ANNUAL REPORT 2001
AIG Private Equity Ltd. Phone +41 (41) 710 70 60 Baarerstrasse 8 Fax +41 (41) 710 70 64 CH-6300 Zug Email [email protected] Switzerland www.aigprivateequity.com FACTS AND FIGURES ADDRESSES AND CONTACTS
Company profile Registered Office AIG Private Equity Ltd. is a Swiss investment com- AIG Private Equity Ltd. pany domiciled in Zug. The company’s objective Baarerstrasse 8 is to achieve long-term capital growth for share- CH-6300 Zug holders by actively managing a well balanced port- Phone +41 (41) 710 70 60 folio of private equity funds and direct investments Fax +41 (41) 710 70 64 in privately held operating companies. This com- E-mail [email protected] bination of fund-of-funds and direct investments Subsidiary provides broad diversification and predictable cash AIG Private Equity (Bermuda) Ltd. flows – key elements in a comprehensive risk 29, Richmond Road management program. While the company is re- Pembroke, HM 08 latively young, having been established in Septem- Bermuda ber 1999, many of its investments are mature, and all of them are co-investments with AIG, an estab- Investor Relations lished and successful global private equity investor. Conradin Schneider AIG Private Equity Ltd. is listed on the SWX Swiss AIG Private Equity Ltd. Exchange under the ticker symbol “APEN” and is Baarerstrasse 8 traded daily. CH-6300 Zug Phone +41 (41) 710 70 60 Valuation as of December 31, 2001 Fax +41 (41) 710 70 64 Closing price per share CHF 135.00 E-mail [email protected] Net asset value per share CHF 108.01 (applying fair values) If you would like to submit an investment Exchange rate CHF/USD 1.6825 proposal please contact: Exchange rate CHF/EUR 1.4825 For US direct investments: Number of shares outstanding 3175000 E-mail [email protected];
Swiss Security Number Phone +212 458 2164
915.331 For US based private equity funds: ISIN: CH0009153310 E-mail [email protected] Ticker: APEN Phone +212 458 2941
Trading Information For European direct investments: Reuters: APEZn.S E-mail [email protected] Bloomberg: APEN Phone +44 207 335 8121 Telekurs: APEN E-mail [email protected] Phone +41 1 227 57 29 www.aigprivateequity.com For European private equity funds: E-mail [email protected] Phone +44 207 335 8121
www.aigprivateequity.com CONTENTS Chairman’s Statement 2 Well Positioned in Challenging Environment
Management Report 4 Review 2001 and Outlook
Strategy 6 Broad Experience in Difficult Market Environment
Fund Investment Profile 8 Broad Variation of Fund Performance
Direct Investment Profile 10 Promising Life Science Investments
Direct Investments 12 Overview of Direct Investments
Financial Report 17 – AIG Private Equity Group 18 Consolidated Financial Statements 2001 – AIG Private Equity Ltd. 37 Financial Statements 2001
Additional Information 41 –The Organizational Structure 42 – Glossary 44 CHAIRMAN’S STATEMENT CHAIRMAN’S STATEMENT
DR. ERNST MÄDER, Member
ERICH HORT, Vice Chairman
EDWARD E. MATTHEWS, Member
DR. ROGER SCHMID, Member
EDUARDO LEEMANN, Chairman of the Board
price surpassed the performance of most of the important January 1, 2001. Since then, all of a corporation’s financial expanded their holdings, and we have intensively examined AIG Private Equity – indices, such as the NASDAQ or Morgan Stanley, and also out- instruments must be recorded in the balance sheet at fair mar- new investment opportunities during the second half of Well Positioned in performed the competitors. The quality of our well-developed ket value. Previously, investments were held at book value the year. and broadly diversified portfolio was one of the prime factors with the exception of those investments, which had been per- This past year has shown us that our internal procedures Challenging Environment contributing to this, as were the 15 years of experience and the manently impaired. Under IAS 39, unrealized gains and losses are reliable and that the control mechanisms are operating disciplined execution of the investment strategy by the invest- are included in “Revaluation Surplus/Deficit” under Share- well. An important link in this chain is our investment com- The year 2001 was eventful not only for AIG Private Equity. The ment advisor of AIG Private Equity, AIG Global Investment holders’ Equity; the fair or market value of the investments is mittee, which goes over every investment decision with a fine- realms of politics and business experienced an unusually Corp. Our direct investments also performed well. The focus on re-measured quarterly. toothed comb. Larry K. Mellinger has now joined this highly turbulent period. It should therefore come as no surprise that buyouts proved to be advantageous; these are established Other decisions taken during the reporting year by the specialized body as the successor to William Dooley. Larry K. widespread uncertainty and the economic downturn have also companies, which demonstrate the ability to generate stable Board of Directors concerned the management of foreign cur- Mellinger is the senior managing director at AIG and heads the effected the private equity sector and have led to a cooling-off cash flows. Certain holdings have been in the portfolio for over rency exposure and ensuring liquidity. The portfolio weighting private equity division. period. Nevertheless, we are of the opinion that this is just a 2 years and have developed according to budget projections. of the US dollar was reduced to about 50% through forward We are completely convinced that AIG Private Equity is passing phase and that the correction in the marketplace will After we decided not to participate in a follow-on round of rate agreements, which corresponds to the investment guideli- optimally positioned to take advantage of the opportunities in have a positive long-term impact on the growth dynamics of financing, we wrote off our remaining holding in Personic nes for the geographic allocation of assets. In order to better the marketplace through the decisions taken by the Board of the private equity business. A recovery of sorts was already Software. assure our liquidity, we entered into credit agreements with Directors. We draw this confidence from the trust placed in us seen in the fourth quarter. Private equity has established itself The year 2001 was also marked by occurrences, which two financial institutions. These provide AIG Private Equity by our shareholders and for this we would like to express our as an alternate source of financing so that the present weak- lowered the public trust in accounting and accounting prac- with a second source of financing besides cash distributions heartfelt thanks. ness also presents an attractive entry opportunity for long-term tices. Even before these events, it was our expressed policy at from funds and direct investments. oriented investors. AIG Private Equity to account for our activities in the most Finally, the Board of Directors’ decision of the second quar- AIG Private Equity looks to the future with confidence for informative and transparent manner possible. For this reason, ter of 2001 not to make further direct investments or commit- the simple reason that it performed better than the rest of the we implemented changes to our practices to comply with ments in new funds is worth mentioning. This decision was market during the reporting year. The AIG Private Equity share accounting regulations quickly and consistently. It should be necessary since AIG Private Equity is fully invested and avail- Eduardo Leemann noted in this conjunction that standard IAS 39 (Financial In- able cash is used to service the capital calls of the existing Chairman of the Board struments: Recognition & Measurement), issued by the Inter- portfolio funds. Nevertheless, AIG is able to profit from an 2 national Accounting Standard Committee, went into effect on improving market environment. Our portfolio funds have 3 MANAGEMENT REPORT MANAGEMENT REPORT
“Our team is as diversified as our investments.” ROCCO SGOBBO, Managing Director
ROCCO SGOBBO ANDREW FLETCHER Review 2001 and Outlook CONRADIN SCHNEIDER
In 2001, the private equity sector experienced its most companies over the course of the year. AIG Private Equity’s CHF 8.7 million (2000 CHF 25.8 million). Nearly all of the year, whereas new funds added to the portfolio in 2000 and challenging year in recent memory. The economies in two largest funds were particularly affected with fair market capital gains stem from 10 funds that were established in 1996 2001 are still in the investment phase and are expected to be the US and Europe entered a recession in the second values 25% and 33% below their cost basis. The direct invest- or earlier. Two of those funds are based in Europe, the others net consumers of cash. Since it is fully invested, AIG Private semester of 2001, the world equity markets were down ment portfolio, in contrast, held up very well in 2001. With in the US. The European funds portfolio contains fewer funds Equity continues to be cautious about making new fund com- for a second year in a row, investors and banks con- the exception of a small direct investment that was written off with a larger weight per fund. Overall, the European part of the mitments. tinued to exhibit extreme caution, and the terrorist completely, the companies are performing according to plan. portfolio is not as mature as the US part and experienced an Although there are not yet clear signs of an imminent attacks of September 11 shook whatever confidence In the year under review AIG Private Equity adopted environment in 2001 that made it more difficult to realize exits. turnaround in the private equity market, we are beginning to investors had remaining. Within this framework AIG IAS 39. With the introduction of IAS 39 investments in private Additionally, the extremely successful exits (“homeruns”) that see indications that the number of exit opportunities for com- Private Equity performed satisfactorily. The share price equity funds and direct investments are no longer valued at could be counted on in recent years to boost results did not panies with strong cash flows and sound business models may dropped 17%, which compares favorably with other cost but reflect fair market values. As a consequence, tem- occur in the market conditions prevailing in 2001. be increasing. The financial press has mentioned several of listed private equity funds and with most of the major porary gains and losses are included in “Revaluation Surplus/ AIG Private Equity is fully invested. Investments made by APEN’s largest portfolio companies — including our largest, world stock market indices. Deficit” under Shareholders’ Equity until the investment is sold portfolio funds are being funded with available cash and by Punch Taverns (direct investment and held through AIG Hori- or otherwise disposed of, or until it is determined to be per- means of distributions received from private equity funds as zon Partners Fund and CapVest Equity Partners) — as candi- AIG Private Equity’s Net Asset Value per share at December 31, manently impaired or realised, at which time the cumulative well as credit facilities provided by two financial institutions. dates for initial public offerings. The successful listing of this 2001 was CHF 108.01, a 11.7% decline from CHF 122.38 at gain or loss previously accounted for under equity will now be The 65 funds acquired by AIG Private Equity following its initial company and others will depend to a large degree on favorable December 31, 2000. This decline can be attributed to lower included in the net profit or loss report for the period. In 2001 public offering in 1999 were cash flow neutral in 2001. The capital market conditions, but should one or more of these fair market values reported by the portfolio funds. Foreign AIG Private Equity had write-offs of CHF 0.6 million in one amount of capital called by the funds for new investments companies manage a successful IPO, this will have a further exchange rate movements, the other determining factor for direct investment and CHF 14.6 million in 5 portfolio funds that equaled the distributions received from these funds. This positive impact on AIG Private Equity’s Net Asset Value and the Net Asset Value, had a positive impact of approximately eliminated impaired investments from the fair market value reflects the continued maturing of the portfolio. In 2000 a net cash position. CHF 2.50 Swiss francs per share on Net Asset Value. The main calculations. amount of approximately CHF 27 million was paid by AIG driver for the negative performance of the Net Asset Value Liquidity events were significantly lower than in 2000. Private Equity to the portfolio funds. We expect this core part stems from portfolio funds adjusting the fair value of portfolio Total capital gains, interest and dividend income amounted to of the portfolio to be cash flow generative in the current fiscal
1. Diversification by Investment Focus as of December 31, 2001 2. Investment Framework as of December 31, 2001 3. Diversification by Vintage Year as of December 31, 2001 4. Diversification by Region as of December 31, 2001 Expressed as % of invested assets applying fair values Expressed as % of total assets applying fair values Expressed as % of invested assets applying fair values Expressed as % of invested assets applying fair values
Fund Direct in % Emerging Markets 4.6 % 28.2 % 28.5 % Investments Investments Total 30 Mezzanine 0.4 % AIG 3rd-Party North America 54.5 % Portfolio Portfolio 25 22.1 % Venture 21.0 % Developed Markets 20 Buyout Europe 10.81 % 19.88 % 2.37 % 33.06 % South America 0.8 % 56.0 % North America 10.51 % 40.38 % 8.56 % 59.45 % 15 Global 4.8 % Development Capital Asia 3.3 % 10 18.0 % Emerging Markets 5.8 % 4 Asia 3.13 %3.13 % 3.8 % 4.4 % 3.5 % 5 5 Europe 36.6 % South America 0.82 % 0.82 % 0.9 % 1.5 % 1.3 % 0 Total 25.27 % 60.26 % 10.93 % 96.46 % 85–92 1993 1994 1995 1996 1997 1998 1999 2000 2001 STRATEGY STRATEGY
a few difficult periods over the last 15 years. Fortu- Sharp declines in the technology sectors have caused a the monetization of these investments until 2003–2004 when Broad Experience nately all of these “storms” passed eventually and crisis of confidence in the venture capital markets. Some 12–24 months of solid corporate earnings will have accumulated. in Difficult patient investors were ultimately rewarded with strong venture capitalists are in a state of denial but successive down returns. Each time investor confidence and sentiments rounds and early stage company failures have provided the Outlook Market Environment were at a low level during the “nadir” of these critical needed “wake-up call”. Private Equity markets froze up as valu- We are continuing to emphasize the following areas in our junctures. We are not attempting to discount the sev- ations declined and uncertainty about the corporate earnings private equity portfolios: middle market leveraged buyouts in erity of recent market events, but are merely reporting outlook caused the bid-ask spread to widen significantly. both Europe and North America, healthcare and life science that this is not the first time that confidence has been Liquidity has dried up and deals no longer get done. The area globally as well as opportunistic strategies with distressed severely shaken. It is from this historical perspective IPO market has all but shut down except for selective oppor- securities. Our view is that certain venture capital strategies, in that we continue to review our process of asset allo- tunities in value-defensive sectors. The September 11 crisis particular those with information technology components that cation and the structure of our clients’ private equity caused a further crisis in confidence and the ensuing convul- are presently depressed, will have a few more years of relative portfolios. We have noticed common denominators sive liquidation of assets marked a temporary bottom in equity under-performance. This is because the IT budgets of corpor- and stages when analyzing past patterns of market valuations. ate America are still under pressure and spending is not likely behavior. Each pattern varies only with respect to the In light of this environment, we believe AIG Private Equity to pick up in this area in the short term. We hope that budgets sector affected and the duration and speed of the has benefited from the consistent application of the principles for IT spending will improve in 2003, but any such spending ultimate “snap-back”. that form our approach when constructing balanced portfolios. will not be reflected until the 2003–2004 earnings seasons. While AIG Private Equity’s exposure to venture capital com- Buyouts on the other hand have not faced the severe decline The only sector that has had less acute declines has been panies has impaired NAV growth, AIG Private Equity’s over- in valuations that venture capital funds have encountered. Life Science/Biotech. This is one area in particular where we weighting of value-based leveraged buyouts and cash-positive Our emphasis when managing this component of the portfolio have emphasized exposure in the direct investment portfolio. companies has contributed to satisfactory capital preservation will continue to be on companies that have secular growth Pure leveraged buyouts (“LBOs”) on the other hand are more in a dangerous capital market environment, during which most characteristics and hold out the promise of top line revenue
DAVID PINKERTON representative of value-based investing and have more durable other equity benchmarks have suffered severe declines. We and profit growth that is not wholly dependent upon overall Managing Director, AIG Global Investment Corp. return patterns. They have faced a decline in available lines believe that the prospects for the company’s investments in GDP growth. of credit and accordingly their valuations have receded some- established cash-positive companies are improving and that an The calendar year 2001 proved to be very difficult for what. Typically the companies leveraged are chosen for the improvement in overall market conditions should in future the private equity industry. During the 75 years AIG has stability of their cash flows. This “style preference” has helped enable these companies to yield further realized returns. been conducting business we have encountered many insulate the company’s assets from the huge downward valu- Liquidity events for 2002 will continue to remain below the treacherous times that required astute and careful navi- ation pressures seen in the technology sectors. We attribute industry average of the past few years. The company does gation. Our private equity portfolios have gone through the positive relative performance of AIG Private Equity to be a have a few specific portfolio liquidity events that are expected reflection of the value orientation of its investments and its to materialize in 2002, but we expect that the majority of diversified approach to private equity investing. owners of strongly performing businesses are likely to defer
“We attribute the positive relative performance of AIG Private Equity to be a reflection of the value orientation of its investments and its diversified approach to private equity investing.”
6 DAVID PINKERTON, Managing Director, AIG Global Investment Corp. 7 Bob Discolo Phil Dunne FUND INVESTMENT PROFILE FUND INVESTMENT PROFILE
Broad Variation of Fund Performance
Private Equity’s venture funds have substantial capital AIG Horizon Partners, which represents 13% of the fair mar- William Hill (an off-site gaming/betting company) which is available and are in a position to take advantage of ket value of AIG Private Equity, has also had a difficult time dur- expected to go public in 2002. valuations that have not been seen for over a decade. ing 2001. AIG Horizon Partners has drawn 60% of its capital. KRG Capital Partners has utilized the consolidation strategy Three early stage venture companies in AIG Horizon Partners in US small and mid-market companies. These investments, What has kept the AIG Private Equity portfolio steady during have been written off and one has been written down. This has we believe, will develop into significant companies which 2001 has been its exposure to US and European buyouts. caused a 25% decline in value from the Fund’s cost basis. are well positioned to take advantage of the trend to out- Because AIG Private Equity has wide exposure to a broad spec- Carlyle European Ventures has also been experiencing a source manufacturing in medical devices (UTI) and the ever- trum of corporate finance activities including the full spectrum difficult time with its early stage venture portfolio. Added to increasing expenditures on infrastructural improvements in of buyout activities (small to large size transactions) in a large this, a number of significant changes have occurred amongst the US (Atlantech International) as well as an increasing focus range of different geographical locations, this exposure has the management team. The management has not agreed not on efficiency in transportation and distribution management resulted in only modest distributions and lower volatility as only to reduce management fees but also to allow limited (Transcor). well as reasonable expectations of solid gains in 2002. Despite partners to either reduce or increase their future commitments difficulties in the financing environments, we have observed to the fund by up to 15%. Summary that buyout funds are utilizing different strategies, such as the On the more encouraging note, the AIG Private Equity port- Overall, we believe that the AIG Private Equity portfolio has “platform acquisition” strategy, in order to be less reliant upon folio has fund managers that appear to be well-positioned to performed satisfactorily over the last 12 months in view of leverage. The consolidation of fragmented industries both in take advantage of current markets. the realities of the markets, both public and private. It is our STEVE COSTABILE Vice President, AIG Global Investment Corp. the US and Europe is continuing and accelerating. Moreover, Heartland Industrial Partners, L.P. is a mid-market LBO fund observation that many of our general partners have recognized we continue to see buyout managers using their capital to take focused solely on industrial sector consolidation and growth that they must acknowledge that a multitude of companies 2001 was a challenging year for private equity across advantage of operationally sound businesses that have over- opportunities. The fund has invested in three platform com- in certain sectors are impaired. These general partners have all sectors and geographies. AIG Private Equity’s port- leveraged balance sheets and also the use primarily of equity panies: Metaldyne Corp., a full service “solutions house” which finally “capitulated” and have aggressively marked down folio, which has exposure to technology and communi- in “growth buyouts” of companies in industries that will benefit supplies multi-metal machined castings, forgings, finished positions for 2001. Though it is of course disappointing that cations, has not been immune to these effects. Due from an improving economy. Leverage is not introduced in components and sub-assemblies to the automotive industry; this has happened, the relative impact has been well managed. to the high “buy-in” valuations that these companies these investments until there are actual signs of growth. Collins and Aikman, Inc., a global leader in the automotive Moreover, it clears the way for the AIG Private Equity port- commanded from venture capital investors during floor and acoustic systems industry and a leading supplier of folio to strive for a better performance in 2002. Again, we 1999–2000, many of these investments may never Select Partnership Fund Review automotive fabric, interior trim and convertible top systems; believe that the breadth and depth of the portfolio will be a return to their buy-in valuations despite the fact that The balanced nature of the AIG Private Equity portfolio has and Spring Industries, a leading manufacturing and marketing contributing factor in AIG Private Equity’s success during the some may be fully funded until “break-even”. More- meant that, while some funds have faced difficulties, other company for textile and nontextile home furnishing products. coming year. over, many companies did not have fully funded funds have been successful. The AIG Private Equity portfolio The CINVEN Funds are focused on larger Pan-European business plans to begin with and this has inevitably has had its share of disappointing developments with its fund buyout opportunities in which AIG Private Equity has CHF 3.1 resulted in write-downs and write-offs for this positions over the past year. The following are some of the million invested in The First CINVEN Fund and CHF 21.7 million segment of the portfolio. Fortunately most of AIG more notable developments. in The Second CINVEN Fund. Both funds have invested in
“Last year proved to be a difficult one across the portfolio, but we feel that the AIG Private Equity is as a result well positioned to have a rewarding 2002.” 8 STEVE COSTABILE, Vice President, AIG Global Investment Corp. 9 Harvey Lambert V. Rory Chang Stedman Oakey Rachel Wang Simon Faure DIRECT INVESTMENT PROFILE DIRECT INVESTMENT PROFILE
Promising Life Science www.cognetix.com Investments www.nexray.com
derived from the venom of the Conus species of predatory sea snails. These slow-moving snails routinely feed on quick swimming fish, having perfected venoms containing pharma- cologically active molecules with exquisite specificity. Research has shown that these molecules are able to hit targets in the body related to disease and thus produce a defined therapeu- tic effect. Because of their specificity, conopeptide molecules have the potential to be turned into highly effective drugs with minimal side effects. Although the original molecules are sourced from snails, Cognetix is able to manufacture these molecules synthetically. Cognetix’s initial products will be directed towards high- value but relatively under-served niche markets, including epi- lepsy, neuropathic pain, post-operative pain and coronary heart disease. The company’s lead compound for epilepsy has com- pleted Phase I clinical trials, with no adverse events reported. F. T. CHONG Vice President, AIG Global Investment Corp. Phase II clinicals are scheduled to begin in mid-2002 and will be NexRay NexRay has developed a new technology called Scanning completed in 2003. Sufferers of epilepsy include over 2.3 million NexRay, founded in 1992 and based in Los Gatos, California, Beam Digital X-Ray (SBDX), which was granted 510 (k) clearance While we are committed to building a balanced port- people, 25% of whom are intractable to current treatment. Three addresses the $1 billion global interventional cardiology by the FDA in 1998. This technology will produce equivalent folio, we highlight below two of the life science invest- other compounds for pain and acute myocardial infarction will imaging market. In the past decade, interventional cardiology or superior images relative to current x-ray fluoroscopy, but ments made in 2001. The environment for private equity be in Phase I and II clinical trials in 2002–2003. procedures (angiograms, balloon angioplasties, stenting, and will lower radiation exposures to physicians and patients by investments remain challenging due to competition for A highly experienced group of business, scientific, clinical, others) have become widespread and are now growing at a 80–90%. NexRay’s technology, now in its beta version, will be deal flow and difficulty in raising senior debt financing regulatory, and financial professionals are at the helm of rate of 10–15% annually. Although these procedures have used in human interventions at the University of Wisconsin in for buyouts but, on the other hand, valuations are very Cognetix. The company’s Board of Directors also includes bio- been popular, both patients and doctors are concerned about late 2002 and is expected to be launched commercially in 2003. attractive and we continue to be actively seeking new technology experts who have a clear record of success. In the the hazardous side effects of the massive doses of x-ray that is The company’s Board of Directors includes highly success- investment opportunities. next five to ten years, the company plans to have approved routinely used in live imaging for interventional cardiology. The ful entrepreneurs in the medical device space and expert clini- products on the market that will make it a leader in treating more complex the procedure, the longer patients and doctors cians in the field of interventional cardiology. The company’s Cognetix central nervous system and cardiovascular disorders. AIG are exposed to radiation. Patients have been known to suffer management team is focused on delivering a final product Based in Salt Lake City, Utah, Cognetix is a biopharmaceutical made a direct investment in Cognetix that will help fund the severe radiation burns, and both patients and doctors increase that will represent a revolutionary improvement in the well- company that is developing therapeutic products based on clinical development of a new generation of conopeptide their risk of developing cancer due to radiation exposure. established market for medical x-ray fluoroscopy systems. two decades of research into “conopeptides” or small proteins derived drugs.
“The life sciences and biotechnology space represents one of the bright spots in the venture world.”
10 F. T. CHONG, Vice President, AIG Global Investment Corp. 11 Rajveer Ranawat Astrid Tuminez Richard Drake Julia Balandina DIRECT INVESTMENTS NexRay, Inc. MediSpectra, Inc. DIRECT INVESTMENTS NexRay, founded in 1992 and based in Los Gatos, California, Medispectra is focused on the early detection and effective addresses the $1 billion global interventional cardiology management of cervical cancer. Cervical cancer is one of imaging market. NexRay has developed a new technology the most common forms of cancer and tends to be curable if siphon which will produce equivalent or superior images relative to discovered at an early stage. MediSpectra has developed a tentacle current x-ray fluoroscopy, but will lower radiation exposures device that uses fluorescent light to distinguish healthy from proboscis to physicians and patients by 80–90%. NexRay’s technology, cancerous tissue. The device is currently in pivotal clinical Cognetix, Inc. Access to High-Quality now in its beta version, will be used in human interventions trials. Because MediSpectra’s device removes the need for Based in Salt Lake City, Utah, Cognetix is a biopharmaceutical Life Sciences at the University of Wisconsin in late 2002 and is expected to tissue samples, it promises an easier, quicker, cheaper and, company that is developing therapeutic products based on be launched commercially in 2003. potentially, more effective way to diagnose cervical cancer. “conopeptides” or small proteins derived from the venom Investment Opportunities of the Conus species of predatory sea snails. Cognetix has synthesized several molecules, and its lead compound for Scientific, regulatory, business, and financial develop- epilepsy has successfully completed Phase I clinical trials. ments have created significant opportunities in the Besides epilepsy, other development efforts at biotechnology and life sciences space. Therefore, the the company involve neuropathic pain, post- AIG direct investments team has decided to focus its operative pain, and cardiovascular disease. attention on companies in this space, specifically those that are developing new drugs and medical equipment
that seek to address large markets. This is why its Fresenius Medical Care Ltd. investments in these sectors were stepped up in 2001, Fresenius Medical Care (FMC) is the global market leader in with five new life science companies added to the port- dialysis products and services. It supplies more than 100 000 folio. All of these investments have been performing patients at 1375 clinics, and also offers a broad selection of according to plan, thus confirming the decision to dialysis machines and related products. FMC, which is listed increase holdings in these areas still further. on the Frankfurt and New York stock exchanges, made a good operating profit in 2001, despite the fact that its overall result was dampened by one-off charges related to legal disputes. The company remains in very good position to profit from the steady growth in the number of dialysis patients.
Fresenius Medical Cardiovascular Resources Holdings Fresenius Medical Cardiovascular Resources Holdings (FMCR) is the largest U.S. player in perfusion services, which includes primarily the operation and maintenance of heart/lung ma- chines used in open-heart surgeries. Many hospitals are opting increasingly to outsource their perfusion services. Along with Theravance Inc. (formerly, Advanced Medicine Inc.) Avalon Pharmaceuticals, Inc. UTI Corporation these services, FMCR supplies the necessary consumables for Founded in California in 1996, the company is using its drug Founded in Maryland in 1999, Avalon Pharmaceuticals is a UTI Corporation is one of the world’s top providers of high- perfusion and sells a range of inno- design technology to develop multivalent drugs i.e., drugs genomics-based company utilizing proprietary methods to precision metal components and services for the medical vative blood transfusion equipment. comprised of two or more components, each joined by a accelerate the drug discovery process. The company first mines equipment industry. Its products are tailor-made, and as a linking element, which can bind simultaneously to multiple the genome for targets against cancer and other diseases, and result customers benefit from huge savings in terms of the sites on a biological target. The end product would be medi- then uses a novel assay technology to find small-molecule drug amount of time and money spent on development. An IPO had cines with stronger and longer-lasting therapeutic effects. candidates. Avalon completed a successful financing round at been planned for March 2001, but the offering was postponed A R&D team of over 150 staff are seeking new therapies for the end of 2001 and has been able to expand its re- due to poor market conditions. The postponement had little bacterial infections, asthma and incontinence. Some sub- search operations and begin the first pre-clinical impact on operations, and the company con- stances are undergoing pre-clinical trials, while a few trials of its prospective cancer treatments. tinues to perform well. have already reached the clinical 12 trial stage. 13 DIRECT INVESTMENTS DIRECT INVESTMENTS
Buyout Investments in Market Leaders
In addition to pharmaceuticals and medical technology, Atlantech International, Inc. AIG Private Equity also focuses its direct investments Atlantech International Inc. has successfully positioned itself on buyouts. All the companies selected are leaders as a specialist in complex earth-moving and stabilization in their respective markets with established products operations. The group arose from the merger of a number and services. AIG Private Equity's investments are per- of innovative companies, and is now the world’s largest forming according to plan and exhibiting sound cash manufacturer of plastic meshes. These high-tech materials flow margins. are being used increasingly in roadbuilding, ground stabil- ization and the construction of residential and commercial buildings. They make ground-level work faster, more durable and thus more
Punch Group Ltd. cost-effective. With over 5000 pubs, Punch Group is the largest indepen- “Leveraged buyouts are dent pub operator in the UK. Its outlets are divided into two groups: Spirit Group (formerly Punch Retail) runs 1040 pubs more representative of value-based under its own name and with its own staff, whereas Punch investing and have Taverns delivers beer to around 4000 licensed premises which more durable return patterns.” are run on a franchise basis. This split, which was introduced DAVID PINKERTON, Managing Director, in the year under review, allows the group to address AIG Global Investment Corp. its various markets more intensively and also Universal Studios Escape paves the way for two separate IPOs before Universal Studios Escape runs two theme parks in Orlando, the end of 2002. Florida: Universal Studios Florida and Island of Adventure. Both parks give visitors a look behind the scenes of the movie industry with exciting entertainment, rollercoaster rides and other attractions, for example theme restaurants and cinemas at City Walk. While business was adversely affected by the Magnetic Data Technologies terrorist attacks of 11 September, visitor numbers recovered Magnetic Data Technologies (MDT) is the global leader in almost completely in the final logistical and repair services for electronic devices including quarter of 2001. everything from hard disks to entire computers, digital cameras and mobile telephones. Created in 1999 by a management buy- out, the company has collaborated closely with manufacturers to develop new repair methods and has thereby established a unique position with large clients. MDT thus stands to profit from the increasing tendency of electronics manufacturers to outsource their guarantee and repair operations.
14 15 FINANCIAL REPORT 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 CONSOLIDATED INCOME STATEMENT FOR THE PERIOD JANUARY 1 TO DECEMBER 31, 2001 AND in 1000 CHF JANUARY 1 TO DECEMBER 31, 2000 Note 2001 2000 in 1000 CHF Assets Note 2001 2000 Current assets Income – Cash and cash equivalents 1 10 286 60 073 Interest income from current assets 8 871 3 243 – Receivables and prepayments 2 562 6 527 Interest income, net and dividend from long-term assets 1 040 1 881 12 848 66 600 Unrealized gains on quoted investments – 3 100 Long-term assets 2, 8 Net realized gains on investments 7 6 820 20 827 – Loans 7595 4155 Foreign currency exchange gain, net 775 – – Investments Other Income – 129 Direct investments 32 042 32 001 Total Income 9506 29 180 Funds 151 118 129 333 Contractual agreements (Total Return Swaps) 159 103 161 514 349858 327 003 Expenses Total Assets 362706 396 603 Management fees 8 7 667 7 323 Performance fees 8 – 1 680 Service fees 288 368 Liabilities and Shareholders’ Equity Write-down of long-term assets 6 15 257 31 030 Current Liabilities Other operating expenses 1 937 1 576 – Payables and accrued charges 3 5 730 3 733 Foreign currency exchange loss, net – 3 759 – Derivative instruments (foreign exchange forward) 4 3 158 – Tax expenses 557 132 – Bank loans 1 15 000 – Total Expenses 25 706 45 868 23 888 3 733 Shareholders’ Equity – Share capital 5 317500 317500 Net Loss (16 200) (16 688) – Share capital premium 93 588 93 588 – Treasury stock (at cost) (5 788) (4 286) – Revaluation deficit (33 350) – Comprehensive statement of income/expenses – Retained losses (16 932) (244) Revaluation (deficit) from fair value valuation of investments credited to equity, net (36 009) (4 798) – Net loss for the year (16 200) (16 688) Revaluation reserve from foreign exchange gains of investments credited to equity, net 7 457 – 338 818 389 870 (28 552) (4 798) Total Liabilities and Shareholders’ Equity 362 706 393 603 Total Comprehensive Loss, net (44 752) (21 486)
Net asset value per share Net Loss per share 5 (5.17) (6.51) Shares outstanding 3 136 867 3 146 617 Net asset value per share 108.01 122.38 The accompanying notes form an integral part of these consolidated financial statements.
The accompanying notes form an integral part of these consolidated financial statements.
18 19 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 1 TO DECEMBER 31, 2001 AND STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY AS OF DECEMBER 31, 2001 JANUARY 1 TO DECEMBER 31, 2000 in 1000 CHF
in 1000 CHF Share Share Revaluation Revaluation Accumulated Less Total Capital Capital Reserve Reserve (Deficit) treasury Equity 2001 2000 Premium (Deficit) on (Deficit) on stock (at cost) Investments Currency Cash Flows from Operating Activities Shareholders’ Equity Interest income received from current assets 871 3 226 December 31, 1999 184 100 34 514 (244) 218 370 Interest income, net and dividends received from long-term assets 959 811 Capital increase as of June 2000 133 400 59 074 192 474 Dividends received – 161 Net loss for the year 2000 (16 688) (16 688) Net realized gains on investments 5 159 20 827 Purchase treasury stock, net (4 286) (4 286) Operating costs (1 741) (1 024) Total Shareholders’ Equity as of December 31, 2000 317500 93 588 – – (16 932) (4 286) 389 870 Management & Performance fees (5 780) (6 631) Tax Expense (343) (3) Balance January 1, 2001 as previously reported 317 500 93 588 (16 932) (4 286) 389 870 Other Income – 116 Effect of adopting IAS 39: Changes in other current assets and liabilities 808 (5 836) Adjustment of investments to fair value (only shown in notes in prior year) (4 798) (4 798) Total Cash Flows from Operating Activities (67) 11 647 Balance January 1, 2001 as restated 317 500 93 588 (4 798) (16 932) (4 286) 385 072
Value decrease investments Cash Flows from Investing Activities Value decrease on Investments (36 009) (35 319) Increase in long term-assets (67 715) (203 938) Value increase on investment due to currency differences 7 457 6 058 Total Cash Flows from Investing Activities (67 715) (203 938) Purchase treasury stock, net (1 502) (1 502) Net loss for the year (15 492) (15 492) Total Shareholders’ Equity as of December 31, 2001 317500 93 588 (40 807) 7 457 (33 132) (5 788) 338 818 Cash Flows from Financing Activities Proceeds from bank loans 15 000 – The accompanying notes form an integral part of these consolidated financial statements. Share capital received – 133 400 Net premium received* – 59 074 Treasury share repurchase (1 502) (4 286) Total Cash Flows from Financing Activities 13 498 188 188
Foreign Exchange Effect 4 497 (3 759)
Decrease in Cash and Cash Equivalents (49 787) (7 862)
Cash and Cash Equivalents as of January 1 60 073 67 935
Cash and Cash Equivalents as of December 31 10 286 60 073 * The premium was paid to AIG Private Equity Ltd., Zug net of the issuance costs of CHF 6 920 468 in 2000
The accompanying notes form an integral part of these consolidated financial statements.
20 21 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
GENERAL ACCOUNTING POLICIES AND VALUATION PRINCIPLES Principles of consolidation Monetary assets and liabilities denominated in foreign cur- The consolidated financial statements of the Group include rency are translated into CHF at the exchange rates prevailing AIG Private Equity AG, Zug (“the Company”) is a Swiss stock Basis of presentation AIG Private Equity AG and the companies that it controls. This at the balance sheet date. corporation established under the relevant provisions of the The accompanying consolidated financial statements of the control is normally evidenced when the Group owns, either Non-monetary assets and liabilities (including share capi- Swiss Code of Obligations and domiciled in Zug. The Company Group have been prepared in accordance with International directly or indirectly, more than 50% of the voting rights of a tal) denominated in foreign currency are translated at histori- was established by AIG Private Bank Ltd. on September 17, Accounting Standards (IAS) as adopted by the International company’s share capital or it is able to govern the financial and cal rates. Gains and losses resulting from translation of foreign 1999 for an indefinite period of time and was registered in the Accounting Standards Committee (IASC) effective as of Decem- operating policies of an enterprise so as to benefit from its currency balances are recorded into equity and are included in commercial register of the Canton of Zug on September 20, ber 31. 2001 and comply with Swiss Law and the accounting activities. Consolidated financial statements are prepared using a revaluation reserve in equity. 1999. The Company, together with AIG Private Equity Bermuda guidelines laid down in the SWX Swiss Exchange’s supplemen- uniform accounting policies for like transactions and other Ltd (“the Subsidiary”), comprises the AIG PE Group (“the tary listing rules for investment companies. events in similar circumstances. Subsidiaries are consolidated Derivative financial instruments Group”). The company’s shares are listed on the SWX Swiss The consolidated financial statements are prepared under from the date on which effective control is transferred to the The Company enters into foreign exchange forward contracts Exchange. the historical cost convention, except that investments held for Group and are no longer consolidated from the date of dis- to partially macro-hedge its net exposure in private equity in- The Company’s investment objective is to achieve long- trading and available-for-sale are stated at their fair value (see posal. All material intercompany transactions and balances are vestments denominated in foreign currency. These investments term capital growth for shareholders by investing in private investment schedule) as disclosed in the accounting policies eliminated. The scope of consolidation currently includes only are held by AIG Private Equity Ltd. The derivative financial equity sponsored by companies of AIG as well as partnerships hereafter. AIG Private Equity (Bermuda) Ltd., which is owned 100% by the instruments are held-for-trading, initially recognized at cost managed by other leading private equity managers. The Com- The following changes in accounting principles have been Company. and subsequently re-measured at fair value. Changes in the fair pany may also make direct investments in operating com- introduced in accordance with the requirements of IAS 39, All other investments are accounted for in accordance with value of those forward contracts are recorded into income panies. Although the Company may invest directly in Fund Financial Instruments: Recognition and Measurement. All IAS 39, Financial Instruments: Recognition and Measurement statement. Investments or companies, it is anticipated that investments available-for-sale investments are carried at fair value and all as further disclosed in the investment schedule. will generally be made through the Subsidiary. derivative financial instruments have been recognized as assets As the investments of the Group are held as part of the Cash and Cash Equivalents The Subsidiary in Bermuda was incorporated on October 6, or liabilities. The opening balance of equity (revaluation re- Group’s portfolio solely for the purpose of capital gains upon Cash includes cash on hand and cash with banks. Cash equiva- 1999 as a company with limited liability under the laws of serve) as of January 1, 2001 has been adjusted. Changes in fair sale in the near future, the Group’s management considers lents are short-term, highly liquid investments that are readily Bermuda for an unlimited duration and is domiciled in Pem- values on January 1, 2001 have resulted in a net loss, of which that consolidation or equity accounting would not give a true convertible to known amounts of cash with original maturities broke. All shares of the Subsidiary are held by the Company. TCHF 4798 for available-for-sale investments, which were de- and fair view of the Group’s interest in its investments. As of of three months or less and that are subject to an insignificant The purpose of the Subsidiary is to act as an investment vehicle ferred in revaluation deficit on investments. This adjustment is December 31, 2001, the Group holds ownership interests of risk of change of value. For the purpose of the cash flow state- for the Company’s investments and to enter into related trans- only shown in the consolidated statement of changes in equity 20% or more in the following fund investments: ment, cash and cash equivalents also comprise bank overdraft, actions. and the comprehensive statement of income/expenses, the which are included in short term loans and borrowings in the Among the responsibilities of the Board of Directors is prior year figures have not been restated. AIG Horizon Partners Fund 36.37% balance sheet. taking investment decisions and appointing members of the AIG Private Equity Portfolio 31.93% Investment committee. The Investment committee is respon- Use of estimates Loans sible for assessing the investment opportunities presented by The preparation of financial statements requires management Measurement currencies Loans are granted to companies (investments) only under the the Manager and the Investment Advisor and subsequently to make estimates and assumptions that affect the reported The Subsidiary of the Company is considered a foreign oper- following circumstances: When the loan is granted together making investment recommendations to the Board of Directors amounts of assets and liabilities and disclosure of contingent ation integral to the operations of the parent company as per with an equity investment in the company, when an option to for approval. assets and liabilities at the date of the financial statements and IAS 21 “The Effects of Changes in Foreign Exchange Rates”. All purchase shares in the company is part of the loan agreement, The functional currency of the Company is CHF In 2001 the the reported amounts of revenues and expenses during the re- transactions in foreign currencies entered into by AIG Private or when the loan is convertible into shares of the company. Company hedged a part of the non-CHF investments of the porting period. Actual results could differ from those estimates. Equity Group are recorded in CHF at the exchange rate pre- While the loans may vary in their specific terms, in general Group into CHF. vailing on the day of the transaction. Gains and losses resulting the interests calculated for the year is added to the notional As of December 31, 2001 the Company did not employ any from the settlement of transactions denominated in foreign amount. According to IAS 39, loans are classified as originated employees. currency are recorded in the income statement of the Company The financial statements were authorized for issue by the (“income statement”) using the exchange rate prevailing on Board of Directors subsequent to their meeting held on May 13, that date. 2002 in Zurich. 22 23 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
loans which are carried at amortized cost less any impair- factors relevant to their value, including but not limited to shareholders by the weighted average number of ordinary • The revaluation reserve includes the cumulative net ment adjustments. Prior to adopting IAS 39, the loans were the following: shares outstanding during the period. change in fair value of available-for-sale investments measured at cost. – Result of multiple analysis; until the investment is disposed of or is determined to – Result of discounted cash flow analysis Contractual Agreements (Total Return Swaps) be impaired. Direct investments and Fund Investments – Reference to transaction prices (including subsequent The contractual agreements (total return swap) are valued with •At January 2001 the Group adopted IAS 39, Financial financing rounds); the same principles as the direct investments and the fund Impairment of assets Instruments: Recognition and Measurement, and classified – Reference to the valuation of other investors; investments. On December 22, 1999 Group entered into three Financial instruments are reviewed for impairment at each its investments as available-for-sale. Available-for-sale – Result of operational and environmental assessment. contractual agreements with AIG that entitles the Group to balance sheet date. For available-for-sale investments, the securities are initially recorded at cost. These securities are Based on a composite assessment of all appropriate and receive payments equal to a pro rata share of all distributions cumulative gain or loss previously recognized in equity is subsequently re-measured at fair value. Temporary gains or applicable indicators of fair value, the Group makes a good from a specified list of funds, while obligating the Group to included in net profit or loss for the period when there is losses on measurement to fair value of available-for-sale faith estimate of the fair values as of the valuation date. make payments equally to a pro rata share of all draw-downs of objective evidence that the asset is impaired. The value of investments are recognized directly in the revaluation In estimating the fair value of fund investments, the Group committed capital to the same underlying funds. expected future cash flows discounted at the current mar- reserve/deficit in the shareholders equity, until the invest- considers all appropriate and applicable factors relevant to ket interest is recorded when the decrease in the impair- ment is sold or otherwise disposed of, or until it is deter- their value, including but not limited to the following: Taxes ment loss can be objectively related to an event occurring mined to be impaired, at which time the cumulative gain or – Reference to the fund’s investment’s reporting Tax provisions are based on reported income and include taxes after the write down. Such reversal is recorded in income. loss previously recognized in equity is included in net pro- information; on capital, as well as non-recoverable tax withheld on interest fit or loss for the period. A value adjustment is recorded – Reference to transaction prices; and dividends. The activities of the Subsidiary are currently not Segment reporting when the Board of Directors considers that non-temporary – Result of operational and environmental assessment. subject to any income, withholding or capital gains taxes in The sole business segment is investing in private equities, decline in value has occurred. Such valuation adjustments All purchases and sales of investments are recognized on Bermuda. Provisions for taxes payable on profits earned in resulting in no segment disclosure reporting as per IAS 14. are recorded under “write-down of long-term assets”. the trade date, which is the date that the Group commits to the AIG Private Equity Group companies are calculated and Therefore, the results published in this report correspond As mentioned above these investments are mainly non- purchase or sell the asset. Cost of purchase includes trans- recorded based on the applicable tax rate in Switzerland. Taxes to the primary segment-reporting format. current financial assets and market quotations are not action cost. Prior to the adoption of IAS 39 the Group payable as result of consolidation are dealt with in accordance readily available, therefore these investments are valued at showed the cumulative fair values in the notes. with IAS 12. Contingencies their fair value as determined in good faith by the Board of •Investments in securities and in other financial instru- Contingent liabilities are not recognized in the financial Directors in consultation with the investment manager. ments, which are traded on recognized exchanges (includ- Bank loans statements. They are disclosed unless the possibility of an No third party valuations are used. In this respect, invest- ing bonds, equities, futures contracts, options and funds), Bank loans include short-term borrowing granted by third outflow of resources embodying economic benefits is re- ments in other investment companies which are not pub- are valued at the last reported bid price on the valuation parties. Short-term implies a planned repayment within 12 mote. A contingent asset is not recognized in the financial licly traded are normally valued at the underlying net asset date. Investments in securities and in other financial in- months of the balance sheet date. statements but disclosed when an inflow of economic value as advised by the managers or administrators of struments traded in the over-the-counter market and listed benefits is probable. these investment companies, unless the Board of Directors securities for which no trade is reported on the valuation Equity are aware of good reasons why such a valuation would not date are valued at the last reported bid and ask price for • Treasury shares are presented in the balance sheet as a be the most appropriate indicator of fair value. All fair long and short positions, respectively. The valuation of the deduction from equity. The acquisition of treasury shares valuations may differ significantly from values that would investments is done on a regular basis. is presented as a change in equity. No gain or loss is re- have been used had ready markets existed, and the • Dividends are recognized in the statement of income at the cognized in the income statement on the sale, issuance or differences could be material. time upon the declaration of such dividends. cancellation of treasury shares. Consideration received is In estimating the fair value of an unquoted direct invest- presented in the financial statements as a change in equity. ment, the Group considers all approriate and applicable Net Asset Value per Share and Earnings per Share • The transaction costs of an equity transaction, other than The net asset value per share is calculated by dividing the net in the context of a business combination, are accounted for assets included in the balance sheet by the number of partici- as a deduction from equity. Equity transaction costs are pating shares in issue the year end. Earnings per share is cal- comprised of only those incremental external costs culated by dividing the net profit attributable to the ordinary directly attributable to the equity transaction, which would otherwise have been avoided. 24 25 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
INVESTMENT SCHEDULE AS OF DECEMBER 31, 2001
Opening Paid in Returned Write-down/write- Cost Value Fair Value Original Total BalanceCapitalCapital up of investments31.12.01 31.12.01 Currency commitment in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF AIG Fund Portfolio AIG Asian Opportunity Fund L.P. 11 869 – (386) – 11 483 11 354 USD 24 446 AIG Blue Voyage Fund L.P. 1 912 468 (16) – 2 364 1 944 USD 8 410 AIG Brazil Special Situations Fund L.P. 2 828 2 037 (315) – 4 550 2 960 USD 16 820 AIG Global Sports & Entertainment Fund, L.P. 3 246 1 078 (512) – 3 812 2 673 USD 8 410 AIG Highstar Capital, L.P. 462 1 384 (4) – 1 842 1 285 USD 12 316 AIG Horizon Partners Fund, L.P. 39 231 18 616 (1 900) (6 356) 49 591 45 542 USD 123 892 AIG Orion Fund L.P. 2 515 818 – – 3 333 2 862 USD 9 626 CapVest Equity Partners L.P. 27 426 7 045 – (5 596) 28 875 23 041 Euro 49 948 Subtotal Affiliate Funds 89 489 31 446 (3 133) (11 952) 105 850 91 661 253 868
Third Party Fund Portfolio International Funds A & A Venture 3 000 – – – 3 000 2 313 CHF 2 834 AEA Scandinavia I 4 062 169 (383) – 3 848 4 755 USD 8 595 AEA Scandinavia II 7 109 471 – – 7 580 7 052 USD 8 595 Baring Communications Equity Limited 2 798 267 – (349) 2 716 1 053 Euro 4 298 Carlyle Europe Partners, L.P. 9 973 2 202 – – 12 175 10 732 Euro 21 509 Carlyle Europe Venture Partners L.P. 976 305 (309) (833) 139 569 Euro 4 813 CVC European Equity Partners III, L.P. – 488 – – 488 374 Euro 10 768 Doughty Hanson & Co. III 8 451 621 (82) – 8 990 7 332 USD 14 624 Electra European Fund, L.P. – 2 970 – – 2 970 2 927 Euro 21 407 EQT Northern Europe Fund, L.P. – 5 450 – – 5 450 5 191 Euro 17838 Excel Capital Partners III, L.P. 3 682 904 – – 4 586 2 781 ESP 8 595 GMT Communications Partners II, L.P. 361 226 (14) – 573 240 Euro 3 844 Klesch Capital Partners L.P. 1 491 2 – (1 493) – – USD – Lexington Capital Partners IV, L.P. – 11 615 (3 075) – 8 540 10 811 USD 33 650 Palamon European Equity Fund L.P. 1 857 1 159 – – 3 016 1 987 USD 8 595 Permira German Buy-Outs 3 260 – – – 3 260 766 DM 4 473 Permira Italy II 1 110 – – – 1 110 195 Lira 856 Schroder Venture International Trust Plc 9 956 13 (1 807) – 8 162 5 526 GBP 4 401 TH Lee.Putnam Internet Partners, L.P. 2 130 151 (102) – 2 179 1 406 USD 4 246 The Cinven Fund I 2 975 760 (1 578) – 2 157 3 138 GBP 8 595 The Cinven Fund II 16 220 4 958 (1 009) – 20 169 21 721 GBP 24 519 Subtotal International Funds 79 411 32 731 (8 359) (2 675) 101 108 90 869 217055
Third Party Fund Portfolio US Funds Advanced Technology Ventures VI, L.P. 1 954 746 (59) – 2 641 2 190 USD 4 246 AEA Investors, Inc. I 103 154 (57) – 200 220 USD 2 556 AEA Investors, Inc. II 3 925 973 – – 4 898 5 055 USD 6 153 American Industrial Partners Capital Fund II, L.P. 1 756 196 – – 1 952 1 736 USD 2 051 Apollo Investment Fund III, L.P. 885 6 – – 891 1 195 USD 2 051 Apollo Investment Fund IV, L.P. 7 326 793 – – 8 119 8 008 USD 7 689 Arrow Path Venture Capital, L.P. 3 340 454 (204) – 3 590 2 163 USD 4 246 Bain Capital Fund VI, L.P. 400 30 (33) – 397 400 USD 505 Bain Capital VI Coinvestment Fund, L.P. 298 7 – – 305 315 USD 505 Baker Communications Fund II, L.P. 1 804 349 (74) – 2 079 956 USD 5 102 Berkshire Fund II, L.P. 251 – (16) – 235 169 USD 1 021 Berkshire Fund III, L.P. 1 368 10 (329) – 1 049 1 407 USD 1 535 Berkshire Fund IV, L.P. 2 523 47 (404) – 2 166 2 133 USD 2 154 Berkshire Fund V, L.P. 4 112 2 121 (27) – 6 206 4 577 USD 11 925 Blackstone Capital Partners II 851 9 (93) – 767 498 USD 2 051 Blackstone Capital Partners III 5 707 456 – – 6 163 5 306 USD 7 689 Blackstone Mezzanine Partners, L.P. 1 040 153 (43) – 1 150 1 106 USD 4 762 Boston Millennia Partners II, L.P. 1 315 425 (58) – 1 682 1 344 USD 4 246 26 Carlyle Partners II, L.P. 2 702 118 (1 373) – 1 447 2 487 USD 3 072 27 Carlyle Partners III, L.P. 1 764 434 (45) – 2 153 1 978 USD 6 802 Charterhouse Equity Partners II, L.P. 783 5 (16) – 772 816 USD 1 535 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
INVESTMENT SCHEDULE AS OF DECEMBER 31, 2001
Opening Paid in Returned Write-down/write- Cost Value Fair Value Original Total BalanceCapitalCapital up of investments31.12.01 31.12.01 Currency commitment in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF in 1000 CHF Third Party Fund Portfolio US Funds Clayton & Dubilier Private Equity Fund IV, L.P. 346 1 (209) – 138 107 USD 990 Clayton, Dubilier & Rice Fund V, L.P. 1 657 – – – 1 657 1 677 USD 2 051 Clayton, Dubilier & Rice Fund VI, L.P. 717 95 – – 812 922 USD 2 556 DLJ Merchant Banking Partners II, L.P. 1 347 110 (163) – 1 294 1 581 USD 2 051 Dubilier CRM Fund I, L.P. 275 58 (47) – 286 289 USD 505 Evercore Capital Partners, L.P. 462 230 (48) – 644 718 USD 1 021 Fenway Capital Partners Fund II, L.P. 1 309 101 (1) – 1 409 1 286 USD 3 072 Fenway Partners Capital Fund, L.P. 2 284 28 (163) – 2 149 1 667 USD 3 072 Focus Ventures II, L.P. 832 86 (72) – 846 514 USD 1 700 GKH Investments, L.P. 1 911 – (1 027) – 884 2 201 USD 2 556 Greenwich Street Capital Partners, L.P. 1 856 8 (334) – 1 530 1 099 USD 2 556 Heartland Industrial Partners LP – 5 055 (34) – 5 021 4 800 USD 10 741 Hoak Communications Partners, L.P. 726 48 – – 774 498 USD 402 JK&B Capital III, L.P. 2 646 – (193) – 2 453 2 668 USD 5 102 Kelso Investment Associates V, L.P. 2 900 13 (15) – 2 898 2 389 USD 2 556 Kelso Investment Associates VI, L.P. 1 068 301 (87) – 1 282 1 396 USD 3072 KRG Capital Fund I, L.P. 3 969 1 606 (127) – 5 448 7 356 USD 7 153 LJM2 Co-investment Fund, L.P. 1 545 – (1 154) – 391 609 USD 3 875 Meritage Private Equity Fund, L.P. 893 254 (49) – 1 098 826 USD 1 700 Merrill Lynch Capital Appreciation Fund II 447 – – – 447 222 USD 2 556 Morgan Stanley Capital Partners III, L.P. 2 037 160 (483) – 1 714 722 USD 2 051 Morgan Stanley Leveraged Equity Fund II, L.P. 478 1 (66) – 413 229 USD 2 556 North Castle Capital Partners II, L.P. 4 833 897 (209) – 5 521 5 709 USD 5 957 Odyssey Investment Partners Fund L.P. 441 179 – – 620 486 USD 1 021 Questor Partners Fund II, L.P. 919 1 093 19 – 2 031 1 961 USD 12 955 Questor Partners Fund, L.P. 1 160 1 (489) – 672 1 189 USD 3 844 RCBA Strategic Partners, L.P. 6 633 893 (1 472) – 6 054 7 248 USD 7 668 Sandler Mezzanine Partners 653 – – – 653 266 USD 2 051 Sankaty High Yield Partners 1 061 90 – – 1 151 583 USD 815 Silver Lake Partners, L.P. 5 580 662 (109) – 6 133 5 009 USD 11 450 Stonington Capital Appreciation 1994 Fund, L.P. 2 294 23 – – 2 317 2 783 USD 3 072 Technology Crossover Ventures IV, L.P. 5 902 2 055 (203) – 7 754 5 524 USD 14 696 Thayer Equity Investors Fund IV, L.P. 4 451 1 232 (316) – 5 367 3 941 USD 7 668 Thayer Equity Investors III, L.P. 2 399 90 (295) – 2 194 1 150 USD 2 051 Thomas Weisel Capital Partners, L.P. 2 853 1 070 (400) – 3 523 2 621 USD 5 442 Tullis-Dickerson Capital Focus, L.P. 45 – – – 45 51 USD 526 Warbug Pincus Equity Partners, L.P. 7 219 1 855 (312) – 8 762 10 192 USD 10 254 WPG Corporate Development Associates IV, L.P. 325 – – – 325 145 USD 1 021 WPG Corporate Development Associates V, L.P. 1 267 206 – – 1 473 997 USD 2 051 Subtotal US Funds 121 947 26 347 (11 076) – 137 045 127 690 – 238 332
Direct Investments Portfolio Atlantech International, Inc. (Tensar) 4 133 – 12 – 4 145 4 205 USD Avalon Pharmaceuticals, Inc. – 376 – – 376 376 USD Cognetix, Inc. – 1 127 – – 1 127 1 110 USD Fresenius Medical Cardiovascular Resources Holdings – 1 253 – – 1 253 1 174 USD Fresenius Medical Care 4 330 – (170) – 4 160 4 131 USD Magnetic Data Technologies, LLC 1 690 – – – 1 690 1 683 USD Medispectra, Inc. – 916 – – 916 888 USD NexRay, Inc. – 258 – – 258 269 USD Personics Software, Inc. 630 – – (630) – – USD Punch Group Ltd 8 163 – – – 8 163 8 584 GBP Theravance, Inc. (Advanced Medicine, Inc.) 4 514 – (30) – 4 484 4 440 USD Universal Studio Escape 7 095 – (97) – 6 998 7 122 USD 28 UTI Corporation 5 601 77 (44) – 5 634 5 655 USD 29 Subtotal Direct Investments 36 156 4 007 (329) (630) 39 204 39 637
Total of all Investments 327 003 94 531 (22 897) (15 257) 383 207 349 857 709 255 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 5: Shareholders’ Equity in CHF Note 1: Components of Cash and Cash Equivalents in 1000 CHF The share capital of the Company as of December 31, 2001 amounts to CHF 317 500 000 consisting of 3 175 000 registered shares with a par value of CHF 100 each. Each share entitles the holder to participate in any distribution of income and capital. 31.12.01 31.12.00 Cash 2286 4613 Share capital is broken down as follows: 2001 2000 Time Deposit 8 000 55 460 Number of shares authorized and issued 3 175000 3 175000 Total 10 286 60 073 Number of shares outstanding 3 136 867 3 146 617 Issuance price per share (1 334 000 shares on June 13, 2000) – 150 Based on an agreement dated May 29, 2001, the Company has a credit line available with Migrosbank, Zurich of CHF 20 million. As of December 31, 2001 the credit line was used up to CHF 15 million. The interest rate has been fixed at CHF Libor plus 1%. Loss per Share For the purpose of the cash flow statement cash and cash equivalents comprise all cash, short-term deposits and other money Net (loss) for the period (in 1000 CHF) (16 200) (16 688) market instruments, net of short-term overdrafts, with a maturity of three months or less. Cash and cash equivalents are recorded Weighted average of total number of shared outstanding (in 1000) 3 136 2 564 at nominal value. Net (loss) per share outstanding (5.17) (6.51) Net Asset Value per Share 108.01 122.38
Note 2: Loans and Investments (see pages 26/29 for complete list of loans and investments) As at December 31, 2001 the following major shareholders held shares and voting rights of 5% and more as of December 31, 2001:
The investment schedule on pages 26/29 reflects AIG Private Equity Group’s economic interest in funds and direct investments Number of Shares Participation in % Number of Shares Participation in % 2001 2001 2000 2000 rather than its legal interest. As a consequence, the investments held through the Total Return Swaps and AIG Private Equity Ernst Göhner Stiftung 267 000 8.41% 267 000 8.41% Partnership L.P. (see Note 8) are disclosed on this table as if they were held directly. MIGROSBANK 222 177 7.00% 216 192 6.81% AIG Private Bank 231 320 7.29% 198 857 6.26% Note 3: Components of Payables and accrued charges American International Underwriters Overseas Ltd. (ref. Note 8) 317400 10.00% 317400 10.00% in 1000 CHF SUVA, Schweiz Unfallversicherungsanstalt 170 000 5.35% 170 000 5.35% Winterthur Leben 167 000 5.26% 167 000 5.26% 2001 2000 Account payable AIG Global Investment Corp. 2 021 – Note 6: Write-downs of long-term assets Accrued service- and management fees 2 101 3 089 in 1000 CHF Accounts payables and other accrued expenses 1 609 644 Total 5 730 3 733 For the year ended December 31, 2001 write downs on long-term assets were done on following captions. For details see also investment table.
Note 4: Derivative instruments exchange forward contracts with a notional-amount of 2001 2000 Foreign Exchange Forward USD 61.3 million (2000: none) and a negative replacement Direct investments 630 1 087 As of December 31, 2001 the Company has open foreign value of TCHF 3,157 (2000: none). Funds 12 785 17087 Contractual agreements 1842 12 856 Total 15 257 31 030
As explained in Direct investments and Fund Investments of were depreciated in prior periods are credited to income to the the Summary of significant accounting policies and valuation extent that they offset the write-downs previously recorded. 30 principles, write-ups in the carrying value of investments which 31 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
Note 7: (a) Net realized gain on investments 2001 the accounting services were outsourced to third parties. fees on loans and debit balances, and withholding or transfer ment fees it paid with respect to the underlying fund invest- Capital gains realized in 2001 have been contributed by the In 2002 AIG Private Bank Ltd., Zurich, will earn CHF 40 000 for taxes) should be paid or reimbursed by the Subsidiary. The ments prior to the Total Return Swaps, which are not taken into three distinct investment portfolios as follows: its services provided. Investment Advisor shall bear its own overheads and other consideration when calculating the fair value of the underlying 2001 2000 internal operating costs. fund investments. AIG Funds 141 4 072 Management and Advisory Agreement In 2001 the Management and Advisory Agreement resulted As of December 31, 2001, the Total Return Swaps were Third Party Funds 6 679 16 755 The AIG Private Equity Group has entered into a Management in AIG receiving CHF 7.7 million (2000: CHF 9.1 million) from transacted and valued at CHF 159 million. The corresponding Direct Investments 0 0 Agreement with AIG Private Equity Management Ltd. Bermuda the AIG Private Equity Group. transaction fees totaled CHF 2.2 million and are included in the Total 6 820 20 827 (“the Manager”), a wholly owned subsidiary of AIG Private The AIG Private Equity Group shall pay all other expenses value of the investment. Bank Ltd., Zurich. For services rendered, the Manager is attributable to its own activities, including but not limited to (b) Net unrealized gains and losses on investments entitled to receive a management fee at an annual rate equal to fees, costs and expenses related to Fund Investments, cus- • Capital Calls from AIG Fund Investments 2001 2000 2% (before management and performance fee) of the con- todian, third party consultants, outside counsel’s and account- Investments (in million) 2001 2000 AIG Funds (14 189) (6 075) solidated Net Asset Value of AIG Private Equity AG, Zug. on the ants’ fees and expenses, insurance or litigation expenses CHF USD CHF USD Third Party Funds (19 594) 1 457 last business day of each quarter before deductions or accrual (including the cost of directors and officers insurance for per- AIG Horizon Fund 15.0 8.8 30.3 16.4 Direct Investments 433 (7) of the management fee an/or performance fees. sons serving of boards of directors on behalf in Investments), AIG Brazil Special Situations Fund L.P. 2.1 1.2 2.8 1.7 Total(33 350)(4798) In addition to the management fee, the Manager will and taxes fees or other governmental or regulatory charges. AIG Orion Fund L.P. 0.7 0.4 2.2 1.4 receive quarterly performance fee from the AIG Private Equity AIG Blue Voyage Fund L.P. 0.5 0.3 1.9 1.1 Note 8: Related Party Transactions Group. The performance fees with respect to the Third Party MATERIAL TRANSACTIONS AIG Global Sports & Entertainment L.P. 1.1 0.6 3.3 1.9 The AIG Private Equity Group has entered into several agree- Funds Portfolio is fifteen per cent (15%) of the increase in Cash and Cash Equivalents AIG Highstar Capital L.P. 0.9 0.6 0.3 0.2 ments with various companies of the American International the net asset value of the Third Party Funds Portfolio for each As of December 31, 2001 the AIG Private Equity Group has cash AIG Private Equity Portfolio L.P. 15.4 9.1 62.5 37.6 Group, Inc., New York (“AIG”). AIG is the world’s leading U.S.- quarter in excess of any baseline return for such quarter of and cash equivalents totaling CHF 8.3 million on a fiduciary based international insurance and financial services organiz- five per cent (5%) (on an annual basis). The performance fee and current account basis with AIG Private Bank Ltd., Zurich . In Personal ation, the largest underwriter of commercial and industrial with respect to the Direct Investment Portfolio is twenty per 2001, the AIG Private Equity Group earned CHF 0.83 million in Two members of the Board of Directors of AIG Private Equity insurance in the United States, and among the top-ranked U.S. cent (20%) of the increase in the net asset value of the Direct interest from fiduciary deposits placed through AIG Private Ltd. are employees of other companies within the AIG Group. life insurers, and its long term debt is rated “AAA” by Standard Investment Portfolio for each calendar quarter. Bank Ltd., Zurich. AIG executives serving on the Board of Directors and the & Poor’s and “Aaa” by Moody’s. Furthermore both performance fees are subject to a “high- Investment Committee of AIG Private Equity Group companies water mark”, so that no performance fee will be paid with Derivative Instruments do not receive remuneration from AIG Private Equity Group for CONTRACTUAL AGREEMENTS respect to particular portfolio unless the net asset value for The Company has a credit facility of CHF 15 million with their services. Service Agreement I that portfolio is greater than the previous high net asset value AIG Private Bank Ltd. which allows it to conclude forward rate American International Company Ltd., Pembroke, Bermuda, for the portfolio (increased, in the case of the Third Party transactions and pledged some of the investment as security. Note 9: Financial instruments and associated risks an indirect wholly owned subsidiary of AIG, provides several Funds Portfolio at the return of 5% annually). Disclosures about fair value of financial instruments administrative services for the Subsidiary. For its services The Manager has entered into an advisory agreement with Investments International Accounting Standards No. 32 “Financial Instru- provided, the Service company is entitled to receive a fee of AIG Global Investment Corp., New York, a wholly owned • Contractual Agreements (“Total Return Swaps”) ments: Disclosure and Presentation” requires the disclosure USD 50 000 (previously USD 150 000) per annum. In 2001, subsidiary of AIG, to act as Investment Advisor with respect to On December 22, 1999, the AIG Private Equity Group entered of fair value information about financial instruments, whether Service Agreement I resulted in American International Com- the Third Party Funds, Portfolio and Direct Investments Port- into three contractual agreements with AIG that entitle the AIG or not recognized in the financial statements, for which it is pany Ltd. earning CHF 168 250 (2000: CHF 248 344). folio. For its services provided under the Management agree- Private Equity Group to receive distributions equal to pro rata practicable to estimate the value. The carrying amounts of all ment, the Advisor shall be entitled to receive from the Manager share of all distributions from a specified list of Funds, while financial instruments in the financial statements are reasonable Service Agreement II an advisory fee. The fees of such an advisor shall be borne by obligating the AIG Private Equity Group to make payments estimates of fair values. AIG Private Bank Ltd., Zurich, a wholly owned subsidiary of the Manager. equal to pro rata share of all draw-downs of committed capital AIG, provides administrative and accounting services for the All expenses incurred directly in connection with trans- to the same list of funds (the “Total Return Swaps”). Financial instruments and associated risks AIG Private Equity Group. For its services provided, the Service actions effected or positions held on behalf of AIG Private Distributions from the underlying Fund Investments, which The Company is exposed to various risks in respect to its Company is entitled to receive a fee of CHF 120000 per annum. Equity Group pursuant to the Investment Advisor’s exercise of are over the amount of its initial investment plus subsequent financial instruments including: In 2001, Service Agreement II resulted in AIG Private Bank his duties (including, without limitation, custodial fees, clear- payments are split 90% to the company and 10% to AIG. The • Interest rate risk – that the cash and cash equivalents and 32 33 Ltd., Zurich, earning CHF 120 000 (2000: CHF 120 000). During ing fees, brokerage commissions, Interest and commitment profit sharing is intended to compensate AIG for the manage- short-term investments will fluctuate due to changes in AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY GROUP – CONSOLIDATED FINANCIAL STATEMENTS 2001
market prices. The influence of changes in the market rates as of December 31, 2001, no proceedings exist which could have REPORT OF THE GROUP AUDITORS of interest is not expected to be significant. any material effect on the financial position of the Company. • Credit risk – that the counter parties for cash and cash As auditors of the Group, we have audited the consolidated The fair values of the investments have been determined equivalents and investments will fail to discharge the obli- Note 11: Subsequent events financial statements (consolidated balance sheet, consolidated by the Board of Directors and have been disclosed in Note 2. gation to repay. The Group seeks to mitigate its exposure The Group has not made any new capital commitments from income statement, consolidated statement of cash flows, con- We have reviewed the procedures applied by the Board of to credit risk by conducting its contractual transaction with January 2002 up to the date of issuance of these Consolidated solidated statement of changes in shareholders’ equity and Directors in valuing such investments and have sighted under- institutions, that are reputable and well established. Financial Statements. notes to the consolidated financial statements) of AIG Private lying documentation. While in the circumstances the pro- • Liquidity risk – that the Company may have an inability to Between December 31, 2001 and March 8, 2002, the fol- Equity AG, Zug for the year ended 31 December 2001. cedures appear to be reasonable and the documentation raise additional funds or to use credit lines, if any, to satisfy lowing capital calls have been made by the partnerships under These consolidated financial statements are the responsi- appropriate, determination of fair values involves subjective the different commitments to the different partnerships. the commitments existing as of December 31, 2001: bility of the board of directors. Our responsibility is to express judgement which is not capable of independent verification. The Group applies a cash flow model to estimate future an opinion on these consolidated financial statements based We recommend that the consolidated financial statements cash flows. Investment Currency Amount on our audit. We confirm that we meet the legal requirements submitted to you be approved. • Currency risk – most of the investment activities of the Lexington Partners USD 429 043 concerning professional qualification and independence. Company are denominated in U.S. Dollars part of the non- AIG Highstar Capital L.P. USD 319 865 Our audit was conducted in accordance with auditing stan- PricewaterhouseCoopers Ltd CHF investments are hedged into CHF. When the invest- Third Cinven Fund EUR 339 790 dards promulgated by the Swiss profession and with Inter- ments are denominated in currencies other than the Swiss AIG Horizon USD 3 432 781 national Standards on Auditing issued by the International Thomas Huber Thomas Romer Franc, the Company is exposed to risks that the exchange CapVest EUR 251 042 Federation of Accountants (IFAC), which require that an audit rate of the Swiss Franc relative to other currencies may EQT Northern Europe Ltd SEK 877 091 be planned and performed to obtain reasonable assurance Zurich, 16 May 2002 change in a manner which has an adverse effect on the EQT Northern Europe Ltd EUR 79 682 about whether the consolidated financial statements are free Company’s reported net income and net assets. SWAP Payment USD 275 237 from material misstatement. We have examined on a test basis • Political/regulatory risk – uncertainties such as international Lexington Partners USD 1 765 677 evidence supporting the amounts and disclosures in the consol- political developments, changes in government policies, AIG Blue Voyage USD 43 287 idated financial statements. We have also assessed the account- taxation, restrictions on foreign investment and currency CapVest EUR 1 083 645 ing principles used, significant estimates made and the overall fluctuations and other developments in the laws and Lexington Partners USD 561 056 consolidated financial statement presentation. We believe that regulations of the countries in which the Company’s assets Distribution our audit provides a reasonable basis for our opinion. are invested may affect the value of the Company’s assets. Lexington Partners USD 894 874 In our opinion, the consolidated financial statements give AIG Blue Voyage USD 7 764 a true and fair view of the financial position, the results of Note 10: Commitments, contingencies and other off- Schroder Venture International Investment Trust £ 2 180 135 operations and the cash flows in accordance with International balance-sheet transactions Accounting Standards, the accounting provisions as contained In addition to those commitments disclosed in the Investment The Company sold all of the treasury shares (38133) in January in the Additional Rules for the Listing of Investment Companies Schedule and the Derivative Instruments mentioned in Note 4, 2002 and currently does not hold any treasury shares. of the SWX Swiss Exchange and comply with the Swiss law. the Company has no off-balance-sheet transactions open as of The Company entered into an agreement with AIG Inc., Without qualifying our opinion, we draw attention to December 31, 2001 (2000: no off-balance-sheet transactions). whereby capital calls received from funds contained in the Note 2 to the consolidated financial statements. As indicated Of the total commitments of CHF 709 million approximately Total Return Swaps may be deferred up to an amount of in Note 2, the consolidated financial statements include invest- CHF 300 million are unfunded. USD 20 million. The agreement matures March 31st, 2004. The ments (funds, direct investments and loans) stated at their fair Positions in foreign exchange forward contracts are valued interest rate has been fixed at USD Libor plus 2%. value of CHF 350 million. Because of the inherent uncertainty based upon forward rates available from the counterparty The consolidated financial statements are authorized for associated with the valuation of such investments and the ab- bank or other reputable established sources. The Company has issue in May 2002 by the Board of Directors. The annual gen- sence of a liquid market, these carrying values may differ from pledged assets (2001: CHF 64.2 million, 2000: 0) in favor of eral meeting called for June 12, 2002 will vote on the final their realizable values, and the differences could be material. AIG Private Bank AG in respect to a creditline to enter the acceptance of the consolidated financial statements. above-mentioned foreign exchange forwards. Since the balance sheet date of December 31, 2001, there The operations of the Company are affected by legislative, have been no material events that could impair the integrity of 34 35 fiscal and regulatory developments for which provisions are the information presented in the financial statements. made where deemed necessary. The Management concludes that AIG PRIVATE EQUITY LTD. – FINANCIAL STATEMENTS 2001
BALANCE SHEET AS OF DECEMBER 31, 2001 in 1000 CHF Note 2001 2000 Assets Current Assets – Cash and cash equivalents 8 270 56 420 – Receivables and prepayments 46 106 – Own Shares 3 5 148 4 286 13 464 60 812 Long-term Assets – Participation 1 349 923 334 158 349 923 334 158 Total Assets 363 387 394 970
Liabilities and Shareholders’ Equity Current Liabilities – Payables and accrued charges 1 207 757 – Derivative instruments (Foreign exchange forward) 5 3 158 0 – Bank loans 15 000 0 19 365 757 Shareholders’ Equity 2 – Share capital 317500 317500 – Legal reserve 63 500 63 500 – Other reserve 2 24 300 25 802 – Reserve for own shares 4 5 788 4 286 – Accumulated deficit brought forward (16 875) (715) – Net loss for the year (50 191) (16 160) 344 022 394 213 Total Liabilities and Shareholders’ Equity 363 387 394 970
INCOME STATEMENT FOR THE PERIOD JANUARY 1 TO DECEMBER 31, 2001 AND JANUARY 1 TO DECEMBER 31, 2000 in 1000 CHF 2001 2000 Income Interest Income, net 829 3 243 Foreign currency exchange gain, net 8 590 – Other Income – 176 Total Income 9 419 3 419
Expenses Service fees 120 120 Write-down of participation 49 686 16 935 Other operating expenses 1 382 1 289 Foreign currency exchange loss, net 7 224 1 103 Market value adjustment of own shares 3 641 – Tax expenses 557 132 Total Expenses 59 610 19 579
Net loss for the year (50 191) (16 160)
Accumulated Deficit 37 Balance, beginning of the year (16 875) (715) Net loss for the year (50 191) (16 160) Balance, end of the year (67 066) (16 875) AIG PRIVATE EQUITY LTD. – FINANCIAL STATEMENTS 2001 AIG PRIVATE EQUITY LTD. – FINANCIAL STATEMENTS 2001
NOTES TO FINANCIAL STATEMENTS REPORT OF THE STATUTORY AUDITORS in 1000 Location Capital held Nominal Value Paid Book value Book value As statutory auditors, we have audited the accounting records in % in USD in USD in CHF in CHF and the financial statements (balance sheet, income statement 31.12.01 31.12.00 and notes) of AIG Private Equity AG, Zug for the year ended 1. Participation 31 December 2001. AIG Private Equity (Bermuda) Ltd. Pembroke, Bermuda 100 270 000 251 928 349 923 334 158 These financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm 2. Share capital premium and authorized share capital that we meet the legal requirements concerning professional Amount CHF qualification and independence. Balance as of January 1, 2001 25 802 Our audit was conducted in accordance with auditing Increase of reserve for own shares (1 502) standards promulgated by the Swiss profession, which require Balance as of December 31, 2001 24 300 that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from As of December 31, 2001 the Company has CHF 158,75 million authorized share capital outstanding. This authorized share capital material misstatement. We have examined on a test basis evi- will expire on May 2003. dence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles 3. Own Shares used, significant estimates made and the overall financial state- ment presentation. We believe that our audit provides a reasonable basis for our opinion. Own Shares Number Amount CHF Balance as of January 1, 2001 28 383 4 286 105 In our opinion, the accounting records and financial state- Additions (purchased at CHF 151.51) 29 750 4 507 500 ments comply with the Swiss law and the company’s articles of Disposals (sold at CHF 150.25) (20 000) (3 005 000) incorporation. Total 38 133 5 788 605 We recommend that the financial statements submitted to you be approved. Market value adjustment as of December 31, 2001 –640 650 Book value as of December 31, 2001 (38 133 x 135.00) 5 147 955 PricewaterhouseCoopers Ltd
Thomas Huber Thomas Romer
4. Reserve for Own Shares 5. Derivative instruments (Foreign exchange forward) A Reserve for Own Shares in the amount of CHF 5 788 605 (the As of December 31, 2001 the Company has open foreign Zurich, 16 May 2002 acquisition value of the Own Shares held) was created against exchange forward contracts with a notional-amount of USD 61,3 Other Reserves. million (2000: none) and a negative replacement value of CHF 3 158 (2000: none).
38 39 ADDITIONAL INFORMATION ORGANIZATIONAL STRUCTURE ORGANIZATIONAL STRUCTURE
BOARD OF DIRECTORS
SHAREHOLDERS
SERVICE AIG PRIVATE EQUITY LTD. AGREEMENT II AIG PRIVATE BANK LTD. AIG GLOBAL ZUG ZURICH INVESTMENT CORP. (COMPANY) (BANK) (INVESTMENT ADVISOR) Eduardo Leemann Erich Hort Dr. Ernst Mäder Dr. Roger Schmid Edward E. Matthews 100 % Chairman ADVISORY AGREEMENT INVESTMENT COMMITTEE AIG PRIVATE EQUITY 100 % MGMT LTD. BERMUDA MANAGEMENT (MANAGER) AGREEMENT
SERVICE AIG PRIVATE EQUITY AGREEMENT I AMERICAN INTERNATIONAL (BERMUDA) LTD. COMPANY LTD. (SUBSIDIARY) (SERVICE COMPANY) Thomas Lips Win Neuger Larry Mellinger Cesar Zalamea Chairman
MANAGEMENT COMMITTEE
AIG FUNDS THIRD PARTY FUNDS DIRECT INVESTMENTS PORTFOLIO PORTFOLIO PORTFOLIO
INVESTMENTS INVESTMENTS INVESTMENTS Rocco Sgobbo Conradin Schneider Andrew Fletcher Chairman
INVESTOR RELATIONS AUDITORS Conradin Schneider PricewaterhouseCoopers AG Stampfenbachstrasse 73 8035 Zürich
42 43 GLOSSARY
Glossary
Carried Interest Net Asset Value (NAV) Also known as “carry”. The share of profits from investments The intrinsic value of one share. NAV is calculated by dividing made by the fund (generally 20–25%) that the managers the value of the company’s net assets by the total number of receive. shares outstanding.
Fund of funds Preferred Return A fund with an investment portfolio consisting chiefly of inter- Either (I) the set rate of return that the investors must receive ests in private equity funds that in turn make direct investments before the general partners can begin sharing in any distri- in operating companies. butions, or (II) the level that the fund’s net asset value must reach before the general partners can begin sharing in any dis- Initial public offering (IPO) tributions. An offering of shares to the public by a privately held company. Private Equity Internal Rate of Return (IRR) Equity or equity-type investments in privately held companies. The discount rate that equates the net present value (NPV) of an Private Equity generally refers to venture capital and leveraged investment’s cash inflows with its cash outflows. buyouts, but also encompasses distressed debt and mezzanine financing. Leveraged buyout The purchase of a company primarily through debt financing. Total Return Swap that is secured by the assets of the company being acquired. One of three agreements between AIG Private Equity and Leveraged buyouts are often used to take a public company American International Group, Inc. (“AIG”) pursuant to which private. AIG Private Equity makes capital call payments to and receives distributions related to an identified portion of AIG’s private Limited Partnerships equity portfolio as it existed at the end of 1999. The agree- The legal structure used by most private equity funds. Usually ments create the same economic result as if AIG Private Equity fixed life investment vehicles. The general partner or manage- owned the underlying portfolio directly. ment firm manages the partnership using policy laid down in a Partnership Agreement. Venture Capital Impressum Venture capital is a financing instrument used mainly for young Management buyout companies in the early stage and start-up phase. Typically, the Art Director: The purchase of a company by its management, generally with companies are not yet profitable and therefore have only lim- Margaret Thorne, Zurich the assistance of private equity investors and often using a ited access to debt financing. leveraged buyout structure. Photos: Pages 2–5, Tom Haller, Zurich Mezzanine financing The final round of financing before an IPO, generally consisting Lithography: of a mix of equity and debt capital and made available to a com- B+B Repro AG, Zurich pany that is well-established and often already reporting profits. Printing:
44 NZZ Fretz AG, Zurich