1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997MARCH 31, 1998
COMMISSION FILE NO. 0-8841
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THE PIONEER GROUP, INC.
(exact name of registrant as specified in its charter)
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DELAWARE 13-5657669
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
617-742-7825
(Registrant's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changes since last
report)
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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 twelve 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 __
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As of September 30, 1997,March 31, 1998, there were 25,197,81025,389,915 shares of the Registrant's Common
Stock, $.10 par value per share, issued and outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PIONEER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
MARCH 31, DECEMBER 31,
1996
SEPTEMBER 30,1998 1997
--------- ------------
1997
-------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, at cost which approximates fair
value.................................value..................................................... $ 51,84139,875 $ 30,81358,802
Restricted cash.................................................................................. 3,491 1,664cash............................................. 8,353 8,431
Investment in marketable securities, at fair value............................................... 47,053 27,542value.......... 36,990 38,341
Receivables:
From securities brokers and dealers for sales of mutual
fund shares.......................... 12,232 9,010shares............................................ 67,680 11,752
From Pioneer Family of Mutual Funds.......................................................... 16,687 13,978Funds..................... 19,366 17,428
For securities sold.......................................................................... 32,251 2,600sold..................................... 9,159 11,466
For gold shipments........................................................................... 3,048 2,686
Other........................................................................................ 18,862 14,912shipments...................................... 2,935 3,451
Other................................................... 9,537 12,695
Mining inventory................................................................................. 22,705 23,502inventory............................................ 21,087 22,032
Timber inventory............................................ 9,674 5,897
Other current assets............................................................................. 12,138 12,607assets........................................ 11,750 11,957
-------- --------
Total current assets..................................................................... 220,308 139,314assets................................ 236,406 202,252
-------- --------
NONCURRENT ASSETS:
Mining operations:
Mining equipment and facilities (net of accumulated
depreciation of $70,016$81,240 in 19971998 and $56,143$76,060 in 1996)............................................................................ 97,070 107,8071997)... 95,425 99,164
Deferred mining development costs (net of accumulated
amortization of $15,344$16,891 in 19971998 and $13,455$16,177 in 1996)............................................................................ 18,391 10,6751997)... 16,956 17,521
Cost of acquisition in excess of net assets (net of
accumulated amortization of $11,379$12,787 in 19971998 and $9,268$12,083
in 1996)............................................................................ 20,920 22,9451997)................................................... 19,513 20,216
Long-term venture capital investments, at fair value (cost
$69,936$73,748 in 19971998 and $46,651$71,754 in 1996).......................................................................................... 87,384 59,8721997)...................... 96,836 95,382
Long-term investments, at cost................................................................... 15,977 15,996cost.............................. 16,014 15,671
Timber operations:
Timber equipment and facilities (net of accumulated
depreciation of $933$1,672 in 1998 and $1,260 in 1997)............ 20,645 11,852..... 17,411 17,898
Deferred timber development costs (net of accumulated
amortization of $925$1,909 in 1998 and $1,611 in 1997).......... 19,449 25,713
Timber inventory............................................................................. 6,245 1,406..... 21,210 21,264
Building (net of accumulated amortization of $347$784 in 1998
and $598 in 1997)....................................... 22,675 22,340......................................... 24,561 25,087
Furniture, equipment, and leasehold improvements (net of
accumulated depreciation and amortization of $8,021$10,256 in
19971998 and $13,293$8,565 in 1996)............................................ 14,811 14,3681997).................................. 18,220 17,030
Loans to bank customers.......................................................................... 7,045 6,632customers..................................... 11,025 9,152
Dealer advances (net of accumulated amortization of $14,895$20,072
in 19971998 and $8,613$17,366 in 1996).......... 39,623 34,2931997).............................. 44,800 41,871
Other noncurrent assets.......................................................................... 22,833 19,999assets..................................... 23,074 21,285
-------- --------
Total noncurrent assets.................................................................. 393,068 353,898assets............................. 405,045 401,541
-------- --------
$ 613,376 $493,212$641,451 $603,793
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to funds for shares sold.................................................................sold............................ $ 12,25967,665 $ 8,99611,766
Accounts payable................................................................................. 28,174 25,633payable............................................ 14,933 18,724
Accrued expenses................................................................................. 40,553 24,751expenses............................................ 24,140 29,760
Customer deposits................................................................................ 30,218 15,328
Payable for securities purchased................................................................. 27,441 2,040deposits........................................... 18,207 23,584
Brokerage liabilities....................................... 12,452 14,702
Short-term borrowings-banking activities......................................................... 6,054 5,573borrowings -- banking activities................. 7,512 12,083
Accrued income taxes............................................................................. 7,891 1,690taxes........................................ 8,818 7,641
Current portion of notes payable................................................................. 16,284 10,002payable............................ 17,082 17,411
-------- --------
Total current liabilities................................................................ 168,874 94,013liabilities........................... 170,809 135,671
-------- --------
NONCURRENT LIABILITIES:
Notes payable, net of current portion............................................................ 152,453 149,500portion....................... 168,390 168,424
Deferred income taxes, net....................................................................... 28,848 25,569net.................................. 29,467 29,334
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Total noncurrent liabilities............................................................. 181,301 175,069liabilities........................ 197,857 197,758
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Total liabilities........................................................................ 350,175 269,082liabilities................................... 368,666 333,429
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Minority interest................................................................................ 85,144 61,657interest........................................... 85,680 86,677
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10$10 par value; authorized 60,000,000
shares; issued 25,199,36525,392,170 shares in 19971998 and 25,013,76325,219,567
shares in 1996............................................................... 2,520 2,5011997......................................... 2,539 2,522
Paid-in capital.............................................................................. 14,764 11,450capital......................................... 20,600 15,912
Retained earnings............................................................................ 166,718 152,457
Cumulative translation adjustment............................................................ (1,076) --earnings....................................... 174,366 171,558
Treasury stock at cost, 1,5552,255 shares in 19971998 and 9102,670
shares in 1996.......................... (26) (16)1997......................................... (48) (65)
Cumulative translation adjustment....................... (1,521) (1,277)
-------- --------
182,900 166,392195,936 188,650
Less -- Deferred cost of restricted common stock
issued...................................... (4,843) (3,919)issued................................................. (8,831) (4,963)
-------- --------
Total stockholders' equity............................................................... 178,057 162,473equity.......................... 187,105 183,687
-------- --------
$ 613,376 $493,212$641,451 $603,793
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The Company's Annual Report on Form 10-K should be read in conjunction with
these financial statements.
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THE PIONEER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------MARCH 31,
--------------------------
1998 1997
1996 1997 1996
----------- ----------- ----------- --------------- ----
Revenues and sales:
Investment management fees.......fees............................. $ 32,99433,631 $ 22,471 $ 88,511 $ 62,74027,095
Underwriting commissions and distribution fees.............. 5,952 4,231 17,186 12,417fees......... 6,665 5,768
Shareholder services fees........ 7,357 6,379 20,719 18,756
Incomefees.............................. 7,596 6,664
Revenues from brokerage activities..................... 15,670 339 26,112 1,502
Securities and interest income --781 4,735
Revenues from banking activities............. 3,891 4,854 8,943 11,367activities....................... 1,304 2,444
Trustee fees and other income.... 3,870 3,270 14,711 10,389
---------- ---------- ---------- ----------income.......................... 5,562 5,938
----------- -----------
Revenues from financial services businesses..................... 69,734 41,544 176,182 117,171businesses............ 55,539 52,644
Gold sales....................... 23,451 20,956 61,911 58,715sales............................................. 23,373 17,467
Timber sales..................... 4,667sales........................................... 284 --
8,934 --
---------- ---------- ---------- --------------------- -----------
Total revenues and sales.... 97,852 62,500 247,027 175,886
---------- ---------- ---------- ----------sales.......................... 79,196 70,111
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Costs and expenses:
Management, distribution, shareholder service and
administrative expenses........ 48,814 33,187 135,127 92,817expenses............................... 44,629 42,549
Interest expense -- banking activities..................... 1,633 1,671 5,242 3,912activities................. 1,644 1,360
Gold mining operating costs and expenses....................... 23,514 18,791 63,430 52,944expenses............... 24,251 17,414
Timber operating costs and expenses....................... 5,325 200 10,426 578
---------- ---------- ---------- ----------expenses.................... 1,986 433
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Total costs and expenses.... 79,286 53,849 214,225 150,251
---------- ---------- ---------- ----------expenses.......................... 72,510 61,756
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Other (income) expense:
Unrealized and realized gains on venture capital and
marketable securities investments, net.... (6,417) (613) (22,726) (975)net................ (6,138) (8,085)
Interest expense................. 3,434 996 7,961 2,154expense....................................... 3,836 1,614
Other, net....................... 278 100 537 945
---------- ---------- ---------- ----------net............................................. 150 163
----------- -----------
Total other (income) expense................... (2,705) 483 (14,228) 2,124
---------- ---------- ---------- ----------expense...................... (2,152) (6,308)
----------- -----------
Income before provision for federal, state and foreign
income taxes and minority interest................... 21,271 8,168 47,030 23,511
---------- ---------- ---------- ----------interest........................ 8,838 14,663
----------- -----------
Provision for federal, state and foreign income taxes................ 8,430 2,826 20,233 8,634
---------- ---------- ---------- ----------taxes....... 3,425 6,644
----------- -----------
Income before minority interest....... 12,841 5,342 26,797 14,877
---------- ---------- ---------- ----------interest............................. 5,413 8,019
----------- -----------
Minority interest..................... 3,319 251 4,991 1,152
---------- ---------- ---------- ----------interest........................................... 66 710
----------- -----------
Net income............................income.................................................. $ 9,5225,347 $ 5,0917,309
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Basic earnings per share.................................... $ 21,8060.21 $ 13,725
========== ========== ========== ==========
Earnings0.30
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Diluted earnings per share....................share.................................. $ 0.370.21 $ 0.20 $ 0.85 $ 0.54
========== ========== ========== ==========0.29
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Dividends per share...................share......................................... $ 0.10 $ 0.10
$ 0.30 $ 0.30
========== ========== ========== ==========
Weighted average common and common
equivalent=========== ===========
Basic shares outstanding....... 25,688,000 25,470,000 25,589,000 25,462,000
========== ========== ========== ==========outstanding.................................... 24,890,000 24,703,000
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Diluted shares outstanding.................................. 25,772,000 25,457,000
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The Company's Annual Report on Form 10-K should be read in conjunction with
these financial statements.
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THE PIONEER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINETHREE MONTHS
ENDED
SEPTEMBER 30,
---------------------MARCH 31,
--------------------
1998 1997
1996
-------- ------------ ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................income.............................................. $ 21,8065,347 $ 13,7257,309
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................................... 29,779 20,975amortization...................... 12,258 9,054
Unrealized and realized gains on venture capital
and marketable securities, net........................................................ (22,726) (975)
Provision onnet.................... (6,138) (8,486)
(Equity in earnings of) other investments.......................................... 1,241 161investments.......... (354) (16)
Restricted stock plan expense........................................... 1,427 1,114expense...................... 707 456
Deferred income taxes................................................... 3,279 11,602taxes.............................. 133 2,707
Minority interest....................................................... 4,991 1,152interest.................................. 66 710
Changes in operating assets and liabilities:
Investments in marketable securities, net............................... (16,503) 2,854net.......... 1,837 (3,515)
Receivable from securities brokers and dealers for
sales of mutual fund shares................................................................. (3,222) 3,707shares....................... (55,928) (1,135)
Receivables for securities sold......................................... (29,651) --sold.................... 2,307 (11,309)
Receivables for gold shipments.......................................... (362) 1,604shipments..................... 516 2,205
Receivables from Pioneer Family of Mutual Funds and
other............... (6,659) (20,998)other............................................. 1,168 (321)
Mining inventory........................................................ 797 (7,282)inventory................................... 945 (2,137)
Timber inventory................................... (3,777) (3,551)
Other current assets.................................................... (76) (5,573)assets............................... (31) 3,049
Other noncurrent assets................................................. (2,181) (2,541)assets............................ (1,188) (434)
Payable to funds for shares sold........................................ 3,263 (3,665)sold................... 55,899 1,138
Accrued expenses and accounts payable................................... 18,343 34,554
Payable for securities purchased........................................ 25,401 --payable.............. (9,411) 1,773
Brokerage liabilities.............................. (2,250) 14,886
Accrued income taxes.................................................... 6,316 (744)taxes............................... 1,249 2,255
-------- --------
Total adjustments................................................... 13,457 35,945adjustments.............................. (1,992) 7,329
-------- --------
Net cash provided by operating activities........................... 35,263 49,670activities...... 3,355 14,638
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mining equipment and facilities.................................. (3,162) (53,577)facilities............. (1,441) (5,395)
Deferred mining development costs............................................ (9,605) (1,602)costs....................... (149) (635)
Additions to furniture, equipment and leasehold
improvements................. (4,504) (3,825)
Building..................................................................... (682) (9,891)improvements........................................... (2,856) (1,625)
Building................................................ 340 (592)
Long-term venture capital investments........................................ (23,900) (8,665)investments................... (3,253) (4,789)
Proceeds from sale of long-term venture capital
investments.................. 4,766 4,588investments............................................ 4,998 57
Loans to banks and customers................................................. (413) --customers............................ (1,873) 4,073
Deferred timber development costs............................................ 6,094 (896)costs....................... (244) 1,342
Timber equipment and facilities.............................................. (8,793) (6,015)
Timber inventory............................................................. (4,839) (412)facilities......................... 75 (1,554)
Other investments............................................................ (4,041) (4,529)investments....................................... (459) (479)
Proceeds from sales of other investments.....................................investments................ -- 1,732 --
Cost of acquisition in excess of net assets acquired......................... (87) (662)acquired.... -- (16)
Long-term investments........................................................ (3,562) (2,193)investments................................... (370) (1,934)
Proceeds from sale of long-term investments.................................. 12,779 6,176investments............. 1,204 4,897
-------- --------
Net cash used in investing activities................................... (38,217) (81,503)activities.............. (4,028) (4,918)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................................... (7,545) (7,485)
Distributions to minority interest holders................................... -- (354)paid.......................................... (2,539) (2,513)
Distributions to limited partners of venture capital
subsidiary.............. (94) (23)
Exercise of stock options.................................................... 467 254
Restricted stock plan award.................................................. 10 84
Employee stock purchase plan................................................. 380 377
Dealer advances.............................................................. (11,612) (19,901)
Customer deposits............................................................ 14,890 --
Short term borrowings-banking activities, net................................ 481 --subsidiary............................................. (68) (64)
Amounts raised by venture capital investment
partnerships.................... 19,597 7,218
Borrowings................................................................... 37,625 145,206partnerships........................................... 281 3,997
Exercise of stock options............................... 57 229
Restricted stock plan award............................. 17 10
Dealer advances......................................... (5,635) (3,495)
Customer deposits....................................... (5,377) 2,506
Short term borrowings-banking activities, net........... (4,571) (2,687)
Revolving credit agreement borrowings, net.............. 4,000 4,500
Borrowings of notes payable............................. -- 1,500
Repayments of notes payable.................................................. (28,390) (80,534)payable............................. (4,363) (1,675)
Reclassification of restricted cash.......................................... (1,827) --cash..................... 78 (227)
-------- --------
Net cash (used in) provided by financing
activities............................... 23,982 44,842activities........................................ (18,120) 2,081
-------- --------
Net increase in cash and cash equivalents........................................ 21,028 13,009
Cash and cash equivalents at beginning of period.................................EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS.......................................... (134) (82)
NET INCREASE IN CASH AND CASH EQUIVALENTS................... (18,927) 11,719
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 58,802 30,813 27,809
-------- --------
Cash and cash equivalents at end of period.......................................CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 51,84139,875 $ 40,81842,532
======== ========
The Company's Annual Report on Form 10-K should be read in conjunction with
these financial statements.
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THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997MARCH 31, 1998
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 operationventure 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 3334 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 CommissionCorporation ("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 during the first
quarter of 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 97% of
the outstanding shares of Closed Joint-Stock Company also
participates in several natural resource development ventures in Russia,
including a"Forest-Starma", which
harvests timber production project in the Russian Far East inand which the
Company has a 95% direct interest and a majority-owned gold mining project also
in the Russian Far East.commenced commercial
production on January 1, 1997.
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THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1998
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles. The Company has not changed any of its principal
accounting policies from those stated in the 5
6
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
Annual Report on Form 10-K for the
year ended December 31, 1996.1997. The footnotes to the financial statements reported
in the 19961997 Annual Report on Form 10-K are incorporated herein by reference,
except to the extent that any such footnote is updated by the following:
Certain reclassifications have been made to the accompanying 19961997
consolidated financial statements to conform with the 19971998 presentation.
Income taxes paid were $10,874,000$1,385,000 and $515,000$2,224,000 for the ninethree months ended
September 30,March 31, 1998, and March 31, 1997, and September 30, 1996, respectively. In addition, interest paid was
$10,231,000$3,857,000 for the ninethree months ended September 30, 1997,March 31, 1998, and $4,631,000$2,894,000 for the
ninethree months ended September 30, 1996.March 31, 1997. Included in these interest paid amounts was
$1,353,000$1,100,000 for the ninethree months ended September 30,March 31, 1997, that was capitalized
related to TGL's mining Phase III expansion
operations and $2,307,000 for the nine months ended September 30, 1996, that was
capitalized related to the development of the Company's building in progress and
Russian timber operations.
The Company believes that there is a significant unrealized value in the
assets included in the Voucher Fund's securities portfolio. In accordance with
Generally AcceptedStatement of Financial Accounting Principles (FASStandards ("SFAS") 115 -- Accounting"Accounting for Certain
Investments in Debt and Equity Securities)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 shouldwould be reflected
inon the Company's financial statements.balance sheet.
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 September 30, 1997,March 31, 1998, was approximately $16 million. As of October 31,
1997,April 23, 1998,
the value of these securities (based on market quotations if available) was
approximately $104$80 million, which represents an increase of approximately $88 million.$64
million, since the date of acquisition. The Company's pre-tax interest in this
increase, at 51%, would be approximately $45$33 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 September 30, 1997,March 31, 1998, was approximately $3$2 million, $23
million and $6$2 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 $88$64 million described above) would be reflected in long termlong-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. As a result, a relatively
small number of issuers (approximately 15) currently account for approximately
90% of all trading on the Russian Trading System. 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.
In April 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". The new standard requires that entities
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7
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30,MARCH 31, 1998
expense costs of start-up activities as those costs are incurred. The term
start-up includes pre-operating, pre-opening and organization activities. The
Company has capitalized certain pre-operating costs in connection with its
natural resource operations, and has certain capitalized organizational costs
associated with its emerging markets financial services operations.
The statement must be adopted by the first quarter of 1999. At adoption,
the Company must record a cumulative effect of a change in accounting principle
and write-off all remaining unamortized start-up costs. At this time, the
Company has not completed its analysis of the unamortized capitalized start-up
costs. The Company expects that the charge associated with the adoption of this
statement will be material to the Company's results of operations.
NOTE 3 -- EARNINGS PER SHARE
The Company adopted SFAS 128, "Earnings Per Share," during 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 1997 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 PER
INCOME SHARES SHARE
------ ------ --------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
For the three months ended 3/31/98
- ----------------------------------
Basic earnings per share calculation.............. $5,347 24,890 $0.21
=====
Options........................................... -- 745
Restricted stock.................................. -- 137
------ ------
Diluted earnings per share calculation............ $5,347 25,772 $0.21
====== ====== =====
For the three months ended 3/31/97
- ----------------------------------
Basic earnings per share calculation.............. $7,309 24,703 $0.30
=====
Options........................................... -- 685
Restricted stock.................................. -- 69
------ ------
Diluted earnings per share calculation............ $7,309 25,457 $0.29
====== ====== =====
7
8
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1998
NOTE 34 -- COMPREHENSIVE INCOME
The Company adopted SFAS 130. "Reporting Comprehensive Income" in the first
quarter of 1998. SFAS 130 establishes standards for the reporting of
comprehensive income and its components. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. The
Company's foreign currency translation adjustments, which are excluded from net
income, are included in comprehensive income. The following table reports
comprehensive income for the three months ended March 31, 1998 and 1997.
THREE MONTHS
ENDED
MARCH 31,
----------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Net income............................................... $5,347 $7,309
------ ------
Other comprehensive (expense), net of tax:
Foreign currency translation adjustments............... (159) (99)
------ ------
Other comprehensive (expense)............................ (159) (99)
------ ------
Comprehensive income..................................... $5,188 $7,210
====== ======
NOTE 5 -- MINING INVENTORY
Mining inventories consist of the following:
SEPTEMBER 30,MARCH 31, DECEMBER 31,
1998 1997
1996
---------------------- ------------
(DOLLARS IN THOUSANDS)
Gold-in-process.....................................Gold-in-process........................................ $ 2,4741,921 $ 1,6581,998
Materials and supplies.............................. 20,231 21,844supplies................................. 19,166 20,034
------- -------
$22,705 $ 23,502$21,087 $22,032
======= =======
NOTE 46 -- MINING EQUIPMENT AND FACILITIES
SEPTEMBER 30,MARCH 31, DECEMBER 31,
1998 1997
1996
---------------------- ------------
(DOLLARS IN THOUSANDS)
Mobile mine equipment............................... $ 63,76770,888 $ 62,17770,163
Crusher............................................. 49,866 22,55050,060 50,015
Processing plant and laboratory..................... 5,149 5,0406,566 6,737
Leach pads and ponds................................ 25,775 19,31827,568 26,685
Building and civil works............................ 12,657 10,81313,969 13,987
Office furniture and equipment...................... 1,951 1,7981,862 2,089
Motor vehicles...................................... 3,220 2,3073,343 3,201
Construction in progress............................ 2,374 37,937117 69
Other assets........................................ 2,327 2,010
-------- --------
167,086 163,950
Less: accumulated depreciation................ (70,016) (56,143)2,292 2,278
-------- --------
Total mining equipment..............................cost.......................................... $176,665 $175,224
Accumulated depreciation............................ (81,240) (76,060)
-------- --------
$ 97,070 $107,80795,425 $ 99,164
======== ========
NOTE 57 -- INCOME TAXES
The Company follows the accounting and disclosure rules specified by Statement of Financial Accounting Standards ("SFAS
No. 109")109 "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the expected future tax
8
9
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1998
consequences of events that have been included in the financial statements or
tax returns. The amounts of deferred tax assets or liabilities are based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. Deferred
tax assets consist principally ofThe net deferred interest on loans to Forest-Starma
(the Company's Russian timber venture), non-qualified pension expense, and
deferred rent expense. Deferred tax liabilities include
principally deferred foreign income taxes, dealer advances and cumulative
unrealized gains related to the Company's venture capital investment portfolio.
NOTE 68 -- STOCK PLANS
The Company records stock compensation in accordance with APBAccounting
Principles Board ("APB") Opinion 25. 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 7
8
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
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 the first ninethree months of 1997.1998.
UNVESTED SHARES
------------------------------------------------------------------------------------------------------
1997 PLAN 1995 PLAN 1990 PLAN TOTAL
---------- ---------- ---------- ----------------- --------- --------- -----
Balance at 12/31/96...........97............ 25,355 192,760 105,884 323,999
Awarded................... 166,048 -- 69,680 259,841 329,521
Awarded.................. 25,355 132,090 -- 157,445
Vested...................166,048
Vested.................... -- (240) (123,682) (123,922)
Forfeited................(27,752) (58,820) (86,572)
Forfeited................. -- (7,480) (30,095) (37,575)
------(1,282) -- (1,282)
------- -------- --------------- ------- -------
Balance at 9/30/97............ 25,355 194,050 106,064 325,469
======3/31/98............. 191,403 163,726 47,064 402,193
======= ======== =============== ======= =======
VESTED SHARES
------------------------------------------------------------------------------------------------------
1997 PLAN 1995 PLAN 1990 PLAN TOTAL
---------- ---------- ---------- ----------------- --------- --------- -----
Balance at 12/31/96............ -- 10,089 485,658 495,74797............ 2,520 12,926 609,340 624,786
Vested.................... -- 240 123,682 123,922
-------27,752 58,820 86,572
----- ------ --------------- -------
Balance at 9/30/97............. -- 10,329 609,340 619,669
=======3/31/98............. 2,520 40,678 668,160 711,358
===== ====== =============== =======
The Company awarded 27,875 shares in 1997 under the 1997 Plan. The Company
awarded 134,332 shares in 1997 and 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 $.10$0.10 per
share upon termination of employment. Awards under the Plans are compensatory,
and accordingly, the difference between the award price and the market value of
the shares under the Plans at the award date, less the applicable tax benefit,
is being amortized on a straight-
line basis over a five-year period, prior to shares awarded in 1998. Shares
awarded in 1998 are being amortized on a straight-line basis over a five-yearfour-year
period.
Under the 1997 Plan, the Company may grant to key employees, consultants
and advisors, options to purchase the Company's common stock. Both incentive
stock options intended to qualify under Section 422A of the Internal Revenue
Code of 1986 and non-statutory options not intended to qualify for incentive
stock option treatment ("non-statutory options") may be granted under the 1997
Plan. Unless the 1997 Plan is earlier terminated, no option may be granted after
February 3, 2007. The option price per share is determined by the Committee, but
(i) in the case of incentive stock options, may not be less than 100% of the
fair market value of such shares on the date of option grant, and (ii) in the
case of non-statutory options, may not be less than 90% of the fair market value
on the date of option grant.9
10
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1998
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 the grant. Prior to the adoption of the 1997 Plan, options were granted
under the 1988 Option Plan. 8
9
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30,As of March 31, 1998, 961,077 shares of the
Company's common stock remain available for grant under the 1997 Plan.
The following table summarizes all stock optionthe Option Plans activity since December 31,
1994.1995.
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$24.88
Exercised..................................... (80,000) $ 6.34
--------- ------
Outstanding at December 31, 1996................... 2,165,500 $11.50$11.51
Granted....................................... 17,500 22.88
Forfeited..................................... (26,500) 19.24345,000 $29.52
Exercised..................................... (46,000) 9.87$ 9.89
Terminated......................................... (26,500) $19.24
--------- ------
Outstanding at September 30, 1997.................. 2,110,500 $11.54December 31, 1997................... 2,438,000 $13.60
Granted....................................... 12,500 $27.12
Exercised..................................... (8,000) $ 7.06
--------- ------
Outstanding at March 31, 1998...................... 2,442,500 $13.66
========= ======
Exercisable at September 30, 1997.................. 1,453,100March 31, 1998...................... 1,669,300 $ 7.057.70
========= ======
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 19961997 and 1995,1996 the
Company issued 33,433 shares34,527 and 18,22833,433 shares under the 1995 Purchase Plan,
respectively.
Through September 30, 1997, the Company issued 16,845 shares under
the 1995 plan in 1997.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS No. 128") "Earnings Per Share." It is
effective for fiscal years ending after December 15, 1997. SFAS No. 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. No dilution for potentially dilutive securities is
included. Fully diluted EPS, called diluted EPS under SFAS No. 128, is still
required. The Company does not expect the adoption of SFAS No. 128 to have a
material effect on previously reported earnings per share amounts.
NOTE 79 -- NET CAPITAL
As a broker-dealer, Pioneer Funds Distributor, Inc. ("PFD"),PFD is subject to the Securities and Exchange
Commission's ("SEC") regulations and operating guidelines which, among other
things, requirerequires 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 $3,809,613$7,864,187 at September 30, 1997,
which exceeded required net capital of $1,111,810 by $2,697,803. The ratio of
aggregate indebtedness to net capital at September 30, 1997, was 4.38 to 1.March 31, 1998.
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-
9
10
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
dealerbroker-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 benefit
plans for eligible employees: a retirement benefit plan and a savings and
investment plan ("the Benefit Plans") qualified under section 401 of the
Internal Revenue Code. The Company makes contributions to a trustee, on behalf
of eligible employees, to fund both the retirement benefit and the savings and
investment plans. The Company's expenses under the Benefit Plans were $2,297,000
for the nine months ended September 30, 1997, and $1,858,000 for the nine months
ended September 30, 1996.
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 $86,442,000 for the nine months ended September 30,
1997, and $59,215,000 for the nine months ended September 30, 1996. Underwriting
commissions and distribution fees earned from the sales of mutual funds shares
were approximately $17,186,000 for the nine months ended September 30, 1997, and
$12,417,000 for the nine months ended September 30, 1996, respectively.
Shareholder services fees earned from the mutual funds were approximately
$20,719,000 for the nine months ended September 30, 1997, and $18,756,000 for
the nine months ended September 30, 1996.
Within the Pioneer mutual funds, total revenues from Pioneer II were
approximately $37,812,000 for the nine months ended September 30, 1997, and
$23,847,000 for the nine months ended September 30, 1996.
Certain partners of Hale and Dorr, the Company's legal counsel, are
officers and/or directors of the Company and its subsidiaries. Amounts paid to
Hale and Dorr for legal services were $506,000 for the nine months ended
September 30, 1997, and $1,171,000 for the nine months ended September 30, 1996.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
U.S. rental expense was approximately $2,694,000 for the nine months ended
September 30, 1997, and $2,207,000 for the nine months ended September 30, 1996.
Future minimum payments under the leases amount to approximately $949,000 for
the last three months of 1997, $4,038,000 in 1998, $4,177,000 in 1999,
$4,049,000 in 2000, $4,143,000 in 2001, $1,306,000 in 2002 and $1,061,000
thereafter. These future minimum payments include estimated annual operating and
tax expenses of approximately $419,000 in the last three months of 1997, and
$1,740,000 thereafter.
The Company is contingently liable to the Investment Company Institute
Mutual Insurance Company for unanticipated expenses or losses in an amount not
to exceed $500,000. Two thirds of this amount is secured by an irrevocable
standby letter of credit with a bank.
At September 30, 1997, the Company was 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 September 30, 1997, the Company was
10
11
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
committed to additional capital contributions of $1.7 million to Pioneer
Ventures Limited Partnership II, a U.S. venture capital fund.MARCH 31, 1998
NOTE 1110 -- NOTES PAYABLE
Notes payable of the Company consistsconsist of the following:
SEPTEMBER 30,MARCH 31, DECEMBER 31,
1998 1997
1996
------------- ---------------------- ------------
(DOLLARS IN THOUSANDS)
Revolving Credit Agreement........................................Agreement.................................. $100,000 $ 82,500 $ 87,50096,000
Senior note payable to a commercial lender, principal
payable on August 1,15, 2004, interest payable at 7.95%............................ 20,000 20,000
Preferred shares financing related to the Russian investment
operations, principal payable in three annual installments of
$2,000,000 throughApril 1998, interest
payable at 5%.............................................................. 2,000 4,0002,000
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...............2003...................................................... 4,950 4,950
Note payable to a bank, guaranteed by the Swedish Exports Credits
Guarantee Board, interest payable at 5.77%, secured by
equipment....................................................... -- 812
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................... 2,225 --policies........................................ 1,569 1,897
Notes payable to a bank, guaranteed by the Company,
principal payable in semi-annual installments, of $214,000
through November 30, 1999, no interest payable, secured by
equipment............. 1,072 1,286equipment................................................. 858 858
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.....................................equipment........... 11,317 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.......................... 5,035 6,042equipment.................... 4,363 4,699
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................. 1,316 1,535equipment..... 1,161 1,239
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.................................. 4,273 5,128equipment.................... 3,703 3,988
Note payable to a supplier, principal payable in quarterly
installments of $338,000 through SeptemberDecember 15, 2001,
interest payable at 8.25%, secured by equipment.......................... 5,574 6,422equipment........... 4,899 5,237
Note payable to a supplier, principal payable in semi-annual
installments of $637,000 through April 15, 2003, interest
payable at 8.30%, secured by equipment.................... 5,795 5,795
Note payable to a bank, guaranteed by OPIC, principal
payable in twelve equal semi-annual installments of
$1,583,000 commencing
Marchthrough September 15, 1998,2003, interest payable at
a fixed rate of 6.37%............................................................ 17,417 19,000 19,000
11
12
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
Project financing, guaranteed by OPIC, payable in
semi-annual installments of $620,000 through December 15,
2003, interest payable at a fixed rate of 7.20%................................ 8,060 8,680
--------- ---------
168,737 159,502........................... 7,440 7,440
-------- --------
185,472 185,835
Less: Current portion............................................. (16,284) (10,002)
--------- ---------
$ 152,453 $ 149,500
========= =========portion....................................... (17,082) (17,411)
-------- --------
$168,390 $168,424
======== ========
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
11
12
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1998
Company's domestic mutual funds. See Note 14 below for further discussion
on dealer advances. The B-share Revolver is subject to annual renewal by the
Company and the commercial banks. In the event the B-share Revolver is not
renewed at maturity it will automatically convert into a five-year term loan.
Advances under the B-share Revolver bear interest, at the Company's option, at
(a) the higher of the bank's base lending rate or the federal funds rate plus
0.50% or (b) LIBOR plus 1.25%. The Credit Facility also provides that the
Company may borrow up to $80 million for general corporate purposes (the
"Corporate Revolver"). The Corporate Revolver is payable in full on June 11,
2001. AdvancesAt March 31, 1998, the Company had borrowed $57.5 million
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 .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
September 30, 1997, the Company had borrowed $36$42.5 million under the B-share Revolver and $46.5 million under the Corporate Revolver. For the nine months
ended September 30, 1997, and September 30, 1996, the weighted average interest
rate on the borrowings under the Credit Facility and lines of credit outstanding
was 8.0% 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 September 30, 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 September 30, 1997,March 31, 1998, the Company entered into six
five-year interest rate swap agreements with a member of the Company's banking
groupsyndicate 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
.75%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 $812,000$346,000 and $292,000
of interest expense on these swap agreementagreements at September 30, 1997.March 31, 1998 and March 31,
1997, respectively. The fair value of these agreements was approximately $2,101,000,$2,769,000, at September 30, 1997,March
31, 1998, which amount represents the estimated amount the Company would be obligated
to pay the
commercial banks 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 ata the rate of 7.95% per annum, have a maturity of
seven
12
13
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997 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.
InFor the three months ended 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 finance31, 1998, and March 31, 1997 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 September 30, 1997, TGL had 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, a wholly owned subsidiary of Caterpillar Inc.
(collectively, "Caterpillar"), pursuant to which Caterpillar agreed, subject to
the fulfillment of certain conditions, to provide a revolving credit facility of
up to $21 million, subsequently increased to $23 million, to finance the
purchase of Caterpillar and other mining equipment. The revolving facility is
subject to renewal in May 1998. In the event the credit facility is not renewed
at maturity, outstanding loan balances will continue to be repaid over a five
year term. At September 30, 1997, Caterpillar had issued net disbursements, at
TGL's request, for $16.2 million of such facility bearing interest at fixed
rates ranging from 7.85% to 8.25%.
In October 1996, TGL and the Company executed definitive loan agreements
with OPIC pursuant to which OPIC agreed to provide financing 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 fixedweighted
average interest rate of 6.37%. In addition, a spread of 2.65% on outstandingthe 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 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 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, to satisfy TGL's short term liquidity needs, the
Company provided $4.25 million in bridge financing in the first nine months of
1997.
Forest-Starma completed a $9.3 million project financing, guaranteed by
OPIC, in July 1996, of which $8.1 million was outstanding at September 30, 1997.
The underlying note is payable in thirteen remaining equal 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
OPIC's guarantee, the Company was required to execute a Project Completion
Agreement pursuant to which the Company would advance funds to Forest-Starma as
necessary, to permit Forest-Starma to fulfill all of its financial obligations,
including cost overruns related to project development, until such time as
Forest-Starma satisfies a production test and certain financial and project
development benchmarks. By the end of 1997, $1.9 million of principal will be
repaid on this third party financing leaving a $7.4 million outstanding balance.
13
14
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
During the second half of 1996, Forest-Starma applied for $6.5 million in
additional OPIC financing for an expansion planned in 1997. These funds will
offset, in part, the subordinated debt provided by the Company for the 1997
expansion.
In December 1996, Pioneer Real Estate Advisors, Inc. ("PREA") entered into
an agreement with a bank providing for a $2.6 million line of credit to finance
property development activities in Russia. Advances under the line bear interest
at the 3 month LIBOR rate plus 6%. The credit facility, which expires on January
5, 1999, provides for an arrangement fee of 0.25% of the total commitmentCredit Facility and a
commitment fee of 0.50% of the unused portion of the line. Total net drawdowns
at September 30, 1997, amounted to $2.2 million.Note
Agreement was 7.92% and 8.0%, respectively.
Maturities of notes payable at September 30, 1997,March 31, 1998, for each of the next five
years and thereafter are as follows (dollars in thousands):
10/4/1/97-9/30/98...................................................98-3/31/99.................................... $ 16,284
10/17,082
4/1/98-9/30/99................................................... 12,796
10/99-3/31/00.................................... 13,475
4/1/99-9/30/00................................................... 11,654
10/00-3/31/01.................................... 12,718
4/1/00-9/30/01................................................... 59,489
10/01-3/31/02.................................... 72,666
4/1/01-9/30/02................................................... 5,989
Thereafter........................................................ 62,52502-3/31/03.................................... 25,536
Thereafter........................................ 43,995
--------
$168,737$185,472
========
12
13
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1998
NOTE 1211 -- MAJOR CUSTOMERS AND EXPORT SALES
DuringMINORITY INTEREST
The Company's minority interest liability includes the nine months ended September 30, 1997, gold sales aggregated
$61.9 million. During this period, gold shipments from TGLinterests 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 Ghana to two
unaffiliated European refiners accounted for $30.3 million and $30.0 million of
total gold sales, respectively, representing 97% of such total gold sales.
During the nine months ended September 30, 1996, gold sales aggregated
$58.7 million. During this period, gold shipments from TGL in Ghana to two
unaffiliated European refiners accounted for $26.2 million and $32.5 million of
total gold sales, respectively, representing 100% of such total gold sales.
NOTE 13 -- ACQUISITIONS
Cost in excess of net assets acquired, net, as reflectedwhich agreements could result
in the accompanying consolidated balance sheets, consistsCompany 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 March 31, 1998 and December 31, 1997, the Company's minority interest
liability consisted of the following:
SEPTEMBER 30,MARCH 31, DECEMBER 31,
1998 1997
1996
---------------------- ------------
(DOLLARS IN THOUSANDS)
Mutual of Omaha Fund Management Company............ $17,060Gold mining operations............................... $ 18,6497,923 $ 7,958
Russian investment operations...................... 2,236 2,458
Gold mining operations............................. 1,311 1,592operations........................ 26,052 26,091
Polish brokerage operations........................ 313 246operations.......................... 17 13
Poland Fund -- venture capital....................... 23,927 24,269
Pioneer Ventures Limited Partnerships -- venture
capital............................................ 27,761 28,346
------- -------
$20,920 $ 22,945Totals............................................... $85,680 $86,677
======= =======
NOTE 12 -- FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1997. 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 intersegment transactions are for management services and the
secondment of employees. These transactions are generally priced on a cost or
cost plus basis.
13
14
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- 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)(CONTINUED)
MARCH 31, 1998
NOTE 12 -- FINANCIAL INFORMATION BY BUSINESS SEGMENT
Total revenues and back-end load shares (Class Bincome (loss) by business segment 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 yearsgeographic region,
excluding intersegment transactions (dollars in the case of Class B shares and is
one year in the case of C shares. However, the Company pays upfrontthousands):
DOMESTIC FINANCIAL
SERVICES EMERGING MARKETS FINANCIAL SERVICES
-------------------- -----------------------------------------------------------------
DOMESTIC U.S. RUSSIAN POLISH CENT. & EAST.
INVESTMENT VENTURE FINANCIAL FINANCIAL CZECH EUROPE
MANAGEMENT CAPITAL SERVICES SERVICES REPUBLIC VENTURE CAPITAL REAL ESTATE
---------- ------- --------- --------- -------- --------------- -----------
THREE MONTHS ENDED
MARCH 31, 1998:
Gross revenues and sales.... $ 49,871 $ 353 $ 3,629 $ 3,069 $ 353 $ 3,785 $ 234
========= ======= ======== ======= ===== ======= =======
Intersegment eliminations... $ (2,036) $ -- $ -- $ -- $ -- (3,719) $ --
========= ======= ======== ======= ===== ======= =======
Net revenues and sales...... $ 47,835 $ 353 $ 3,629 $ 3,069 $ 353 $ 66 $ 234
========= ======= ======== ======= ===== ======= =======
Income (loss) before income
taxes and minority
interest.................. $ 15,118 $ 3,999 $ (1,850) $ 165 $(326) $(1,088) $ (800)
========= ======= ======== ======= ===== ======= =======
Taxes....................... $ 5,617 $ 1,446 $ (622) $ (18) $ (44) $(1,007) $ (268)
========= ======= ======== ======= ===== ======= =======
Minority interest........... $ -- $ 561 $ (345) $ (1) $ -- $ (115) $ --
========= ======= ======== ======= ===== ======= =======
Net income (loss)........... $ 9,501 $ 1,992 $ (883) $ 184 $(282) $ 34 $ (532)
========= ======= ======== ======= ===== ======= =======
Depreciation and
amortization.............. $ 5,255 $ 56 $ 600 $ 135 $ 67 $ 33 $ 17
========= ======= ======== ======= ===== ======= =======
Interest expense............ $ 836 $ 99 $ 1,727 $ 6 $ -- $ -- $ --
========= ======= ======== ======= ===== ======= =======
Capital expenditures........ $ 2,689 $ -- $ (242) $ 58 $ 9 $ -- $ --
========= ======= ======== ======= ===== ======= =======
Gross identifiable assets at
March 31, 1998............ $ 331,193 $78,978 $115,922 $16,623 $ 189 $31,128 $ 6,272
========= ======= ======== ======= ===== ======= =======
Intersegment eliminations... $(135,469) $ (7) $ (2,435) $ -- $ -- $(1,504) $(2,146)
========= ======= ======== ======= ===== ======= =======
Net identifiable assets at
March 31, 1998............ $ 195,724 $78,971 $113,487 $16,623 $ 189 $29,624 $ 4,126
========= ======= ======== ======= ===== ======= =======
NATURAL RESOURCES
- SUBTOTAL - ------------------
WORLDWIDE
FINANCIAL GOLD RUSSIAN
SERVICES MINING TIMBER OTHER TOTAL
------------ ------ ------- ----- -----
THREE MONTHS ENDED
MARCH 31, 1998:
Gross revenues and sales.... $ 61,294 $ 23,373 $ 284 $ 5,011 $ 89,962
========= ======== ======= ======== =========
Intersegment eliminations... $ (5,755) $ -- $ -- $ (5,011) $ (10,766)
========= ======== ======= ======== =========
Net revenues and sales...... $ 55,539 $ 23,373 $ 284 $ -- $ 79,196
========= ======== ======= ======== =========
Income (loss) before income
taxes and minority
interest.................. $ 15,218 $ (2,150) $(2,876) $ (1,354) $ 8,838
========= ======== ======= ======== =========
Taxes....................... $ 5,104 $ (962) $ (169) $ (548) $ 3,425
========= ======== ======= ======== =========
Minority interest........... $ 100 $ (34) $ -- $ -- $ 66
========= ======== ======= ======== =========
Net income (loss)........... $ 10,014 $ (1,154) $(2,707) $ (806) $ 5,347
========= ======== ======= ======== =========
Depreciation and
amortization.............. $ 6,163 $ 5,987 $ 710 $ 105 $ 12,965
========= ======== ======= ======== =========
Interest expense............ $ 2,668 $ 980 $ 1,011 $ 821 $ 5,480
========= ======== ======= ======== =========
Capital expenditures........ $ 2,514 $ 1,441 $ (75) $ 2 $ 3,882
========= ======== ======= ======== =========
Gross identifiable assets at
March 31, 1998............ $ 580,305 $145,074 $51,628 $ 29,772 $ 806,779
========= ======== ======= ======== =========
Intersegment eliminations... $(141,561) $ -- $ -- $(23,767) $(165,328)
========= ======== ======= ======== =========
Net identifiable assets at
March 31, 1998............ $ 438,744 $145,074 $51,628 $ 6,005 $ 641,451
========= ======== ======= ======== =========
14
15
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
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 share dealer advances for
financial statement purposes over periods which range from three to six years
depending on the participating Fund. The Company capitalizes and amortizes Class
C share dealer advances for financial statement purposes over a twelve month
period. The Company deducts the dealer advances in full for tax purposes in the
year such advances are paid. Distribution and service fees received by the
Company from participating Funds are recorded in income as earned. CDSC received
by the Company from redeeming shareholders reduce unamortized dealer advances
directly. For the nine months ended September 30, 1997, and September 30, 1996,
the Company paid dealer advances in the amount of $15.5 million and $20.4
million, respectively.
15
16
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
NOTE 15 -- FINANCIAL INFORMATION BY BUSINESS SEGMENT
Total revenues and income (loss) before income taxes and minority interest
by business segment, excluding intersegment transactions, were as follows:MARCH 31, 1998
MUTUAL FUND
UNDERWRITING,DOMESTIC FINANCIAL
SERVICES EMERGING MARKETS FINANCIAL SERVICES
-------------------- -----------------------------------------------------------------
DOMESTIC U.S. RUSSIAN POLISH CENT. & EAST.
INVESTMENT BROKERAGEVENTURE FINANCIAL FINANCIAL CZECH EUROPE
MANAGEMENT CAPITAL SERVICES SERVICES REPUBLIC VENTURE CAPITAL SHAREHOLDER
MANAGEMENT AND OTHER BANKING INVESTMENTS SERVICES
------------------ ---------------------- -------------------- --------------------REAL ESTATE
---------- ------- NINE MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97
- -------------------- ------- ---------------- --------- -------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)--------------- -----------
Revenues & Sales.... $90,202 $65,890THREE MONTHS ENDED
MARCH 31, 1997:
Gross revenues and sales.... $ 54,08438,721 $ 18,830382 $ 8,943 $11,3679,758 $ 1,6974,369 $ 1,978 $21,256162 $ 30 $ 288
========= ======= ======== ======= ===== ======= =======
========Intersegment eliminations... $ (1,066) $ -- $ -- $ -- $ -- $ -- $ --
========= ======= ======== ======= ===== ======= =======
======= =======
Income (Loss)
Before Income Taxes
& Minority
Interest........... $64,714 $38,563 $(16,539)(1) $(23,601)(1)Net revenues and sales...... $ (132)(2)37,655 $ 5,593(2)382 $ 6,774(3) $(2,315)(3)9,758 $ 2,317
=======4,369 $ 162 $ 30 $ 288
========= ======= ======== =============== ===== ======= ======= ======= ======= =======
Depreciation &
Amortization....... $ 1,825 $ 1,372 $ 11,792 $ 7,354 $ 105 $ 46 $ 101 $ 91 $ 1,219
======= ======= ======== ======== ======= ======= ======= ======= =======
Capital
Expenditures....... $ 1,034 $ 718 $ 3,149 $ 11,608 $ 133 $ 259 $ 50 $ 37 $ 771
======= ======= ======== ======== ======= ======= ======= ======= =======
Identifiable Assets
at Quarter End..... $86,082 $80,544 $166,698 $ 88,541 $51,642 $25,552 $98,927 $63,855 $ 7,773
======= ======= ======== ======== ======= ======= ======= ======= =======
GOLD MINING TIMBER OTHER CONSOLIDATED
---------------------- -------------------- ------------------- --------------------
NINE MONTHS ENDED 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96
- -------------------- ------- -------- -------- ------- ------- ------- ------ -------- --------
Revenues & Sales.... $19,106 $ 61,911 $ 58,715 $ 8,934 $ 0 $ 0 $ 0 $247,027 $175,886
======= ======== ======== ======= ======= ======= ====== ======== ========
Income (Loss)
Before Income Taxes
& Minority
Interest........... $ 1,756 $ (3,982)(4) $ 5,038(4) $(3,685)(5) $ (578)(5) $(2,437)(6) $ (945) $ 47,030 $ 23,511
======= ======== ======== ======= ======= ======= ====== ======== ========
Depreciation &
Amortization....... $ 1,656 $ 16,069 $ 11,486 $ 94 $ 0 $ 1 $ 84 $ 31,206 $ 22,089
======= ======== ======== ======= ======= ======= ====== ======== ========
Capital
Expenditures....... $ 1,094 $ 3,162 $ 53,577 $ 8,793 $ 6,015 $ 49 $ 0 $ 17,141 $ 73,308
======= ======== ======== ======= ======= ======= ====== ======== ========
Identifiable Assets
at Quarter End..... $ 8,438 $145,673 $129,652 $52,096 $42,182 $ 4,485 $2,786 $613,376 $441,550
======= ======== ======== ======= ======= ======= ====== ======== ========
- ---------------
(1) Net of interest expense of approximately $2,321 for the nine months ended
September 30, 1997, and $1,734 for the nine months ended September 30, 1996.
(2) Net of interest expense of approximately $5,242 for the nine months ended
September 30, 1997, and $3,912 for the nine months ended September 30, 1996.
(3) Net of interest expense of approximately $301 for the nine months ended
September 30, 1997, and $302 for the nine months ended September 30, 1996.
(4) Net of interest expense of approximately $1,769 for the nine months ended
September 30, 1997, and $118 for the nine months ended September 30, 1996.
(5) Net of interest expense of $2,016 for the nine months ended September 30,
1997.
(6) Net of unallocated interest expense of $1,554 for the nine months ended
September 30, 1997. The remaining expenses are related to the Company's
other natural resources businesses in Russia.
16
17
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1997
The following table details for the investment management business segment
and mutual fund underwriting, brokerage and other business segment, total
revenues and income (loss) before income taxes and minority interest by
geographical region, excluding intersegment transactions (dollars in thousands):
INVESTMENT MANAGEMENT
EASTERN EUROPE &
RUSSIA UNITED STATES CONSOLIDATED
------------------ ---------------------- ----------------------
NINE MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96
- -------------------------- ------- ------- -------- -------- -------- --------
Revenues and Sales........ $ 9,548 $ 8,970 $ 80,654 $ 56,920 $ 90,202 $ 65,890
======= ======= ======== ======== ======== ========
Income (loss) before income
taxes and minority
interest.......interest.................. $ 9,91810,492 $ 3,1183,741 $ 54,7961,115 $ 35,445929 $(416) $ 64,714251 $ 38,56319
========= ======= ======== ======= ===== ======= =======
Taxes....................... $ 4,173 $ 1,395 $ 499 $ 555 $ (12) $ 406 $ 8
========= ======= ======== ======= ===== ======= =======
Minority interest........... $ -- $ 409 $ 622 $ (43) $ -- $ (385) $ --
========= ======= ======== ======= ===== ======= =======
Net income (loss)........... $ 6,319 $ 1,937 $ (6) $ 417 $(404) $ 230 $ 11
========= ======= ======== =============== ===== ======= =======
Depreciation and
Amortization............amortization.............. $ 2714,097 $ 35 $ 206 $ -- $ -- $ -- $ 152
$ 1,554 $ 1,220 $ 1,825 $ 1,372========= ======= ======== ======= ===== ======= =======
Interest expense............ $ 679 $ 99 $ 1,410 $ -- $ -- $ -- $ --
========= ======= ======== ======== ======== ========
Capital Expenditures...... $ 225 $ 60 $ 809 $ 658 $ 1,034 $ 718======= ===== ======= =======
Capital expenditures........ $ 1,193 $ 3 $ 762 $ 215 $ -- $ 18 $ 3
========= ======= ======== ======== ======== ========
Identifiable======= ===== ======= =======
Gross identifiable assets at
quarter end............. $49,957 $44,827March 31, 1997............ $ 36,125220,586 $66,619 $105,736 $17,528 $ 35,717478 $14,493 $ 86,082 $ 80,5446,029
========= ======= ======== ======= ===== ======= =======
Intersegment eliminations... $(104,499) $ (7) $ (3,464) $ -- $ -- $ -- $ (126)
========= ======= ======== ======= ===== ======= =======
Net identifiable assets at
March 31, 1997............ $ 116,087 $66,612 $102,272 $17,528 $ 478 $14,493 $ 5,903
========= ======= ======== ======== ========
MUTUAL FUND UNDERWRITING, BROKERAGE AND======= ===== ======= =======
NATURAL RESOURCES
- SUBTOTAL - ------------------
WORLDWIDE
FINANCIAL GOLD RUSSIAN
SERVICES MINING TIMBER OTHER
EASTERN EUROPE &
RUSSIA UNITED STATES CONSOLIDATED
------------------ ----------------------- -----------------------
NINE MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96
- -----------------------TOTAL
------------ ------ ------- ------- -------- -------- -------- ------------- -----
RevenuesTHREE MONTHS ENDED
MARCH 31, 1997:
Gross revenues and Sales..... $33,127sales.... $ 3,23053,710 $ 20,95717,467 $ 15,600-- $ 54,0842,250 $ 18,830
=======73,427
========= ======== ======= ======== =========
Intersegment eliminations... $ (1,066) $ -- $ -- $ (2,250) $ (3,316)
========= ======== ======= ======== =========
Net revenues and sales...... $ 52,644 $ 17,467 $ -- $ -- $ 70,111
========= ======== ======= ======== =========
Income (loss) before income
taxes and minority
interest....interest.................. $ 4,712 $(4,872) $(21,251)(1) $(18,729)(1) $(16,539)(1) $(23,601)(1)
=======16,131 $ (130) $ (630) $ (708) $ 14,663
========= ======== ======= ======== =========
Taxes....................... $ 7,024 $ (45) $ (60) $ (275) $ 6,644
========= ======== ======= ======== =========
Minority interest........... $ 603 $ 107 $ -- $ -- $ 710
========= ======== ======= ======== =========
Net income (loss)........... $ 8,504 $ (192) $ (570) $ (433) $ 7,309
========= ======== ======= ======== =========
Depreciation and
Amortization.........amortization.............. $ 4104,490 $ 374,776 $ 11,38231 $ 7,317213 $ 11,792 $ 7,354
=======9,510
========= ======== ======= ======== ======== ======== ========
Capital Expenditures...=========
Interest expense............ $ 1,313 $10,4762,188 $ 1,83640 $ 1,132196 $ 3,149550 $ 11,608
=======2,974
========= ======== ======= ======== =========
Capital expenditures........ $ 2,194 $ 5,395 $ 1,554 $ 23 $ 9,166
========= ======== ======= ======== ========
Identifiable=========
Gross identifiable assets at
quarter end.......... $66,108 $19,236 $100,590March 31, 1997............ $ 69,305 $166,698431,469 $150,824 $48,063 $ 88,541
=======19,791 $ 650,147
========= ======== ======= ======== =========
Intersegment eliminations... $(108,096) $ -- $ -- $(11,954) $(120,050)
========= ======== ======= ======== =========
Net identifiable assets at
March 31, 1997............ $ 323,373 $150,824 $48,063 $ 7,837 $ 530,097
========= ======== ======= ======== =========
- ---------------
(1) Net of interest expense of approximately $2,321 for the nine months ended
September 30, 1997 and $1,734 for the nine months ended September 30, 1996.
1715
1816
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY OF OPERATIONSOVERVIEW
The consolidated financial statements of The Pioneer Group, Inc. (the
"Company") include the Company's worldwide financial services and natural
resource 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 reported thirdlower net income and earnings per share in the first
quarter 1997
earnings of 371998 compared to the first quarter of 1997. First quarter performance
reflected significant gains from the Company's domestic financial services
operations, which were offset by losses in the Company's emerging markets
financial services and natural resources operations.
Gross revenues for the first quarter of 1998 were $79.2 million compared to
$70.1 million for the first quarter of 1997. This growth resulted from increased
revenues from both the domestic investment management business and gold
shipments.
Net income in the first quarter of 1998 was $5.3 million, or 21 cents per
share, 17 cents higher than earnings in the third
quarter of 1996. The Company had gross revenues andcompared to net income of $97.9$7.3 million, and $9.5 million, respectively,or 29 cents, in the thirdfirst quarter
of 1997, compared to $62.5
million and $5.1 million, respectively, in the third quarter of 1996. For the
nine months ended September 30, 1997, the Company reported1997. Increased earnings of 8512 cents per share 31from the domestic financial
services operations more than offset the 5 cent decrease from emerging market
financial services earnings. As a result, worldwide financial services earnings
increased by 7 cents higherper share. These earnings were more than offset by a
decrease in earnings from gold mining operations of 5 cents per share and a 9c
increase in the nine months ended September 30,
1996. The Company had gross revenues and net income of $247 million and $21.8
million, respectively, for the nine months ended September 30, 1997, compared to
$175.9 million and $13.7 million, respectively, for the nine months ended
September 30, 1996.losses from timber operations.
The table below details earnings per share by business segment for the
thirdfirst quarter of 19971998 versus the thirdfirst quarter of 1996.
THIRD1997:
FIRST QUARTER EARNINGS PER SHARE
DIFFERENCE:
BUSINESS SEGMENT 1998 1997 1996 INCR./(DECR.)
--------------------------------------------------- ---------------- ---- ---- ------------
Domestic mutual fund.............................. 37c 18c 19c
Venture capital:
U.S. ........................................... 1 -- 1
Eastern Europe.................................. (1) 3 (4)
Russian financial services........................ 16 1 15
Polish financial services......................... 2 -- 2
Czech Republic mutual fund........................ (1) (5) 4
Real estate services.............................. (3) -- (3)
--- --- ---
Worldwide financial services................. 51 17 34
--- --- ---
Gold mining....................................... (4) 4 (8)
Russian timber.................................... (6) (1) (5)
Other............................................. (4) -- (4)
--- --- ---
Total................................... 37c 20c 17c
=== === ===
The Company's earnings from its worldwide financial services businesses of
51 cents per share in the third quarter of 1997 increased by 34 cents over the
third quarter of 1996, principally as a result of increased earnings of 19 cents
from domestic mutual fund operations (primarily from higher management fees) and
15 cents from Russian financial services operations (primarily from brokerage
activities). These higher earnings were partially offset by lower earnings from
the Company's gold mining operations, which consist of its wholly owned
subsidiary, Pioneer Goldfields Limited ("PGL"), PGL's 90% owned subsidiary,
Teberebie Goldfields Limited ("TGL"), and Closed Joint-Stock Company,
"Tas-Yurjah Mining Company" ("Tas-Yurjah"), the Company's majority owned Russian
subsidiary. Gold mining operations reported losses of 4 cents per share in the
third quarter of 1997 compared to earnings of 4 cents per share in the third
quarter of 1996, principally reflecting lower gold prices and increased
exploration costs. TGL's operations broke even in the third quarter of 1997
versus earnings of 5 cents per share in the third quarter of 1996. The Company
incurred 4 cents per share of exploration costs in the third quarter of 1997
compared to 1 cent per share of costs in the comparable 1996 quarter. The
Company's Russian Far East timber operation, Closed Joint-Stock Company "Forest-
Starma," which commenced commercial operations on January 1, 1997, reported
losses of 6 cents per share for the quarter.
18
19
The table details earnings by business segment for the nine months ended
September 30, 1997, versus the nine months ended September 30, 1996.
NINE-MONTH EARNINGS PER SHARE
DIFFERENCE:
BUSINESS SEGMENT 1997 1996 INCR./(DECR.)
--------------------------------------------- ------ ------ -------------
Domestic mutual fund......................... $ 0.90 $ 0.47 $ 0.43
Venture capital:investment management.................. 37c 25c 12c
U.S. ...................................... 0.13venture capital............................ 8c 8c --
0.13
Eastern Europe............................. (0.03) -- (0.03)---- --- ----
Total domestic financial services..... 45c 33c 12c
---- --- ----
Russian financial services................... 0.19 0.07 0.12services...................... (3c) -- (3c)
Polish financial services.................... 0.04 (0.01) 0.05services....................... 1c 2c (1c)
Czech Republic mutual fund................... (0.04) (0.06) 0.02fund...................... (1c) (2c) 1c
Central and Eastern European venture capital.... -- -- --
Real estate services......................... (0.04)estate..................................... (2c) -- (0.04)
------ ------ -------(2c)
---- --- ----
Total emerging markets financial
services............................ (5c) -- (5c)
---- --- ----
Worldwide financial services............ 1.15 0.47 0.68
------ ------ -------services..... 40c 33c 7c
---- --- ----
Gold mining.................................. (0.11) 0.11 (0.22)mining..................................... (5c) -- (5c)
Russian timber............................... (0.13) (0.02) (0.11)
Other........................................ (0.06) (0.02) (0.04)
------ ------ -------
Total.............................. $ 0.85 $ 0.54 $ 0.31
====== ====== =======timber.................................. (11c) (2c) (9c)
Other natural resources......................... (1c) -- (1c)
---- --- ----
Natural resources................ (17c) (2c) (15c)
---- --- ----
Interest expense................................ (2c) (2c) --
---- --- ----
Total............................ 21c 29c (8c)
==== === ====
The Company's earnings from its worldwide financial services businesses of
$1.15 per share in the first nine months of 1997 increased by 68 cents over the
comparable period in 1996, principally as a result of a significant increase in
earnings of 43 cents from domestic mutual fund operations, primarily from higher
management fees. In addition, the Company had increased earnings of 13 cents per
share from U.S. venture capital operations, principally from significant gains
recorded in the first half of 1997 from one of the Company's portfolio
companies, and 12 cents from Russian financial services operations, principally
from brokerage activities. These higher earnings were partially offset by lower
earnings from the Company's gold mining operations which reported losses of 11
cents per share in the first nine months of 1997 compared to earnings of 11
cents per share in the first nine months of 1996 and increased losses of 11
cents per share from the Company's timber operations.16
17
WORLDWIDE FINANCIAL SERVICES BUSINESSES
RESULTS OF OPERATIONS
Revenues.
The Company's worldwide financial services businesses have three principal
sources of revenues: fees from managing the 33 U. S.34 U.S. registered investment
companies (mutual funds) in the Pioneer Family of Mutual Funds and institutional
accounts, fees from underwriting and distribution ofdistributing 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 securitiesrevenues from its Russian and interest incomePolish brokerage operations and
from Pioneer Bank in Russia, in which the Company hashad a 57.7% interest and revenuesat March
31, 1998. The Company also has earnings from Russian
brokerageits U.S. venture capital
operations.
Revenues fromIn the first quarter of 1998, the Company's worldwide financial services
businesses had revenues of $69.7$55.5 million, and $176.2 million for the third quarter and nine months ended September 30,
1997, respectively, were $28.2$2.9 million, or 68%, and $59 million, or 50%5%, higher than
revenues earnedof $52.6 million in the comparable 1996 periods as a resultfirst quarter of increases
discussed below.
Management fees1997. Net income of $33$10.0
million in the first quarter of 1998, or 40 cents per share, was $1.5 million,
or 7 cents per share, higher than first quarter 1997 net income and earnings per
share of $8.5 million and $88.5 million for the third quarter and
nine months ended September 30, 1997, respectively, were $10.5 million, or 47%,
and $25.8 million, or 41%, higher than management fees in the comparable 1996
periods. Substantially all of the increases resulted from higher management fees
earned from the Company's U.S. registered mutual funds. These increases in
management fees resulted from: (i) an increase in assets from strong U.S. stock
market performance; and (ii) a
19
20
management fee rate increase for two of the Company's largest U.S. registered
mutual funds effective in the second quarter of 1996.33 cents, respectively.
Worldwide assets under management were $21.4$23.7 billion at September 30, 1997,March 31, 1998,
compared to $17$21 billion at December 31, 1996,1997, and $15.9$17.3 billion at September 30,
1996.
DistributionMarch 31,
1997. The increase in assets under management was principally attributable to a
higher U.S. stock market. Assets under management have further increased to
approximately $24.3 billion at May 1, 1998.
The table below details revenues and net income in the first quarter of
1998 and 1997 for the segments of the Company's worldwide financial services
businesses:
REVENUES AND NET INCOME
(DOLLARS IN MILLIONS)
REVENUES NET INCOME
-------------- -------------
BUSINESS SEGMENT 1998 1997 1998 1997
- ---------------- ---- ---- ---- ----
Domestic investment management................ $47.8 $37.6 $ 9.5 $ 6.3
U.S. venture capital.......................... 0.4 0.4 2.0 2.0
Emerging markets financial services:
Russia...................................... 3.6 9.7 (0.9) --
Poland...................................... 3.1 4.4 0.2 0.4
Czech Republic.............................. 0.3 0.2 (0.3) (0.4)
Central and Eastern Europe venture
capital.................................. 0.1 -- -- 0.2
Real estate services........................ 0.2 0.3 (0.5) --
----- ----- ----- -----
Total worldwide financial
services.......................... $55.5 $52.6 $10.0 $ 8.5
===== ===== ===== =====
Domestic Investment Management
Revenues from the Company's domestic investment management business of
$47.8 million in the first quarter of 1998 increased by $10.2 million, or 27%.
Net income increased by 50% in the first quarter, increasing by $3.2 million, or
12 cents per share, to $9.5 million, or 37 cents per share.
Management fee revenues of $31.1 million increased by $6.6 million,
principally reflecting higher assets under management resulting from continued
strength in the strong U.S. stock market. For the first quarter of 1998,
distribution fees and underwriting commissions of nearly $6$6.5 million in the
third quarter of 1997 were $1.7$2.0
million, or 41%45%, higher than comparablesuch fees and commissions earned in the third quartercomparable
1997 period. A significant majority of 1996. Distributionthe increase related to distribution fees
which increased by $1.5$1.3 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 the thirdfirst
quarter of 1997,1998, the Company had U.S. registered mutual fund sales (including
reinvested dividends) of $743 millionapproximately $1.0 billion (up 45%), and net sales of
$69 million compared to
sales of $558 million and net sales of $229 million in the third quarter of
1996.
For the nine months ended September 30, 1997, distribution fees and
underwriting commissions of $17.2 million were $4.8 million, or 38%, higher than
comparable fees and commissions earned in the comparable 1996 period.
Distribution fees increased by $4.1 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 the first nine months of 1997, the Company had U.S.
registered mutual fund sales (including reinvested dividends) of $2.1$0.4 billion
matching the comparable prior year period, and net sales of $368 million compared to net sales of $1$0.1 billion in the first nine monthsquarter of 1996. Sales1997.
17
18
Shareholder services fee revenues of the Company's Polish mutual funds were $186$7.4 million in the first nine monthsquarter of
1997 versus $123 million in the first nine months of 1996. Underwriting
commissions of $1.9 million earned from these sales1998 increased by $0.6$0.7 million, in
the first nine months of 1997.
Shareholder services fees of $7.4 million and $20.7 million for the third
quarter and nine months ended September 30, 1997, respectively, increased by $1
million, or 15%, and $2 million, or 10%, over the comparable 1996 periods, as a result of an increase in the number of
shareholder accounts. The Company had revenues (principally commission income) of $15.7 million
and $26.1 million for the third quarter and nine months ended September 30,
1997, respectively, from its brokerage activities, which are principally in
Russia. TheseTrustee fee revenues were significantly higher than revenues of $0.3 million
and $1.5 million, respectively, for the comparable 1996 periods. The Company has
benefited from the record volume experienced in the Russian stock market in
1997.
The Company reported securities and interest income from Pioneer Bank of
approximately $3.9 million and $8.9$1.1 million in
both the third quarter and nine months
ended September 30, 1997, respectively, compared to $4.9 million and $11.4
million in the third quarter and nine months ended September 30, 1996. These
revenues are derived primarily from (i) interest earned on Russian government
securities, (ii) realized and unrealized gains and losses on these securities
and (iii) interest income from loans. Decreases in income principally reflect
the impact of less favorable interest rates which affect the realized and
unrealized gains earned on the Russian government securities.
Trustee fees and all other income of $3.9 million in the thirdfirst quarter of 19971998 and 1997.
Costs and expenses increased by $0.6 million over the third quarter of 1996. Revenues in this
category of $14.7$5.5 million in the first nine months of 1997 increased by $4.3
million compared to the first nine months of 1996, almost all from rental income
from a building owned by First Voucher Fund, the Russian voucher investment fund
in which the Company owns a 51% interest.
Costs and Expenses. Costs and expenses of the worldwide financial services
businesses of $48.8 million in the third quarter of 1997 increased by $15.6
million, or 47%, over the third quarter 1996 level.1998
to $32.7 million. Approximately one half of the increase in expenses, or $2.9
million, resulted from expenses from the Company's Russian investment
operations. An additional 20% of the increase reflected higher payroll costs, in
the domestic mutual fund business.
Costs and expensespart of the worldwide financial services businesses of $135.1
million in the first nine months of 1997 increased by $42.3 million, or 46%,
over the level in the comparable 1996 period. Approximately 80% of the increase
resulted from: (i) $24.5 million of higher expenseswhich related to the
Company's Russianefforts to strengthen its investment operations, one halfmanagement and sales and
marketing staff. An additional 25% of which camethe increase in expenses, or $1.3 million,
resulted from the brokerage
business;
20
21
(ii) $7.4 million of higher payroll costs in the domestic mutual fund business;distribution costs, including the printing and
(iii) $2.4mailing of sales literature, paying commissions earned by the sales force,
mutual fund advertising and public relations. An additional 15% of the increase
in expenses, or $0.8 million, inresulted from higher expenses associated with the
amortization of Dealer Advancesdealer 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 $4.1$1.3 million.
Other Income and Expense. 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 the first quarter of 1998 versus $0.1 million in the
first quarter of 1997.
U.S. Venture Capital
Net income from the Company's U.S. venture capital operations reportedfor the first
quarter of 1998 was $2.0 million, or 8 cents per share. The Company had similar
net income and earnings for the first quarter of 1997. The Company continued to
report significant gains from one of its portfolio companies which completed an
initial public offering in December 1997.
The Company had net venture capital investment portfolio gains (excluding
operating expenses) of $1.7 million and $9.4$4.5 million in the thirdfirst quarter and nine months
ended September 30, 1997, respectively,of 1998 compared to net
lossesgains of $0.1$4.2 million in the thirdfirst quarter of 1996 and net gains1997.
Russian Financial Services
Revenues from the Company's Russian financial services operations of $0.5$3.6
million in the nine months
ended September 30, 1996. Additionally,first quarter of 1998 decreased by 63% from $9.7 million. These
operations reported net losses of $0.9 million, or 3 cents per share, in the
first quarter of 1998, compared to break-even operations in the first quarter of
1997.
In the first quarter of 1998, revenues from the Company's Russian brokerage
activities, which are principally derived from trading activities, decreased by
$4.0 million, to $0.4 million, as a result of the decline in the Russian stock
market. Costs and expenses associated with the Russian brokerage business were
$0.8 million in the first quarter of 1998, compared to $2.0 million in the first
quarter of 1997.
The Company reported revenues from Pioneer Bank of approximately $1.3
million in the first quarter of 1998, compared to $2.4 million in the first
quarter of 1997. 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. Expenses associated with Pioneer Bank of $1.3 million in
the first quarter of 1998 decreased by $1.3 million.
The Company reported net realized gains of $4.1$1.2 million and $12.2$2.7 million in
the thirdfirst quarter of 1998 and nine months ended
September 30,in the first quarter of 1997, respectively, from
investments sold by the First Voucher Fund and
other(the "Voucher Fund"), the Russian
venture capital investmentsvoucher investment fund in which the Company has a 51% interest.
Polish Financial Services
Revenues from the Company's Polish financial services operations of $3.2
million in the first quarter of 1998 decreased by $1.2 million. These operations
had net income of $0.2 million, or 1 cent per share, in the first quarter of
1998, compared to net realized gainsincome of $0.7$0.4 million, and $0.4or 1 cent, in the first quarter of
1997.
18
19
Management fee revenues of $2.3 million in the respective 1996 periods.
Interest expensefirst quarter of $3.41998
declined slightly by $0.2 million from first quarter 1997 levels. Underwriting
commissions decreased significantly by $1.2 million to $0.1 million. The revenue
decreases were mostly offset by decreased expenses and $8gains from the Company's
50% owned transfer agency business.
At March 31, 1998, assets under management in the Company's four Polish
mutual funds were $466 million, slightly higher than the December 31, 1997
level. Polish mutual fund sales were $10 million in the thirdfirst quarter of 1998
and nine months ended September 30, 1997, respectively,net redemptions were $27 million, compared to sales of $118 million and net
sales of $93 million in the first quarter of 1997.
Czech Republic Financial Services
The Company's Czech Republic financial services operations reported losses
of $0.3 million, or 1 cent per share, in the first quarter of 1998, compared to
losses of $0.4 million, or 2 cents per share, in the first quarter of 1997.
Revenues from management fees and underwriting commissions increased by $2.4$0.2
million in the first quarter of 1998 and $5.8costs and expenses increased by $0.1
million. The Czech Republic mutual fund had $54 million of assets under
management at March 31, 1998, an increase of $11 million over the comparable 1996 periods.1997 year-end
level. The increasesCompany continues to believe that this operation will reach
break-even status in the second half of 1998.
Central and Eastern Europe Venture Capital Operations
The Company's Central and Eastern Europe venture capital operations were
essentially break even in both periods
resulted from increased borrowingsthe first quarter of 1998 and from1997.
Real Estate Services
The Company's real estate services operations reported losses of $0.5
million, or 2 cents per share, in the Company ceasingfirst quarter of 1998, compared to
capitalize
interest expenses relatedbreak-even operations in the first quarter of 1997. Most of the losses were
attributable to projects that were completed in late 1996 or early
1997. These projects includedcosts associated with the development of the Company's Polish
and Russian timber project, the office building
owned by the Voucher Fundreal estate investment, and TGL's Phase III mine expansion.
Taxes.property and facilities management
operations.
Taxes
The Company's effective tax rate for the first quarter of 1998 for the
worldwide financial services businesses was 37%34% compared to 44% for the first
quarter of 1997. The first quarter 1998 results included a tax benefit of nearly
$1 million related to costs incurred to date in the third quarter of 1997 and 35% in the third
quarter of 1996. Through September 30, 1997, the effective tax rate was 40%
versus 37% in the first nine months of 1996. The 1996 results included
significant tax exempt income associated with the Company's Russian bank.venture capital
operation.
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 September
30, 1997,March 31,
1998, the Company served as trustee for $6.5$6.9 billion of qualified plan assets
and the ratio of net worth to qualified assets was 2.8%2.7%. The Company's
stockholders' equity of $178$187.1 million at September 30, 1997,March 31, 1998, would permit it to
serve as trustee for up to $8.9$9.4 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
19
20
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 $507$238 million in
the first nine monthsquarter of 19971998 versus $631 million in
the comparable 1996 period. Dealer Advances totaled $15.5$167 million in the first nine monthsquarter of 1997 versus $20.41997.
Dealer Advances totaled $7.2 million in the first nine monthsquarter of 1996.1998 versus $5.1
million in the first quarter of 1997. Dealer Advances related to Class B shares
(which are amortized to operations over the life of the CDSC period) were $39.6$44.8
million at September 30, 1997.March 31, 1998. The Company intends to continue to finance this
program, in part, through the credit facilities described in the section
entitled "General."Liquidity and Capital Resources -- General."
In April 1995, the Company acquired approximately 51% of the shares of
the
First Voucher Fund, (the "Voucher Fund"), the largest voucher investment fund established in Russia in
connection with that country's privatization program. The shares were issued by
the Voucher Fund to two newly-formed subsidiaries of Pioneer Omega, Inc.
("Pioneer Omega"), a subsidiary of the Company. In addition to acquiring shares
in the Voucher Fund, Pioneer Omega, acting through a subsidiary, Pioneer First
Russia, Inc. ("PFR"), acquired a 21
22
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 hashad the right to cause the Company to purchase such shares (the
"put option") and the Company hashad a corresponding right to purchase such shares
from the holder (the "call option"). The put and call options are each exercisable with respect to
one-third of the Omega shares on the first, second and third anniversaries of
the closing of the transaction. The put and call option exercise price is $2
million per tranche, plus a 5% per annum premium on the option exercise price.
The Company will paypaid a total of $6.6 million
for the Omega shares over a three-year period asincluding a 5% per annum premium
on the put and/or call options are exercised.option exercise price. The Company has
exercised its options and purchased the first two tranches of Omega shares for
$4.3 million.last installment payment was made on April 11,
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. This insurance is
presently limited to a ceiling of $75 million.
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(Statement of Financial Accounting
Standards No. 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 shouldwould be reflected inon the Company's financial statements.balance sheet.
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 September 30, 1997,March 31, 1998, was approximately $16 million. At October 31, 1997,April 23, 1998, the
value of these securities (based on market quotations if available) was
approximately $104$80 million, which represents an increase of approximately $88$64
million. The Company's pre-tax interest in this increase, at 51%, would be
approximately $45$33 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 September 30, 1997,March 31, 1998, was approximately $3$2 million, $23 million and $6$2
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 $88$64 million described above) would be reflected in long termlong-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. As a result, a relatively
smallLiquidity and volumes
fluctuate significantly and are strongly influenced by global market trends. In
1997, the number of issuers (approximately 15) currently account for approximately
90% of all tradingissues actively traded on the Russian Trading System.System
increased substantially until the end of October when, after the Asian financial
crisis, meaningful trading was confined to four to five
20
21
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.
22
23
NATURAL RESOURCE DEVELOPMENT BUSINESSES
GOLD MINING BUSINESS
The results of the gold mining business are substantially attributable to
the operations of TGL,Teberebie Goldfields Limited ("TGL"), the principal operating
subsidiary of the Company's wholly owned subsidiary, PGL.Pioneer Goldfields Limited
("PGL"). The Company's financial statements include an
adjustment to TGL'sreported earnings to 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 Tas-Yurjah,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.
Prior to July 1, 1997,
exploration costs associated with Tas-Yurjah were not includedFINANCIAL RESULTS
In the first quarter of 1998, the gold mining segment lost $1.2 million, or
5 cents per share. The segment reported break-even earnings in the Company'sfirst quarter
1997. The effective tax rate in the first quarter of 1998 was a 44% benefit
compared with a 15% provision in the first quarter of 1997.
The table below details the earnings per share for the gold mining segment.
FINANCIAL RESULTS
The gold mining business lost $0.9 million, or 4 cents per share, insegment
for the thirdfirst quarter of 1997,1998 versus earnings of $1 million, or 4 cents, reported in
the thirdfirst quarter of 1996. For the nine months ended September 30, 1997, losses
of $2.7 million, or 11 cents per share, were 22 cents below reported earnings of
$2.8 million, or 11 cents, in the comparable 1996 period. The following table
details gold mining financial results for the three and nine months ended
September 30, 1997, versus the comparable 1996 periods:1997:
THREE MONTHS
ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
DIFFERENCE: DIFFERENCE:MARCH 31,
----------------------- 1998 VS 1997
19961998 1997 INCR./(DECR.) 1997 1996 INCR./(DECR.)
---- ---- -------------
---- ---- -------------
African operations (TGL)......Operations(TGL).......................... $(0.02) $ 0.01 $(0.03)
African Exploration.............................. (0.02) (0.01) (0.01)
------ ------ ------
PGL Total................................... (0.04) -- 5 c (5)c (4)c 13 c (17)c
African exploration........... (2) c (1) (1) (3) (2) (1)
--- --- --- --- --- ---
PGL Total................ (2) 4 (6) (7) 11 (18)
--- --- --- --- --- ---(0.04)
------ ------ ------
Russian exploration........... (2)Exploration.............................. (0.01) -- (2) (4)(0.01)
------ ------ ------
Total.................................. $(0.05) $ -- (4)
--- --- --- --- --- ---
Total............... (4) c 4 c (8)c (11)c 11 c (22)c
=== === === === === ===$(0.05)
====== ====== ======
TGL RESULTS OF OPERATIONS
TGL earns all of its revenues in U. S.U.S. dollars and the majority of its
transactions and costs are denominated in U. S.U.S. dollars or are based in U. S.U.S.
dollars. Consequently, Ghanaian inflation has not had a material effect on TGL's
operations. Ghanaian cedi denominated costs such as cement, fuel, wages, power and local
purchases are affected, in dollar terms, when currency devaluation does not
offset changes in the relative inflation rates in the U. S.U.S. and Ghana. Since
Ghana has experienced significant inflation over the last three years, the cedi
has devalued continuously against the dollar.
TGL RESULTS OF OPERATIONS
Gold Sales.Sales
Revenues increased by 12%$5.9 million to $23.5$23.4 million in the third
quarter of 1997 compared with the third quarter of 1996 as gold salesshipments
increased by 27% from 54,800 ounces23,600, or 47%, to 69,40073,500 ounces. The average realized price of
gold decreased by 12% from $382$32 to $318 per ounce to $338. Duringounce. In the first nine monthsquarter of 1997, revenues increased by 5% to $61.9 million compared with1998, the corresponding
period in 1996 as gold sales increased by 20% from 150,600 ounces to 180,900
ounces. The
average realized price of gold decreased by 12% from $390includes proceeds of $1.7 million, or $23 per
ounce,
to $342. The average realized price of gold for the three and nine months ended
September 30, 1997, includes proceeds from the sale of floor program optionsoptions.
21
22
During the first quarter of $17 per ounce1998, TGL experienced several negative factors
which caused production to fall short of the forecasted level. The most
significant is a severe electric power shortage in Ghana resulting from
widespread drought in the region where the country generates its hydroelectric
power. See "Recent Developments" below.
Gold Production.
The table below provides production results and $6 per ounce, respectively.
23
24
Production. TGL's gold production and shipments each increased by 27% and
20%, respectively, compared with the three and nine months ended September 30,
1996, as ore processed increased by 60% and 31%, respectively. A comparison of
key statistics for these periods is shown below:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1997 1996 1997 1996
------ ------ ------- -------
Production (ounces)........................... 69,400 54,800 180,900 150,600
Shipments (ounces)............................ 69,400 54,800 180,900 150,600
Tonnes mined (in thousands):
Waste......................................... 8,133 6,343 19,407 13,480
Run-of-mine................................... -0- 1,509 610 4,807
------- ------- -------
------
-
Tonnes Waste and Run-of-mine.................. 8,133 20,017 18,287
7,852
Ore........................................... 2,879 7,116 5,364
1,866
------- ------- -------
------
-
Total Tonnes Mined....................... 11,012 27,133 23,651
9,718
Stripping Ratio (waste + run of mine/ore)..... 2.82:1 2.81:1 3.41:1
4.21:1
Tonnes of Ore Processed....................... 2,723 6,563 5,016
1,704
Process Grade (grams/tonne)................... 1.31 1.25 1.26
1.19
Costs and Expenses. The following table compares TGL's cash costs
and total costs per ounce for the three and nine months ended September 30, 1997,first quarter of 1998 with the comparable periods in 1996:prior year:
THREE MONTHS
ENDED
SEPTEMBER
30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ---------------------------------
(DECREASE)/ (DECREASE)/MARCH 31,
----------------
1998 1997 1996 INCREASE 1997 1996 INCREASE
------- ------- ----------- -------- -------- -----------INCREASE/(DECREASE)
---- ---- -------------------
Production (ounces)............................... 73,500 56,700 16,800
------ ------ -------
Cash Costs:
Production............costs:
Production costs............................. $ 194196 $ 209193 $ (15) $ 202 $ 222 $ (20)
Royalties.............3
Royalties.................................... 9 10 11 (1) 10 11 (1)
General and administrative...... 29 34 (5) 34 37 (3)
------- ------- ------- -------- --------administrative................... 25 35 (10)
------ ------ -------
Cash Cost Per Ounce... 233 254 (21) 246 270 (24)
Non Cash:costs per ounce......................... 230 238 (8)
------ ------ -------
Non-cash costs:
Depreciation and Amortization........ 88 80 8 87 77 10
Other................. 4 2 2amortization................ 91 92 (1)
Other........................................ 3 5 2 3
------- ------- ------- -------- --------(2)
------ ------ -------
Cost of Production Per
Ounce............... 325 336production per ounce................. 324 335 (11)
338 349 (11)------ ------ -------
Interest and other costs... 18 10costs.......................... 16 8 14 10 4
------- ------- ------- -------- --------8
------ ------ -------
Total Cost Per
Ounce..........costs per ounce................... $ 340 $ 343 $ 346 $ (3)
$ 352 $ 359 $ (7)
======= ======= ======= ======== ============== ====== =======
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 or "stripping"("stripping") ratio, the age and availability of equipment, the
weather
conditions, availability and cost of labor, haul distances, foreign exchangesexchange
fluctuations and the inherent lag in gold production lag from new operations andheap leaching
operations. In the numberfirst quarter of lifts on the heap
leach pads. Production1998, production costs for the three and nine months ended September 30,
1997, decreasedincreased by $15$3 to
$196 per ounce and $20 per ounce, respectively, compared with the three and nine months ended September 30, 1996,first quarter in 1997, principally because of
the
decision to decrease the stripping ratio to ensure sufficient ore feed to the
crushing plants and higher production levels. During the current periods, TGL
also experienced a decrease in the cost per tonne hauled comparedprocessing costs associated with the three
and nine months ended September 30, 1996, becausePhase III expansion South Plant.
These higher costs were offset partially by mining economies of lower explosives costs and
certain production efficiencies associated withscale realized
upon the introduction of larger mining equipment. Processingequipment and higher production levels.
The increase in processing costs also decreased becausewas attributable to higher crusher wear parts,
leach reagents, and cement usage.
A comparison of higher goldkey production 24
25
levels, which tend to decreasestatistics for the cost per ounce when applied to these
relatively fixed costs,three months ended March
31, 1998, and decreasesMarch 31, 1997, is shown in run-of-mine costs.the table below:
THREE MONTHS
ENDED
MARCH 31,
----------------
1998 1997
---- ----
Tonnes mined (in thousands):
Waste....................................................... 7,424 6,182
Run-of-mine................................................. -- 592
------ ------
Tonnes Waste and Run-of-Mine................................ 7,424 6,774
Ore......................................................... 2,081 1,979
------ ------
Total Tonnes Mined..................................... 9,505 8,753
====== ======
Stripping Ratio ((waste + run-of-mine)/ore)................. 3.57:1 3.42:1
Ore Processed............................................... 2,162 1,771
Process Grade (grams/tonne)................................. 1.36 1.28
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. TheSuch operating ratio represents the percentage
that the operating profits, after giving effect to capital allowances and
interest expense (as
22
23
permitted by TGL's Deed of Warranty), bears to gold sales. DuringIn the first nine monthsquarter
of 19971998 and 1996,1997, 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 rents.vehicle
expenditures. Since these costs are relativelyprimarily fixed and unrelated to production
levels, during the three and
nine months ended September 30, 1997,decrease in the cost per ounce was attributable principally to the
increase in gold production. In addition, general and administrative costs
decreased by $5approximately $2 per ounce and $3 per ounce, respectively, compared with the corresponding periods in
1996, because of production increases of 27% and 20%, respectively. The
underlying costs during the current periods increased by 6% and 11%,
respectively, compared with the three and nine months ended September 30, 1996,
principally because of increases in personnel-driven infrastructure costs
associated with the Phase III mine expansion, such as employee meals and local
transportation, commercial insurance premiums related to Phase III equipment
additions, benefitlower benefits costs
associated with TGL's 19961998 collective bargaining agreement with the Ghana
Mineworkers'sMineworkers' Union ("GMU"), employee meals, and consulting costs.pre-inspection fees related to a
reduction in capital equipment imported during the quarter.
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. During the third quarter of 1997, these costs increased by $8 per
ounce comparedCompared with the thirdfirst quarter of 1996, principally because of Phase III
processing equipment additions and increases in capitalized rebuilds, which are
depreciated rapidly over a period of two years. During the first nine months of 1997, depreciation and
amortization increaseddecreased by $10$1 per ounce principally because of mininghigher production
levels which decreased the cost per ounce for fixed depreciation recorded on a
straight-line basis. During the first quarter of 1998, development costs, which
are amortized by plant based upon a monthly shipment allocation, also decreased
slightly because a lower proportion of higher East Plant development costs were
amortized. These increases were offset, in part, by increases in crushing
equipment additions (increasing depreciation expense by $6 per
ounce), incremental depreciation related toassociated with Phase III expansion additions partially offset by lower depreciation at the original plants ($3 per ounce) and capitalized rebuild andhigher
run-of-mine pad depreciation aggregating $4 per ounce.
These increases were offset partially by lower development cost amortization of
$2 per ounce.depreciation.
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
increases during the 1997 periodsNo
additional obsolescence reserves were attributable principally to increasesrequired in the provision for inventoryfirst quarter of 1998 and,
as a result, obsolescence and higher exploration costs.reserves decreased by $2 per ounce compared with the
first quarter of 1997.
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, and other income.amortization. The $8 per ounce and $4 per ounce
increasesincrease in interest and other costs in the three and nine months ended
September 30, 1997,first
quarter of 1998 compared with the corresponding periods in 1996, were1997 period was attributable to
interest expense and fees (increases of $15 and $9 per ounce,
respectively) associated with the Phase III financing which ceased to be
capitalized after April 1997,expansion ($14 per ounce). These
increases were offset partially by (i) gains of $2 per ounce and
$1 per ounce, respectively, from the sale of gold price floor program options
not directly linkeda decrease related to shipments, (ii) foreign exchange gains of $2 per ounce
and $1 per ounce, respectively, associated with a high incidence of cedi
denominated payables and (iii) higher production levels which positively affectrelatively fixed costs
such as political risk insurance premiums (approximately $3and goodwill amortization ($3 per
ounceounce), and $2proceeds from floor program sales and interest income ($3 per
ounce, respectively)ounce).
Income Taxes. The statutory tax rate for mining companies in Ghana in 19971998
and 19961997 was 35%.
EXPLORATION ACTIVITIES.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
in other African countries. These activities are currently
25
26 conducted by TGL in
Ghana and by PGL or its local subsidiary in Niger, Burkina
Faso and Zimbabwe. Through September 30, 1997,countries outside of Ghana. In the
first quarter of 1998, PGL incurred exploration costs of approximately $1.5$0.5
million, approximately $1.4$0.1 million of which related to exploration activities
outside of Ghana.
In 1994, the Company entered into a joint venture, Tas-Yurjah, with a
Russian company 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 has conducted
exploration drilling and geochemical and geological surveys to further examine
anomalies located in the licensed area. Through September 30, 1997,In the first quarter of 1998, the
Company had expended approximately $1.5$0.2 million for exploration work related to
Tas-Yurjah.
23
24
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. CashFlow
The cash balances of the gold mining business increased by $1.7segment decreased from $7.6 million to
$2.7$5.3 million during the first nine monthsquarter of 1997. Ninety1998. Forty-five percent, or $2.4
million, of suchTGL's cash balances remain in escrow and are unavailable to pay
short-term obligations. Cash generated from operating activities aggregated $13.9$3.4
million while capital expenditures and loan principal payments were $12.8$2.3 million
and $5.4$4.0 million, respectively. Major capital expenditures during the year
included $3.6$1.0 million for crushing, electrical, and other processing equipment expenditures associated with the Phase III mine expansion,and pad and pond construction, conveyor replacement, processing plant modifications, and
other processing capital expenditures aggregating $3.8development,
including $0.9 million capitalized
interest and financing costs associated with the Phase III mine expansion of
$1.4for leach pad expansion; $0.7 million for mining
equipment and capitalized rebuilds of $1.4$0.2 million. In addition,During the first quarter of
1998, the Company provided financing of approximately $4.3$0.6 million to satisfy TGL's short-term
liquidity needs and approximately $1.7 million, in aggregate, forfund the exploration activities of
PGL and Tas-Yurjah exploration activities. Otherwise, the gold mining business generated
sufficient operating cash flow to fund all of its third-party debt service
payments and short-term cash commitments.Tas-Yurjah.
Phase III Mine Expansion.Expansion
In July 1995, the Board of Directors of TGL approved the Phase III
expansion of the Teberebie mine. Phase III includesincluded 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 increaseincreased annual crushing capacity to 12 million tonnes of
ore. Construction work on the project has been completed and the first gold pourbar
at the South Plant occurredwas 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.Third-Party Debt
At September 30, 1997,the end of the first quarter of 1998, third-party debt aggregated $49$49.5
million, including $19$17.4 million from OPIC for which the Company is subject to
limited recourse (described below under "Financing Facilities") and $1.1$0.9 million
from other sources which is guaranteed by the Company. Scheduled third-party
debt service for the fourth quarterremainder of 19971998 is expected to aggregate $1.6 million, all of which is expected to be funded by
mining operations revenues.
At inception, financing requirements for$9.8 million.
Financing Facilities
In connection with the Phase III mine expansion, were
estimated at $54 million. By December 31, 1996,TGL secured third-party
financing of approximately $54.2 million, had been secured, of which $53.6 million was drawn down,
and $47.9$42.9 million remained outstanding at September 30, 1997.March 31, 1998. In the
fourth quarter ofDecember 1997, TGL
expects to securesecured $5.8 million of additional financing for replacement mining equipment.
Skandinaviska Enskilda Banken/Swedish Export Credits BoardBoard. 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 September 30, 1997, TGL had drawn down SEK
93.8March 31, 1998, $11.3 million (or approximately $14.1 million), of which $1.4 million had been
repaid.this facility remained
outstanding.
In connection with the purchase of TGL's Phase I crusher plant, a loan of
$1.1$0.9 million, secured in 1989, remained outstanding at September 30, 1997,March 31, 1998, bearing
an interest rate of 0%, which is guaranteed by the Company.
26
27
Caterpillar Financial Services CorporationCorporation. 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 CAT and otherreplacement mining equipment. The revolving credit
facility is subject to renewal in May 1998.1998 and is currently under review. 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 September 30,
1997,March 31,
1998, Caterpillar had issued disbursements, at TGL's request, for $20.5$26.3 million
of such facility, bearing interest at fixed rates ranging from 7.85% to 8.25%8.30%,
of which $4.3$6.4 million had been repaid.
In the fourth quarter of 1997, TGL expects to secure from Caterpillar $5.8
million in additional financing, in three tranches, for the purchase of
replacement mining equipment. The loans will bear interest at a fixed rate of
8.30% and be repaid over respective terms of five and three years. There can be
no assurance that TGL will be able to secure this additional financing.24
25
Overseas Private Investment CorporationCorporation. 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, of which $17.4 million
remained outstanding at March 31, 1998, with respect to the Phase III expansion.
DisbursementDisbursements under this facility occurred in November 1996. The underlying note
is payable in twelveeleven remaining equal semiannual installments from MarchSeptember 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
cedisCedis increases above a certain threshold and, as a result of regulatory orand
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 DebtDebt. In addition to third-party financing facilities, to satisfy TGL's short
term liquidity needs, the
Company provided to TGL $1.25$4.2 million in bridge financing to TGL during 1997 to satisfy
its short-term liquidity needs. The Company expects to provide financing of
approximately $5.0 million in the second quarter of 1997 and $3 million additional bridge
financing in the third quarter.1998.
Risk Management.Management
In the fourth quarter of 1996, TGL entered intopurchased a series of put options which
securesecured a minimum selling price of $340 per ounce to cover 1997 estimated
production. ShouldWhen the market price of gold declinedeclined below $340 per ounce inbetween
February and December 1997, the Company continuescontinued to ship gold to refineries and
either
sells or exercisessold the put options, receiving payment for the difference between the market
price of gold and approximately $340 per ounce. TGL has been selling
these put options since February 1997. 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. In April 1998, TGL purchased
additional options at an exercise price of $305 per ounce to cover production
from May through September 1998.
The Company maintains $65.9$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. This insuranceThe OPIC equity and retained earnings coverage is
presently limited to a ceiling of $64.4 million;$63.1 million. The Company is, however,
the Company intends to applyapplying to increase the ceiling in 1997.1998. There can be no assurance that such
OPIC insurance will become available in 1997.1998. 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 27
28
insurance policies, TGL has secured business interruption coverage of
up to $19 million for losses associated with machinery breakdown and property
damage and to defray continuing infrastructure and interest costs.
RECENT DEVELOPMENTS
TGL changed its mining methodGhana is currently experiencing a severe electric power shortage resulting
from selective to bulk miningwidespread drought in the second
quarterregion from which Ghana generates its
hydroelectric power. In response to the shortage, the Ghanaian government's
electric utility, Electric Corporation of 1997.Ghana Ltd. ("ECG"), has imposed
significant distribution restrictions on electricity that have negatively
impacted TGL's operations. ECG is currently providing 60% of TGL's electric
power needs. TGL added additional standby diesel generators at the beginning of
May 1998, which now enables the mine to operate at approximately 85% capacity.
The Company does not believe that the situation, which has also impacted TGL's
suppliers, will improve until the rainy season begins. As a result of the
foregoing, TGL believes that this change will increase operating
efficiencies and improve ore control. TGL is currently developing and testing a
new mine plan using a more sophisticated mine model and historicalactual production
data. The new mine plan: (i) incorporates a new, modified pit design, (ii)
facilitates the change in mining method, and (iii) addresses the previously
disclosed slope instability problem. Until the new mine plan is finalized and
testing completed (which is expected in early 1998), TGL cannot quantify the
effect that the new mine plan will have on the calculation of previously
reported proven and probable in situ mineable reserves. It is anticipated,
however, that proven and probable in situ mineable reserves will be reduced.
TGL estimates 1997 goldapproximately 10% less
than forecasted production at approximately 265,000of 340,000 ounces.
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 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."25
26
TIMBER BUSINESS
The Company's Russian venture, Forest-Starma,Closed Joint-Stock Company "Forest-Starma",
in which Pioneer Forest, Inc. (a wholly owned subsidiary of the Company) has a
95%97% direct interest is pursuing the development of timber production under a
long-term lease comprising 240,000 hectares (approximately 592,800593,000 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 cuttingleasehold rights that will give
Forest-Starma total cutting rights of approximately 575,000555,000 cubic meters.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 280,000335,000 cubic meters of timber in 1997.1998. The
decrease from the previously reported target of 360,000 cubic meters was
attributable principally to unusually inclement weather and lower than expected
operating productivity and equipment availability.
In the first quarter of 1995, Forest-Starma commenced the harvesting of
timber harvestingwhich 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.
WhileRESULTS OF OPERATIONS
Forest-Starma harvests timber throughout the year and incurs the
resulting operating expenses, it ships timber from mid-April through
mid-December. As a result, Forest-Starma has incurred, and expects to continue
to incur, operatingrecorded losses from fixed costsof $2.7 million, or 11 cents per share, on
revenues of $0.3 million in the first quarter of the
Company's fiscal year, and may incur operating losses1998, compared to a loss of
$0.6 million, or 2 cents, in the second quarter.
RESULTS OF OPERATIONS
In January 1997,first quarter of 1997. There were no revenues
recorded during this quarter in 1997. The higher losses resulted from higher
interest expense and a timber inventory cost-to-market write-down resulting from
lower timber prices. Forest-Starma commenced commercial operations, producing
approximately 190,000produced 52,500 cubic meters of timber induring
the first nine monthsquarter of the
year, including 78,0001998 compared to 49,000 cubic meters in the thirdfirst quarter
of 1997. Forest-Starma was severely limited in its ability to ship in both the
first quarter of 1998 and commencing
amortization of deferred development costs.1997, because, as expected, the harbor was frozen.
Forest-Starma shipped 73,0008,300 cubic meters of low grade timber in the thirdfirst
quarter resulting in revenues of $4.7 million. Timber
shipments through the first nine months1998 at an average realized price of 1997 totaled 136,000$34 per cubic meters
resulting in revenues of $8.9 million. During the third quarter and nine months
ended September 30, 1997, Forest-Starma recorded losses of $1.6 million, or 6
cents per share, and $3.4 million, or 13 cents per share, respectively. The
losses were principally attributable to lower than expected timber prices in the
Japanese market and lower than expected operating productivity and shipments.
28
29meter.
Forest-Starma values its inventory at the lower of cost or market using the
full absorption accounting method. Accordingly, costs of goods sold of $4.7$1.6
million in the thirdfirst quarter and $8.5 million through September 30, 1997,of 1998 included all operating costs such as
payroll, fuel, spare parts, site related general and administrative expenses,
amortization, depreciation and other taxes.taxes as well as a cost-to-market
adjustment of $1.1 million. During the quarter, the average production cost was
$79 per cubic meter. Since a portion of these costs are fixed and unrelated to
production levels, the Company anticipates that the average production cost per
cubic meter will decline as production levels increase. The decline in realized
timber prices experienced in 1997 continued through the first quarter of 1998
and, as a result, finished goods inventory was restated to market value at $49
per cubic meter. Approximately 117,000 cubic meters of timber remained in
inventory at March 31, 1998.
Other expenses of $1.4 million and $3.5 million for the third quarter and nine months ended September 30, 1997, respectively,March 31, 1998
included interest and management fees, foreign
exchange losses and bad debt expense.fees. The statutory income tax rate in Russia is 35%.
LIQUIDITY AND CAPITAL RESOURCES
Project Financing.Financing
Capital required by this venture is now projected at approximately $53.1$62
million through the end of 1997,1998. At March 31, 1998, project financing aggregated
$55.9 million including $38.4$39.3 million in subordinated debt and accrued interest
provided by the Company, $7.3$9.2 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 and in February of 1998 has forgiven $1.9
million of subordinated debt and interest. Forest-Starma completed a $9.3
million project financing with OPIC in July 1996, of which $8.1$7.4 million wasremained
outstanding at September 30, 1997.March 31, 1998. The underlying note is payable in thirteentwelve
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
26
27
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. By the end of 1997, $1.9 million
of principal will be repaid on theScheduled third-party financing, leaving an outstanding
balance of $7.4debt service for 1998 is expected
to aggregate $2 million. During the second half of 1996, Forest-Starma applied
for $6.5 million in additional OPIC financing for an expansion planned in 1997.
These funds will offset, in part, the subordinated debt provided by the Company
for the 1997 expansion.
Direct Investment and Risk Management.Management
Direct investmentsinvestment in Forest-Starma by the Company aggregated $37.4$40.2 million
at September 30, 1997.March 31, 1998. 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.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 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. Prior to securing third-party
financing,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 will providemay elect to develop these
projects in the future. Since inception, the Company provided funding of approximately $1and
services to these projects aggregating $4.3 million, including $0.5 million in
1998.
MISCELLANEOUS -- OTHER OPERATIONS
The Company reported losses of 2 cents per share as "other" in the first
quarter of 1998 and the first quarter of 1997, principally from unallocated
interest expense.
In April 1998, the American Institute of which $0.8 million had been expended through September 30, 1997.
29
30Certified Public Accountants (the
"AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". The new standard requires that entities expense costs of start-up
activities as those costs are incurred. The term start-up includes
pre-operating, pre-opening and organization activities. The Company has
capitalized certain pre-operating costs in connection with its natural resource
operations, and has certain capitalized organizational costs associated with its
emerging markets financial services operations.
The statement must be adopted by the first quarter of 1999. At adoption,
the Company must record a cumulative effect of a change in accounting principle
and write-off all remaining unamortized start-up costs. At this time, the
Company has not completed its analysis of the unamortized capitalized start-up
costs. The Company expects that the charge associated with the adoption of this
statement will be material to the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL
The Company's liquid assets consisting of cash and marketable securities
(exclusive of gold mining and timber operations) increaseddecreased by $38.2$19.0 million in
the first nine monthsquarter of 19971998 to $95.6$76.9 million principally from increaseddecreased 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
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(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 September 30, 1997,March 31, 1998, the
Company had borrowed $36$42.5 million under the B-share Revolver and $46.5$57.5 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 September 30, 1997,March 31, 1998, 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 September 30, 1997,March 31, 1998, 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 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 $2.1$2.8
million at September 30, 1997,March 31, 1998, 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.
In December 1996, the Company's wholly owned subsidiary, Pioneer Real
Estate Advisors, Inc. ("PREA"), entered into an agreement with a bank providing
for a $2.6 million line of credit to finance property development activities in
Russia. Advances under the line bear interest at the rate of LIBOR (3 months)
plus 6%. The credit facility, which expires on January 5, 1999, provides for an
arrangement fee of 0.25% of the total commitment and an annual commitment fee of
0.50% of the unused portion of the facility. At September 30, 1997, PREA had
borrowed $2.2 million under the facility.
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FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q,
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
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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, threefour of the Company's mutual
funds (including the twothree largest funds) have management fees which are
adjusted based upon the funds' performance relative to the performance of an
established index. As a result, management fee revenues may be subject to
unexpected volatility.
The mutual fund industry is intensely competitive. Many organizations in
this industry are attempting to sell and service the same clients and customers,
not only with mutual fund investments but with other financial services
products. Some of the Company's competitors have more products and product lines
and substantially greater assets under management and financial resources.
As described above, the Company offers a multi-class share structure on its
domestic mutual funds. Under such structure, the Company pays to dealers a
commission on the sale of back-end load shares but the investor does not pay any
sales charge unless it redeems before the expiration of the minimum holding
period, which ranges from three to six years in the case of Class B Shares and
which is one year in the case of Class C Shares. The Company's cash flow and
results of operations may be adversely affected by vigorous sales of back-end
load shares because its recovery of the cost of commissions paid up front to
dealers is spread over a period of years. During this period, the Company bears
the costs of financing and the risk of market decline.
The businesses of the Company and its domestic financial services
subsidiaries are primarily dependent upon their associations with the Pioneer
Family of Mutual Funds with which they have contractual relationships. In the
event any of the management contracts, underwriting contracts or service
agreements 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 31
32
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.
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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 has derived significant revenues and net income from
its Russian financial services businesses.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.
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.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.(a) Exhibits
The Exhibits filed with this Quarterly Report on Form 10-Q are listed on
the "Index to Exhibits" below, which is incorporated herein by reference.
(B) REPORTS FILED ON FORMbelow.
(b) Reports filed on Form 8-K. None.
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SIGNATURES
It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary to a fair statement of results
for the period report, but such results are not necessarily indicative of
results to be expected for the year due to the effect that stock market
fluctuations may have on assets under management. All accounting policies have
been applied consistently with those of prior periods. Such financial
information is subject to year-end adjustments and annual audit by independent
public accountants.
Pursuant to the requirements 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.
Dated: November 14, 1997May 15, 1998
THE PIONEER GROUP, INC.
/s/ WILLIAM H. KEOUGH
--------------------------------------------------------------------------
WILLIAM H. KEOUGH, SENIOR VICE
PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------
10.1 Note Agreement dated as of August 14, 1997, by and between The Pioneer Group, Inc.
and The Travelers Insurance Company.
11 Computation of earnings per share.
2727.98 Financial Data Schedule.Schedule
27.97 Financial Data Schedule
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EXHIBIT 11
THE PIONEER GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
COMPUTATION FOR CONSOLIDATED -------------------------- --------------------------
STATEMENT OF INCOME 1997 1996 1997 1996
- ----------------------------------------- ----------- ----------- ----------- -----------
Net income(1)............................ $ 9,522 $ 5,091 $ 21,806 $ 13,725
=========== =========== =========== ===========
Shares
Weighted average number of common
shares outstanding.................. 25,182,000 24,961,000 25,148,000 24,943,000
Dilutive effect of stock options and
restricted stock proceeds as common
stock equivalents computed under the
treasury stock method using the
average price during the period..... 506,000 509,000 441,000 519,000
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding as adjusted(1)............. 25,688,000 25,470,000 25,589,000 25,462,000
=========== =========== =========== ===========
Earnings per share(1).................... $ 0.37 $ 0.20 $ 0.85 $ 0.54
=========== =========== =========== ===========
- ---------------
(1) These amounts agree with the related amounts in the Consolidated Statement
of Income.32