides production results and compares TGL's cash cost and total cost per ounce for 1997 with the prior year. Table 5
Twelve months ended ------------------- December 31 ----------- 1997 1996 Increase/(Decrease) ---- ---- ------------------- Production (ounces) ............... 263,000 203,100 59,900 ======= ======= ====== Cash costs: Production costs ................ $189 $218 ($29) Royalties ....................... 10 12 (2) General and administrative ...... 31 36 (5) ------- ------- ------ Cash costs per ounce ......... 230 266 (36) ------- ------- ------ Non-cash costs: Depreciation and amortization 87 81 6 Other .......................... 5 4 1 ------- ------- ------ Cost of production per ounce 322 351 (29) ------- ------- ------ Interest and other costs .......... 15 10 5 ------- ------- ------ Total costs per ounce ........ $337 $361 ($24) ======= ======= ======
Production Costs. Production costs represent costs attributable to mining ore and waste and processing the ore through crushing and processing facilities. TGL's costs of production are affected by ore grade, gold recovery rates, the waste to ore ("stripping") ratio, the age and availability of equipment, weather conditions, availability and cost of labor, haul distances, foreign exchange fluctuations and the inherent lag in gold production from heap leaching operations. In 1997, production costs decreased by $29 to $189 per ounce compared with 1996, principally because of the economies of scale realized upon completion of the Phase III mine expansion, coupled with the decision to decrease the stripping ratio to ensure a sufficient ore feed to the crushing plants. The introduction of bulk zone mining and the elimination of run-of-mine dump leaching also contributed to a reduction in the stripping ratio and the elimination of run-of-mine processing costs. In response to lower gold prices, significant emphasis was placed on mining in the South pit where ore grades are marginally higher. This emphasis favorably affected costs on a unit-of-production basis. During 1997, TGL also experienced a decrease in the cost per tonne hauled because of lower explosives costs. A comparison of key production statistics for the twelve months ended December 31, 1997 and 1996 is shown on Table 6.
Table 6 Twelve months ended ------------------- December 31 ----------- 1997 1996 ---- ---- Tonnes mined (in thousands): Waste ............................................. 27,824 21,068 Run-of-mine ....................................... 610 6,209 ------ ------ Tonnes Waste and Run-of-Mine .................... 28,434 27,277 Ore ............................................... 9,096 7,036 ------ ------ Total Tonnes Mined .............................. 37,530 34,313 ====== ====== Stripping Ratio ((waste+run-of-mine)/ore) ......................... 3.13:1 3.88:1 Ore Processed ..................................... 9,072 6,540 Process Grade (grams/tonne) ....................... 1.29 1.26 ====== ======
Royalties. Under the Ghanaian Minerals and Mining Law, royalties are levied at rates ranging from 3% to 12% of operating revenues as determined by reference to an operating ratio. Such operating ratio represents the percentage that the operating profits, after giving effect to capital allowances and interest expense (as permitted by TGL's Deed of Warranty), bears to gold sales. In 1997 and 1996, the royalty rate payable by TGL remained at 3% of operating revenues, the minimum permitted by law, principally because of a sustained level of capital expenditures, and associated capital allowances, since the inception of the project. General and Administrative Costs. General and administrative costs consist principally of administrative salaries and related benefits, travel expenses, insurance, utilities, legal costs, employee meals, rents and vehicle expenditures. Since these costs are primarily fixed and unrelated to production levels, the decrease in the cost per ounce was attributable principally to a 29% increase in gold production. Actual 1997 costs, however, increased by approximately $3 per ounce because of higher benefits costs associated with TGL's collective bargaining agreement with the Ghana Mineworkers' Union ("GMU"), consulting costs, and personnel-driven infrastructure costs associated with the Phase III mine expansion, such as employee meals, personal safety supplies, and local transportation costs. Depreciation and Amortization. Depreciation and amortization is calculated using units-of-production and straight-line methods designed to fully depreciate property, plant, and equipment over the lesser of their estimated useful lives or ten years. In 1997, these costs increased by $6 per ounce prin- 22 25 cipally because of mining and crushing equipment additions associated with the Phase III mine expansion. Increases were also experienced in run-of-mine leach pad depreciation and capitalized rebuilds, however, such increases were largely offset by lower development cost amortization. Other. Other costs represent a provision for future reclamation costs and supplies inventory obsolescence and costs related to exploration activities conducted by TGL at the Teberebie concession and elsewhere in Ghana. The increase of $1 per ounce in 1997 compared with 1996 was attributable to an increase in exploration costs. Interest and Other Costs. Interest and other costs include interest expense, foreign exchange gains and losses, political risk insurance premiums, floor program option sales which are unrelated to shipments, and goodwill amortization. The $5 per ounce increase in interest and other costs in 1997 compared with 1996 was attributable to interest expense associated with the Phase III expansion ($10 per ounce). These increases were offset partially by a decrease associated with relatively fixed costs such as political risk insurance premiums and goodwill amortization ($3 per ounce), and proceeds from floor program sales and foreign exchange gains ($2 per ounce). Income Taxes. The statutory tax rate for mining companies in Ghana in 1997 and 1996 was 35%. TGL - 1996 Compared to 1995 Gold Sales. TGL's gold shipments decreased by 32,400 to 203,100 ounces resulting in a decrease in revenues of approximately $12 million to $78.3 million. The average realized price of gold increased by $2 to $385 per ounce. During 1996, TGL experienced several negative factors which caused actual production to be substantially below forecasted production, including: (i) abnormally heavy rainfall resulting in excessive dilution in the gold production process, (ii) equipment availability problems resulting primarily from breakdowns and maintenance problems with the older equipment, and (iii) difficulty in hiring and training experienced supervisors for mining operations. The excessive dilution contributed to a decrease in the gold recovery rate from 78% to 69%. In addition, the amount of ore TGL processed decreased by 0.5 million tonnes and TGL experienced a decrease in the ore grade from 1.28 to 1.26 grams per tonne. An 11,400 ounce increase in run-of-mine production partially offset these production declines. Table 7 provides production results and compares TGL's cash cost and total cost per ounce for 1996 with the prior year.
Table 7 Twelve months ended ------------------- December 31 ----------- 1996 1995 Increase/(Decrease) ---- ---- ------------------- Production (ounces) ............... 203,100 235,500 (32,400) ======= ======= ======== Cash costs: Production costs ............. $218 $160 $58 Royalties .................... 12 11 1 General and administrative ... 36 27 9 ------- ------- -------- Cash costs per ounce ....... 266 198 68 ------- ------- -------- Non-cash costs: Depreciation and amortization 81 67 14 Other ........................ 4 3 1 ------- ------- -------- Cost of production per ounce 351 268 83 ------- ------- -------- Interest and other costs .......... 10 9 1 ------- ------- -------- Total costs per ounce ...... $361 $277 $84 ======= ======= ========
Production Costs. In 1996, production costs increased by $58 per ounce to $218 per ounce compared with 1995, principally because of a 14% decrease in gold production and the anticipated increase in the stripping ratio from 2.75:1 to 3.88:1. The relatively high level of fixed costs tends to result in an increase in the cost per ounce when gold production declines. TGL also experienced unexpected increases in equipment maintenance costs and labor costs associated with TGL's collective bargaining agreement with the GMU. 23 26 MANAGEMENT'S DISCUSSION (CONTINUED) A comparison of key production statistics for the twelve months ended December 31, 1996 and 1995 is shown in Table 8.
Table 8 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 ................. 27,277 19,397 Ore ............................................. 7,036 7,061 ------ ------ Total Tonnes Mined ........................... 34,313 26,458 ====== ====== Stripping Ratio ((waste+run-of-mine)/ore) ....................... 3.88:1 2.75:1 Ore Processed ................................... 6,540 7,068 Processed Grade (grams/tonne) ................... 1.26 1.28
Royalties. In 1996 and 1995, the royalty rate payable by TGL remained at 3% of revenues, the minimum permitted by law, principally because of a sustained level of capital expenditures, and associated capital allowances, since the inception of the project. General and Administrative Costs. Since these costs are primarily fixed and unrelated to production levels, the increase in the cost per ounce was attributable, in part, to a 14% decrease in gold production. In addition, costs increased by approximately $4 per ounce because of higher labor and benefits costs associated with TGL's collective bargaining agreement with the GMU and increases in commercial insurance premiums, employee meals, and employee transportation costs. Depreciation and Amortization. Depreciation and amortization increased by $14 per ounce principally because of mining equipment additions and higher capitalized rebuild expenditures which increased depreciation expense by approximately $6 per ounce and $2 per ounce, respectively. In addition, increases in run-of-mine leach pad depreciation associated with the start-up of the West Plant run-of-mine pad in 1996 and leach pad and pond depreciation aggregated approximately $4 per ounce. Other. Other costs increased by $1 per ounce in 1996 compared with 1995 principally because of the establishment of an inventory obsolescence provision. Interest and Other Costs. The $1 per ounce increase in interest and other costs in 1996 compared with 1995 was attributable to lower production levels and an increase in political risk insurance premiums. Income Taxes. The statutory tax rate for mining companies in Ghana in 1996 and 1995 was 35%. Exploration Activities Since the end of 1993, in addition to continuing to develop the Teberebie mine, PGL has increased its exploration activities in the Republic of Ghana and other African countries. These activities are currently conducted by TGL in Ghana and by PGL or its local subsidiary in countries outside of Ghana. In 1997, PGL incurred exploration costs of approximately $1.9 million, approximately $1.8 million of which related to exploration activities outside of Ghana. In 1994, the Company entered into a joint venture, Tas-Yurjah, to explore potential gold mining properties in the Khabarovsk Territory of Russia. In 1995, Tas-Yurjah secured a license to conduct exploration activities over a 240 square kilometer area (the "licensed area"). During 1997, Tas-Yurjah conducted exploration drilling and geochemical and geological surveys to further examine anomalies located in the licensed area. In 1997, the Company expended approximately $1.7 million for exploration work related to Tas-Yurjah. Liquidity and Capital Resources Cash Flow. The cash balances of the gold mining segment increased by $6.6 million to $7.6 million during 1997. Thirty-two percent, or $2.4 million, of TGL's cash balances remain in escrow and are unavailable to pay short-term obligations. Cash generated from operating activities aggregated $20.6 24 27 million while capital expenditures and loan principal payments were $20.8 million and $6.7 million, respectively. Major capital expenditures during the year included $8.3 million for processing equipment and pad and pond development, including $3.6 million for crushing, electrical, and other processing equipment expenditures associated with the Phase III mine expansion; $7.4 million for mining equipment; capitalized rebuilds of $1.7 million and capitalized interest and financing costs associated with the Phase III mine expansion of $1.6 million. During 1997, TGL secured approximately $5.8 million in third-party financing for the purchase of replacement mining equipment. In addition, the Company provided financing of approximately $7.7 million, comprised of $4.2 million to satisfy TGL's short-term liquidity needs and $3.5 million to fund the exploration activities of PGL and Tas-Yurjah. Third-Party Debt. At the end of 1997, third-party debt aggregated $53.5 million, including $19 million from OPIC for which the Company is subject to limited recourse (described in the "Financing Facilities" section of this report) and $0.9 million from other sources which is guaranteed by the Company. Scheduled third-party debt service for 1998 is expected to aggregate $15.4 million. Phase III Mine Expansion. In July 1995, the Board of Directors of TGL approved the Phase III expansion of the Teberebie mine. Phase III included a further heap leach operation and a near-pit gyratory crushing facility which acts as the primary crushing facility for both the existing West Plant and the new South Plant. The Phase III expansion is expected to increase annual crushing capacity to 12 million tonnes of ore. Construction work on the project has been completed and the first gold bar at the South Plant was poured in April 1997. The cost of the expansion aggregated approximately $56 million, including 1997, 1996, and 1995 capital expenditures of $5.4 million, $48.1 million, and $2.6 million, respectively. Financing Facilities. At inception, financing requirements for the Phase III mine expansion were estimated at $54 million. By December 31, 1996, third-party financing of approximately $54.2 million had been secured, of which $53.6 million was drawn down, and $46.9 million remained outstanding at December 31, 1997. In December 1997, TGL secured $5.8 million of additional financing for replacement mining equipment. Skandinaviska Enskilda Banken/Swedish Export Credits Board. In March 1996, TGL executed a loan agreement with Enskilda, a division of Skandinaviska Enskilda Banken, pursuant to which Enskilda agreed to provide a direct loan of SEK 94.5 million (approximately $14.2 million) bearing interest at a fixed rate of 6.42% to finance the gyratory crusher and related equipment procured from Svedala Crushing and Screening AB. The loan is guaranteed by the Swedish Export Credits Board. As of December 31, 1997, $12.7 million of this facility remained outstanding. In connection with the purchase of TGL's Phase I crusher plant, a loan of $0.9 million, secured in 1989, remained outstanding at December 31, 1997, bearing an interest rate of 0%, which is guaranteed by the Company. Caterpillar Financial Services Corporation. In April 1996, TGL obtained credit approval from Caterpillar Financial Services Corporation ("Caterpillar"), pursuant to which Caterpillar agreed to provide a revolving credit facility of up to $21 million, subsequently increased to $23 million in September 1997, to finance the purchase of replacement mining equipment. The revolving credit facility is subject to renewal in May 1998. In the event that the credit facility is not renewed, 85% of the outstanding loan balances (approximately $20 million) will continue to be repaid over a five year term, while the remainder will be repaid over a three year term. At December 31, 1997, Caterpillar had issued disbursements, at TGL's request, for $26.3 million of such facility, bearing interest at fixed rates ranging from 7.85% to 8.30%, of which $5.4 million had been repaid. 25 28 MANAGEMENT'S DISCUSSION (CONTINUED) Overseas Private Investment Corporation. In October 1996, TGL and the Company executed definitive loan agreements with OPIC pursuant to which OPIC agreed to provide financing of up to $19 million with respect to the Phase III expansion. Disbursements under this facility occurred in November 1996. The underlying note is payable in twelve equal semiannual installments from March 15, 1998 through September 15, 2003, and bears a fixed interest rate of 6.37% In addition, a spread of 2.65% on outstanding borrowings is payable to OPIC. As a condition to the financing, the Company was required to execute a Project Completion Agreement pursuant to which the Company would advance funds, as necessary (to the extent of dividends received during the construction stage of the Phase III expansion), to permit TGL to fulfill all of its financial obligations, including cost overruns related to project development. Under the Project Completion Agreement, the Company is also obligated to advance the lesser of $9 million and any deficit with respect to a defined cash flow ratio in the event of a payment default. The foregoing obligations of the Company continue to exist until such time as TGL satisfies a production test and certain financial and project development benchmarks. In addition, the Company has agreed that if the percentage of gold proceeds that TGL must convert to Ghanaian Cedis increases above a certain threshold and, as a result of regulatory and other restrictions, TGL is unable to convert such proceeds to satisfy its debt service obligations to OPIC, it shall cover up to $10 million of such obligations. The Company has secured insurance for 90% of this obligation. Subordinated Debt. In addition to third-party financing facilities, the Company provided $4.2 million in bridge financing to TGL during 1997 to satisfy its short-term liquidity needs. Risk Management. In the fourth quarter of 1996, TGL purchased a series of put options which secured a minimum selling price of $340 per ounce to cover 1997 estimated production. When the market price of gold declined below $340 per ounce between February and December 1997, the Company continued to ship gold to refineries and sold the put options, receiving payment for the difference between the market price of gold and approximately $340 per ounce. In May 1997, TGL purchased additional options at an exercise price of $320 per ounce to cover estimated production for the first four months of 1998. The Company maintains $65.5 million of "political risk" insurance principally from OPIC covering 90% of its equity and loan guarantees. The insurance also covers 90% of the Company's proportionate share of TGL's cumulative retained earnings. The OPIC equity and retained earnings coverage is presently limited to a ceiling of $63.1 million; however, the Company will apply to increase the ceiling in 1998. There can be no assurance that such OPIC insurance will become available in 1998. The Company has also secured $9 million of foreign exchange exposure insurance from another source to hedge 90% of its exposure to a limited recourse provision contained in the OPIC Phase III expansion financing (discussed in more detail above). In addition to other commercial insurance policies, TGL has secured business interruption coverage of up to $19 million for losses associated with machinery breakdown and property damage and to defray continuing infrastructure and interest costs. Recent Developments Reserves Table 9 sets forth the proven and probable gold reserves of TGL as of December 31, 1997 which have been audited by an independent mining consultant. The design cut-off grade used to delineate the reserves is 0.58 grams per tonne of ore at a gold price of $340 per ounce.
Table 9 Proven and Probable Reserves($340/oz) ------------------------------------- Tonnes, ore Grade, g/t Contained Gold, Ounces ----------- ---------- ---------------------- Total Reserves 159,180,000 1.19 6,090,000
TGL's last reported proven and probable reserve estimate was 9.1 million ounces as of December 31, 1995. Approximately 1.7 million ounces of the decrease is attributable primarily to the use in the mine model of a lower gold price ($340 per ounce versus $385 per ounce) and the normal reduction for 26 29 gold production during 1996 and 1997. The balance of the difference is attributable to allowances for previously reported slope instability issues, haul road refinements and physical mine design parameters, and miscellaneous refinements associated with the transition to more comprehensive mine modeling software. Based on current mining methods (bulk mining and heap leaching), it is estimated that recoverable gold from these open pit reserves will aggregate approximately 4.9 million ounces. In early 1998, the Republic of Ghana experienced power shortages which adversely affected TGL's ability to crush and process ore. Presently, certain processes at the mine are supported by back-up power generation equipment. TGL is in the process of leasing additional equipment to support all of its power generation requirements. The use of such equipment will increase the power costs per tonne processed. TGL estimates 1998 gold production at approximately 340,000 ounces. The estimate has been decreased by 20,000 ounces from TGL's previously reported target of 360,000 ounces reflecting lower than expected crushing equipment availability in the first quarter of 1998. TGL's gold production is dependent upon a number of factors that could cause actual gold production to differ materially from projections, including obtaining and maintaining necessary equipment, accessing key supplies, including electrical power and fuel, and hiring and training supervisory personnel and skilled workers. Gold production is also affected by the time lag inherent in heap leaching technology, subject to changing weather conditions, dependent on the continued political stability in the Republic of Ghana and subject to the additional risk factors detailed below in the section entitled "Future Operating Results." Timber Business The Company's Russian venture, Closed Joint-Stock Company "Forest-Starma", in which Pioneer Forest, Inc. (a wholly owned subsidiary of the Company) has a 95% direct interest is pursuing the development of timber production under a long-term lease comprising 240,000 hectares (approximately 593,000 acres) in the aggregate with annual cutting rights of 361,000 cubic meters awarded to the venture in the Khabarovsk Territory of Russia. Forest-Starma is in the process of finalizing lease agreements for additional leasehold rights that will give Forest-Starma total cutting rights of approximately 555,000 cubic meters over a territory of 390,100 hectares (approximately 964,000 acres). Forest-Starma has developed a modern logging camp, including a harbor facility, from which it exports timber for markets in the Pacific Rim, primarily Japan. Forest-Starma is expected to produce approximately 360,000 cubic meters of timber in 1998. In the first quarter of 1995, Forest-Starma commenced the harvesting of timber which was acquired in the development phase. Forest-Starma's first shipments of timber, totaling approximately 30,000 cubic meters, occurred in the second half of that year. In 1996, Forest-Starma shipped approximately 133,000 cubic meters of timber. Since Forest-Starma remained in the development stage through the end of 1996, timber proceeds aggregating $10.1 million were used to offset capitalized interest and development costs. 1997 Compared to 1996 Forest-Starma recorded losses of $6.6 million, or 26 cents per share, on revenues of $11.9 million in 1997. This represents a decline of $6.1 million, or 24 cents per share, compared to 1996 losses of 2 cents per share. The losses were attributable to lower than expected timber prices in the Japanese market and lower than expected operating productivity and shipments. In January 1997, Forest-Starma 27 30 MANAGEMENT'S DISCUSSION (CONTINUED) commenced commercial operations, producing approximately 257,000 cubic meters of timber during the year. Timber shipments for the twelve months ended December 31, 1997 aggregated 194,000 cubic meters. Forest-Starma values its inventory at the lower of cost or market using the full absorption accounting method. Accordingly, costs of goods sold of $13.2 million in 1997 included all operating costs such as payroll, fuel, spare parts, site related general and administrative expenses, amortization, depreciation and other taxes. During 1997, the average realized selling price was $61 per cubic meter, roughly equivalent to the average production cost of $60 per cubic meter. Average realized timber prices dropped steadily throughout most of 1997; however, as a result of a significant price decline at the end of 1997, finished goods inventory was restated to market value at $50 per cubic meter. Inventory market adjustments throughout 1997 aggregated approximately $1 million and were recorded in cost of goods sold. Approximately 73,000 cubic meters of timber remained in inventory at the end of 1997. Marketing, sales and related expenses of approximately $0.6 million in 1997 were attributable largely to sales commissions. Other expenses of $4.7 million for the twelve months ended December 31, 1997 included interest, management fees, foreign exchange losses and bad debt expense. The statutory tax rate in Russia is 35%. Liquidity and Capital Resources Project Financing. Capital required by this venture is now projected at approximately $59.9 million through the end of 1998. At December 31, 1997, project financing aggregated $54.3 million including $38.2 million in subordinated debt and accrued interest provided by the Company, $8.7 million in unpaid liabilities to the Company for ongoing operating expenses and $7.4 million in outstanding third party financing. The Company expects to convert approximately $15 million of subordinated debt to equity in 1998. Forest-Starma completed a $9.3 million project financing with OPIC in July 1996, of which $7.4 million remained outstanding at December 31, 1997. The underlying note is payable in thirteen remaining semiannual installments through December 15, 2003, and bears interest at a fixed rate of 7.20%. In addition, a spread of 2.75% on outstanding borrowings is payable to OPIC prior to project completion, increasing to 5.125% after project completion when the Company ceases to be an obligor in the transaction. As a condition to the OPIC financing, the Company was required to execute a Project Completion Agreement pursuant to which the Company would advance funds to Forest-Starma, as necessary, to permit Forest-Starma to fulfill all of its financial obligations, including cost overruns related to project development, until such time as Forest-Starma satisfies a production test and certain financial and project development benchmarks. Scheduled third-party debt service for 1998 is expected to aggregate $2 million. Direct Investment and Risk Management. Direct investment in Forest-Starma by the Company aggregated $38.3 million at December 31, 1997. In connection with its investment in Forest-Starma, the Company has secured OPIC political risk insurance in an amount of up to $47 million which would protect 90% of the Company's equity investment and loans and a proportionate share of cumulative retained earnings. In addition, the Company has secured OPIC business income loss insurance of up to $5 million for Forest-Starma. Other Ventures. In 1995, Closed Joint-Stock Company "Amgun-Forest" and Closed Joint-Stock Company "Udinskoye," the Company's other Russian timber ventures, each executed a long-term lease (50 years) relating to timber harvesting. The Amgun-Forest lease covers 485,400 hectares (approximately 1,200,000 acres) with annual cutting rights of 350,000 cubic meters while the Udinskoye lease covers 201,000 hectares (approximately 497,000 acres) with annual cutting rights of 300,000 cubic meters. Pioneer Forest, Inc. has an 80.6% direct interest and 7.1% indirect interest in Amgun-Forest and a 72% direct 28 31 interest and 4.2% indirect interest in Udinskoye. The feasibility study on Amgun-Forest is being reviewed, and the Udinskoye feasibility study is in the early stages of development. The studies will form the basis for estimating capital requirements for these projects. Depending upon factors such as capital availability, management resources, market demand and the stabilization of larch prices, the predominant timber species in both concessions, the Company may elect to develop these projects in the future. Since inception, the Company provided funding and services to these projects aggregating $3.8 million, including $1 million in 1997. Miscellaneous -- Other Operations The Company reported losses of 7 cents per share as "other" in 1997, principally from $2.1 million of unallocated interest expense, or 5 cents, and $0.5 million, or 2 cents, of losses from its Russian powdered metals business. Other losses were 5 cents per share in 1996, half of which resulted from losses from the Russian powdered metals business. Other losses were 14 cents per share in 1995, and included a loss of 12 cents per share related to expenses the Company incurred in connection with its unsuccessful effort to sell, in a global offering, approximately 20% of its shares of PGL. Liquidity and Capital Resources -- General The Company's liquid assets consisting of cash and marketable securities (exclusive of gold mining and timber operations) increased by $38.5 million in 1997 to $95.9 million principally from increased cash and investments held by the Russian investment operations. The Company entered into an agreement in June 1996 with a syndicate of commercial banks for a senior credit facility (the "Credit Facility"). Under the Credit Facility, the Company may borrow up to $60 million (the "B-share Revolver") to finance Dealer Advances relating to sales of back-end load shares of the Company's domestic mutual funds. The B-share Revolver is subject to annual renewal by the Company and the commercial banks. In the event the B-share Revolver is not renewed at maturity, it will automatically convert into a five-year term loan. Advances under the B-share Revolver bear interest, at the Company's option, at (a) the higher of the bank's base lending rate or the federal funds rate plus 0.50% or (b) LIBOR plus 1.25%. The Credit Facility also provides that the Company may borrow up to $80 million for general corporate purposes (the "Corporate Revolver"). The Corporate Revolver is payable in full on June 11, 2001. Advances under the Corporate Revolver bear interest, at the Company's option, at (a) the higher of the bank's base lending rate or the federal funds rate plus 0.50% or (b) LIBOR plus the applicable margin, tied to the Company's financial performance, of either 0.75%, 1.25%, 1.50% or 1.75%. The Credit Facility provides that the Company must pay additional interest at the rate of 0.375% per annum of the unused portion of the facility and an annual arrangement fee of $35,000. At December 31, 1997, the Company had borrowed $41 million under the B-share Revolver and $55 million under the Corporate Revolver. The Credit Facility contains restrictions that limit, among other things, encumbrances on the assets of the Company's domestic mutual fund subsidiaries and certain mergers and sales of assets. Additionally, the Credit Facility requires that the Company meet certain financial covenants including covenants that require the Company to maintain certain minimum ratios with respect to debt to cash flow and interest payments to cash flow and a minimum tangible net worth, all as defined in the Credit Facility. As of December 31, 1997, the Company was in compliance with all applicable covenants. Under the Credit Facility, the Company is required to maintain interest rate protection agreements covering at least 60% of the outstanding indebtedness under the B-share Revolver. As of December 31, 1997, the Company had entered into six five-year interest rate swap agreements with a member of the Company's banking syndicate which has effectively fixed the interest rate on notional amounts totaling $100 million. Under these agreements, the Company will pay the bank a weighted average fixed rate 29 32 MANAGEMENT'S DISCUSSION (CONTINUED) of 6.76%, plus the applicable margin (ranging from 0.75% to 1.75%), on the notional principal. The bank will pay the Company interest on the notional principal at the current variable rate stated under the B-share Revolver. The fair value of these swap agreements was approximately $2.6 million at December 31, 1997, which amount represents the estimated amount the Company would be obligated to pay to terminate the agreements. In August 1997, the Company entered into an agreement (the "Note Agreement") with a commercial lender pursuant to which the Company issued to the lender Senior Notes in the aggregate principal amount of $20 million. The Senior Notes, which bear interest at the rate of 7.95% per annum, have a maturity of seven years. The restrictions and financial covenants under the Note Agreement are substantially similar to the restrictions and financial covenants in the Credit Facility. The Company used the proceeds of this financing to reduce the amount outstanding under the Corporate Revolver. Future Operating Results Certain of the information contained in this Annual Report, including information with respect to the Company's plans and strategies for its worldwide financial services and natural resource development businesses, consists of forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "projects," "estimates" and similar expressions are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following: The Company is presently in the process of evaluating its information technology infrastructure for Year 2000 compliance at all of its worldwide operations. The Company does not anticipate that the cost to modify its information technology infrastructure to be Year 2000 compliant will be material to its financial condition or results of operations. The Company does not expect any material disruption in its operations as a result of any failure by the Company to be Year 2000 compliant. The Company is currently evaluating the Year 2000 compliance of its vendors and financial institutions with which it conducts business to ensure that the Company's continued operations will not be adversely affected. There can be no assurance that the Company's Year 2000 compliance efforts will be successful or that cost estimates will not change as the evaluation process continues. The Company derives a significant portion of its revenues from investment management fees, underwriting and distribution fees and shareholder services fees. Success in the investment management and mutual fund share distribution businesses is substantially dependent on investment performance. Good performance stimulates sales of shares and tends to keep redemptions low. Sales of shares result in increased assets under management, which, in turn, generate higher management fees and distribution fees. Good performance also attracts institutional accounts. Conversely, relatively poor performance results in decreased sales and increased redemptions and the loss of institutional accounts, with corresponding decreases in revenues to the Company. Investment performance may also be affected by economic or market conditions which are beyond the control of the Company. In addition, three of the Company's mutual funds (including the two largest funds) have management fees which are adjusted based upon the funds' performance relative to the performance of an established index. As a result, management fee revenues may be subject to unexpected volatility. The mutual fund industry is intensely competitive. Many organizations in this industry are attempting to sell and service the same clients and customers, not only with mutual fund investments but with other financial services products. Some of the Company's competitors have more products and product 30 33 lines and substantially greater assets under management and financial resources. As described above, the Company offers a multi-class share structure on its domestic mutual funds. Under such structure, the Company pays to dealers a commission on the sale of back-end load shares but the investor does not pay any sales charge unless it redeems before the expiration of the minimum holding period, which ranges from three to six years in the case of Class B Shares and which is one year in the case of Class C Shares. The Company's cash flow and results of operations may be adversely affected by vigorous sales of back-end load shares because its recovery of the cost of commissions paid up front to dealers is spread over a period of years. During this period, the Company bears the costs of financing and the risk of market decline. The businesses of the Company and its domestic financial services subsidiaries are primarily dependent upon their associations with the Pioneer Family of Mutual Funds with which they have contractual relationships. In the event any of the management contracts, underwriting contracts or service agreements was canceled or not renewed pursuant to the terms thereof, the Company may be substantially adversely affected. The Securities and Exchange Commission has jurisdiction over registered investment companies, registered investment advisers, broker-dealers and transfer agents and, in the event of a violation of applicable rules or regulations by the Company or its subsidiaries, may take action which could have a serious negative effect on the Company and its financial performance. Because a significant portion of the Company's revenues are derived from the mining and sale of gold by TGL, the Company's earnings are directly related to gold production, the cost of such production, and the price of gold. TGL's gold production is dependent upon a number of factors that could cause actual gold production to differ materially from projections, including obtaining and maintaining necessary equipment, accessing key supplies, and hiring and training supervisory personnel and skilled workers. Gold production is also affected by the time lag inherent in heap leaching technology, subject to weather conditions and dependent on the continued political stability in the Republic of Ghana. Gold prices have historically fluctuated significantly and are affected by numerous factors, including expectations for inflation, the strength of the U.S. dollar, global and regional demand, central bank gold supplies and political and economic conditions. If, as a result of a decline in gold prices, TGL's revenues from gold sales were to fall below cash costs of production, and to remain below cash costs of production for any substantial period, the Company could determine that it is not economically feasible for TGL to continue commercial production. TGL is dependent upon a number of key supplies for its mining operations, including cement, diesel fuel, electricity, explosives, lubricants, tires and sodium cyanide. There can be no assurance that a disruption in the supplies to TGL of these key materials will not occur and adversely affect the Company's operations. The operations at TGL depend on its ability to recruit, train and retain employees with the requisite skills to operate large-scale mining equipment. Although TGL offers its employees an attractive compensation package, competition for skilled labor is strong among the various mines in Ghana. There can be no assurance that the Company's operations will not be adversely affected by a shortage of skilled laborers or by an increase in the time required to fully train new employees. During 1997, the Company derived significant revenues and net income from its Russian financial services operations. Given the volatility of the Russian financial markets, and the effect such volatility may have on the Company's Russian businesses, there can be no assurance that these sources of revenue and net income will continue or that they will continue at current levels. 31 34 MANAGEMENT'S DISCUSSION (CONTINUED) The Company has incurred considerable expenses in connection with the Forest-Starma timber project located in the Russian Far East. Forest-Starma has commenced harvesting and has made shipments of timber. The commercial feasibility of Forest-Starma is, however, dependent upon a number of factors which are not within the control of the Company including the price of timber, the weather, political stability in Russia and the strength of the Japanese economy, the primary market for Forest-Starma's timber. While the Company continues to believe that the project will achieve commercial feasibility, there can be no assurance that it will do so. The Company has a significant number of operations and investments located outside of the U. S., including the gold mining operation at TGL and the timber and investment management operations in Russia. Foreign operations and investments may be adversely affected by exchange controls, currency fluctuations, taxation, political instability and laws or policies of the particular countries in which the Company may have operations. There is no assurance that permits, authorizations and agreements to implement plans at the Company's projects can be obtained under conditions or within time frames that make such plans economically feasible, that applicable laws or the governing political authorities will not change or that such changes will not result in the Company's having to incur material additional expenditures. The Company believes that it is in sound financial condition, that it has sufficient liquidity from operations and financing facilities to cover short-term commitments and contingencies and that it has adequate capital resources to provide for long-term commitments. 32 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Pioneer Group, Inc.: We have audited the accompanying consolidated balance sheets of The Pioneer Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Pioneer Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts, February 3, 1998 33 36 Consolidated Statements of Income Dollars in Thousands Except Per Share Amounts
Year Ended December 31, 1997 1996 1995 ------------ ------------ ------------ Revenues and sales: Investment management fees ......................... $121,372 $87,843 $64,604 Underwriting commissions and distribution fees ..... 23,322 16,636 8,515 Shareholder services fees .......................... 28,002 25,340 22,447 Revenues from brokerage activities ................. 35,570 2,232 -- Revenues from banking activities ................... 12,324 14,966 -- Trustee fees and other income ...................... 20,884 13,816 12,909 ------------ ------------ ------------ Revenues from financial services businesses ....... 241,474 160,833 108,475 Gold sales ......................................... 89,487 78,279 90,242 Timber sales ....................................... 11,879 -- -- ------------ ------------ ------------ Total revenues and sales .......................... 342,840 239,112 198,717 ------------ ------------ ------------ Costs and expenses: Management, distribution, shareholder service and administrative expenses ...................... 184,419 133,331 94,003 Interest expense--banking activities ............... 7,676 6,068 -- Gold mining operating costs and expenses ........... 88,915 72,563 64,905 Timber operating costs and expenses ................ 15,479 730 -- ------------ ------------ ------------ Total costs and expenses .......................... 296,489 212,692 158,908 ------------ ------------ ------------ Other (income) expense: Unrealized and realized gains on venture capital and marketable securities investments, net ............ (27,460) (12,279) (9,345) Interest expense ................................... 11,395 3,318 1,024 Public offering costs .............................. -- -- 4,863 Other, net ......................................... 606 1,716 735 ------------ ------------ ------------ Total other (income) expense ...................... (15,459) (7,245) (2,723) ------------ ------------ ------------ Income before provision for federal, state and foreign income taxes and minority interest ........ 61,810 33,665 42,532 Provision for federal, state and foreign income taxes 27,547 11,548 16,598 ------------ ------------ ------------ Income before minority interest ..................... 34,263 22,117 25,934 ------------ ------------ ------------ Minority interest ................................... 5,097 3,280 3,123 ------------ ------------ ------------ Net income .......................................... $29,166 $18,837 $22,811 ============ ============ ============ Basic earnings per share ............................ $1.17 $0.77 $0.93 ============ ============ ============ Diluted earnings per share .......................... $1.14 $0.74 $0.90 ============ ============ ============ Basic shares outstanding ............................ 24,873,000 24,620,000 24,407,000 ============ ============ ============ Diluted shares outstanding .......................... 25,630,000 25,460,000 25,311,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 34 37 Consolidated Balance Sheets Dollars in Thousands Except Per Share Amount
December 31, 1997 1996 ------------ ------------ Assets Current assets: Cash and cash equivalents, at cost which approximates fair value ......................... $ 58,802 $ 30,813 Restricted cash .......................................................................... 8,431 1,664 Investment in marketable securities, at fair value ....................................... 38,341 27,542 Receivables: From securities brokers and dealers for sales of mutual fund shares ..................... 11,752 9,010 From Pioneer Family of Mutual Funds ..................................................... 17,428 13,978 For securities sold ..................................................................... 11,466 2,600 For gold shipments ...................................................................... 3,451 2,686 Other ................................................................................... 12,695 14,912 Mining inventory ......................................................................... 22,032 23,502 Timber inventory ......................................................................... 5,897 1,406 Other current assets ..................................................................... 11,957 12,607 -------- -------- Total current assets .................................................................. 202,252 140,720 -------- -------- Noncurrent assets: Mining operations: Mining equipment and facilities (net of accumulated depreciation of $76,060 in 1997 and $56,143 in 1996) ................................................ 99,164 107,807 Deferred mining development costs (net of accumulated amortization of $16,177 in 1997 and $13,455 in 1996) ................................................ 17,521 10,675 Cost of acquisitions in excess of net assets acquired (net of accumulated amortization of $12,083 in 1997 and $9,268 in 1996) .................................... 20,216 22,945 Long-term venture capital investments, at fair value (cost $71,754 in 1997 and $46,651 in 1996) ................................................................... 95,382 59,872 Long-term investments, at cost ........................................................... 15,671 15,996 Timber operations: Timber equipment and facilities (net of accumulated depreciation of $1,260 in 1997) ..... 17,898 13,952 Deferred timber development costs (net of accumulated amortization of $1,611 in 1997) ... 21,264 22,897 Building (net of accumulated depreciation of $598 in 1997) ............................... 25,087 22,777 Furniture, equipment and leasehold improvements (net of accumulated depreciation and amortization of $8,565 in 1997 and $13,293 in 1996) ..................................... 17,030 13,931 Loans to bank customers .................................................................. 9,152 6,632 Dealer advances (net of accumulated amortization of $17,366 in 1997 and $8,613 in 1996) .. 41,871 34,293 Other noncurrent assets .................................................................. 21,285 18,215 -------- -------- Total noncurrent assets ............................................................... 401,541 349,992 -------- -------- $603,793 $490,712 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Payable to funds for shares sold ......................................................... $ 11,766 $ 8,996 Accounts payable ......................................................................... 18,724 25,633 Accrued expenses ......................................................................... 29,760 22,251 Customer deposits ........................................................................ 23,584 15,328 Brokerage liabilities .................................................................... 14,702 2,040 Short-term borrowings--banking activities ................................................ 12,083 5,573 Accrued income taxes ..................................................................... 7,641 1,690 Current portion of notes payable ......................................................... 17,411 10,002 -------- -------- Total current liabilities ............................................................. 135,671 91,513 -------- -------- Noncurrent liabilities: Notes payable, net of current portion .................................................... 168,424 149,500 Deferred income taxes, net ............................................................... 29,334 25,569 -------- -------- Total noncurrent liabilities .......................................................... 197,758 175,069 -------- -------- Total liabilities ..................................................................... 333,429 266,582 -------- -------- Minority Interest ........................................................................ 86,677 61,657 -------- -------- Commitments and Contingencies (Note 10) Stockholders' Equity: Common stock, $0.10 par value; authorized 60,000,000 shares; issued 25,219,567 shares in 1997 and 25,013,763 in 1996 ................................ 2,522 2,501 Paid-in capital ......................................................................... 15,912 11,450 Retained earnings ....................................................................... 171,558 152,457 Treasury stock at cost, 2,670 shares in 1997 and 910 shares in 1996 ..................... (65) (16) Cumulative translation adjustment ....................................................... (1,277) -- -------- -------- 188,650 166,392 Less--Deferred cost of restricted common stock issued ................................... (4,963) (3,919) -------- -------- Total stockholders' equity ........................................................... 183,687 162,473 -------- -------- $603,793 $490,712 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 35 38 Consolidated Statements of Changes in Stockholders' Equity Dollars in Thousands Except Per Share Amounts
Common Stock ------------------------------- Shares Paid-in Retained Issued Amount Capital Earnings ------------ -------- --------- ------------ Balance, December 31, 1994 ......................................... 24,697,960 $2,470 $ 3,599 $ 130,715 ---------- ------ ------- --------- Add (Deduct): Net income ........................................................ -- -- -- 22,811 Dividends paid--$0.40 per share ................................... -- -- -- (9,923) Shares awarded under the 1990 and 1995 restricted stock plans, (127,337 shares) ................................................. 94,003 9 2,468 -- Shares purchased under the 1995 employee stock purchase plan (18,228 shares) .................................................. 16,880 1 398 -- Amortization of deferred cost of restricted common stock issued ... -- -- -- -- Additional tax benefits from stock plans .......................... -- -- 1,049 -- Forfeitures of shares awarded under the 1990 restricted stock plan (6,245 shares) .............................................. -- -- -- -- Exercise of stock options awarded under the 1988 stock option plan (25,000 shares) ............................................. 24,665 3 146 -- ---------- ------ ------- --------- Balance, December 31, 1995 ......................................... 24,833,508 $2,483 $ 7,660 $ 143,603 ---------- ------ ------- --------- Add (Deduct) Net income ........................................................ -- -- -- 18,837 Dividends paid--$0.40 per share ................................... -- -- -- (9,983) Shares awarded under the 1995 restricted stock plan (78,137 shares) .......................................................... 74,667 8 2,041 -- Shares purchased under the 1995 employee stock purchase plan (33,433 shares) .................................................. 17,368 2 351 -- Amortization of deferred cost of restricted common stock issued ... -- -- -- -- Additional tax benefits from stock plans .......................... -- -- 664 -- Forfeiture of shares awarded under the 1990 and 1995 restricted stock plans (12,225 shares) ...................................... -- -- -- -- Shares issued and returned to treasury ............................ 10,070 -- 273 -- Exercise of stock options awarded under the 1988 stock option plan (80,000 shares) ............................................. 78,150 8 461 -- ---------- ------ ------- --------- Balance, December 31, 1996 ......................................... 25,013,763 $2,501 $11,450 $ 152,457 ---------- ------ ------- --------- Add (Deduct) Net income ........................................................ -- -- -- 29,166 Dividends paid--$0.40 per share ................................... -- -- -- (10,065) Shares awarded under restricted stock plans (162,207 shares) ...... 156,945 16 3,679 -- Shares purchased under the 1995 employee stock purchase plan (34,527 shares) .................................................. 17,682 2 330 -- Amortization of deferred cost of restricted common stock issued ... -- -- -- -- Additional tax benefits from stock plans .......................... -- -- 306 -- Forfeiture of shares awarded under restricted stock plans (38,690 shares) .......................................................... -- -- -- -- Exercise of stock options awarded under the 1988 stock option plan (46,000 shares) ............................................. 31,177 3 147 -- Cumulative translation adjustment ................................. -- -- -- -- ---------- ------ ------- --------- Balance, December 31, 1997 ......................................... 25,219,567 $2,522 $15,912 $ 171,558 ========== ====== ======= =========
Deferred Cost Total Cumulative of Stock- Treasury Translation Restricted holders' Stock Adjustment Stock Equity ---------- ------------- ------------ ----------- Balance, December 31, 1994 ......................................... $ (167) $ -- $ (2,195) $ 134,422 ------ -------- -------- --------- Add (Deduct): Net income ........................................................ -- -- -- 22,811 Dividends paid--$0.40 per share ................................... -- -- -- (9,923) Shares awarded under the 1990 and 1995 restricted stock plans, (127,337 shares) ................................................. 220 -- (2,609) 88 Shares purchased under the 1995 employee stock purchase plan (18,228 shares) .................................................. 17 -- -- 416 Amortization of deferred cost of restricted common stock issued ... -- -- 1,329 1,329 Additional tax benefits from stock plans .......................... -- -- -- 1,049 Forfeitures of shares awarded under the 1990 restricted stock plan (6,245 shares) .............................................. (72) -- 72 -- Exercise of stock options awarded under the 1988 stock option plan (25,000 shares) ............................................. 2 -- -- 151 ------ -------- -------- --------- Balance, December 31, 1995 ......................................... $ -- $ -- $ (3,403) $ 150,343 ------ -------- -------- --------- Add (Deduct) Net income ........................................................ -- -- -- 18,837 Dividends paid--$0.40 per share ................................... -- -- -- (9,983) Shares awarded under the 1995 restricted stock plan (78,137 shares) .......................................................... 66 -- (1,951) 164 Shares purchased under the 1995 employee stock purchase plan (33,433 shares) .................................................. 365 -- -- 718 Amortization of deferred cost of restricted common stock issued ... -- -- 1,221 1,221 Additional tax benefits from stock plans .......................... -- -- -- 664 Forfeiture of shares awarded under the 1990 and 1995 restricted stock plans (12,225 shares) ...................................... (214) -- 214 -- Shares issued and returned to treasury ............................ (273) -- -- -- Exercise of stock options awarded under the 1988 stock option plan (80,000 shares) ............................................. 40 -- -- 509 ------ -------- -------- --------- Balance, December 31, 1996 ......................................... $ (16) $ -- $ (3,919) $ 162,473 ------ -------- -------- --------- Add (Deduct) Net income ........................................................ -- -- -- 29,166 Dividends paid--$0.40 per share ................................... -- -- -- (10,065) Shares awarded under restricted stock plans (162,207 shares) ...... 103 -- (3,673) 125 Shares purchased under the 1995 employee stock purchase plan (34,527 shares) .................................................. 350 -- -- 682 Amortization of deferred cost of restricted common stock issued ... -- -- 1,821 1,821 Additional tax benefits from stock plans .......................... -- -- -- 306 Forfeiture of shares awarded under restricted stock plans (38,690 shares) .................................................. (808) -- 808 -- Exercise of stock options awarded under the 1988 stock option plan (46,000 shares) ............................................. 306 -- -- 456 Cumulative translation adjustment ................................. -- (1,277) -- (1,277) ------ -------- -------- --------- Balance, December 31, 1997 ......................................... $ (65) $ (1,277) $ (4,963) $ 183,687 ====== ======== ======== =========
36 The accompanying notes are an integral part of these consolidated financial statements. 39 Consolidated Statements of Cash Flows Dollars in Thousands
Year Ended December 31, 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income .............................................................................. $ 29,166 $ 18,837 $ 22,811 --------- ---------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................................................... 45,090 29,952 23,667 Unrealized and realized gains on venture capital and marketable securities investments, net ....................................................................... (27,460) (12,279) (9,345) (Equity in earnings of) provision on other investments ................................. 2,710 107 (438) Restricted stock plan expense .......................................................... 1,821 1,221 1,329 (Prepaid) deferred income taxes ........................................................ 3,765 11,066 (2,404) Minority interest ...................................................................... 5,097 3,280 3,123 Changes in operating assets and liabilities: Investments in marketable securities, net .............................................. (10,266) (19,216) (422) Receivable from securities brokers and dealers for sales of mutual fund shares ......... (2,742) 3,375 (4,979) Receivables for securities sold ........................................................ (8,866) (2,600) -- Receivables for gold shipments ......................................................... (765) 2,724 (1,017) Receivables from Pioneer Family of Mutual Funds and other .............................. (1,514) (14,805) (2,547) Mining inventory ....................................................................... 1,470 (7,897) (3,724) Timber inventory ....................................................................... (4,491) 81 (1,487) Other current assets ................................................................... (110) (4,626) (2,163) Other noncurrent assets ................................................................ (895) (3,858) (898) Payable to funds for shares sold ....................................................... 2,770 (3,373) 5,294 Accrued expenses and accounts payable .................................................. 600 18,937 6,853 Brokerage liabilities .................................................................. 13,232 2,040 -- Accrued income taxes ................................................................... 6,257 1,185 1,470 --------- ---------- --------- Total adjustments ..................................................................... 25,703 5,314 12,312 --------- ---------- --------- Net cash provided by operating activities ............................................. 54,869 24,151 35,123 --------- ---------- --------- Cash flows from investing activities: Purchase of mining equipment and facilities ............................................. (11,520) (74,789) (15,601) Deferred mining development costs ....................................................... (9,568) (3,088) (959) Additions to furniture, equipment and leasehold improvements ............................ (9,053) (5,309) (6,592) Building ................................................................................ (2,865) (10,101) (7,909) Long-term venture capital investments ................................................... (26,945) (14,256) (26,564) Proceeds from sale of long-term venture capital investments ............................. 6,688 9,576 6,985 Loans to bank customers ................................................................. (2,520) (6,632) -- Deferred timber development costs ....................................................... (354) (6,716) (8,633) Timber equipment and facilities ......................................................... (5,206) (2,466) (7,001) Other investments ....................................................................... (5,871) (1,824) (4,086) Proceeds from sales of other investments ................................................ 1,732 -- -- Cost of acquisition in excess of net assets acquired .................................... (87) (928) (96) Acquisition of Russian investment operations, net of cash acquired ...................... -- -- 4,180 Long-term investments ................................................................... (4,026) (5,353) (7,791) Proceeds from sale of long-term investments ............................................. 13,884 7,200 8,935 --------- ---------- --------- Net cash used in investing activities ................................................. (55,711) (114,686) (65,132) --------- ---------- --------- Cash flows from financing activities: Dividends paid .......................................................................... (10,065) (9,983) (9,923) Distributions to minority interestholders subsidiary .................................... -- (354) (350) Distributions to limited partners of venture capital subsidiary ......................... (94) (23) (11) Amounts raised by venture capital investment partnerships ............................... 21,024 7,848 20,839 Additional minority interest capital raised by foreign subsidiaries ..................... -- 6,269 -- Employee stock purchase plan ............................................................ 682 718 416 Exercise of stock options ............................................................... 456 509 151 Restricted stock plan award ............................................................. 125 164 88 Dealer advances ......................................................................... (16,331) (23,247) (14,913) Customer deposits ....................................................................... 7,686 15,328 -- Short-term borrowings--banking activities ............................................... 6,510 5,573 -- Revolving credit agreement borrowings, net .............................................. 8,500 35,500 42,000 Borrowings of notes payable ............................................................. 28,420 62,960 -- Repayments of notes payable ............................................................. (10,587) (6,059) (3,597) Reclassification of restricted cash ..................................................... (6,767) (1,664) -- --------- ---------- --------- Net cash provided by financing activities ............................................. 29,559 93,539 34,700 --------- ---------- --------- Effect of foreign currency exchange rate changes on cash and cash equivalents ............ (728) -- -- Net increase in cash and cash equivalents ................................................ 27,989 3,004 4,691 Cash and cash equivalents at beginning of year ........................................... 30,813 27,809 23,118 --------- ---------- --------- Cash and cash equivalents at end of year ................................................. $ 58,802 $ 30,813 $ 27,809 ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 37 40 Notes to Consolidated Financial Statements December 31, 1997 Note 1-- Nature of Operations and Organization The Pioneer Group, Inc., and its subsidiaries (collectively, the "Company"), are engaged in financial services businesses in the United States and several foreign countries and in a number of natural resource development projects, including a gold mining venture in the Republic of Ghana and three timber ventures in the Russian Far East. In the United States, the Company conducts four lines of financial services businesses: (i) Pioneering Management Corporation ("PMC") serves as investment manager to the 34 U.S. registered investment companies in the Pioneer Family of Mutual Funds and several institutional accounts, (ii) Pioneer Funds Distributor, Inc. ("PFD") serves as distributor of shares of the Pioneer Family of Mutual Funds, (iii) Pioneer Capital Corporation ("PCC"), and its subsidiaries, engage in venture capital investing and management activities, and (iv) Pioneering Services Corporation serves as shareholder servicing agent for the Pioneer Family of Mutual Funds. The Company's international financial services businesses include investment operations in: (i) Warsaw, Poland, where the Company manages and distributes units of four mutual funds, owns 50% of a unitholder servicing agent, manages an institutional venture capital fund and owns a majority interest in a brokerage operation, (ii) Dublin, Ireland, where the Company distributes shares of, manages and services six offshore investment funds, sold primarily in Western Europe, and (iii) Moscow, Russia, where the Company provides financial services, including banking, investment advisory, investment banking and brokerage and transfer agency services, distributes shares of, manages, and services, Pioneer First, one of the first open-end mutual funds available to Russian citizens, and where the Company owns 51% of the First Voucher Fund, the largest Russian voucher investment fund. In addition, the Company has investment operations in the Czech Republic and has invested in investment management operations in India and Taiwan. The Company's Russian investment operations are consolidated under Pioneer First Russia, Inc. ("PFR"). In 1996, PFR entered into a subscription agreement with the International Finance Corporation ("IFC") for the sale of up to $4 million of its common stock. Simultaneously, the Company also entered into a put and call agreement for this common stock. The put allows the holder of the shares to put them to PFR for the greater of the IFC shares net asset value, as defined in the agreement, or twelve times PFR's average earnings, as defined in the agreement, during the period from four years to eight years from the date of the initial closing. The call feature allows the Company to call the shares for the same amount, beginning eight years and ending ten years from the date of the initial closing. In 1996, the IFC advanced $2 million to PFR, pursuant to the subscription agreement. The balance of the commitment was received by PFR in 1997. The entire commitment is included in minority interest liability. Adjustments are made to the carrying amount of this liability to reflect the IFC's interest under the put and call agreement. The Company's wholly owned subsidiary, Pioneer Goldfields Limited ("PGL"), conducts mining and exploration activities in the Republic of Ghana and exploration activities elsewhere in Africa. PGL's principal asset is its ownership of 90% of the outstanding shares of Teberebie Goldfields Limited ("TGL"), which operates a gold mine in the western region of the Republic of Ghana. The Republic of Ghana owns the remaining 10% of TGL. In addition, the Company's majority-owned subsidiary Closed Joint-Stock Company "Tas-Yurjah Mining Company" conducts mining exploration activities in the Russian Far East. The Company's wholly owned subsidiary, Pioneer Forest, Inc. ("Pioneer Forest"), conducts timber harvesting and timber development activities in the Russian Far East. Pioneer Forest's principal asset is its ownership of 95% of the outstanding shares of Closed Joint-Stock Company "Forest-Starma", which harvests timber in the Russian Far East and which commenced commercial production on January 1, 1997. Note 2-- Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company, its wholly owned and majority-owned subsidiaries and certain partnerships that the Company controls. The Company has consolidated the Pioneer Ventures Limited Partnership II, Pioneer Poland U.S. L.P. and Pioneer Poland U.K. L.P. in which the Company's ownership interest is 14.0%, 7.2% and 9.2%, respectively. Control is defined by several factors, including, but not limited to, the fact that the Company is the general partner, the general partner has absolute and unilateral authority to make investment decisions, the limited partners may not remove the general partner and the general partner has absolute and unilateral authority to declare, or not declare, distributions of partnership income to the partners. All material intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates with regard to these consolidated financial statements relates to the valuation of venture capital investments, other investments and the estimated future cash flows of the Company's natural resource operations, as discussed herein. Certain reclassifications have been made to 1996 and 1995 amounts to conform with the 1997 presentation. Consolidated Statements of Cash Flows Cash and cash equivalents consist primarily of cash on deposit in banks and amounts invested in commercial paper, Pioneer money market mutual funds and U.S. Treasury bills with original maturities of three months or less. Restricted cash consists of cash on deposit in banks, use of which is restricted by certain loan covenants, cash reserved for the exclusive benefit of brokerage customers and cash on deposit with the Central Bank of Russia. Income taxes paid were approximately $18,719,000, $1,149,000 and $16,617,000 in 1997, 1996 and 1995, 38 41 Notes to Consolidated Financial Statements (Continued) respectively. In addition, $13,146,000, $7,263,000 and $2,587,000 of interest was paid in 1997, 1996 and 1995, respectively. The amounts paid in 1997, 1996 and 1995 include approximately $1,353,000, $4,800,000 and $1,800,000, respectively, of interest that was capitalized related to the development of the Company's building, Russian timber operations and the mining Phase III expansion operations. The Company purchased 51% of the First Voucher Fund and certain Russian investment operating entities in 1995 for approximately $20 million. In conjunction with the acquisition, liabilities were assumed as follows:
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, and certain equity and debt securities of companies based in Russia. The Russian securities, except for those securities issued by the Russian government, are carried at cost, adjusted for impairment losses. In accordance with the Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities", these securities are carried at cost, adjusted for impairment losses, rather than fair value until such time as the breadth and scope of the Russian securities markets develop to certain quantifiable levels. These securities are held for trading purposes, and accordingly all realized and unrealized gains and losses are included in the accompanying consolidated statements of income under income from banking and income from brokerage activities. Additionally, the Company's investments in the Pioneer Family of Mutual Funds are included in this amount. Recognition of Revenues Investment management, shareholder services, trustee and other fees are recorded as income during the period in which services are performed. Agreements with certain of the Pioneer Family of Mutual Funds provide for fee reductions, which are based on the excess of annual expenses of each mutual fund over certain limits. Fee reductions are recorded on an accrual basis. Underwriting commissions earned from the distribution of the Pioneer Family of Mutual Fund shares and the systematic investment plan are recorded as income on the trade (execution) dates. Distribution fees are earned based on 0.75% of certain Pioneer Family of Mutual Fund net assets. Revenues from brokerage activities are derived from net realized and unrealized gains and losses from securities trading activities. The Company's principal brokerage activities relate to the purchase and sale of Russian securities, including Russian government debt securities and the equity and debt securities of companies based in Russia. Revenues from banking activities are related to the Bank's securities trading and lending activities. The Bank trades in certain Russian government securities including GKO and OFZ bonds as well as Russian equity and debt securities, and also conducts a modest amount of commercial lending. Income includes interest earned on the bonds while they are held, net realized gains and losses on the sale of the bonds and equity securities to third parties, net unrealized gains and losses associated with marking the portfolio to market at the end of the period, and interest income on loans. Interest expense on the Bank's customer deposits and short-term borrowings is recorded on the accrual basis. The Company records sales of gold at sales value net of refining costs when gold is shipped to a refinery. The Company has purchased put options as "insurance" against significant declines in the market price of gold below $320 per ounce. The put options have been purchased from a bank, and the premium paid is amortized monthly. Unamortized premiums are included in other current assets in the accompanying consolidated balance sheets. The put options are in place for estimated monthly planned production aggregating 120,000 ounces through the four months ending April 30, 1998. No put options have been purchased to cover production after April 30, 1998. The put options only require an initial cash outlay (the premium amount), which amounted to approximately $252,000, $255,000 and $150,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Put options represent a right and not an obligation. As such, the Company has neither ongoing exposure (other than credit exposure) nor upside potential with respect to the put options. When the market price of gold declines below $320 per ounce, the Company continues to ship gold to refineries and exercises the put options, receiving payment for the difference between the market price of gold and $320. These receipts are included as gold sales in the accompanying consolidated statements of income. During 1997, put option proceeds of approximately $4 million were received. The Company records timber sales when timber is shipped. Public Offering Costs Public offering costs consists of expenses incurred in connection with the Company's unsuccessful effort to sell, in a global offering, approximately 20% of the shares of its gold mining subsidiary PGL. The expenses relate primarily to marketing expenses and the fees of professional advisers. Building The building represents the Meridian Commercial Tower in Russia. The Meridian Commercial Tower is an office building which is wholly owned by the First Voucher Fund. The Company owns a 51% interest in the First Voucher Fund. Furniture, Equipment and Leasehold Improvements Depreciation and amortization are provided for financial reporting purposes on a straight-line basis over the following estimated useful lives: furniture and equipment, 3-5 years, and leasehold improvements, over the term of the lease. In the event of retirement or other disposition of furniture and equipment, the cost of the assets and the related accumulated depreciation and amortization amounts are removed from the accounts, and any resulting gains or losses are reflected in earnings. 39 42 Notes to Consolidated Financial Statements (Continued) Mining Inventory Gold bullion inventory and gold-in-process contained in the processing plant are valued at the lower of cost or market. Material and supplies are valued at the lower of average cost or replacement cost. Mining Equipment and Facilities Processing plant and equipment is recorded at cost and is depreciated on a units-of-production basis, which anticipates recovery over ten years or less. Mining equipment (rolling stock) is recorded at cost and is depreciated on a units-of-production basis which anticipates recovery over seven years or less. Buildings and housing units are recorded at cost and are depreciated on a straight-line basis over ten years. Leach pads are recorded at cost and are depreciated on a units-of-production basis. All other equipment and facilities are recorded at cost and are depreciated over their estimated useful lives on a straight-line basis ranging from three to ten years. Depreciation begins at the time construction is completed and the assets are placed into service. Deferred Mining Development Costs Deferred mining development costs, which include the cost of site development, capitalized interest and infrastructure costs during the development and construction phases of the project, are recorded at cost and amortized on a units-of-production basis, which anticipates recovery over ten years or less. Costs incurred to develop economically viable ore bodies, to further define mineralization in existing ore bodies, or to secure rights to proven reserves are capitalized as development costs. Exploration costs associated with the initial identification of ore reserves are expensed. Property and lease acquisition costs incurred in the process of acquiring exploration mineral rights are expensed as incurred. Mining Reclamation Costs Estimated future reclamation costs are based principally on anticipated environmental and regulatory requirements and are accrued and charged to expense over the expected operating life of the mine on a units-of-production basis. The accrual is maintained on an undiscounted basis. Deferred Timber Development Costs Deferred timber development costs principally consist of construction and engineering expenditures and infrastructure costs incurred in developing the site, the roads, capitalized interest, legal, timber rights and organizational costs. In the first quarter of 1997, the Company commenced commercial production of timber and amortization of these development costs. These costs are amortized on a units-of-production basis which anticipates recovery principally over ten years. Timber Equipment and Facilities Timber equipment and facilities consist of logging machinery and building and housing units. These costs are principally depreciated on a units-of-production basis which anticipates recovery over five to twenty years. Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired is amortized on a straight-line basis over five to fifteen years. In connection with the purchase of the Russian investment operations in 1995 (see Note 14), the Company allocated cost in excess of net assets acquired in the amount of $2,858,000. Cost in excess of net assets acquired, net, as reflected in the accompanying consolidated balance sheets, consists of the following:
December 31, 1997 1996 ------- ------- (Dollars in thousands) Mutual of Omaha Fund Management Company .................. $16,530 $18,649 Russian investment operations ......... 2,163 2,458 Gold mining operations ................ 1,217 1,592 Polish brokerage operations ........... 306 246 ------- ------- $20,216 $22,945 ======= =======
Valuation of Long-Term Venture Capital Investments The Company's long-term venture capital investments consist of the following (in thousands):
December 31, 1997 1996 ------- ------- Domestic ......... $68,937 $47,354 Non-U.S. ......... 26,445 12,518 ------- ------- $95,382 $59,872 ======= =======
The Company's domestic venture capital investments are in companies that are primarily engaged in bringing new technology to market as well as more mature companies in need of capital for expansion, acquisitions, management buyouts or recapitalizations. At the time the investments are made, the Company's investments are primarily in the form of unregistered common and preferred stock, warrants and promissory notes. Most securities are valued at fair value, as determined in good faith by management and approved by the Board of Directors, when market quotes are not available. Of the total domestic venture capital value at December 31, 1997, the value of securities for which market quotes are not available was $43,629,000. In addition, total domestic venture capital investments included cash that has been restricted for the future purchase of venture capital investments of $3,654,000. In addition, non-U.S. venture capital investments are the investments held by certain consolidated partnerships. These venture capital investments are in companies that are domiciled in Poland. Of the total non-U.S. venture capital value at December 31, 1997, the value of securities for which market quotes are not available was $15,689,000. In addition, total non-U.S. venture capital investments included cash that has been restricted for the future purchase of venture capital investments of $10,756,000. In determining fair value, investments are initially stated at cost until significant subsequent events require a change in 40 43 Notes to Consolidated Financial Statements (Continued) valuation. The Company considers the financial condition and operating results of the investee, prices paid in subsequent private offerings of the same or similar securities, the amount that the Company can reasonably expect to realize upon the sale of these securities, and any other factors deemed relevant. Securities for which market quotations are available are valued at the closing price as of the valuation date with an appropriate discount, if restricted. Long-term Investments Long-term investments consists mainly of Russian investments of the First Voucher Fund. These securities are classified as available for sale. The Company believes that there is a significant unrealized value in the assets included in the Voucher Fund's securities portfolio. In accordance with SFAS 115, the securities in the Voucher Fund reflect the cost rather than "fair value" until such time as the breadth and scope of the Russian securities markets develop to certain quantifiable levels. The Company believes that these markets are approaching this point, at which time the "fair value" of securities held by the Voucher Fund would be reflected in the Company's financial statements. The Voucher Fund's assets consist of cash and cash equivalents, securities (both liquid and illiquid), real estate holdings and other miscellaneous assets. The cost of the securities portion of the portfolio on the Company's balance sheet at December 31, 1997, was approximately $16 million. As of January 29, 1998, the value of these securities (based on market quotations if available) was approximately $67 million, which represents an increase of approximately $51 million, since the date of the acquisition. The Company's pre-tax interest in this increase, at 51%, would be approximately $26 million. The cost of the cash and cash equivalents, real estate and miscellaneous assets of the Voucher Fund on the Company's balance sheet at December 31, 1997, was approximately $2 million, $24 million and $3 million, respectively. Currently, the Company recognizes realized gains and losses in its income statement only when Voucher Fund securities are sold. Once the Russian securities market develops to the requisite level, unrealized gains and losses (such as the $51 million described above) would be reflected in long-term investments in the Company's balance sheet with a corresponding after-tax increase or decrease in stockholder's equity for the Company's 51% interest with the remainder recorded as minority interest. The Company will continue to recognize realized gains and losses in income upon the sale of such securities. The Russian securities markets are significantly smaller and less liquid than the securities markets in the United States. The relative lack of liquidity may result in the Voucher Fund selling a portfolio security at a price that does not reflect its underlying value. Accordingly, fair values are not necessarily indicative of the amount that could be realized in a short period of time on large volumes of transactions. In addition, the securities investments in the Voucher Fund may be negatively affected by adverse economic, political and social developments in Russia including changes in government and government policies, taxation, currency instability, interest rates and inflation levels and developments in law and regulations affecting securities issuers and their shareholders and securities markets. As a result of the foregoing, there can be no assurance that the Company will be able to realize the values described above. Valuation of Financial Instruments The Company considers the liquid nature and readily available market quotations when estimating fair value of financial instruments. As stated in the accompanying consolidated balance sheets, the carrying values of the Company's financial instruments approximate fair value, except for the long-term investments of the Voucher Fund, as discussed above. Earnings Per Share In March 1997, the Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share." It is effective for fiscal years ending after December 15, 1997. SFAS 128 requires the replacement of earnings per share ("EPS") with basic EPS. Basic EPS is computed by dividing reported earnings available to stockholders by weighted average shares outstanding not including contingently issuable shares. No dilution for potentially dilutive securities is included. Fully diluted EPS, called diluted EPS under SFAS 128, is still required. Amounts for 1996 and 1995 have been restated to conform to this presentation. The computations for basic earnings per share and diluted earnings per share are as follows:
Earnings Net Income Shares Per Share ------------ -------- ---------- For the year ended 12/31/97 (Dollars and shares in thousands - ----------------------------- except per share amounts) Basic earnings per share calculation ............... $29,166 24,873 $ 1.17 ====== Options ..................... -- 692 Restricted stock ............ -- 65 ------- ------ Diluted earnings per share calculation ............... $29,166 25,630 $ 1.14 ======= ====== ====== For the year ended 12/31/96 - ------------------------------ Basic earnings per share calculation ............... $18,837 24,620 $ 0.77 ====== Options ..................... -- 745 Restricted stock ............ -- 95 ------- ------ Diluted earnings per share calculation ............... $18,837 25,460 $ 0.74 ======= ====== ====== For the year ended 12/31/95 - ------------------------------ Basic earnings per share calculation ............... $22,811 24,407 $ 0.93 ====== Options ..................... -- 750 Restricted stock ............ -- 154 ------- ------ Diluted earnings per share calculation ............... $22,811 25,311 $ 0.90 ======= ====== ======
Foreign Currency Translation In accordance with SFAS 52, "Foreign Currency Translation", the functional currency of the Company's natural resource operations is 41 44 Notes to Consolidated Financial Statements (Continued) the U.S. dollar, as the revenues, costs of capital equipment and financing costs are principally denominated in U.S. dollars. The functional currency of the Company's financial services operations is generally the currency of the country in which those operations are conducted. However, some of those operations are conducted in countries having highly inflationary economies and as a result the functional currency is currently the U.S. dollar. For those entities, the gains and losses which result from remeasuring into the U.S. dollar for reporting purposes are included in the accompanying consolidated statements of income. The net foreign currency losses were $1.7 million in 1997 and $1.3 million in 1996. The net foreign currency amount in 1995 was immaterial. For those entities for which the functional currency is the local currency, the gains and losses which result from translating into the U.S. dollar for reporting purposes are included in the accompanying consolidated balance sheets' stockholders' equity section as a cumulative translation adjustment. Long-Lived Assets The Company periodically reviews its long-lived assets which it continues to hold and use for potential impairment. Those long-lived assets held and used in connection with the Company's natural resource operations are reassessed whenever there is a significant change in the market price of the goods produced, and continuously during capital intensive periods of expansion. Additionally, the building is reassessed for potential impairment when there are significant changes in market rental rates or market values of comparable buildings. The Company assesses the future useful life of these assets whenever events or changes in circumstances indicate that the current useful life has diminished. The Company considers the future undiscounted cash flows of the acquired businesses in assessing the recoverability of these assets. During 1997, the Company experienced declines in the market prices of both gold and timber. At this time it is the Company's intention to continue to hold and use the long-lived assets used in the production of both gold and timber. An impairment analysis was performed consistent with the Company's intentions with no impairment identified. Concentration of Risk The Company performs ongoing evaluations of its subsidiaries and investments and obtains political risk insurance which mitigates its exposure in foreign countries. Note 3-- Mining Inventory Mining inventories consist of the following:
December 31, 1997 1996 ------- ------- (Dollars in Thousands) Gold-in-process ................ $ 1,998 $ 1,658 Materials and supplies ......... 20,034 21,844 ------- ------- $22,032 $23,502 ======= =======
Note 4-- Mining Equipment and Facilities December 31, 1997 1996 ------- -------- (Dollars in Thousands) Mobile mine equipment ................... $70,163 $ 62,177 Crusher ................................. 38,252 22,550 Processing plant and laboratory ......... 18,500 5,040 Leach pads and ponds .................... 26,685 19,318 Building and civil works ................ 13,987 10,813 Office furniture and equipment .......... 2,089 1,798 Motor vehicles .......................... 3,201 2,307 Construction in progress ................ 69 37,937 Other assets ............................ 2,278 2,010 ------- -------- Total cost .............................. 175,224 163,950 Accumulated depreciation ................ (76,060) (56,143) ------- -------- $99,164 $107,807 ======= ========
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:
1997 1996 1995 ------- ------- ------- (Dollars in Thousands) Domestic ......... $51,394 $26,484 $10,824 Foreign .......... 10,416 7,181 31,708 ------- ------- ------- $61,810 $33,665 $42,532 ======= ======= =======
The components of the provision for federal, state and foreign income taxes consist of:
1997 1996 1995 -------- ------- ------- (Dollars in Thousands) Current: Federal .......... $13,328 $ 1,197 $ 260 State ............ 2,188 376 68 Foreign .......... 8,266 (1,091) 18,674 Deferred (Prepaid): Federal .......... 4,536 6,326 4,072 State ............ (2) 2,531 1,438 Foreign .......... (769) 2,209 (7,914) -------- ------- ------- $27,547 $11,548 $16,598 ======== ======= =======
Income taxes, as stated as a percentage of income before provision for federal, state and foreign income taxes, are comprised of the following:
1997 1996 1995 ---------- ---------- ---------- Federal statutory tax rate .......... 35.0% 35.0% 35.0% Increases (decreases) in tax rate resulting from: State income tax (net of effect on federal income tax) ...................... 2.3 5.6 2.3 Foreign income taxes ............... 6.2 (3.6) 2.5 Tax exempt income .................. -- (4.2) -- Other, net ......................... 1.1 1.5 (0.8) ---- ---- ---- Effective tax rate ................. 44.6% 34.3% 39.0% ==== ==== ====
42 45 Notes to Consolidated Financial Statements (Continued) The approximate income tax effect of each type of temporary difference is as follows:
1997 1996 -------- -------- (Dollars in Thousands) Deferred taxes related to foreign mining operations ...................... $ (7,637) $ (9,628) Net operating losses of foreign subsidiaries ........................... 4,600 -- Deferred rent ............................ 499 464 Restricted stock ......................... 774 848 Reserves ................................. 1,041 1,669 Dealer advances .......................... (16,347) (14,244) Venture capital and other investments..... (8,732) (5,206) Other temporary differences, net ......... 1,068 528 -------- -------- (24,734) (25,569) Valuation allowance ...................... (4,600) -- -------- -------- Net deferred tax liability ............... $(29,334) $(25,569) ======== ========
U.S. Federal income taxes have been provided on all foreign earnings except for the amount considered to be permanently invested outside the U.S. which approximates $50,000,000 at December 31, 1997. Note 6-- Stock Plans The Company has a Stock Incentive Plan (the "1997 Plan") to provide incentives to certain employees who have contributed and are expected to contribute materially to the success of the Company and its subsidiaries. An aggregate total of 1,500,000 shares of the Company's common stock may be awarded to participants under the 1997 Plan. Under the 1997 Plan, the Company may grant restricted stock, stock options and other stock based awards. The 1997 Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). The 1997 Plan expires in February 2007. The Company's 1995 Restricted Stock Plan (the "1995 Plan") and 1988 Stock Option Plan (the "1988 Option Plan") were terminated upon the approval of the 1997 Plan by the stockholders of the Company on May 20, 1997. The Company's 1990 Restricted Stock Plan (the "1990 Plan") expired in January 1995. The 1997 Plan, 1995 Plan and the 1990 Plan are collectively referred to as the "Plans." Restricted stock is granted at a price to be determined by the Board of Directors, generally $.10 per share. The following tables summarize restricted stock plan activity for the Plans during 1997.
Unvested Shares ----------------------------------------------------- 1997 Plan 1995 Plan 1990 Plan Total ----------- ----------- ------------- --------- Balance at 12/31/96 .... -- 69,680 259,841 329,521 Awarded ............... 27,875 134,332 -- 162,207 Vested ................ (2,520) (240) (123,682) (126,442) Forfeited ............. -- (8,415) (30,275) (38,690) ------ ------- -------- -------- Balance at 12/31/97 .... 25,355 195,357 105,884 326,596 ====== ======= ======== ========
Vested Shares -------------------------------------------------- 1997 Plan 1995 Plan 1990 Plan Total ----------- ----------- ----------- -------- Balance at 12/31/96 .... -- 10,089 485,658 495,747 Vested ................ 2,520 240 123,682 126,442 ----- ------ ------- ------- Balance at 12/31/97 .... 2,520 10,329 609,340 622,189 ===== ====== ======= =======
The Company awarded 78,137 shares in 1996 and 3,937 shares in 1995 under the 1995 Plan. The Company awarded 123,400 shares in 1995 under the 1990 Plan. The participant's right to sell the awarded stock under the Plans is generally restricted as to 100% of the shares awarded during the first two years following the award, 60% during the third year and 20% less each year thereafter. The Company may repurchase unvested restricted shares at $0.10 per share upon termination of employment. Awards under the Plans are compensatory, and accordingly, the difference between the award price and the market value of the shares under the Plans at the award date, is being amortized on a straight-line basis over a five-year period. Options issuable under the 1997 Plan become exercisable as determined by the Committee not to exceed ten years from the date of grant. Options granted to date vest over five years at an annual rate of 20% on each anniversary date of the date of grant. Prior to the adoption of the 1997 Plan, options were granted under the 1988 Option Plan. As of December 31, 1997, 1,139,625 shares of the Company's common stock remain available for grant under the 1997 Plan. In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan"), which qualifies as an "Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986. An aggregate total of 500,000 shares of common stock have been authorized for issuance under the 1995 Purchase Plan, to be implemented through one or more offerings, each approximately six months in length beginning on the first business day of each January and July. The price at which shares may be purchased during each offering will be the lower of (i) 85% of the closing price of the common stock as reported on the NASDAQ National Market (the "closing price") on the date that the offering commences or (ii) 85% of the closing price of the common stock on the date the offering terminates. In 1997, 1996 and 1995, the Company issued 34,527, 33,433 shares and 18,228 shares under the 1995 Purchase Plan, respectively. The Company records stock compensation in accordance with Accounting Principles Board ("APB") Opinion 25. Had the compensation cost for these plans been determined consistent with SFAS 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been the following pro forma amounts:
1997 1996 1995 ------------ ------------ ------------ Net income: As reported $29,166 $18,837 $22,811 Pro forma $28,327 $18,369 $22,718 Diluted EPS: As reported $ 1.14 $ 0.74 $ 0.90 Pro forma $ 1.11 $ 0.72 $ 0.90
The weighted-average grant-date fair value of options granted during 1997, 1996 and 1995 was approximately $4,651,000, $2,952,000 and $2,528,000, respectively. For purposes of the pro forma disclosure, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 43 46 Notes to Consolidated Financial Statements (Continued)
1997 1996 1995 --------- --------- --------- Volatility 36% 34% 36% Risk-Free interest rate 5.8% 6.6% 5.6% Dividend yield 1.43% 1.71% 1.71% Expected life of options 9 years 9 years 9 years
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:
1997 1996 1995 --------- --------- --------- Volatility 28% 18% 28% Risk-Free interest rate 5.7% 5.8% 5.6% Dividend yield 1.43% 1.71% 1.71% Expected life of options 6 months 6 months 6 months
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The following table summarizes the Option Plans activity for the three years ended December 31, 1997.
Weighted average Number of exercise price shares per share ------------- ----------------- Outstanding at December 31, 1994 1,794,500 $ 7.35 Granted 207,500 $ 27.48 Exercised (25,000) $ 6.03 --------- ------- Outstanding at December 31, 1995 1,977,000 $ 9.30 Granted 268,500 $ 24.88 Exercised (80,000) $ 6.34 --------- ------- Outstanding at December 31, 1996 2,165,500 $ 11.51 Granted 345,000 $ 29.52 Exercised (46,000) $ 9.89 Terminated (26,500) $ 19.24 --------- ------- Outstanding at December 31, 1997 2,438,000 $ 13.60 Exercisable at year end 1,662,800 $ 7.69
1,662,800 of the 2,438,000 options outstanding at December 31, 1997 have exercise prices between $4.1875 and $28.625, with a weighted average exercise price of $7.69 and a weighted average remaining contractual life of 3.8 years. All of these options are exercisable. The remaining 775,200 options have exercise prices between $7.0625 and $29.875, with a weighted average exercise price of $26.26 and a weighted average remaining contractual life of 9 years. Note 7-- Net Capital As a broker-dealer, PFD is subject to the Securities and Exchange Commission's ("SEC") regulations and operating guidelines which, among other things, requires PFD to maintain a specified amount of net capital, as defined, and a ratio of aggregate indebtedness to net capital, as defined, not exceeding 15 to 1. Net capital and the related ratio of aggregate indebtedness to net capital may fluctuate on a daily basis. PFD's net capital, as computed under Rule 15c3-1, was $3,565,383 at December 31, 1997, which exceeded required net capital of $1,134,105 by $2,431,278. The ratio of aggregate indebtedness to net capital at December 31, 1997 was 4.77 to 1. PFD is exempt from the reserve requirements of Rule 15c3-3, since its U.S. broker-dealer transactions are limited to the purchase, sale and redemption of redeemable securities of registered investment companies. All customer funds are promptly transmitted and all securities received in connection with activities as a broker-dealer are promptly delivered. PFD does not otherwise hold funds or securities for, or owe money or securities to, customers. Note 8-- Benefit Plans The Company and its subsidiaries have two defined contribution plans for eligible employees: a retirement benefit plan and a savings and investment plan ("the Benefit Plans") qualified under Section 401 of the Internal Revenue Code. The Company makes contributions to a trustee, on behalf of eligible employees, to fund both the retirement benefit and the savings and investment plans. The Company's expenses under the Benefit Plans were approximately $2,666,000 in 1997, $2,531,000 in 1996 and $1,930,000 in 1995. Both of the Company's qualified Benefit Plans described above cover all full-time employees who have met certain age and length-of-service requirements. Regarding the retirement benefit plan, the Company contributes an amount which would purchase a certain targeted monthly pension benefit at the participant's normal retirement date. In connection with the savings and investment plan, participants can voluntarily contribute up to 10% of their compensation to the plan, and the Company will match this contribution up to 2%. Note 9-- Related Party Transactions Certain officers and/or directors of the Company and its subsidiaries are officers and/or trustees of the Pioneer Family of Mutual Funds and the Company's international mutual funds. Investment management fees earned from the mutual funds were approximately $118,851,000 in 1997, $84,178,000 in 1996 and $60,832,000 in 1995. Underwriting commissions and distribution fees earned from the sales of mutual fund shares were approximately $23,322,000 in 1997, $16,636,000 in 1996 and $8,515,000 in 1995. Shareholder services fees earned from the mutual funds were approximately $28,002,000 in 1997, $25,340,000 in 1996 and $22,447,000 in 1995. Within the Pioneer Family of Mutual Funds, total revenues from Pioneer II were approximately $50,933,000 in 1997, $39,102,000 in 1996 and $32,244,000 in 1995. Certain partners of Hale and Dorr LLP, the Company's legal counsel, are officers and/or directors of the Company and its subsidiaries. Amounts paid to Hale and Dorr LLP consist of legal fees of approximately $635,000 in 1997, $1,189,000 in 1996 and $1,587,000 in 1995. Hale and Dorr LLP is a partner in the law firm Brobeck Hale and Dorr International. The Company paid legal fees in the amount of approximately $76,000 in 1997, $188,000 in 1996 and $1,355,000 in 1995 to Brobeck Hale and Dorr International. 44 47 Notes to Consolidated Financial Statements (Continued) Note 10--Commitments U.S. rental expense amounted to approximately $3,766,000 in 1997, $2,977,000 in 1996 and $3,007,000 in 1995, respectively. Future minimum payments under the leases amount to approximately $4,702,000 in 1998, $4,642,000 in 1999, $4,514,000 in 2000, $4,608,000 in 2001, $1,979,000 in 2002 and $1,490,000 thereafter. These future minimum rental payments include estimated annual operating and tax expenses of approximately $1,973,000. Rental expense for the Polish Mutual Fund operations amounted to approximately $956,000, $963,000 and $863,000 in 1997, 1996 and 1995, respectively. The lease is open-ended and can be terminated by either the Company or the lessor upon 90 days notice. The Company is contingently liable to the Investment Company Institute Mutual Insurance Company for unanticipated expenses or losses in connection with its mutual fund operations in an amount not to exceed $500,000. Two thirds of this amount is secured by an irrevocable standby letter of credit with a bank. The Company is committed to additional capital contributions of $1.2 million to Pioneer Poland U.S. L.P. and $1.2 million to Pioneer Poland U.K. L.P. These contributions are due upon call by Management as prior contributions become 80% invested. At December 31, 1997, the Company was committed to additional capital contributions of $1.5 million to Pioneer Ventures Limited Partnership II, a U.S. venture capital fund. The Company acts as a passive, non-bank trustee for retirement plan accounts. IRS regulations and operating guidelines allow a passive, non-bank trustee to accept fiduciary accounts only if the trustee's net worth (determined as of the end of the most recent taxable year) exceeds the greater of (1) $100,000 or (2) two percent of the net assets of fiduciary accounts. At December 31, 1997, the Company's net worth of $183.7 million was 2.9% of the net assets of fiduciary accounts. Note 11-- Notes Payable Notes payable of the Company consist of the following:
December 31, 1997 1996 ------------ ------------ (Dollars in Thousands) Revolving Credit Agreement ................... $ 96,000 $ 87,500 Senior note payable to a commercial lender, principal payable on August 15, 2004, interest payable at 7.95%. ........... 20,000 -- Preferred shares financing related to the Russian investment operations, principal payable in three annual installments of $2,000,000 through 1998, interest payable at 5% .............................. 2,000 4,000 Small Business Administration ("SBA") financing, notes payable to a bank, interest payable semi-annually at rates ranging from 6.12% to 9.8%, principal due in 1998 through 2003 ................... 4,950 4,950 Note payable to a bank, interest payable quarterly at the three month LIBOR rate plus 6%, principal due in eight quarterly installments through January, 1999, secured by lease rental payments and proceeds from insurance policies ........... 1,897 -- Note payable to a bank, guaranteed by the Swedish Exports Credits Guarantee Board, interest payable at 5.77%, secured by equipment ....................... -- 812 Notes payable to a bank, guaranteed by the Company, principal payable in semi-annual installments, of $214,000 through November 30, 1999, no interest payable, secured by equipment .............. 858 1,286 Note payable to a bank, guaranteed by the Swedish Exports Credits Guarantee Board, principal payable in semi-annual installments of $1,415,000 through January 31, 2002, interest payable at 6.42%, secured by equipment ................ 12,732 14,147 Note payable to a supplier, principal payable in quarterly installments of $336,000 through April 15, 2001, interest payable at 7.85%, secured by equipment ............................... 4,699 6,042 December 31, 1997 1996 ------------ ------------ (Dollars in Thousands) Note payable to a supplier, principal and interest payable in quarterly installments of $102,000 through April 15, 2001, interest payable at 7.85%, secured by equipment ............................... 1,239 1,535 Note payable to a supplier, principal payable in quarterly installments of $285,000 through May 30, 2001, interest payable at 8.00%, secured by equipment ............................... 3,988 5,128 Note payable to a supplier, principal payable in quarterly installments of $338,000 through December 15, 2001, interest payable at 8.25%, secured by equipment .................................. 5,237 6,422 Note payable to a supplier, principal payable in semiannual installments of $637,000 through April 15, 2003, interest payable at 8.30%, secured by equipment .................................. 5,795 -- Note payable to a bank, guaranteed by OPIC, principal payable in twelve equal semi-annual installments of $1,583,000 commencing March 15, 1998, interest payable at 6.37% ........................... 19,000 19,000 Project financing, guaranteed by OPIC, payable in semiannual installments of $620,000 through December 15, 2003, interest payable at 7.20% .................. 7,440 8,680 -------- -------- 185,835 159,502 Less: Current portion ........................ (17,411) (10,002) -------- -------- $168,424 $149,500 ======== ========
45 48 Notes to Consolidated Financial Statements (Continued) In June 1996, the Company entered into an agreement with a syndicate of commercial banks for a senior credit facility (the "Credit Facility"). Under the Credit Facility, the Company may borrow up to $60 million (the "B-share Revolver") to finance dealer advances relating to sales of back-end load shares of the Company's domestic mutual funds. See Note 15 below for further discussion on dealer advances. The B-share Revolver is subject to annual renewal by the Company and the commercial banks. In the event the B-share Revolver is not renewed at maturity it will automatically convert into a five-year term loan. Advances under the B-share Revolver bear interest, at the Company's option, at (a) the higher of the bank's base lending rate or the federal funds rate plus 0.50% or (b) LIBOR plus 1.25%. The Credit Facility also provides that the Company may borrow up to $80 million for general corporate purposes (the "Corporate Revolver"). The Corporate Revolver is payable in full on June 11, 2001. Advances under the Corporate Revolver bear interest, at the Company's option, at (a) the higher of the bank's base lending rate or the federal funds rate plus 0.50% or (b) LIBOR plus the applicable margin tied to the Company's financial performance, of either 0.75%, 1.25%, 1.50% or 1.75%. The Credit Facility provides that the Company must pay additional interest at the rate of 0.375% per annum of the unused portion of the facility and an annual arrangement fee of $35,000. The commitment fees were approximately $0.7 million. At December 31, 1997, the Company had borrowed $55 million under the Corporate Revolver and $41 million under the B-share Revolver. For the years ended December 31, 1997, 1996 and 1995, the weighted average interest rate on the borrowings under the Credit Facility and lines of credit outstanding was 8.0%, 7.3% and 7.1%, respectively. The Credit Facility contains restrictions that limit, among other things, encumbrances on the assets of the Company's domestic mutual fund subsidiaries and certain mergers and sales of assets. Additionally, the Credit Facility requires that the Company meet certain financial covenants including covenants that require the Company to maintain certain minimum ratios with respect to debt to cash flow and interest payments to cash flow and a minimum tangible net worth, all as defined in the Credit Facility. As of December 31, 1997, the Company was in compliance with all applicable covenants of the Credit Facility. Under the Credit Facility, the Company is required to maintain interest rate protection agreements covering at least 60% of the outstanding indebtedness under the B-share Revolver. As of December 31, 1997, the Company entered into six five-year interest rate swap agreements with a member of the Company's banking syndicate which has effectively fixed the interest rate on notional amounts totaling $100 million. Under these agreements, the Company will pay the bank a weighted average fixed rate of 6.76%, plus the applicable margin (ranging from 0.75% to 1.75%), on the notional principal. The bank will pay the Company interest on the notional principal at the current variable rate stated under the B-share Revolver. The Company has incurred approximately $976,000 and $499,000 of interest expense on these swap agreements during 1997 and 1996, respectively. The fair value of these agreements was $2,639,000, at December 31, 1997, which represents the estimated amount the Company would be obligated to pay to terminate the agreements. In August 1997, the Company entered into an agreement (the "Note Agreement") with a commercial lender pursuant to which the Company issued to the lender Senior Notes in the aggregate principal amount of $20 million. The Senior Notes, which bear interest at the rate of 7.95% per annum, have a maturity of seven years. The restrictions and financial covenants under the Note Agreement are substantially similar to the restrictions and financial covenants under the Credit Facility. The Company used the proceeds of this financing to reduce the amount outstanding under the Corporate Revolver. In March 1996, TGL executed a loan agreement with Enskilda, a division of Skandinaviska Enskilda Banken, pursuant to which Enskilda agreed to provide a direct loan of SEK 94.5 million (approximately $14.2 million) bearing interest at a fixed rate of 6.42% to finance the gyratory crusher and related equipment procured from Svedala Crushing and Screening AB. This loan is guaranteed by the Swedish Export Credits Board. As of December 31, 1997, TGL has drawn down SEK 93.8 million (or approximately $14.1 million) of which $1.4 million had been repaid. In April 1996, TGL obtained credit approval from Caterpillar Financial Services Corporation ("Caterpillar"), pursuant to which Caterpillar agreed to provide a revolving credit facility of up to $21 million, subsequently increased to $23 million in September 1997, to finance the purchase of replacement mining equipment. The revolving credit facility is subject to renewal in May 1998. In the event the credit facility is not renewed at maturity, most of the outstanding loan balances (approximately $20 million) will continue to be repaid over a five year term. At December 31, 1997, Caterpillar had issued disbursements, at TGL's request, for $26.3 million of such facility bearing interest at fixed rates ranging from 7.85% to 8.30%, of which $5.4 million had been repaid. In October 1996, TGL and the Company executed definitive loan agreements with the Overseas Private Investment Corporation ("OPIC") pursuant to which OPIC agreed to guarantee financing up to $19 million with respect to the Phase III expansion. Disbursement under this facility occurred in November 1996. The underlying note is payable in twelve equal semiannual installments from March 15, 1998, through September 15, 2003, and bears a fixed interest rate of 6.37%. In addition, a spread of 2.65% on outstanding borrowings is payable to OPIC. As a condition to such OPIC financing, the Company was required to execute a Project Completion Agreement pursuant to which the Company would advance funds, as necessary (to the extent of dividends received during the construction stage of the Phase III Expansion), to permit TGL to fulfill all of its financial obligations, including cost overruns related to project development. Under the Project Completion Agreement, the Company is also obligated to advance the lesser of $9 million and any deficit with respect to a defined cash flow ratio in the event of a payment default. The foregoing obligations of the Company continue to exist until such time as TGL satisfies a production test and certain financial and project development benchmarks. In addition, the Company has guaranteed that if the percentage of gold proceeds that TGL must convert to Ghanaian cedis increases above a certain threshold, and, as a result of regulatory or other restrictions, TGL is unable to convert such proceeds to satisfy its debt service obligations to OPIC, the Company shall cover up to $10 million of such obligations. The Company insured 90% of this obligation in January 1997. In addition to third party financing facilities, the Company provided $4.25 million in bridge financing to TGL in 1997 to satisfy TGL's short term liquidity needs. 46 49 Notes to Consolidated Financial Statements (Continued) Forest-Starma completed a $9.3 million project financing, guaranteed by OPIC, in July 1996, of which $7.4 million was outstanding at December 31, 1997. The underlying note is payable in twelve remaining equal semiannual installments through December 15, 2003, and bears interest at a fixed rate of 7.20%. In addition, a guarantee fee of 2.75% on outstanding borrowings is payable to OPIC prior to project completion, increasing to 5.125% after project completion when the Company ceases to be an obligor in the transaction. As a condition to OPIC's guarantee, the Company was required to execute a Project Completion Agreement pursuant to which the Company would advance funds to Forest-Starma, as necessary, to permit Forest-Starma to fulfill all of its financial obligations, including cost overruns related to project development, until such time as Forest-Starma satisfies a production test and certain financial and project development benchmarks. Maturities of notes payable at December 31, 1997, for each of the next five years and thereafter are as follows (dollars in thousands):
1998 ..................................... $ 17,411 1999 ..................................... 14,326 2000 ..................................... 13,470 2001 ..................................... 66,663 2002 ..................................... 7,555 Thereafter ............................... 66,410 -------- $185,835 ========
Note 12-- Minority Interest The Company's minority interest liability includes the interests of the minority equity holders of the Company's consolidated entities. The liability for each entity is recorded based upon the net book value of that entity at the balance sheet date, except for those instances in which agreements could result in the Company redeeming those interests at amounts greater than their share of the net book value. In those instances, adjustments are made to the liability to reflect the minority equity holders' economic interests under those agreements. As of December 31, 1997 and 1996, the Company's minority interest liability consisted of the following:
1997 1996 ------- ------- Gold mining operations $ 7,958 $ 7,514 Russian investment operations 26,091 24,495 Polish brokerage operations 13 194 Poland Fund--venture capital 24,269 11,443 Pioneer Ventures Limited Partnerships--venture capital 28,346 18,011 ------- ------- Totals $86,677 $61,657 ======= =======
Note 13-- Major Customers During the year ended December 31, 1997, gold sales aggregated $89.5 million. During 1997, gold shipments from TGL in Ghana to two unaffiliated European refiners accounted for $43.9 million and $41 million, respectively, representing 95% of such total sales. During the year ended December 31, 1996, gold sales aggregated $78.3 million. During 1996, gold shipments from TGL in Ghana to two unaffiliated European refiners accounted for $41.2 million and $37.1 million, respectively, representing 100% of such total sales. During the year ended December 31, 1995, gold sales aggregated $90.2 million. During 1995, gold shipments from TGL in Ghana to two unaffiliated European refiners accounted for $51.0 million and $39.2 million, respectively, representing 100% of such total sales. Note 14-- Acquisitions Russian Investment Operations On April 11, 1995, the Company completed its acquisition of the First Voucher Fund and related financial entities. The Company financed the acquisition through the use of its lines of credit in the amount of approximately $14 million and the issuance of preferred share financing in the amount of $6 million. Results of operations are included in the accompanying consolidated statements of income commencing April 11, 1995. This transaction was accounted for under the purchase method. Pro forma results of operations have not been presented since the amounts are not material to the consolidated financial statements. Note 15-- Dealer Advances Certain of the Pioneer Family of Mutual Funds maintain a multi-class share structure, whereby the participating funds offer both the traditional front-end load shares (Class A shares) and back-end load shares (Class B and Class C shares). Back-end load shares do not require the investor to pay any sales charge unless there is a redemption before the expiration of the minimum holding period which ranges from three to six years in the case of Class B shares and is one year in the case of Class C shares. However, the Company pays upfront sales commissions (dealer advances) to broker-dealers ranging from 2% to 4% of the sales transaction amount on Class B shares and 1% on Class C shares. The participating Funds pay the Company distribution fees of 0.75% and service fees of 0.25%, per annum of their net assets invested in Class B and Class C shares, subject to annual renewal by the participating Fund's Board of Trustees. In addition, the Company is paid a contingent deferred sales charge (CDSC) on B and C shares redeemed within the minimum holding period. The CDSC is paid based on declining rates ranging from 2% to 4% on the purchases of Class B shares and 1% for Class C shares. The Company capitalizes and amortizes Class B dealer advances for financial statement purposes over periods which range from three to six years depending on the participating Fund. The Company capitalizes and amortizes Class C share dealer advances for financial statement purposes over a twelve month period. The Company deducts the dealer advances in full for tax purposes in the year such advances are paid. Distribution fees received by the Company from participating Funds are recorded in income as earned. CDSC received by the Company from redeeming shareholders reduce unamortized dealer advances directly. In 1997, 1996 and 1995, the Company paid B-share dealer advances in the amount of $16.3 million, $23.2 million and $14.9 million, respectively. Note 16-- Financial Information by Business Segment The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" in these consolidated financial statements. SFAS 131 requires companies to present segment information using the management approach. The management approach is based on the way that management organizes the segments within a Company for making operating decisions and assessing performance. The Company's operating segments are organized around services and products provided, as well as geographic regions. The segment information for 1996 and 1995 has been restated to conform to these requirements. The intersegment transactions are for management services and the secondment of employees. These transactions are generally priced on a cost or cost plus basis. 47 50 Notes to Consolidated Financial Statements (Continued) Note 16-- Financial Information by Business Segment (Continued) Total revenues and income (loss) by business segment and geographic region, excluding intersegment transactions (dollars in thousands):
Financial Services ------------------------------------- Domestic Investment Czech Management Russia Poland Republic -------------- ------------ ----------- ------------ Year ended December 31, 1997: Gross revenues and sales ................................... $ 176,900 $ 54,708 $14,542 $ 1,046 ========== ======== ======= ======== Intersegment eliminations .................................. $ (8,427) $ (188) $ -- $ -- ========== ======== ======= ======== Net revenues and sales ..................................... $ 168,473 $ 54,520 $14,542 $ 1,046 ========== ======== ======= ======== Income (loss) before income taxes and minority interest .... $ 52,146 $ 12,811 $ 2,409 $ (1,406) ========== ======== ======= ======== Taxes ...................................................... $ 20,086 $ 5,411 $ 1,114 $ (162) ========== ======== ======= ======== Minority interest .......................................... $ -- $ 2,086 $ (52) $ -- ========== ======== ======= ======== Net income (loss) .......................................... $ 32,060 $ 5,314 $ 1,347 $ (1,244) ========== ======== ======= ======== Depreciation and amortization .............................. $ 17,358 $ 1,673 $ 625 $ 280 ========== ======== ======= ======== Interest expense ........................................... $ 2,885 $ 7,902 $ 6 $ -- ========== ======== ======= ======== Capital expenditures ....................................... $ 6,986 $ 3,749 $ 322 $ -- ========== ======== ======= ======== Gross identifiable assets at December 31, 1997 ............. $ 263,073 $135,809 $16,308 $ 237 ========== ======== ======= ======== Intersegment eliminations .................................. $ (127,705) $ (3,877) $ -- $ -- ========== ======== ======= ======== Net identifiable assets at December 31, 1997 ............... $ 135,368 $131,932 $16,308 $ 237 ========== ======== ======= ======== Year ended December 31, 1996: Gross revenues and sales ................................... $ 130,854 $ 21,147 $10,374 $ 245 ========== ======== ======= ======== Intersegment eliminations .................................. $ (4,474) $ -- $ -- $ -- ========== ======== ======= ======== Net revenues and sales ..................................... $ 126,380 $ 21,147 $10,374 $ 245 ========== ======== ======= ======== Income (loss) before income taxes and minority interest .... $ 27,683 $ 2,655 $ (885) $ (3,172) ========== ======== ======= ======== Taxes ...................................................... $ 10,246 $ (1,806) $ (72) $ (272) ========== ======== ======= ======== Minority interest .......................................... $ -- $ 3,125 $ (83) $ -- ========== ======== ======= ======== Net income (loss) .......................................... $ 17,437 $ 1,336 $ (730) $ (2,900) ========== ======== ======= ======== Depreciation and amortization .............................. $ 13,312 $ 577 $ -- $ -- ========== ======== ======= ======== Interest expense ........................................... $ 2,328 $ 6,518 $ -- $ -- ========== ======== ======= ======== Capital expenditures ....................................... $ 3,599 $ 10,716 $ 213 $ 631 ========== ======== ======= ======== Gross identifiable assets at December 31, 1996 ............. $ 211,661 $ 92,353 $ 9,507 $ 313 ========== ======== ======= ======== Intersegment eliminations .................................. $ (96,894) $ (3,092) $ -- $ -- ========== ======== ======= ======== Net identifiable assets at December 31, 1996 ............... $ 114,767 $ 89,261 $ 9,507 $ 313 ========== ======== ======= ======== Year ended December 31, 1995: Gross revenues and sales ................................... $ 95,375 $ 5,762 $ 8,649 $ -- ========== ======== ======= ======== Intersegment eliminations .................................. $ (3,144) $ -- $ -- $ -- ========== ======== ======= ======== Net revenues and sales ..................................... $ 92,231 $ 5,762 $ 8,649 $ -- ========== ======== ======= ======== Income (loss) before income taxes and minority interest .... $ 15,065 $ 5,020 $ 798 $ -- ========== ======== ======= ======== Taxes ...................................................... $ 6,213 $ 2,156 $ 592 $ -- ========== ======== ======= ======== Minority interest .......................................... $ -- $ 1,449 $ -- $ -- ========== ======== ======= ======== Net income (loss) .......................................... $ 8,852 $ 1,415 $ 206 $ -- ========== ======== ======= ======== Depreciation and amortization .............................. $ 8,597 $ 218 $ -- $ -- ========== ======== ======= ======== Interest expense ........................................... $ 341 $ -- $ 3 $ -- ========== ======== ======= ======== Capital expenditures ....................................... $ 5,676 $ 8,000 $ 646 $ -- ========== ======== ======= ======== Gross identifiable assets at December 31, 1995 ............. $ 151,826 $ 48,957 $ 5,432 $ -- ========== ======== ======= ======== Intersegment eliminations .................................. $ (66,594) $ -- $ -- $ -- ========== ======== ======= ======== Net identifiable assets at December 31, 1995 ............... $ 85,232 $ 48,957 $ 5,432 $ -- ========== ======== ======= ========
Venture Capital -------------------------- Cent. & East. Domestic Europe ----------- -------------- Year ended December 31, 1997: Gross revenues and sales ................................... $ 1,828 $ 603 ======= ======== Intersegment eliminations .................................. $ -- $ (81) ======= ======== Net revenues and sales ..................................... $ 1,828 $ 522 ======= ======== Income (loss) before income taxes and minority interest .... $14,678 $ (2,454) ======= ======== Taxes ...................................................... $ 4,348 $ 297 ======= ======== Minority interest .......................................... $ 4,005 $ (1,386) ======= ======== Net income (loss) .......................................... $ 6,325 $ (1,365) ======= ======== Depreciation and amortization .............................. $ 176 $ 214 ======= ======== Interest expense ........................................... $ 402 $ -- ======= ======== Capital expenditures ....................................... $ 38 $ 34 ======= ======== Gross identifiable assets at December 31, 1997 ............. $77,101 $ 28,767 ======= ======== Intersegment eliminations .................................. $ (7) $ -- ======= ======== Net identifiable assets at December 31, 1997 ............... $77,094 $ 28,767 ======= ======== Year ended December 31, 1996: Gross revenues and sales ................................... $ 1,989 $ 594 ======= ======== Intersegment eliminations .................................. $ -- $ -- ======= ======== Net revenues and sales ..................................... $ 1,989 $ 594 ======= ======== Income (loss) before income taxes and minority interest .... $ 9,272 $ (3,689) ======= ======== Taxes ...................................................... $ 2,964 $ (90) ======= ======== Minority interest .......................................... $ 1,804 $ (2,210) ======= ======== Net income (loss) .......................................... $ 4,504 $ (1,389) ======= ======== Depreciation and amortization .............................. $ 124 $ -- ======= ======== Interest expense ........................................... $ 403 $ -- ======= ======== Capital expenditures ....................................... $ 14 $ 24 ======= ======== Gross identifiable assets at December 31, 1996 ............. $58,454 $ 15,603 ======= ======== Intersegment eliminations .................................. $ (7) $ -- ======= ======== Net identifiable assets at December 31, 1996 ............... $58,447 $ 15,603 ======= ======== Year ended December 31, 1995: Gross revenues and sales ................................... $ 1,016 $ 817 ======= ======== Intersegment eliminations .................................. $ -- $ -- ======= ======== Net revenues and sales ..................................... $ 1,016 $ 817 ======= ======== Income (loss) before income taxes and minority interest .... $ 3,732 $ (850) ======= ======== Taxes ...................................................... $ 1,581 $ (250) ======= ======== Minority interest .......................................... $ (133) $ -- ======= ======== Net income (loss) .......................................... $ 2,284 $ (600) ======= ======== Depreciation and amortization .............................. $ 109 $ -- ======= ======== Interest expense ........................................... $ 402 $ -- ======= ======== Capital expenditures ....................................... $ 49 $ 14 ======= ======== Gross identifiable assets at December 31, 1995 ............. $39,562 $ 16,869 ======= ======== Intersegment eliminations .................................. $ (1) $ -- ======= ======== Net identifiable assets at December 31, 1995 ............... $39,561 $ 16,869 ======= ========
48 51 Notes to Consolidated Financial Statements (Continued)
-Subtotal- Real Estate Worldwide Gold Services Financial Services Mining Timber Other Total - ------------- -------------------- ------------ ------------ ------------ ------------- $ 543 $ 250,170 $ 89,487 $ 11,879 $ 9,667 $ 361,203 ======== ========== ======== ======== ========= ========== $ -- $ (8,696) $ -- $ -- $ (9,667) $ (18,363) ======== ========== ======== ======== ========= ========== $ 543 $ 241,474 $ 89,487 $ 11,879 $ -- $ 342,840 ======== ========== ======== ======== ========= ========== $ (2,939) $ 75,245 $ (2,818) $ (6,996) $ (3,621) $ 61,810 ======== ========== ======== ======== ========= ========== $ (1,035) $ 30,059 $ (426) $ (270) $ (1,816) $ 27,547 ======== ========== ======== ======== ========= ========== $ -- $ 4,653 $ 444 $ -- $ -- $ 5,097 ======== ========== ======== ======== ========= ========== $ (1,904) $ 40,533 $ (2,836) $ (6,726) $ (1,805) $ 29,166 ======== ========== ======== ======== ========= ========== $ 55 $ 20,381 $ 23,260 $ 2,871 $ 399 $ 46,911 ======== ========== ======== ======== ========= ========== $ -- $ 11,195 $ 2,766 $ 3,045 $ 2,065 $ 19,071 ======== ========== ======== ======== ========= ========== $ 344 $ 11,473 $ 11,520 $ 5,206 $ 177 $ 28,376 ======== ========== ======== ======== ========= ========== $ 7,173 $ 528,468 $152,866 $ 50,998 $ 24,199 $ 756,531 ======== ========== ======== ======== ========= ========== $ (1,847) $ (133,436) $ -- $ -- $ (19,302) $ (152,738) ======== ========== ======== ======== ========= ========== $ 5,326 $ 395,032 $152,866 $ 50,998 $ 4,897 $ 603,793 ======== ========== ======== ======== ========= ========== $ 104 $ 165,307 $ 78,279 $ -- $ 2,679 $ 246,265 ======== ========== ======== ======== ========= ========== $ -- $ (4,474) $ -- $ -- $ (2,679) $ (7,153) ======== ========== ======== ======== ========= ========== $ 104 $ 160,833 $ 78,279 $ -- $ -- $ 239,112 ======== ========== ======== ======== ========= ========== $ (463) $ 31,401 $ 4,737 $ (729) $ (1,744) $ 33,665 ======== ========== ======== ======== ========= ========== $ (186) $ 10,784 $ 1,519 $ (246) $ (509) $ 11,548 ======== ========== ======== ======== ========= ========== $ -- $ 2,636 $ 644 $ -- $ -- $ 3,280 ======== ========== ======== ======== ========= ========== $ (277) $ 17,981 $ 2,574 $ (483) $ (1,235) $ 18,837 ======== ========== ======== ======== ========= ========== $ 2 $ 14,015 $ 16,371 $ 116 $ 671 $ 31,173 ======== ========== ======== ======== ========= ========== $ -- $ 9,249 $ 137 $ -- $ -- $ 9,386 ======== ========== ======== ======== ========= ========== $ 14 $ 15,211 $ 74,789 $ 2,466 $ 199 $ 92,665 ======== ========== ======== ======== ========= ========== $ 2,692 $ 390,583 $149,613 $ 43,367 $ 18,209 $ 601,772 ======== ========== ======== ======== ========= ========== $ -- $ (99,993) $ -- $ -- $ (11,067) $ (111,060) ======== ========== ======== ======== ========= ========== $ 2,692 $ 290,590 $149,613 $ 43,367 $ 7,142 $ 490,712 ======== ========== ======== ======== ========= ========== $ -- $ 111,619 $ 90,242 $ -- $ -- $ 201,861 ======== ========== ======== ======== ========= ========== $ -- $ (3,144) $ -- $ -- $ -- $ (3,144) ======== ========== ======== ======== ========= ========== $ -- $ 108,475 $ 90,242 $ -- $ -- $ 198,717 ======== ========== ======== ======== ========= ========== $ -- $ 23,765 $ 24,365 $ -- $ (5,598) $ 42,532 ======== ========== ======== ======== ========= ========== $ -- $ 10,292 $ 8,521 $ -- $ (2,215) $ 16,598 ======== ========== ======== ======== ========= ========== $ -- $ 1,316 $ 1,807 $ -- $ -- $ 3,123 ======== ========== ======== ======== ========= ========== $ -- $ 12,157 $ 14,037 $ -- $ (3,383) $ 22,811 ======== ========== ======== ======== ========= ========== $ -- $ 8,924 $ 15,744 $ -- $ 328 $ 24,996 ======== ========== ======== ======== ========= ========== $ -- $ 746 $ 278 $ -- $ -- $ 1,024 ======== ========== ======== ======== ========= ========== $ -- $ 14,385 $ 15,601 $ 7,001 $ 116 $ 37,103 ======== ========== ======== ======== ========= ========== $ -- $ 262,646 $ 82,782 $ 33,212 $ 12,703 $ 391,343 ======== ========== ======== ======== ========= ========== $ -- $ (66,595) $ -- $ -- $ (5,679) $ (72,274) ======== ========== ======== ======== ========= ========== $ -- $ 196,051 $ 82,782 $ 33,212 $ 7,024 $ 319,069 ======== ========== ======== ======== ========= ==========
49 52 Information Relating to Shares The Company's common stock is quoted on the NASDAQ National Market under the symbol PIOG. At March 1, 1998, the Company had approximately 5,000 shareholders. The price range of the common stock and the dividends paid to shareholders during each quarter of the last two years were as follows: Price Range of Common Stock*
1997 1996 ------------------- ------------------- High Low High Low --------- --------- --------- --------- January--March ............ $26-3/4 $22-7/8 $30-1/2 $26-3/8 April--June ............... 26-1/2 23 28-3/4 26-1/4 July--September ........... 32-1/2 22-3/4 27 25-3/4 October--December ......... 33-3/8 27-1/8 26-3/4 21-3/4
* 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, 1996 ............. March 11, 1996 $ .10 June 3, 1996 .............. June 12, 1996 .10 September 3, 1996.......... September 10, 1996 .10 December 2, 1996 .......... December 10, 1996 .10 March 10, 1997 ............ March 17, 1997 .10 June 2, 1997 .............. June 9, 1997 .10 September 2, 1997.......... September 10, 1997 .10 December 1, 1997 .......... December 9, 1997 .10 March 2, 1998 ............. March 10, 1998 .10
50 53 [INSIDE BACK COVER] THE PIONEER GROUP, INC. AND SUBSIDIARIES Directors and Executive Officers* Philip L. Carret, Director Emeritus. Trustee Emeritus of certain of the Pioneer Family of Mutual Funds; Founder Chairman of Carret & Company. John F. Cogan, Jr., Chairman of the Board, Director and President. Chairman of the Board, President and Trustee of each of the Pioneer Family of Mutual Funds; President and Director of Pioneer Omega, Inc., Pioneer First Russia, Inc., Pioneer International Corporation and Pioneer Metals and Technology, Inc.; Director of Pioneer Real Estate Advisors, Inc., Pioneer Capital Corporation, Pioneer Management (Ireland) Limited, "Pioneer Investments," Pioneering Services Corporation and Pioneer Forest, Inc.; Chairman of the Board and Director of Pioneering Management Corporation, Pioneer Funds Distributor, Inc., Closed Joint Stock Company "Pioneer Metals International," Closed Joint-Stock Company "Forest-Starma," Teberebie Goldfields Limited and Pioneer Goldfields Limited; Chairman of the Supervisory Board of Pioneer Fonds Marketing GmbH, Pioneer First Polish Investment Fund Joint Stock Company S.A. and Pioneer Czech Investment Company, A.S.; and Partner, Hale and Dorr LLP. Robert L. Butler, Director and Executive Vice President. President and Director of Pioneer Funds Distributor, Inc.; Director of Pioneering Management Corporation, Pioneering Services Corporation, Pioneer Real Estate Advisors, Inc., Pioneer International Corporation and Pioneer Management (Ireland) Limited; Vice Chairman of the Supervisory Board of Pioneer Fonds Marketing GmbH; and Member of the Supervisory Board of Pioneer First Polish Investment Fund Joint Stock Company S.A. and Pioneer Czech Investment Company, A.S. Maurice Engleman, Director. Chairman and CEO of Professional Equity Corporation and Marketing Two, Inc., and Principal, Engleman & Associates. Alan J. Strassman, Director. Partner and Chairman of the Board of Martingale Asset Management; Treasurer and Member of the Board of Trustees of the Museum of Fine Arts, Boston and a member of the Board of WGBH (public television and radio) Jaskaran S. Teja, Director. Senior Vice President of Pioneer International Corporation; and Director of "Pioneer Investments," Pioneer Goldfields Limited and Closed Joint Stock Company "Pioneer Metals International." David D. Tripple, Director and Executive Vice President. Executive Vice President and Trustee of each of the Pioneer Family of Mutual Funds; President and Director of Pioneering Management Corporation; Director of Pioneer Capital Corporation, Pioneer Real Estate Advisors, Inc., Pioneer International Corporation, Pioneer Management (Ireland) Limited, "Pioneer Investments," Pioneer Funds Distributor, Inc., and Pioneer First Russia, Inc.; Member of Supervisory Board of Pioneer First Polish Investment Fund Joint Stock Company S.A. and Pioneer Czech Investment Company A.S.; and Director and Vice President of Pioneer Omega, Inc. John H. Valentine, Director. Director of Pioneer Capital Corporation; Director of Entrepreneurial Management of Health Policy Institute; Director of Visualization Technology, Inc.; Overseer of Hurricane Island/Outward Bound School and Trustee of Thompson Island Outward Bound Education Center; and Vice-Chairman of the Board of Boston Medical Center. William H. Keough, Senior Vice President, Chief Financial Officer and Treasurer; Treasurer of each of the Pioneer Family of Mutual Funds; an Treasurer of Pioneering Management Corporation, Pioneering Services Corporation, Pioneer Real Estate Advisors, Inc., Pioneer Capital Corporation, Pioneer SBIC Corp., Pioneer Funds Distributor, Inc., Pioneer International Corporation, Pioneer Metals and Technology, Inc., Pioneer First Russia, Inc. and Pioneer Omega, Inc. Timothy T. Frost, Vice President. Director and Vice President of Pioneer Omega, Inc. and Pioneer First Russia, Inc.; Director of "Pioneer Investments;" Senior Vice President of Pioneer International Corporation; and Vice President of Pioneer Real Estate Advisors, Inc. Lucien Girard, III, Vice President. Managing Director and Chief Executive of Pioneer Goldfields Limited; Managing Director of Teberebie Goldfields Limited; and Director of Pioneer Metals and Technology, Inc. Stephen G. Kasnet, Vice President. President and Director of Pioneer Real Estate Advisors, Inc.; Trustee and Vice President of Pioneer Real Estate Shares; and President of Pioneer Real Estate Advisors Poland, s.p. Z.O.O. John F. Lawlor, Vice President. Vice President of Pioneering Management Corporation; Director of Pioneer Goldfields Limited, Teberebie Goldfields Limited, Pioneer Management (Ireland) Limited, Closed Joint Stock Company "Pioneer Metals International" Pioneer Forest, Inc. and Closed Joint-Stock Company "Forest-Starma;" and Vice President and Director of Pioneer Metals and Technology, Inc. Alicja K. Malecka, Vice President. President of Pioneer First Polish Investment Fund Joint Stock Company S.A. and Pioneer Investment Poland Ltd.; Senior Vice President of Pioneer International Corporation; Member of Supervisory Board of Pioneer Czech Investment Company, A.S.; Director of "Pioneer Investments" and Pioneer Polski Dom Maklerski S.A.; and Vice President of Pioneer Real Estate Advisors, Inc. Frank M. Polestra, Vice President. President and Director of Pioneer Capital Corporation and Pioneer SBIC Corp. William H. Smith, Jr., Vice President. President and Director of Pioneering Services Corporation; Director and Vice President of Pioneer International Corporation; Director of Pioneer Management (Ireland) Limited; and Member of Supervisory Board of Pioneer Czech Investment Company, A.S. Joseph P. Barri, Secretary. Secretary of each of the Pioneer Family of Mutual Funds and the Company's subsidiaries; and Partner, Hale and Dorr LLP. Robert P. Nault, General Counsel and Assistant Secretary. Assistant Secretary of each of the Pioneer Family of Mutual Funds and the Company's subsidiaries. * As defined pursuant to Section 16 of the Securities Exchange Act of 1934. 60 State Street, Boston Massachusetts 02109 EX-23 7 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23 Consent of Independent Public Accountant As independent public accountants, we hereby consent to the incorporation of our report, incorporated by reference into this form 10-K, into the Company's previously filed registration statement nos. 33-61932, 33-59185, 33-59183 and 333-31847. Arthur Andersen LLP March 30, 1998 EX-27.97 8 FDS FOR FISCAL YEAR 1997
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1.00000 67,233 38,341 56,792 0 27,929 202,252 245,662 (86,483) 603,793 135,671 168,424 0 0 2,522 181,165 603,793 0 342,840 0 296,489 (21,757) 0 11,395 56,713 27,547 0 0 0 0 29,166 1.170 1.140
EX-27.95 9 FDS FOR FISCAL YEAR 1995
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1.00000 27,809 7,630 31,880 0 15,605 91,219 137,660 (53,189) 319,069 98,538 0 2,483 0 0 147,860 319,069 0 198,717 0 158,908 (624) 0 1,024 39,409 16,598 0 0 0 0 22,811 0.930 0.900
EX-27.96 10 FDS FOR FISCAL YEAR 1996
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 24,908 140,720 227,903 (69,436) 490,712 91,513 149,500 0 0 2,501 159,972 490,712 0 239,112 0 212,692 (7,283) 0 3,318 30,385 11,548 0 0 0 0 18,837 .77 .74
-----END PRIVACY-ENHANCED MESSAGE-----