"It was the best of times, it was the worse of times, it was the age of wisdom, it was the age of foolishness..." - Charles Dickens

We at Solis Capital Partners hope that this letter finds you in good health and successfully navigating these challenging times. 2009 has been a difficult year for many, and we feel for those families and individuals that are struggling, and for the losses many have suffered.

During this Holiday Season, we thankfully reflect on Solis' 2009 successes, despite the difficult economy, including:

• the sale of Temcor, Inc., generating a 3.3 multiple of invested capital and 125% net IRR to investors;
• the potential positive sale of another portfolio company;
• the winning of major contracts by a third portfolio company expected to roughly double revenue and triple EBITDA; and,
• the receipt of unsolicited inquiries to purchase another portfolio company at values significantly greater than our purchase value.

We attribute these successes to the talent and dedication of our portfolio company management teams, and our steadfast adherence to a few fundamental investment philosophies that hold true regardless of economic or market cycles.

Like many of you, we look to the New Year for opportunity. While we have not found any compelling platform investments in the last 18 months, we strongly believe that new opportunities will become more prevalent as lenders and investors come to terms with decisions they made during the prior robust cycle. Solis plans to raise a committed fund beginning in the New Year to capture some of these opportunities for our investors.

Solis also is growing its team, with a new colleague to be announced shortly. Our just-launched, updated website, www.soliscapital.com, now better communicates our investment philosophies and practices, and the happenings at our firm.

Most importantly, we want to thank all of you that have helped, supported and invested with us. For those in our Solis family, we believe that the "best of times" are just beginning.

Happy Holidays!

Solis Capital Partners

Dear Solis Investors:

July 1, 2006 will be the 4th anniversary of Solis’ formation. With the closing of Certi-Fresh in July 2003, Miro Technologies in August 2004 and ATA in June 2005 we are meeting our goal of at least one high quality transaction per year. Thank you for being a member of the Solis family of investors.

Now, let’s talk about the current LBO market...

Right now, transaction pricing is very high. According to The Deal, for companies with under $100 Million in revenue purchased in Q4 2004 and Q1 and Q2 2005, the average purchase multiple of EBITDA was 7.8x. The purchase multiple was even higher for larger companies. Yikes! What does a conservative purchaser of companies do in a market like this? Our answer is—not many deals.

Why is pricing so high? Some people attribute this pricing to the large amount of private equity capital pursuing transactions. In terms of dollars in funds targeting equity transactions in the United States, we have seen estimates as low as $470 Billion (The Deal) and as high as $630 Billion (Institutional Investor). These estimates do not include the trillions of dollars that are sitting in the accounts of retirement funds, endowments and other institutions that in theory could be placed in the hands of private equity investors.

These numbers are extremely large, but have not changed significantly over the past several years. As such, we believe there are other more significant factors driving pricing. Another possible explanation is that most private equity funds have convinced their limited partners (mostly institutions) that a 15% to 20% IRR is an acceptable return target, versus the 25% to 30% they targeted as recently as a few years ago. This lower return expectation enables funds to pay more for transactions.

Although the amount of equity looking for homes and the lower IRR expectations by institutional investors are factors driving the inflated, we believe the primary factor is the availability of leverage. In general, senior lenders are like lemmings. Either they all are lending, or they are not lending at all. For example, when we closed Certi-Fresh in mid-2003, there was virtually no senior debt available in the market. Even though we were looking for a debt facility with a total debt to EBITDA ratio of about 2.2x, the only debt we could find at the time had a blended rate of over 13%. By comparison, when we refinanced Certi-Fresh’s debt earlier this year, we were offered significantly more debt at a rate of LIBOR plus 275 basis points, today about 6.90%. Similarly, over the last 12 months or so we have received offering packages regarding companies for sale that have included pre-approved debt at multiples of EBITDA as high as 4.5x. Double yikes!

What does this mean? It means that buyers can pay a lot more for companies and theoretically generate the same returns. That is exactly what is happening. The problem with using leverage to justify higher purchase valuations is that it does not properly account for the added operational risk associated with more debt. We believe that each company has an appropriate leverage tolerance within which the company can withstand operational hiccups. If that tolerance is exceeded, then there is significant risk that the managers at some point will be spending a considerable amount of their time working on forbearance agreements, chasing additional capital and paying large fees and costs rather than creating value.

Like all economic cycles, this one will end as well. We believe that within the next 24 to 36 months, the lenders will again retreat. We believe this will happen (as is has in the past) because many of the over-leveraged transactions of the past 24 months will soon be in covenant and potentially payment breach. Lenders’ portfolios will then have a significant number of non-performing loans, which will force them to increase their reserves. Even more relevant, the underwriters, in their typical fashion, will stop approving even great transactions. Transaction pricing will then rationalize.

What does this mean for Solis? Over the long run, it doesn’t mean much. Solis invests based on fundamental principals. These principals don’t change because of economic or pricing cycles. It may mean in the short run that Solis will not find as many opportunities. If so, it likely will mean that there will be more opportunities in the period following.

We are very pleased with the three companies we currently have in our portfolio. We also, as always, are spending a significant portion of our time looking for our next great investment. We don’t know when that will happen, but we are certain that we will. When we do, we look forward to your joining us again.

In the meantime, thank you for your support and patience.

Solis Capital Partners