As of September 30, 2003, in cash terms, the 10 USG-backed Enterprise Funds had received about $1.17 billion from the USG. The detailed financials in this report are from the latest audited annual reports of the Enterprises Funds, which cover FY 2003. The following table shows the basic financial status of the Enterprise Funds as of the end of FY 2004.

FINANCIAL STATUS OF USG-BACKED ENTERPRISE FUNDS AS OF SEPTEMBER 30, 2004

ALBANIAN-AMERICAN ENTERPRISE FUND (AAEF)

The Albanian-American Enterprise Fund (AAEF) was established in 1995 with a USAID grant of $30 million. Since then, the Fund’s investments have been a stimulus to the Albanian economy by providing growth and export-oriented small and medium sized enterprises (SMEs) with access to equity, loans, and leases.

During FY 2003, the AAEF continued to consolidate and improve the quality of its portfolio and strengthen a pipeline of new investment opportunities. The Fund profitably liquidated a portion of its real estate holdings, including the sale of the ground floor of the Noli Business Center for about $1.5 million. It also converted a long-time equity holding in NPV Korca, a garment manufacturer, into an intermediate term loan with a profit. Teqja Company was awarded a number of contracts to supply plastic pipe to projects funded by international donors, and Global Gaz continued to expand it storage and distribution operations.

The American Bank of Albania (ABA) is the AAEF’s largest investment and has become one of the most important financial institutions in Albania. In 2003, it posted a profit of more than $8 million. Total assets grew by 42 percent to $290 million and lending increased by 110 percent. The bank now has branches in cities of Tirana, Durres, Elbasan, Fier, Vlore, Mother Teresa Airport, and the U.S. Embassy, with plans to open branches in Korca and Gjirokaster. The ABA also received approval to become the first Albanian financial institution to open a branch outside the physical borders of Albania when the opening of a branch in Athens, Greece, was approved.

During 2003, several troubled investments were turned around, and the Fund achieved partial recovery on a number of less successful investments that had been fully provisioned for loss.

CZECH AND SLOVAK-AMERICAN ENTERPRISE FUND (CSAEF)

The Czech and Slovak-American Enterprise Fund (CSAEF) was established in 1991 and capitalized with a $65.0 million USAID grant. Following the dissolution of the Czech and Slovak Federal Republic on January 1, 1993, the Board of Directors of the CSAEF created two separate subsidiary Funds: the Czech-American Enterprise Fund (CAEF) and the Slovak-American Enterprise Fund (SAEF). In 1996, the Board of Directors decided to discontinue the Fund's activities in the Czech Republic. The office in Prague was closed, and the investment portfolio was sold to a third-party investment company. Today the Fund is active solely in the Slovak Republic.

The Fund regained momentum in 2003, taking critical actions to shore up existing investments and developing the pipeline for new investments. The Fund is looking to make two to three quality investments over the next two years and expects to be fully invested by the Spring of 2006. The Fund will also investigate the possible mechanisms to attract additional private investment to Slovakia.

In 2003, the CSAEF committed $8.8 million to three new investments. The two most significant were the Value Growth Fund Slovakia ($5.7 million) and Gotive ($2.7 million). The Fund is a founding investor in the Value Growth Fund, along with the European Bank for Reconstruction and Development (EBRD), Raiffeisen, and a locally-owned bank Tatrabank, for a total of €14 million (about $16.8 million). This fund looks to invest in companies under restructuring and in need of finance, but with a good underlying business model. Gotive produces wireless handheld devices that uniquely integrate wireless, GPS, bar code, magnetic stripe reader, and other technologies. This technology is attracting a lot of interest from the technology community, and the company is doing better than expected.

As a whole, the Fund’s investment in the three wood companies started to turn the corner in 2003. Originally, the Fund planned that the sawmill (Novomanip) would supply Novo Horehronska (producers of three layer board) and Slovlepex (wooden window scantlings). However, non-transparent pricing practices by the state-owned forestry enterprise forced these firms to look outside of Slovakia for raw timber. As a result, the companies are being managed by the Fund as individual entities. This shift in strategy has yielded positive results. The Fund also has invested in an Internet job-portal, a meat and sausage factory, and the leading producer of chalk in Slovakia. Investments in a rabbit farm now look like they will produce a good overall return; the Fund’s investment in Lestra, a garden center, also looks good as they are expanding operations, and the investment in Bioaspa (an asparagus farm) appears to be doing well.

The investment climate in Slovakia showed a turnaround in 2003, with significant foreign direct investment starting to enter the country. Economic stability, EU accession, relatively lower cost but highly educated labor, and a new across-the-board flat tax rate of 19 percent have brought Slovakia to the attention of many strategic investors, such as Peugeot, Johns Manville, and Whirlpool. Slovakia has experienced an increase in terms of the number of transactions and capital invested. However, reflecting the regional trend, the growth of new participants in the venture capital and private equity sectors has remained low. Despite these advances, issues of transparency and consistency in the judiciary continue to keep the level of risk for the foreign investor in Slovakia at a significant level.

Slovakia’s accession to the EU in May 2004 marked a significant realization of one of its long-term economic and political priorities. Economically, the country experienced real growth of 4 percent, led by foreign trade. Inflation increased to 8.6 percent in 2003, largely the result of needed price deregulation in the energy and utility sectors. Unemployment fell by 4 percent to end the year at 13.75 percent. Slovakia received upgraded credit ratings from Fitch, Standard & Poor’s, as well as Moody’s, reflecting investment grade status, following its accession to the EU.

BALTIC-AMERICAN ENTERPRISE FUND (BalAEF)

The Baltic-American Enterprise Fund (BalAEF) has grown to become a significant U.S. investment presence in the Baltic States. Its active role diversifies the source of foreign direct investments in the region and brings innovative financial services to the market. During FY 2003, the Fund disbursed more than $58 million in new investments, and its portfolio grew by 63 percent. By the end of the fourth quarter of 2003, the Fund had cumulatively invested more than $160 million in the Baltic States, working from its original grant of $50 million in 1994.

Drawing upon its strengths and skills and upon the unique contributions it can bring to the Baltic market, the Fund is creating two specialty finance companies, Hanseatic Capital, LLC, and Baltic-American Mortgage Holdings, LLC. Consistent progress in building both of these businesses was achieved during 2003. The Fund’s investment partners now include the International Finance Corporation (IFC) and leading financial institutions in each of the Baltic States.

Baltic-American Mortgage Holdings: The Fund continues to deliver on its plan to build an American-style mortgage banking firm. Mortgage disbursements, at $55 million, significantly exceeded the goal set last year. Monthly mortgage disbursements now average $5 million. The Fund has introduced innovative home financing products through its Borrower’s Advantage 25-year adjustable rate mortgage with an initial 3-year fixed rate. The Fund’s new consumer-oriented loan center in Riga has been well received by borrowers. A similar center in planned for Estonia. The cost to originate and service mortgages declined in 2003. Loan delinquencies are less than half the U.S. average.

The Fund continued to develop the primary and secondary mortgage markets. In the course of FY 2003, the Fund packaged and sold $5.2 million in mortgage assets to local institutions, bringing the total to $10.4 million and demonstrating that mortgage assets can be traded to other investors to increase liquidity in the local housing market. The Fund’s local investment partners are the IFC, Latvijas Unibanka, and Nord LB, Lithuania. Ongoing work with major U.S. financial institutions is aimed toward strengthening the secondary market: eventual securitization of the Fund’s mortgage portfolio on the international market.

Hanseatic Capital: This company was launched in June 2003, to accelerate the Fund’s commercial finance activities. With an initial capitalization of €20 million, the new company is now booking business with small, growing Baltic enterprises. By September 30, 2003, the portfolio included four companies valued at a total of €3 million. When disbursed, these investments will substantially increase investment income flow. Partners in Hanseatic Capital now include the IFC and Hansabank, Estonia. New investment opportunities are constantly sought through active networking and direct mail outreach.

BULGARIAN-AMERICAN ENTERPRISE FUND (BAEF)

The Bulgarian-American Enterprise Fund (BAEF), which has received $57.8 in funding from USAID, has actively invested in Bulgaria since 1992. In 2003, the BAEF concluded its eleventh full year of operations, showing a net increase in fund balance from operations of $631,000 on total investment income of $2.5 million. The total portfolio grew 7 percent over 2002, from $46.5 million to $50 million, with reflows increasing from $4.6 million in 2002 to $5.3 million in 2003. During the year, BAEF disbursed $5.2 million in the form of new loans and equity investments. Since 1992, BAEF has made over $73 million in loans and equity investments. BAEF’s total investments (by sector) are as follows: construction and housing 33 percent; consumer goods, 27 percent; hotel and services, 21 percent; agriculture, agribusiness, and food processing, 17 percent; and, financial services, 2 percent.

Over the past years, the BAEF and its wholly- owned bank, the Bulgarian American Credit Bank (BACB), have been instrumental in shaping legislation that has fostered new types of financial products (e.g., home mortgages, private pension plans, and capital markets (securitized mortgage bonds). The BAEF and BACB now employ some 140 people, most of them in the Bank.

BAEF’s equity portfolio, on balance, showed significant progress in FY 2003. Ameta, an integrated poultry producer in a still-difficult industry, remained profitable for the third consecutive year. Most other firms in the portfolio showed improved results. Sanita, now the second largest pharmaceutical distributor in Bulgaria, was affected by changes in government reimbursement policies. It s downstream integration into retail pharmacies has yet to achieve expected results. BAEF realized over 20 percent annualized returns from the sale of its 36 percent interest in the Rodina Pension Fund.

The Fund’s real estate group concluded another successful year, with a growing portfolio of well-secured and profitable construction loans and rising property management revenues. The Group’s new initiatives include the engagement of two prominent Western European firms to develop and construct commercial and office facilities to their specifications; both also signed long-term leases with BAEF

BM Leasing, in which the Fund acquired a majority interest, is a small leasing company founded by Bulgarian entrepreneurs. BM Leasing broke even in its fist year, exceeding its projections, opened credit lines with several banks, and is now developing a long-term plan for further expansion.

Financial results for Bulgarian-American Credit Bank showed increased growth in assets, from €89.2 million to €112.5 million and a 31 percent increase in profits. BACB raised additional long-term debt financing of about €32 million through loans from DEG and the Black Sea Trade and Development Bank, as well as further issuances of debt securities. Cumulative BACB funding from third parties was $62 million as of December 31, 2003.

HUNGARIAN-AMERICAN ENTERPRISE FUND (HAEF)

The Hungarian-American Enterprise Fund (HAEF) is a $72.5 million investment fund fully funded by its USAID grant. The purpose of the HAEF, established in 1990, is to accelerate the development of Hungary’s private commercial sector through the provision equity and loan capital, as well as technical assistance to small and medium-sized enterprises. As of September 30, 2003, the HAEF had fully drawn down $72.5 million from the grant and invested about $130 million in Hungarian enterprises.

As of September 30, 2003, the HAEF concluded its active investment activities and started the wind-down of the Fund. It is expected that winding down the Fund and selling its investments will take three to five years in order to ensure that maximum value of the proceeds is secured. Similar to the approach taken by the Polish-American Enterprise Fund, the HAEF will return one half of the proceeds of the Fund to the U.S. Treasury and use the other half to establish and fund the Hungarian-American Enterprise Scholarship Fund (HAESF). The HAESF will provide year-long, hands-on professional experiences for young Hungarians in the U.S., as well as post-graduate opportunities for senior Hungarian professionals for applied research in the U.S. This legacy of the HAEF will help to strengthen the United States’ relationship with future Hungarian leaders for decades to come.

While the Fund’s active investment activities have concluded, it may still make investments to protect the value of existing investments or to meet outstanding commitments. Operating as a purely private equity fund, HAEF will not know the final returns until all of the investments are exited. The Fund’s final proceeds may be significantly more or less than the current book value. A notable example of this principle in action was the sale of Euronet Worldwide, Inc. The HAEF’s $2.9 million investment in Euronet returned $21.6 million. It still holds about 120,000 shares and will continue to hold them until market conditions improve enough to warrant their sale.

In 1997, HAEF established a parallel venture capital fund called Hungarian Equity Partners (HEP), LP. With $9.5 million of HAEF capital invested, the Fund has a 19 percent interest in HEP, while EBRD and private investors have the remaining 81 percent interest, with about $40 million invested. So far, the HEP has made nine investments costing $26.8 million.

In 1998, HAEF established the Hungarian Innovative Technology Fund (HITF) as a subsidiary specializing in financing smaller, high-tech start-up companies with global market potential. HITF was capitalized by HAEF at $5 million. HITF has four investments in the areas of computer software and biotechnology.

In 2003, HAEF moved ahead in exiting its investments and in making its portfolio more liquid. For example, HAEF along with HEP, succeeded in selling HAEF’s investment in Barcika TV. Also, HAEF has achieved greater liquidity by restructuring its positions in three companies, including: 1) Bekescsaba freezing Rt, 2) Medicor trading company, and 3) International Fashion House Kft. Efforts are now focused on adding to the cash pool of $17 million which HAEF has already built, to fund the HAESF and the return of capital to the U.S. Treasury consistent with the model established by the Polish-American Enterprise Fund.

In September 2004, the first group of HAESF fellows began arriving in the United States to commence study and work at major U.S. universities and corporate venues. Nineteen HAESF Fellows from 17 different fields are represented in this first group. This dynamic and diverse group represents an array of fields of study ranging from business, finance, economics, foreign policy and diplomacy to law, medicine, astrobiology, media/communications, information technology, chemistry, and education.

POLISH-AMERICAN ENTERPRISE FUND (PAEF)

The Polish American Enterprise Fund (PAEF) originally received $262 million as a USG grant. The Fund officially began liquidation in 1999, and in keeping with the agreement with the Congress, the PAEF has returned $120 million to the U.S. Treasury and $120 million to launch the new Polish-American Freedom Foundation (PAFF). Subsequent reflows from the PAEF were to be given to the PAFF. Currently, the PAEF has handed over $208 million to the Foundation, and expects this amount to be increased to $235 million when the remaining assets are liquidated.

A review of the current value of remaining assets and timetable for liquidation is as follows: The cash balance as of September 30, 2003 was $52.3 million. By the end of 2003, PAEF had generated $14.4 million from the sale of assets and other income, less $0.2 million for management fees and costs. The net amount transferred to the PAFF was $59 million. The PAEF’s remaining portfolio as of March 31, 2004, was valued at $21.92 million. These remaining PAEF assets will continue to be sold off during the next two to three years where and when there is an opportunity to maximize a return. They include:

• The "core" programs, such as Fundusz Mikro micro-banking, the Housing Development Corporation, and the Community Assistance Fund, valued together at $18 million; 
  
  
• Direct investments, such as Haste International, W. Kruk, and London Co., valued together at $1.39 million; 
  
  
• Polish Private Equity Funds I&II partnership interest, valued at $2.53 million.
  

The PAEF has privatized as Polish Enterprise Investors, which manages the PAEF. Polish Enterprise Investors is now the largest investment fund in Poland, and probably the largest in Central Europe, having independently raised five investment funds over the past 10 years worth an estimated $900 million, most of which will remain in Poland to benefit that country.

ROMANIAN-AMERICAN ENTERPRISE FUND (RAEF)

The Romanian American Enterprise Fund (RAEF) was established in September 1994. USAID initially capitalized the RAEF with a $50 million grant and later added $11 million to bring total obligations to $61 million. During the period 1995-2003, the Fund has participated in more than $150 million in equity investments. Through its previous trade and capital development efforts, the Fund has acted as an advisor to business, generating an additional $297 million in third-party investments. The Fund’s lending activity supplies capital to entrepreneurs and generates revenue for the Fund’s operations. To date, the Fund has loaned more than $30 million to more than 1,850 enterprises engaged in targeted sectors. In addition to the Fund’s loans, RAEF has attracted more than $36 million in capital to investee companies. The RAEF also acts in an advisory capacity to the Romanian private sector. Through its private management company it serves in an investment banker capacity to third parties. RAEF management is among a number of groups working with the Romanian Government to develop and improve tax and trade legislation. The Fund’s advisory clients, in addition to their investments in Romania, transacted more than $200 million in trade.

In 2003, RAEF made another profitable exit from a successful investment with the sale of Banca Romaneasca to the National Bank of Greece. The Fund has increased its investment in Motoractiva, a company specializing in leasing. Growth in revenues and assets in Motoractiva since 1999 has been 700 percent, with total assets now standing at $21 million and profits reflecting a substantial return on equity. A 51 percent interest in Certinvest, one of Romania’s oldest mutual fund management companies, was bought by RAEF in 2003. The company will handle mortgage bonds issued by RAEF’s new mortgage institution, Domenia Credit.

The Fund’s successful Micro Loan Program is fully self-sustaining and has disbursed close to $20 million since 1996, with almost $4.3 million of that loaned out in 2003. Micro loans are available in 10 cities, and the support has created or sustained more than 27,000 jobs. Loans past due (over 30 days) have dropped to an all-time low of 3 percent.

In 2003, the Fund opened Domenia Credit, the first specialized, residential non-banking mortgage finance company in Romania. Romania’s mortgage market is estimated to be worth between $2.2 and $4.5 million, with longer-term prospects that will exceed $10 billion. In 2003, the Fund raised $29 million in loans and equity participation from EBRD, the German Investment and Development Company (DEG), the International Finance Corporation (IFC), and Raiffeissen Bank. RAEF expects that significant additional funds will be available for this program.

Romania launched an Energy Efficacy Fund in 2003 to tap into the huge energy consumption market (five times the rate of Western Europe and the United States). The new venture, the Romanian Industrial Energy Efficiency Company (RIEEC), in its first phase will finance new electrical generation capacity for 15 selected industrial projects. The company was launched with an initial $14 million commitment in loans from the Fund and the EBRD.