1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1999
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)
------------------------
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 [ ]
------------------------
As of September 30, 1999, there were 26,503,913 shares of the Registrant's
Common Stock, $.10 par value per share, issued and outstanding.
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2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PIONEER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, at cost which approximates fair
value..................................................... $ 42,148 $ 44,212
Restricted cash............................................. 10,975 5,512
Investment in marketable securities, at fair value.......... 4,482 3,638
Receivables:
From securities brokers and dealers for sales of mutual
fund shares............................................ 11,805 14,072
From Pioneer Family of Mutual Funds..................... 19,509 17,334
For securities sold..................................... 803 1,089
Other................................................... 8,796 15,247
Timber inventory............................................ 5,026 3,585
Other current assets........................................ 10,515 13,310
Current assets net of current liabilities of discontinued
operations................................................ -- 1,011
-------- --------
Total current assets................................ 114,059 119,010
-------- --------
NONCURRENT ASSETS:
Cost of acquisition in excess of net assets (net of
accumulated amortization of $16,509 in 1999 and $14,900 in
1998)..................................................... 15,289 16,572
Long-term venture capital investments, at fair value (cost
$55,773 in 1999 and $117,547 in 1998)..................... 49,552 129,560
Long-term investments, at lower of cost or fair value....... 7,063 7,006
Timber operations:
Timber equipment and facilities (net of accumulated
depreciation of $7,226 in 1999 and $5,346 in 1998)..... 18,835 18,800
Deferred timber development costs (net of accumulated
amortization of $3,152 in 1999 and $2,841 in 1998)..... 7,144 19,031
Building (net of accumulated depreciation of $1,928 in 1999
and $1,413 in 1998)....................................... 24,599 25,136
Furniture, equipment, and leasehold improvements (net of
accumulated depreciation and amortization of $17,695 in
1999 and $13,146 in 1998)................................. 18,064 20,169
Other noncurrent assets..................................... 29,641 15,016
Noncurrent assets net of noncurrent liabilities of
discontinued operations................................... 46,295 68,918
-------- --------
Total noncurrent assets............................. 216,482 320,208
-------- --------
$330,541 $439,218
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to funds for shares sold............................ $ 11,796 $ 14,053
Accounts payable............................................ 8,011 9,162
Accrued expenses............................................ 46,012 30,621
Brokerage liabilities....................................... 10,375 5,669
Accrued income taxes........................................ 4,057 19,647
Current portion of notes payable............................ 1,345 1,818
Current liabilities net of current assets of discontinued
operations................................................ 39,929 --
-------- --------
Total current liabilities........................... 121,525 80,970
-------- --------
NONCURRENT LIABILITIES:
Notes payable, net of current portion....................... 64,541 99,035
-------- --------
Total noncurrent liabilities........................ 64,541 99,035
-------- --------
Total liabilities................................... 186,066 180,005
-------- --------
Minority interest........................................... 61,438 104,411
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value; authorized 60,000,000
shares; issued 26,508,198 shares in 1999 and 26,134,103
shares in 1998......................................... 2,651 2,613
Paid-in capital......................................... 46,839 30,110
Retained earnings....................................... 45,260 133,013
Treasury stock at cost, 4,285 shares in 1999 and 11,303
shares in 1998......................................... (111) (265)
Cumulative translation adjustment....................... (2,664) (1,855)
-------- --------
91,975 163,616
Less -- Deferred cost of restricted common stock
issued................................................. (8,938) (8,814)
-------- --------
Total stockholders' equity.......................... 83,037 154,802
-------- --------
$330,541 $439,218
======== ========
The Company's Annual Report on Form 10-K should be read in conjunction with
these financial statements.
2
3
THE PIONEER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues and sales:
Investment management fees........................ $ 37,216 $ 34,506 $ 108,875 $ 105,247
Underwriting commissions and distribution fees.... 3,365 7,694 11,434 22,203
Shareholder services fees......................... 10,832 8,243 32,742 23,737
Net revenues from brokerage activities............ 284 (828) 1,154 1,240
Trustee fees and other income..................... 7,189 13,290 21,797 26,439
----------- ----------- ----------- -----------
Revenues from financial services businesses....... 58,886 62,905 176,002 178,866
Timber sales...................................... 5,223 3,059 9,499 5,941
----------- ----------- ----------- -----------
Total revenues and sales..................... 64,109 65,964 185,501 184,807
----------- ----------- ----------- -----------
Costs and expenses:
Management, distribution, shareholder service and
administrative expenses......................... 50,116 58,372 149,757 155,794
Timber operating costs and expenses............... 7,125 6,764 12,196 18,838
----------- ----------- ----------- -----------
Total costs and expenses..................... 57,241 65,136 161,953 174,632
----------- ----------- ----------- -----------
Other (income) expense:
Unrealized and realized (gains) losses on venture
capital and marketable securities investments,
net............................................. (68) 13,824 2,814 780
Equity in (earnings) losses of affiliated
companies....................................... 2,217 -- 9,852 (51)
Interest expense.................................. 1,207 2,929 5,069 8,510
----------- ----------- ----------- -----------
Total other (income) expense................. 3,356 16,753 17,735 9,239
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
provision for income taxes and minority interest.... 3,512 (15,925) 5,813 936
----------- ----------- ----------- -----------
Provision for income taxes............................ 2,858 1,966 6,626 11,129
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest................................... 654 (17,891) (813) (10,193)
----------- ----------- ----------- -----------
Minority interest..................................... (168) (10,102) 1,146 (8,403)
----------- ----------- ----------- -----------
Net income (loss) from continuing operations before
cumulative effect of change in accounting
principle........................................... 822 (7,789) (1,959) (1,790)
Loss from discontinued operations..................... (42,844) (8,688) (73,682) (21,470)
Cumulative effect of change in accounting principle,
(start-up costs, net of income taxes of $261)....... -- -- (12,112) --
----------- ----------- ----------- -----------
Net income (loss)..................................... $ (42,022) $ (16,477) $ (87,753) $ (23,260)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Continuing operations............................. $ 0.03 $ (0.31) $ (0.08) $ (0.07)
Discontinued operations........................... (1.65) (0.34) (2.84) (0.86)
Cumulative effect of change in accounting
principle....................................... -- -- (0.47) --
----------- ----------- ----------- -----------
Total basic earnings (loss) per share........ $ (1.62) $ (0.65) $ (3.39) $ (0.93)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations............................. $ 0.03 $ (0.31) $ (0.08) $ (0.07)
Discontinued operations........................... (1.63) (0.34) (2.83) (0.85)
Cumulative effect of change in accounting
principle....................................... -- -- (0.47) --
----------- ----------- ----------- -----------
Total diluted earnings (loss) per share...... $ (1.60) $ (0.65) $ (3.38) $ (0.92)
=========== =========== =========== ===========
Dividends per share................................... -- $ -- -- $ (0.20)
=========== =========== =========== ===========
Basic shares outstanding.............................. 26,014,000 25,207,000 25,897,000 25,091,000
=========== =========== =========== ===========
Diluted shares outstanding............................ 26,238,000 25,207,000 25,972,000 25,325,000
=========== =========== =========== ===========
The Company's Annual Report on Form 10-K should be read in conjunction with
these financial statements.
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4
THE PIONEER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $(87,753) $(23,260)
Less net income (loss) of discontinued operations.......... (73,682) (21,470)
Less cumulative effect of change in accounting principle... (12,112) --
-------- --------
Net income (loss) from continuing operations............... $ (1,959) $ (1,790)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 13,085 20,727
Unrealized and realized gains (losses) on venture
capital, marketable securities, and long term
investments, net....................................... 2,814 780
Equity in (earnings) losses of affiliated companies...... 9,852 (51)
Restricted stock plan expense............................ 2,424 2,273
Deferred income taxes.................................... (4,100) (21,356)
Minority interest........................................ 1,146 (8,403)
Changes in operating assets and liabilities:
Investments in marketable securities, net................ (930) 4,441
Receivable from securities brokers and dealers for sales
of mutual fund shares.................................. 2,267 1,314
Receivables for securities sold.......................... 286 10,410
Receivables from Pioneer Family of Mutual Funds and
other.................................................. 4,017 3,816
Receivable from sale of Class B share rights............. -- (61,731)
Timber inventory......................................... (1,441) 3,394
Other current assets..................................... 1,151 (5,024)
Other noncurrent assets.................................. 1,644 (783)
Payable to funds for shares sold......................... (2,257) (1,339)
Accrued expenses and accounts payable.................... 13,879 8,289
Brokerage liabilities.................................... 4,706 (8,796)
Accrued income taxes..................................... (15,003) 12,016
-------- --------
Total adjustments and changes in operating assets and
liabilities.......................................... 33,540 (40,023)
-------- --------
Net cash provided by (used in) continuing operating
activities........................................... 31,581 (41,813)
-------- --------
Net cash provided by (used in) discontinued operating
activities........................................... 480 7,742
-------- --------
Net cash provided by (used in) operating
activities........................................... 32,061 (34,071)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture, equipment and leasehold
improvements............................................. (4,488) (8,714)
Building................................................... 22 (513)
Long-term venture capital investments...................... (884) (30,117)
Proceeds from sale of long-term venture capital
investments.............................................. 909 21,248
Proceeds from sale of domestic venture capital
operations............................................... 34,945 --
Deferred timber development costs.......................... -- 357
Purchase of timber equipment and facilities................ (1,915) (1,732)
Other investments.......................................... (502) (2,582)
Proceeds from sales of other investments................... -- 1,103
Cost of acquisition in excess of net assets acquired....... (169) (50)
Deconsolidation of pension company subsidiary.............. (10,070) --
Purchase of long-term investments.......................... (111) (827)
Proceeds from sale of long-term investments................ 644 5,007
-------- --------
Net cash provided by (used in) continuing investing
activities........................................... 18,381 (16,820)
-------- --------
Net cash (used in) investing activities, discontinued
operations........................................... (4,874) (6,888)
-------- --------
Net cash provided by (used in) investing
activities........................................... 13,507 (23,708)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................. -- (5,079)
Liquidation of venture capital partnership................. (1,972) --
Distributions to limited partners of venture capital
subsidiary............................................... (1,288) (68)
Amounts raised by venture capital investment
partnerships............................................. -- 17,903
Sale of stock by subsidiary................................ 555 --
Employee stock purchase plan............................... 349 474
Exercise of stock options.................................. 1,139 3,391
Restricted stock plan award................................ 16 28
Dealer advances............................................ -- 32,797
Revolving credit agreement (repayments) borrowings, net.... (30,000) 22,500
Repayments of notes payable................................ (4,967) (4,805)
Reclassification of restricted cash........................ (5,463) (1,351)
-------- --------
Net cash provided by (used in) continuing financing
activities........................................... (41,631) 65,790
-------- --------
Net cash (used in) financing activities, discontinued
operations........................................... (5,726) (9,494)
-------- --------
Net cash provided by (used in) financing
activities........................................... (47,357) 56,296
-------- --------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS........................................... (275) (211)
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (2,064) (1,694)
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 44,212 50,421
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 42,148 $ 48,727
======== ========
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, 1999
NOTE 1 -- 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 Annual Report on Form 10-K for the
year ended December 31, 1998. The footnotes to the financial statements reported
in the 1998 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 1998
consolidated financial statements to conform with the 1999 presentation.
During the first quarter of 1999, the Company adopted the provisions of the
American Institute of Certified Public Accountants' (the "AICPA") SOP 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
Company had capitalized certain pre-operating costs in connection with its
natural resource operations, and had capitalized organizational costs associated
with its financial services operations. Adoption of this statement resulted in a
write-off of unamortized start-up costs of $12.1 million, or $0.47 per share,
which is reflected in the accompanying consolidated financial statements as a
change in accounting principle. The amount of pro forma net income in the first
quarter of 1998 did not differ materially from the amount reported after giving
effect to the change in accounting principle.
In April 1999, the Company reached agreement with Nationwide Global
Holdings, Inc. to sell newly issued shares of its Polish pension company
subsidiary resulting in a 30% interest for $20 million. As a result of the
transaction, which received Polish regulatory approval on June 9, 1999, the
Company recognized a gain of approximately $12 million which was reflected as a
credit to stockholders' equity in the second quarter of 1999. In addition, the
Company deconsolidated the Polish pension company as control is shared with
Nationwide and is accounting for its investment in the pension company under the
equity method retroactive to January 1, 1999. The effect of this transaction is
reflected in the accompanying Consolidated Statements of Cash Flows as
deconsolidation of pension company subsidiary.
Income taxes paid were $23,290,000 and $14,794,000 for the nine months
ended September 30, 1999, and September 30, 1998, respectively. In addition,
interest paid was $7,223,000 for the nine months ended September 30, 1999, and
$8,167,000 for the nine months ended September 30, 1998.
NOTE 2 -- EARNINGS PER SHARE
The following table details the calculation of basic and diluted earnings
per share ("EPS"). Basic EPS is computed by dividing reported earnings available
to stockholders by weighted average shares outstanding not including
contingently issuable shares. Diluted EPS includes the effect of the
contingently issuable shares and other common stock equivalents, if not
antidilutive.
NET EARNINGS/
INCOME/ (LOSS)
(LOSS) SHARES PER SHARE
--------- ------- ----------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED 9/30/99
Basic earnings per share calculation:
Continuing operations........................... $ 822 26,014 $ 0.03
Discontinued operations......................... $(42,844) 26,014 $(1.65)
-------- ------ ------
Total................................. $(42,022) 26,014 $(1.62)
======== ====== ======
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6
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1999
NET EARNINGS/
INCOME/ (LOSS)
(LOSS) SHARES PER SHARE
--------- ------- ----------
(DOLLARS AND SHARES IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Options......................................... 224
Restricted stock................................ --
------
Diluted earnings per share calculation:
Continuing operations........................... $ 822 26,238 $ 0.03
Discontinued operations......................... $(42,844) 26,238 $(1.63)
-------- ------ ------
Total................................. $(42,022) 26,238 $(1.60)
======== ====== ======
FOR THE THREE MONTHS ENDED 9/30/98
Basic earnings per share calculation:
Continuing operations........................... $ (7,789) 25,207 $(0.31)
Discontinued operations......................... $ (8,688) 25,207 $(0.34)
-------- ------ ------
Total................................. $(16,477) 25,207 $(0.65)
======== ====== ======
Options......................................... --
Restricted stock................................ --
Diluted earnings per share calculation:
Continuing operations........................... $ (7,789) 25,207 $(0.31)
Discontinued operations......................... $ (8,688) 25,207 $(0.34)
-------- ------ ------
Total................................. $(16,477) 25,207 $(0.65)
======== ====== ======
FOR THE NINE MONTHS ENDED 9/30/99
Basic earnings per share calculation:
Continuing operations........................... $ (1,959) 25,897 $(0.08)
Discontinued operations......................... $(73,682) 25,897 $(2.84)
Cumulative effect of change in accounting
principle..................................... $(12,112) 25,897 $(0.47)
-------- ------ ------
Total................................. $(87,753) 25,897 $(3.39)
======== ====== ======
Options......................................... 75
Restricted stock................................ --
------
Diluted earnings per share calculation:
Continuing operations........................... $ (1,959) 25,972 $(0.08)
Discontinued operations......................... $(73,682) 25,972 $(2.83)
Cumulative effect of change in accounting
principle..................................... $(12,112) 25,972 $(0.47)
-------- ------ ------
Total................................. $(87,753) 25,972 $(3.38)
======== ====== ======
FOR THE NINE MONTHS ENDED 9/30/98
Basic earnings per share calculation:
Continuing operations........................... $ (1,790) 25,091 $(0.07)
Discontinued operations......................... $(21,470) 25,091 $(0.86)
-------- ------ ------
Total................................. $(23,260) 25,091 $(0.93)
-------- ------ ------
Options......................................... 251
Restricted stock................................ (17)
------
Diluted earnings per share calculation:
Continuing operations........................... $ (1,790) 25,325 $(0.07)
Discontinued operations......................... $(21,470) 25,325 $(0.85)
-------- ------ ------
Total................................. $(23,260) 25,325 $(0.92)
======== ====== ======
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7
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1999
NOTE 3 -- 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 nine months ended September 30, 1999 and 1998.
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- ---------
(DOLLARS) IN
THOUSANDS
Net income (loss)................................... $(87,753) $(23,260)
-------- --------
Other comprehensive income (expense):
Foreign currency translation adjustments.......... (809) (510)
-------- --------
Other comprehensive income (expense)................ (809) (510)
-------- --------
Comprehensive (loss)/income......................... $(88,562) $(23,770)
======== ========
NOTE 4 -- NET CAPITAL
As a broker-dealer, Pioneer Funds Distributor, Inc. ("PFD") is subject to
the Securities and Exchange Commission's ("SEC") regulations and operating
guidelines which, among other things, requires PFD to maintain a specified
amount of net capital. Net capital may fluctuate on a daily basis. PFD's net
capital, as computed under Rule 15c3-1, was $1,145,217 at September 30, 1999,
which exceeded required net capital of $250,000 by $895,217.
PFD is exempt from the reserve requirements of Rule 15c3-3, since its U.S.
broker-dealer transactions are limited to the purchase, sale and redemption of
redeemable securities of registered investment companies. All customer funds are
promptly transmitted and all securities received in connection with activities
as a broker-dealer are promptly delivered. PFD does not otherwise hold funds or
securities for, or owe money or securities to, customers.
NOTE 5 -- NOTES PAYABLE
Notes payable of the Company consist of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(DOLLARS)IN THOUSANDS
Senior Credit Facility...................................... $40,000 $ 70,000
Senior note payable to a commercial lender, principal
payable on August 15, 2004, interest payable at 9.45%..... 20,000 20,000
Small Business Administration ("SBA") financing, notes
payable to a bank......................................... -- 3,750
Note payable to a bank, interest and principal payable
monthly at the one-month Warsaw Bank rate plus 1.75%
through August 2002....................................... 306 447
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.................................................. -- 456
Project financing, guaranteed by OPIC, payable in
semi-annual installments of $620,000 through December 15,
2003, interest payable at 9.95%........................... 5,580 6,200
------- --------
65,886 100,853
Less: Current portion....................................... (1,345) (1,818)
------- --------
$64,541 $ 99,035
======= ========
7
8
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1999
Maturities of notes payable at September 30, 1999, for each of the next
five years and thereafter are as follows (dollars in thousands):
10/1/99 - 9/30/00........................................... $ 1,345
10/1/00 - 9/30/01........................................... 41,379
10/1/01 - 9/30/02........................................... 1,302
10/1/02 - 9/30/03........................................... 1,240
10/1/03 - 9/30/04........................................... 20,620
Thereafter.................................................. --
-------
$65,886
=======
At September 30, 1999, the Company had $36 million of debt attributable to
its discontinued gold mining operations. Scheduled debt service for the
remainder of 1999 is expected to aggregate $2.2 million, of which $1.8 million
represents principal payments.
In June 1996, the Company entered into an agreement with a syndicate of
commercial banks for a senior credit facility, which has been amended from time
to time (the "Credit Facility"). Under the Credit Facility, the Company may
borrow up to $55 million for general corporate purposes. 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. The Company is in compliance with all applicable covenants. At
September 30, 1999, the Company had borrowed $40 million under the Credit
Facility.
As of September 30, 1999, the Company had two 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 $60 million.
Under these agreements, the Company will pay the bank a weighted average fixed
rate of 6.90%, plus the applicable margin of 2.25% on the notional principal.
The bank will pay the Company interest on the notional principal at the current
variable rate stated under the Credit Facility. The Company has incurred
approximately $955,000 and $876,000 of interest expense on these swap agreements
during the nine months ended September 30, 1999 and September 30, 1998,
respectively. During June 1999, the Company unwound $40 million of overhedged
swaps and recognized $426,000 of income on the transaction. At September 30,
1999, the Company had $20 million of overhedged swaps and recognized
approximately $191,000 of expense during the nine months ended September 30,
1999, in accordance with generally accepted accounting principles, related to
these swaps. At September 30, 1999, the fair value of the swaps was ($959,000),
compared to a book value of ($293,000). If the Company were to terminate these
agreements, it would be required to pay an amount approximating fair value.
In 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 8.95% per annum, have a maturity of seven years.
The restrictions and financial covenants under the Note Agreement are
substantially similar to the amended restrictions and financial covenants under
the Credit Facility.
For the nine months ended September 30, 1999 and September 30, 1998 the
weighted average interest rate on the borrowings under the Credit Facility and
Note Agreement was 9.41% and 7.93%, respectively.
NOTE 6 -- DISCONTINUED OPERATIONS
In the third quarter of 1998, the Company decided to liquidate its Russian
banking operations. Accordingly, the operating results for the bank have been
segregated from the results from the continuing
8
9
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1999
operations and reported as a separate line on the consolidated statements of
operations for all periods presented. In December 1998, the Company sold its
stock in its Russian banking operations to an unrelated third party. The
following is an unaudited summary of the results of discontinued Russian banking
operations for the nine months ended September 30, 1998:
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
(AMOUNTS
IN THOUSANDS)
Revenues from banking activities............................ $ 2,150
-------
Loss before income taxes and minority interest.............. (9,589)
Income tax benefit.......................................... (311)
-------
Loss from discontinued operations before minority
interest.................................................. (9,278)
-------
Minority interest........................................... (2,829)
-------
Loss from discontinued operations........................... $(6,449)
-------
In the second quarter of 1999, the Company reflected the gold mining
segment as a discontinued operation. Accordingly, the operating results for gold
mining have been segregated from the results of continuing operations and
reported as a separate line on the consolidated statements of operations for all
periods presented. Losses from discontinued gold mining operations in the nine
months ended September 30, 1999 include $53.6 million from the estimated loss on
the disposition of the gold mining segment, principally from the impairment of
the long-lived assets of Teberebie Goldfields Limited, the Company's 90% owned
subsidiary. The above referenced losses are management's best estimates of the
costs of winding down the gold mining operations. The Company, however, may
record gains or incur additional losses in either a sales transaction or closure
scenario as details, timing and other events unfold. There can be no assurance
that the Company can successfully negotiate a sales transaction and consummate
that transaction or close the mine in accordance with management's estimates. In
addition, the Company disposed of its powdered metals business. Losses included
$0.9 million from the loss on the disposition of the powdered metals business.
The following is an unaudited summary of the loss from operations of the gold
mining and powdered metals segments for the nine months ended September 30, 1999
and 1998, respectively:
NINE MONTHS ENDED
SEPTEMBER 30, 1999
-----------------------------
NET INCOME EARNINGS/(LOSS)
/(LOSS) PER SHARE
---------- ---------------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Loss from operations of discontinued gold mining
segment, net of taxes of ($365)................... $(18,705) $(0.72)
Estimated loss on disposal of gold mining
segment......................................... (53,580) (2.06)
Loss from operations of discontinued powdered
metals business, net of taxes of ($239)......... (498) (0.02)
Loss on disposal of powdered metals business...... (899) (0.03)
-------- ------
Total loss from discontinued
operations............................ $(73,682) $(2.83)
======== ======
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------------
NET INCOME EARNINGS/(LOSS)
/(LOSS) PER SHARE
---------- ---------------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Loss from operations of discontinued gold mining
segment, net of taxes of ($4,948)............... $(15,021) $(0.60)
-------- ------
9
10
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1999
The following is an unaudited summary of the results of discontinued gold
mining operations for the nine months ended September 30, 1999 and 1998,
respectively:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(AMOUNTS (AMOUNTS
IN THOUSANDS) IN THOUSANDS)
Revenues from gold mining activities........ $ 54,319 $ 58,387
-------- --------
Loss before income taxes and minority
interest.................................. (21,374) (21,525)
Income tax benefit.......................... (365) (4,948)
-------- --------
Loss from discontinued operations before
minority interest......................... (21,009) (16,577)
-------- --------
Minority interest........................... (2,304) (1,556)
-------- --------
Loss from discontinued operations........... $(18,705) $(15,021)
-------- --------
The results of discontinued gold mining operations for the nine months
ended September 30, 1999 and September 30, 1998 included an allocation of
directly attributable corporate interest expense of $1,283,000 and $403,000,
respectively. Interest has been allocated based upon the intercompany financing
provided to the gold mining operations.
NOTE 7 -- FINANCIAL INFORMATION BY BUSINESS SEGMENT
Pursuant to SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" the Company presents 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.
10
11
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE 7 -- FINANCIAL INFORMATION BY BUSINESS SEGMENT (CONTINUED)
The following details total revenues and income (loss) by business segment
and geographic region, excluding discontinued operations (dollars in thousands):
PIONEER -SUBTOTAL-
INTERNATIONAL FINANCIAL SERVICES PIONEER
PIONEER ------------------------------------- INTERNATIONAL
INVESTMENT CZECH FINANCIAL
MANAGEMENT RUSSIA POLAND REPUBLIC ASIA SERVICES
---------- ------- -------- -------- ----- --------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Gross revenues and sales.......... $ 156,728 $ 9,359 $ 11,930 $1,189 $ -- $ 22,478
========= ======= ======== ====== ===== ========
Intersegment eliminations......... $ (4,558) $ (622) $ -- $ -- $ -- $ (622)
========= ======= ======== ====== ===== ========
Net revenues and sales............ $ 152,170 $ 8,737 $ 11,930 $1,189 $ -- $ 21,856
========= ======= ======== ====== ===== ========
Income (loss) before income taxes,
minority interest and cumulative
effect of accounting change..... $ 40,410 $ (914) $(11,653) $ (695) $(425) $(13,687)
========= ======= ======== ====== ===== ========
Income taxes...................... $ 14,020 $ (578) $ (373) $ (186) $(149) $ (1,286)
========= ======= ======== ====== ===== ========
Minority interest................. $ -- $ 448 $ (132) $ -- $ -- $ 316
========= ======= ======== ====== ===== ========
Net income (loss) from continuing
operations before cumulative
effect of accounting change..... $ 26,390 $ (784) $(11,148) $ (509) $(276) $(12,717)
========= ======= ======== ====== ===== ========
Cumulative effect of change in
accounting principle............ $ (205) $ (521) $ -- $ (14) $ -- $ (535)
========= ======= ======== ====== ===== ========
Net income (loss)................. $ 26,185 $(1,305) $(11,148) $ (523) $(276) $(13,252)
========= ======= ======== ====== ===== ========
Depreciation and amortization..... $ 9,899 $ 1,496 $ 762 $ 70 $ -- $ 2,328
========= ======= ======== ====== ===== ========
Interest expense.................. $ -- $ 10 $ 44 $ -- $ -- $ 54
========= ======= ======== ====== ===== ========
Capital expenditures.............. $ 4,085 $ 507 $ -- $ 19 $ -- $ 526
========= ======= ======== ====== ===== ========
Gross identifiable assets at
September 30, 1999.............. $ 276,080 $45,850 $ 17,430 $ 838 $ -- $ 64,118
========= ======= ======== ====== ===== ========
Intersegment eliminations......... $(159,548) $ (485) $ -- $ -- $ -- $ (485)
========= ======= ======== ====== ===== ========
Net identifiable assets at
September 30, 1999.............. $ 116,532 $45,365 $ 17,430 $ 838 $ -- $ 63,633
========= ======= ======== ====== ===== ========
PIONEER GLOBAL INVESTMENTS
-------------------------------------------------------
CENT. &
EAST. -SUBTOTAL-
REAL U.S. EUROPE PIONEER
ESTATE VENTURE VENTURE RUSSIAN GLOBAL
SERVICES CAPITAL CAPITAL TIMBER INVESTMENTS OTHER TOTAL
-------- -------- -------- -------- ----------- ------- ---------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Gross revenues and sales.......... $ 1,078 $ 109 $ 991 $ 9,499 $ 11,677 $ 7,830 $ 198,713
======= ======== ======= ======== ======== ======= =========
Intersegment eliminations......... $ (1) $ -- $ (201) $ -- $ (202) $(7,830) $ (13,212)
======= ======== ======= ======== ======== ======= =========
Net revenues and sales............ $ 1,077 $ 109 $ 790 $ 9,499 $ 11,475 $ -- $ 185,501
======= ======== ======= ======== ======== ======= =========
Income (loss) before income taxes,
minority interest and cumulative
effect of accounting change..... $(4,098) $ (4,151) $ (959) $ (5,778) $(14,986) $(5,924) $ 5,813
======= ======== ======= ======== ======== ======= =========
Income taxes...................... $(1,048) $ (1,882) $ (51) $ (1,044) $ (4,025) $(2,083) $ 6,626
======= ======== ======= ======== ======== ======= =========
Minority interest................. $ -- $ 1,349 $ (519) $ -- $ 830 $ -- $ 1,146
======= ======== ======= ======== ======== ======= =========
Net income (loss) from continuing
operations before cumulative
effect of accounting change..... $(3,050) $ (3,618) $ (389) $ (4,734) $(11,791) $(3,841) $ (1,959)
======= ======== ======= ======== ======== ======= =========
Cumulative effect of change in
accounting principle............ $ (115) $ (183) $ (382) $(10,692) $(11,372) $ -- $ (12,112)
======= ======== ======= ======== ======== ======= =========
Net income (loss)................. $(3,165) $ (3,801) $ (771) $(15,426) $(23,163) $(3,841) $ (14,071)
======= ======== ======= ======== ======== ======= =========
Depreciation and amortization..... $ 95 $ (128) $ 10 $ 3,199 $ 3,176 $ 106 $ 15,509
======= ======== ======= ======== ======== ======= =========
Interest expense.................. $ 5 $ 234 $ -- $ 905 $ 1,144 $ 3,871 $ 5,069
======= ======== ======= ======== ======== ======= =========
Capital expenditures.............. $ (141) $ (12) $ 3 $ 1,915 $ 1,765 $ 5 $ 6,381
======= ======== ======= ======== ======== ======= =========
Gross identifiable assets at
September 30, 1999.............. $ 1,105 $ 24,497 $49,999 $ 43,033 $118,634 $14,813 $ 473,645
======= ======== ======= ======== ======== ======= =========
Intersegment eliminations......... $ -- $(23,590) $ -- $ -- $(23,590) $(5,776) $(189,399)
======= ======== ======= ======== ======== ======= =========
Net identifiable assets at
September 30, 1999.............. $ 1,105 $ 907 $49,999 $ 43,033 $ 95,044 $ 9,037 $ 284,246
======= ======== ======= ======== ======== ======= =========
11
12
THE PIONEER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
SEPTEMBER 30, 1999
PIONEER -SUBTOTAL-
INTERNATIONAL FINANCIAL SERVICES PIONEER
PIONEER ------------------------------------- INTERNATIONAL
INVESTMENT CZECH FINANCIAL
MANAGEMENT RUSSIA POLAND REPUBLIC ASIA SERVICES
---------- -------- ------- -------- ----- --------------
NINE MONTHS ENDED SEPTEMBER
30, 1998
Gross revenues and
sales.................. $ 166,151 $ 7,476 $ 8,476 $1,234 $ -- $ 17,186
========= ======== ======= ====== ===== ========
Intersegment
eliminations........... $ (7,028) $ -- $ -- $ -- $ -- $ --
========= ======== ======= ====== ===== ========
Net revenues and sales... $ 159,123 $ 7,476 $ 8,476 $1,234 $ -- $ 17,186
========= ======== ======= ====== ===== ========
Income (loss) before
income taxes and
minority interest...... $ 46,827 $(19,446) $(1,264) $ (796) $(668) $(22,174)
========= ======== ======= ====== ===== ========
Income taxes............. $ 16,933 $ (2,710) $ (112) $ (132) $(257) $ (3,211)
========= ======== ======= ====== ===== ========
Minority interest........ $ -- $ (6,862) $ (6) $ -- $ -- $ (6,868)
========= ======== ======= ====== ===== ========
Net income (loss)........ $ 29,894 $ (9,874) $(1,146) $ (664) $(411) $(12,095)
========= ======== ======= ====== ===== ========
Depreciation and
amortization........... $ 18,366 $ 1,152 $ 444 $ 207 $ -- $ 1,803
========= ======== ======= ====== ===== ========
Interest expense......... $ 2,613 $ 368 $ 15 $ -- $ -- $ 383
========= ======== ======= ====== ===== ========
Capital expenditures..... $ 6,697 $ 2,041 $ 363 $ 100 $ -- $ 2,504
========= ======== ======= ====== ===== ========
Gross identifiable assets
at September 30,
1998................... $ 325,757 $ 70,174 $23,640 $1,200 $ -- $ 95,014
========= ======== ======= ====== ===== ========
Intersegment
eliminations........... $(171,896) $(14,640) $ -- $ (86) $ -- $(14,726)
========= ======== ======= ====== ===== ========
Net identifiable Assets
at September 30,
1998................... $ 153,861 $ 55,534 $23,640 $1,114 $ -- $ 80,288
========= ======== ======= ====== ===== ========
PIONEER GLOBAL INVESTMENTS
---------------------------------------
CENT. &
EAST. -SUBTOTAL-
REAL U.S. EUROPE PIONEER
ESTATE VENTURE VENTURE RUSSIAN GLOBAL
SERVICES CAPITAL CAPITAL TIMBER INVESTMENTS OTHER TOTAL
-------- ------- ------- -------- ----------- -------- ---------
NINE MONTHS ENDED SEPTEMBER
30, 1998
Gross revenues and
sales.................. $ 825 $ 1,293 $ 4,238 $ 5,941 $ 12,297 $ 10,370 $ 206,004
======= ======= ======= ======== ======== ======== =========
Intersegment
eliminations........... $ -- $ -- $(3,799) $ -- $ (3,799) $(10,370) $ (21,197)
======= ======= ======= ======== ======== ======== =========
Net revenues and sales... $ 825 $ 1,293 $ 439 $ 5,941 $ 8,498 $ -- $ 184,807
======= ======= ======= ======== ======== ======== =========
Income (loss) before
income taxes and
minority interest...... $(2,438) $ 7,343 $(7,847) $(17,253) $(20,195) $ (3,522) $ 936
======= ======= ======= ======== ======== ======== =========
Income taxes............. $ (779) $ 1,802 $(1,560) $ (451) $ (988) $ (1,605) $ 11,129
======= ======= ======= ======== ======== ======== =========
Minority interest........ $ -- $ 3,048 $(4,583) $ -- $ (1,535) $ -- $ (8,403)
======= ======= ======= ======== ======== ======== =========
Net income (loss)........ $(1,659) $ 2,493 $(1,704) $(16,802) $(17,672) $ (1,917) $ (1,790)
======= ======= ======= ======== ======== ======== =========
Depreciation and
amortization........... $ 48 $ 140 $ 108 $ 2,208 $ 2,504 $ 327 $ 23,000
======= ======= ======= ======== ======== ======== =========
Interest expense......... $ -- $ 262 $ -- $ 3,149 $ 3,411 $ 2,103 $ 8,510
======= ======= ======= ======== ======== ======== =========
Capital expenditures..... $ -- $ 12 $ 14 $ 1,732 $ 1,758 $ -- $ 10,959
======= ======= ======= ======== ======== ======== =========
Gross identifiable assets
at September 30,
1998................... $ 5,308 $77,098 $36,701 $ 47,217 $166,324 $ 34,386 $ 621,481
======= ======= ======= ======== ======== ======== =========
Intersegment
eliminations........... $ (710) $ (7) $(1,163) $ -- $ (1,880) $(25,157) $(213,659)
======= ======= ======= ======== ======== ======== =========
Net identifiable Assets
at September 30,
1998................... $ 4,598 $77,091 $35,538 $ 47,217 $164,444 $ 9,229 $ 407,822
======= ======= ======= ======== ======== ======== =========
12
13
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The consolidated financial statements of The Pioneer Group, Inc. (the
"Company") include the Company's three strategic business units. Pioneer
Investment Management includes the investment management, marketing,
distribution and servicing of the Company's mutual funds based in the United
States and offshore funds based in Ireland. This business unit also provides
investment management services for institutional investors. Pioneer
International Financial Services includes the Company's investment management
and financial services businesses in Poland, the Czech Republic, Russia and
India. Pioneer Global Investments includes the Company's worldwide venture
capital, real estate and timber operations. The Company is in the process of
disposing its gold mining operations and as such is reporting those results as
discontinued operations. Management's Discussion and Analysis of Financial
Condition and Results of Operations is presented in four sections: Results of
Operations, Liquidity and Capital Resources-General, Future Operating Results
and Year 2000.
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS
In the third quarter of 1999, the Company had net income from continuing
operations of $0.8 million, or $0.03 per share, and losses from discontinued
gold mining operations of $42.8 million, or $1.63 per share. During the third
quarter of 1998, the Company reported losses from continuing operations of $7.8
million, or $0.31 per share, losses from discontinued gold mining operations of
$8.2 million, or $0.32 per share, and losses from discontinued Russian banking
operations of $0.5 million, or $0.02 per share. Revenues from continuing
operations were $64.1 million in the third quarter of 1999 compared to $65.9
million in the third quarter of 1998.
For the nine months ended September 30, 1999, the Company reported losses
from continuing operations of $2.0 million, or $0.08 per share, losses from
discontinued gold mining and powdered metals operations of $73.7 million, or
$2.83 per share, and the impact of the first quarter write-off of unamortized
capitalized start-up costs of $12.1 million, or $0.47 per share, as a result of
the required change in accounting principle. Also included in the loss from
continuing operations is the one-time $3.4 million first quarter 1999 loss on
the sale of the Company's U.S. venture capital operations. During the nine
months ended September 30, 1998, the Company reported losses from continuing
operations of $1.8 million, or $0.07 per share, losses from discontinued gold
mining operations of $15.1 million, or $0.60 per share, and losses from
discontinued Russian banking operations of $6.4 million, or $0.25 per share.
Revenues from continuing operations were $185.5 million for the nine months
ended September 30, 1999, compared to $184.8 million for the nine months ended
September 30, 1998.
Worldwide assets under management were approximately $22.6 billion at
September 30, 1999, compared to approximately $23.4 billion at December 31,
1998.
13
14
The following table details revenues and net income (loss) by business
segment for the three months and nine months ended September 30, 1999, and 1998,
respectively.
REVENUES AND NET INCOME (LOSS)
(DOLLARS IN MILLIONS)
REVENUES NET INCOME (LOSS) REVENUES NET INCOME (LOSS)
-------------- ------------------ ---------------- ------------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- ------------------ ---------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998
----- ----- ------- ------- ------ ------ ------- -------
BUSINESS SEGMENT
Pioneer Investment Management:
Mutual Funds and
Institutional Accounts.... $51.1 $49.5 $ 8.9 $ 5.5 $152.1 $151.1 $ 26.4 $ 24.6
Sale of Class B Share
Rights.................... -- 8.1 -- 5.3 -- 8.1 -- 5.3
----- ----- ------ ------ ------ ------ ------ ------
51.1 57.6 8.9 10.8 152.1 159.2 26.4 29.9
----- ----- ------ ------ ------ ------ ------ ------
Pioneer International
Financial Services:
Russia...................... 2.2 1.4 (0.5) (8.0) 8.7 7.5 (0.8) (9.8)
Central and Eastern
Europe.................... 4.9 3.0 (3.0) (0.9) 13.2 9.7 (11.7) (1.8)
Asia........................ -- -- (0.1) (0.1) -- -- (0.3) (0.4)
----- ----- ------ ------ ------ ------ ------ ------
7.1 4.4 (3.6) (9.0) 21.9 17.2 (12.8) (12.0)
----- ----- ------ ------ ------ ------ ------ ------
Pioneer Global Investments:
Venture Capital............. 0.4 0.5 (0.1) (2.8) 0.9 1.7 (4.0) 0.8
Real Estate................. 0.3 0.4 (1.2) (0.5) 1.1 0.8 (3.1) (1.7)
Timber...................... 5.2 3.0 (2.0) (5.6) 9.5 5.9 (4.7) (16.8)
----- ----- ------ ------ ------ ------ ------ ------
5.9 3.9 (3.3) (8.9) 11.5 8.4 (11.8) (17.7)
----- ----- ------ ------ ------ ------ ------ ------
Interest Expense and Other
Expenses.................... -- -- (1.2) (0.7) -- -- (3.8) (2.0)
----- ----- ------ ------ ------ ------ ------ ------
Total From Continuing
Operations.................. $64.1 $65.9 $ 0.8 $ (7.8) $185.5 $184.8 $ (2.0) $ (1.8)
----- ----- ------ ------ ------ ------ ------ ------
Discontinued Operations....... -- -- (42.8) (8.7) -- -- (73.7) (21.5)
Change in Accounting Principle
(Start-up Costs)............ -- -- -- -- -- -- (12.1) --
----- ----- ------ ------ ------ ------ ------ ------
Totals............... $64.1 $65.9 $(42.0) $(16.5) $185.5 $184.8 $(87.8) $(23.3)
===== ===== ====== ====== ====== ====== ====== ======
PIONEER INVESTMENT MANAGEMENT
Pioneer Investment Management ("PIM") recorded third quarter 1999 net
income of $8.9 million compared to third quarter 1998 net income of $10.8
million, including $5.5 million of operating income and a gain of $5.3 million
associated with the sale of Class B share rights. PIM recorded net income of
$26.4 million for the nine months ended September 30, 1999, compared to $29.9
million for the nine months ended September 30, 1998. Excluding the one-time
gain, PIM's net income increased by $3.4 million and $1.8 million for the third
quarter and nine months ended September 30, 1999, respectively.
PIM's assets under management at September 30, 1999 were approximately
$22.3 billion compared to approximately $23.0 billion at December 31, 1998. In
the third quarter of 1999, sales of U.S. registered mutual funds (including
reinvested dividends) were approximately $0.8 billion, 13% below sales in the
third quarter of 1998. Net redemptions were approximately $0.1 billion, compared
to net sales of approximately $0.3 billion in the third quarter of 1998. For the
nine months ended September 30, 1999, sales of U.S. registered mutual funds
(including reinvested dividends) were approximately $2.9 billion, 6% below sales
in the comparable 1998 period. Net redemptions were approximately $0.1 billion,
compared to net sales of approximately $1.3 billion in the first nine months of
1998.
14
15
Since October 1998, the Company has sold each month at a premium additional
rights arising from sales of Class B shares. In consideration for the sale, the
Company relinquishes its rights to receive future distribution fees and certain
sales charges. As a result, distribution fees and expenses associated with the
amortization of Class B Share dealer advances have decreased significantly in
1999. In the third quarter of 1998, distribution fees related to Class B and C
shares were $4.8 million and amortization expenses were $3.8 million, compared
to fees of $1.1 million and expenses of $0.5 million in the third quarter of
1999. In the first nine months of 1998, distribution fees were $13.6 million and
amortization expenses were $10.1 million, compared to fees of $4.2 million and
expenses of $1.6 million in the first nine months of 1999.
Revenues of $51.1 million in the third quarter of 1999 increased by $1.6
million, excluding the one-time gain associated with the B-Share rights sale.
Management fee revenues of $35.1 million increased by $2.8 million, as average
assets under management for the quarter increased by $2.0 billion to $23.5
billion. Revenues from underwriting commissions, distribution fees, and
shareholder servicing fees decreased by $2.4 million to $13.2 million, as
increased shareholder service fees partially offset lower distribution fees.
Excluding the B-Share rights sale, revenues of $152.1 million in the first
nine months of 1999 increased by $1.0 million. Management fee revenues of $102.8
million increased by $4.8 million, as average assets under management for the
nine months increased by $1.1 billion to $23.2 billion. Revenues from
underwriting commissions, distribution fees, and shareholder servicing fees
decreased by $5.1 million to $40.7 million, as increased shareholder service
fees partially offset lower distribution fees. All other revenues increased by
$1.3 million, principally from increased trustee fees on mutual fund retirement
accounts and higher interest income.
Costs and expenses decreased by $3.3 million in the third quarter of 1999
to $37.4 million, principally from lower expenses associated with the
amortization of dealer advances. For the nine months ended September 30, 1999,
costs and expenses of $111.7 million decreased by $0.8 million. Excluding the
$8.5 million decrease in dealer advance amortization expenses overall expenses
increased by $7.7 million, resulting principally from higher payroll costs,
higher mutual fund distribution expenses and higher costs related to additional
office space.
PIM's effective tax rate for the third quarters of both 1999 and 1998 were
36%. For the nine months ended September 30, 1999, PIM's effective tax rate was
34.7% compared to 36.2% in the first nine months of 1998. The decrease resulted
principally from a change in Massachusetts' tax law that provided certain tax
incentives to Massachusetts-based mutual fund companies which maintain and grow
their Massachusetts employee base.
PIONEER INTERNATIONAL FINANCIAL SERVICES
During the third quarter of 1999, Pioneer International Financial Services
("PIFS") lost $3.6 million on revenues of $7.1 million compared to a loss of
$9.0 million on revenues of $4.4 million in the third quarter of 1998. A
substantial portion ($2.8 million) of the third quarter 1999 loss occurred in
Poland, $2.2 million of which related to the Company's pension subsidiary. In
line with the Company's expectations, the quarterly rate of loss declined as
start-up costs and advertising expenses wound down. In addition, the Company
only recorded 70% of the pension company's operating losses for the full third
quarter as opposed to recording 100% of the losses for most of the second
quarter. Most of PIFS' third quarter 1998 loss ($8.0 million) occurred in
Russia, $5.6 million of which related to a cost basis adjustment and the
write-off of uncollectible receivables of the Pioneer First Investment Fund.
During the nine months ended September 30, 1999, PIFS lost $12.8 million on
revenues of $21.9 million compared to a loss of $12.0 million on revenues of
$17.2 million in the nine months ended September 30, 1998. Most of the 1999 loss
($11.2 million) occurred in Poland and related to the Company's pension
subsidiary while most of the 1998 loss ($9.8 million) occurred in Russia and
related to the Pioneer First Investment Fund.
In April 1999, the Company reached agreement with Nationwide Global
Holdings, Inc. ("Nationwide") to sell a 30% interest in the Company's Polish
pension subsidiary for $20 million. As a result of the transaction, which
received Polish regulatory approval in June 1999, the Company recognized a gain
of approximately $12 million which was reflected as a credit to stockholders'
equity in the second quarter. In addition, the Company has deconsolidated the
Polish pension company as control is shared with Nationwide and has accounted
for its
15
16
investment in the pension company under the equity method retroactive to January
1, 1999. The consolidation method of accounting was used during the fourth
quarter of 1998, when the pension company was formed.
PIONEER GLOBAL INVESTMENTS
In the third quarter, Pioneer Global Investments lost $3.3 million on
revenues of $5.9 million compared to losses of $8.9 million on revenues of $3.9
million in the third quarter of 1998. The reduced losses included lower timber
losses of $3.6 million and lower venture capital losses of $2.7 million,
partially offset by higher real estate losses of $0.7 million.
In the first nine months of 1999, Pioneer Global Investments lost $11.8
million on revenues of $11.5 million compared to losses of $17.7 million on
revenues of $8.4 million in the first nine months of 1998. Included in the $5.9
million reduction in losses were lower timber losses of $12.1 million which more
than offset the lower venture capital earnings of $4.8 million and higher real
estate losses of $1.4 million. The Company sold its U.S. venture capital
operations in the first quarter of 1999 resulting in a one-time loss of $3.4
million.
TIMBER BUSINESS
The results of the timber business are substantially attributable to the
operations of Forest-Starma, the Company's indirect wholly owned subsidiary.
Forest-Starma, which harvests timber in the Khabarovsk Territory of Russia, has
developed a modern logging camp, including a harbor, from which it exports
timber to markets in the Pacific Rim.
RESULTS OF OPERATIONS. For the three and nine months ended September 30,
1999, the timber business lost $2.0 million and $4.7 million, respectively.
During the corresponding periods in 1998, the timber business lost $5.6 million
and $16.8 million, respectively. The decrease in losses was attributable
principally to higher prices and production, and lower interest expense
associated with an intercompany debt-to-equity conversion.
TIMBER PRODUCTION AND SALES. Production during the three and nine months
ended September 30, 1999, was 72,000 and 230,000 cubic meters, respectively.
This represents increases of 60% and 68%, respectively, compared with
corresponding periods in 1998. Production costs for the third quarter of 1999
were approximately $58 per cubic meter, including approximately $10 per cubic
meter of depreciation and amortization. Production costs were $87 per cubic
meter in the third quarter of 1998, including approximately $13 per cubic meter
of depreciation and amortization. During the three and nine months ended
September 30, 1999, Forest-Starma shipped 135,000 cubic meters and 234,000 cubic
meters of timber at an average realized price of $39 per cubic meter and $41 per
cubic meter, respectively. During the three and nine months ended September 30,
1998, Forest-Starma shipped 109,000 cubic meters and 191,000 cubic meters,
respectively, at average realized prices of $28 per cubic meter and $31 per
cubic meter, respectively. Production costs were $52 and $88 per cubic meter in
the nine months ended September 30, 1999 and September 30, 1998, including $10
and $13 per cubic meter of depreciation and amortization, respectively.
THIRD-PARTY DEBT. Forest-Starma had $5.6 million of external debt
outstanding at September 30, 1999. The Company is subject to recourse on this
borrowing. Scheduled third-party debt service for the remainder of the year is
expected to aggregate $0.9 million.
RECENT DEVELOPMENTS. The Company is continuing discussions with several
potential strategic partners as participants in its timber business.
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DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company reflected the gold mining
segment as a discontinued operation. The gold mining segment consists of Pioneer
Goldfields Limited ("PGL"), and its 90%-owned Ghanaian operating subsidiary,
Teberebie Goldfields Limited ("TGL"), and Closed Joint-Stock Company "Tas-Yurjah
Mining Company" ("Tas-Yurjah"), the Company's majority owned (95%) Russian
subsidiary. The Company also reflected its powdered metals and Russian banking
operations as discontinued operations in the second quarter of 1999 and the
third quarter of 1998, respectively. The following table summarizes discontinued
operations for the three and nine months ended September 30, 1999 and September
30, 1998:
LOSSES FROM DISCONTINUED OPERATIONS
($ IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
Discontinued gold mining........................ $(42.8) $(8.2) $(72.3) $(15.1)
Discontinued powdered metals.................... -- -- (1.4) --
Discontinued Russian banking.................... -- (0.5) -- (6.4)
------ ----- ------ ------
Total................................. $(42.8) $(8.7) $(73.7) $(21.5)
====== ===== ====== ======
GOLD MINING
In October 1998, the Company engaged the services of an investment banking
firm to sell PGL, including its African exploration rights and its ownership
interest in TGL. An offering document, which incorporated a new mine plan and
revised reserve estimates, was circulated in the second quarter of 1999 to a
select group of potential buyers. Several of these potential buyers began
conducting due diligence efforts during July. The Company is now conducting what
it believes to be final negotiations with potential purchasers.
Whether or not the Company consummates a sale, it recently determined to
proceed with an orderly closure of the Teberebie mine. Mining operations will
cease by the end of the year and all processing activities will cease in the
first half of 2000. The Company believes it can complete the closure without
providing additional funding to TGL. Based on the foregoing, additional losses
from discontinued gold mining operations in the third quarter of 1999 were $42.8
million, principally related to the impairment of the long-lived assets of TGL.
The losses described above reflect management's estimates of the costs of
winding down the gold mining operations. The Company, however, may record gains
or incur additional losses in either a sales transaction or closure scenario as
details, timing, and other events unfold. There can be no assurance that the
Company can successfully negotiate a sales transaction and consummate that
transaction or close the mine in accordance with management's estimates.
Losses from discontinued gold mining operations were $8.2 million in the
third quarter of 1998.
Losses from discontinued gold mining operations during the first nine
months of 1999 were $72.3 million, including $18.7 million from operations and
$53.5 million from the estimated loss on the disposition of the gold mining
segment. Losses from discontinued gold mining operations in the first nine
months of 1998 were $15.1 million.
The following summarizes the operations of TGL during the third quarter and
nine months ended September 30, 1999, compared to the third quarter and nine
months ended September 30, 1998.
GOLD SALES. Revenues decreased by $0.7 million to $17.1 million in the
third quarter of 1999 compared with 1998, as a $39 decrease in the average
realized price of gold to $264 per ounce was largely offset by a 6,400 ounce, or
11%, increase in gold shipments to 65,000 ounces. Revenues decreased by $4.1
million to $54.3 million during the first nine months of 1999 compared with 1998
as a 12% decrease in the average realized gold price to $274 per ounce was
offset partially by a 6% increase in gold sales to 198,600 ounces. During the
third quarter and first nine months of 1998, the average realized price of gold
included proceeds of $15 per ounce and $17 per ounce, respectively, from the
sale of floor program options.
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GOLD PRODUCTION AND COSTS. The table below provides production results and
compares TGL's cash costs and total costs per ounce for the three and nine
months ended September 30, 1999, with the comparable periods in 1998:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- INCREASE/ ------------------- INCREASE/
1999 1998 (DECREASE) 1999 1998 (DECREASE)
-------- -------- ---------- -------- -------- ----------
Production & shipment (ounces)......... 65,000 58,600 6,400 198,600 188,100 10,500
======= ======= ====== ======== ======== =======
Cash costs per ounce................... $ 224 $ 346 $ (122) $ 233 $ 292 $ (59)
------- ------- ------ -------- -------- -------
Total costs per ounce............. $ 366 $ 476 $ (110) $ 367 $ 415 $ (48)
======= ======= ====== ======== ======== =======
THIRD-PARTY DEBT. At September 30, 1999, third-party debt aggregated $36.1
million, including $12.7 million from the Overseas Private Investment
Corporation ("OPIC"), for which the Company is subject to limited recourse, and
$0.2 million from other sources which the Company guarantees. Scheduled
third-party debt service for the remainder of 1999 is expected to aggregate $2.2
million, of which $1.8 million represents principal payments.
POWDERED METALS
The Company sold for nominal value its powdered metals operations at the
end of the third quarter of 1999. The Company incurred $1.4 million of expenses
in 1999 associated with these operations, including $0.9 million from the loss
on the disposition of this business.
RUSSIAN BANKING OPERATIONS
In the third quarter of 1998, the Company liquidated its Russian banking
operations. Accordingly, losses of $0.5 million and $6.4 million for the three
months and nine months ended September 30, 1998 were reported as discontinued
operations. In December 1998, the Company sold its stock in the bank to an
unrelated third party.
OTHER
The Company had net interest expense and other expenses of $1.2 million in
the third quarter of 1999 compared to $0.7 million in the third quarter of 1998.
For the nine months ended September 30, 1999, net interest and other expenses
were $3.8 million compared to $2.0 million in the first nine months of 1998. The
increased expenses for both periods resulted from corporate overhead no longer
allocated to discontinued operations, corporate interest no longer allocated to
the timber business as a result of the intercompany debt-to-equity conversion,
mark-to-market adjustments on the Company's interest rate protection agreements
and expenses associated with amendments to the Company's credit facility and
senior notes.
RECENT ACCOUNTING PRONOUNCEMENTS
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, which the Company adopted in the first quarter of
1999, required that entities expense costs of start-up activities as those costs
are incurred. The Company had capitalized certain pre-operating costs in
connection with its natural resource operations, and had capitalized certain
organizational costs associated with its financial services operations. In the
first quarter of 1999, as a result of this new standard, the Company recorded a
cumulative effect of a change in accounting principle of approximately $12.1
million related principally to its timber operations.
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL
The Company's liquid assets consisting of cash and marketable securities
decreased slightly by $1.2 million in the first nine months of 1999 to $46.6
million.
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During 1999, the Company and its commercial banking syndicate amended its
senior credit facility, which, among other things reduced the availability under
the facility from $80 million to $55 million and shortened the maturity date to
March 31, 2001. For a description of the Company's $55 million senior credit
facility and $20 million senior notes, including interest rates and applicable
covenants, see Note 5 (Notes Payable) to Notes to the Company's Consolidated
Financial Statements included elsewhere in this Quarterly Report. At September
30, 1999, the Company had borrowed $40 million under the senior credit facility
and had $20 million of senior notes outstanding.
------------------------
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.
FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report, including,
without limitation, information with respect to the Company's plans and
strategies for its domestic and international financial services and global
investment business units, liquidity and capital resources and Year 2000 plans,
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. All forward-looking statements are based on
currently available information and management expectations that involve
substantial risks and uncertainties that could cause actual results to differ
materially from expectations. Important factors that could cause actual results
to differ materially from those indicated by the forward-looking statements made
in this Quarterly Report and presented elsewhere by management from time to time
include, but are not limited to, the following as well as the factors presented
below under Year 2000 and in the Company's most recent Annual Report on Form
10-K:
The Company derives a significant portion of its revenues from investment
management fees and underwriting 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. 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. In addition, investment performance is affected in part by
economic and market conditions which are beyond the control of the Company.
Finally, four of the Company's mutual funds (including three of the four 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 and is undergoing
substantial consolidation. 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. Many of the Company's
competitors have more products and product lines and substantially greater
assets under management, financial resources and name recognition.
The Company and its domestic investment management business unit are
primarily dependent upon their contractual relationships with the Company's U.S.
mutual funds. In the event any of these agreements were canceled or not renewed
on similarly favorable terms, the Company would be substantially adversely
affected.
Pioneer Investment Management is subject to extensive regulation in the
United States, including by the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. The Company is also subject to
the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies.
The failure of the Company and its subsidiaries to comply with applicable laws
or regulations could result in fines, suspensions of personnel or other
sanctions. Changes in laws or regulations or in government policies could have a
material adverse effect on the Company.
The Company has a significant number of operations and investments located
outside of the U.S., including the timber operations in the Russian Far East and
the financial services operations in Eastern and
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Central Europe. Foreign operations and investments may be adversely affected by
exchange controls, currency fluctuations, taxation, political and economic
instability, ineffective regulatory oversight and laws or policies of the
particular countries in which the Company may have operations. There is no
assurance that the Company can obtain permits, authorizations, regulatory
approvals and agreements to implement plans at its foreign projects under
conditions or within time frames that make such plans economically feasible.
Also, there can be no assurance that applicable laws or the governing political
authorities will not change unfavorably or that such changes will not result in
the Company having to incur material additional expenditures.
The commercial feasibility of Forest-Starma is dependent upon a number of
factors which are not within the control of the Company including the price of
timber, weather conditions, political stability in Russia and the strength of
the Japanese and Korean economies, the primary markets for Forest-Starma's
timber. While the Company continues to believe that the project will achieve
commercial feasibility in the long term, there can be no assurance that it will
do so.
YEAR 2000
SUMMARY. The Company has for some time been addressing actively the
potential impact of the Year 2000 problem to its businesses and has largely
completed a comprehensive project to help ensure that all of its business units
will be able to function normally before, during and after the century date
rollover. Furthermore, the Company is aware that Year 2000 issues have the
potential to impact the capital markets and macroeconomic conditions globally.
While the Company is monitoring the threat of such impact and is taking measures
reasonably designed to protect the investments of its fund shareholders and
corporate investors, there can be no assurance that factors outside its control
will not disrupt the Company's operations.
MANAGEMENT. The Company has been executing and managing its Year 2000
project activities at several levels within the organization, including:
- Regular senior-level management briefings.
- Regular Company Audit Committee briefings.
- Oversight subcommittee established by the Trustees of the Company's U.S.
mutual funds.
- Year 2000 Steering Committee comprised of representatives from all
operational areas empowered to review progress and ensure the successful
completion of the Year 2000 project.
- Year 2000 project office responsible for centralized monitoring,
reporting and support of project activities.
- Managers throughout the Company responsible for executing local Year
2000 plans.
The Company has been separately tracking the Year 2000 readiness of each of
its operating units and has created comprehensive reporting for each project
team worldwide. The Company has developed reports to monitor risk management and
project status for both systems and vendors and has utilized the services of
outside companies and consultants specializing in Year 2000 issues.
APPROACH AND STATUS. The Company's Year 2000 initiative has addressed
hardware, software, embedded systems and vendor systems and has consisted of the
following six phases:
- Awareness -- communicating management's commitment to identify and
resolve Year 2000 issues.
- Inventory, Assessment, and Planning -- identifying all systems and
vendors with potential Year 2000 problems, rating the business
criticality of each, and planning for all project tasks.
- Repair -- executing all necessary system remediation plans.
- Testing -- ensuring that all remediated systems function correctly in
both current date and future date environments.
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- Contingency Planning -- developing contingency plans and business
continuity strategies for each business unit.
- Vendor Analysis -- working closely with all important third parties to
ensure that their systems and business process have been evaluated and
corrected adequately for any potential Year 2000 issues.
The Company has completed the awareness, assessment and repair phases of
the project with respect to all of its core systems. Additionally, the Company
has performed stand-alone testing on all of its core information technology
applications. During the second quarter of 1999, the Company conducted an
integrated test of all systems critical to the domestic mutual fund business.
This test successfully validated that the data flow among the Company's systems
would function properly in a future-dated scenario. The Company also
participated in industry-wide testing sponsored by the Securities Industry
Association. In this testing, performed in conjunction with the National
Securities Clearing Corporation and other key third parties, the Company
successfully processed mutual fund transactions in a future-dated environment.
The contingency planning phase has been ongoing throughout the year. The Company
has assessed the Year 2000 readiness of all critical third parties but will
continue to monitor the status of these external parties through the end of the
project.
CERTAIN RISKS AND CONTINGENCY PLANNING. The Company segregates Year 2000
risks into four areas: (i) systems, (ii) vendors, (iii) capital markets
infrastructure and (iv) basic infrastructure.
Systems. Although the majority of the Company's most critical "core"
applications are provided by third parties, most of these applications are
relatively new and all have been certified as Year 2000 compliant. As a result
of successful testing, the Company believes that all core systems will operate
properly after January 1, 2000.
Vendors. The Company has been monitoring closely the Year 2000 progress of
all critical third parties and to date has not identified a need to replace any
of these providers.
Capital markets infrastructure. Particularly in the U.S., the Company is
heavily reliant upon functional capital markets (trading, clearing and
settlement). The successful industry-wide tests mitigated the Company's concerns
regarding the Year 2000 readiness of the domestic trading and settlement
infrastructure.
Basic infrastructure. The Company expects to be able to react
appropriately to short term or isolated disruptions of basic infrastructure
services (such as telecommunications, electricity, water and transportation)
based on its contingency plans. In the event of long term or pervasive failures,
however, the Company's risk is as significant as that of any other firm or
entity that relies upon such services.
Internationally, the outlook is less certain with respect to the Year 2000
readiness of third parties and infrastructure elements. The Company has
indigenous operations in a number of foreign countries, and these countries have
demonstrated various levels of awareness and readiness with respect to Year 2000
issues. The Company has been preparing its systems and evaluating its vendors in
each of its core international operations in the same manner as in the U.S.
Nevertheless, the Company is subject to risks imposed by infrastructure failures
beyond its control in the countries in which it has operations.
As part of its normal business procedures, the Company has disaster
recovery plans in place to address potential infrastructure failures, including
basic services such as electrical power and telecommunications. The Company is
leveraging and enhancing those plans to address potential Year 2000 scenarios.
With respect to Year 2000 issues, the Company's approach to contingency planning
has two additional components: (i) ensuring the Company's ability to achieve
Year 2000 compliance, even in the event of a vendor failure in 1999, and (ii)
preparing business continuity plans for various potential failure scenarios
that, despite the Company's best efforts, could occur on or around January 1,
2000.
Since mid-1998, the Company has had Year 2000 contingency plans in place to
address century transition issues with respect to all of its primary systems and
operations. To date, substantially all of the Company's operating units have
developed contingency plans. The Company and its subsidiaries continue to review
these plans to ensure their adequacy as internal systems and/or business
conditions evolve. Contingency planning is an inherently complex and dynamic
process that must adapt to changes affecting the Company's operations.
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Commencing October 1, 1999 and continuing through February 1, 2000, there will
be a freeze in effect on the introduction of new computer code or other systems
modifications. Any proposed changes during this timeframe will be approved by
the Year 2000 Steering Committee prior to being implemented. In general, it is
expected that only system changes required to address critical issues or legal
or regulatory requirements will be implemented during the freeze period. Because
we expect no significant system changes during this period, the Company does not
foresee a need to alter any of its contingency plans to accommodate system
changes. Nonetheless, the Company will continue to monitor business conditions
and infrastructure elements affecting its primary systems and operations to
ensure that no changes on these levels necessitate revisions to the existing
contingency plans. If the Company identifies any significant changes, it will
refine its contingency plans appropriately.
COSTS. Total Year 2000 project costs are based on currently available
information and management's estimates with respect to the costs of repairing
and replacing software, hardware, embedded systems and vendor systems and are
subject to change. For this purpose, the Company defines costs as incremental
expenditures, and cost estimates include both period costs and disbursements
that typically would be treated as capital. Estimates do not include overhead
with respect to the portion of certain employees' time allocated to the Year
2000 project or opportunity costs associated with other projects that may have
been delayed by the Year 2000 project.
As of September 30, 1999, the Company had incurred and expensed
approximately $2.3 million in connection with its Year 2000 project. The Company
estimates its total remaining costs to be approximately $200,000, which will be
expensed as incurred during the fourth quarter of 1999. All Year 2000 project
costs have been and, the Company believes, will continue to be funded from
operating cash flows.
Year 2000 project costs are relatively minimal primarily because the
Company owns little internally developed code. The result of the Company's
strategy of outsourcing technology-based operations is that it has only a small
base of proprietary code that it must analyze and remediate. Consequently, the
cost of the Year 2000 compliance efforts are not expected to be material to the
Company's financial position. The Company also believes that it will not incur
significant Year 2000 related costs on behalf of third parties from which it
purchases technology or outsourced technology-based functions.
GENERAL. The Company's ability to complete its Year 2000 project by the
dates projected and the total costs incurred to accomplish those efforts are
based on estimates of the Company's management in reliance on certain
assumptions. Such assumptions include, among others, the Company's ability to
locate and identify all potential Year 2000 issues in the systems it uses,
successful remediation efforts by the Company's vendors and other third parties
upon which it relies, the continued availability of personnel capable of
carrying out the Year 2000 project efforts and the availability of suitable
alternative software and systems. There can be no assurances that management's
reliance on such assumptions will prove to be valid. The failure of any of these
assumptions to hold true or the existence of additional significant
uncertainties could result in the inaccurateness of any of the foregoing
estimates. As a result, actual completion of the Company's Year 2000 project
could be later than anticipated or involve costs materially higher than those
estimated. Finally, investors in the Company's funds who are concerned about the
Year 2000 problem could withdraw their investments, which in turn would reduce
assets under management and related management fee revenues. The Company's
financial condition could be adversely affected if it experienced any of the
problems associated with the risks described above.
The impact of any such failures on the Company's customers or other third
parties could vary significantly, as could such customers' or third parties'
definitions of Year 2000 compliance. Therefore, the extent of any claims
resulting from such failures is difficult to estimate. There can be no assurance
that the costs of resolving any such claims will not materially affect the
Company's business, financial condition or results of operations.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-K
(a) Exhibits
The Exhibits filed with this Quarterly Report on Form 10-Q are listed
on the "Exhibit Index" below and incorporated by reference herein.
(b) Reports filed on Form 8-K.
None.
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 12, 1999
THE PIONEER GROUP, INC.
/s/ ERIC W. RECKARD
------------------------------------
Eric W. Reckard,
Executive Vice President
Chief Financial Officer and
Treasurer
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
10.1 Shareholders Agreement dated as of 8th April 1999 between
the Company and Nationwide Global Holdings, Inc.
27.99 Financial Data Schedule.
27.98 Financial Data Schedule.
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