SARATOGA PARTNERS IV, L.P.

Transcription

1 Financial Statements and Supplemental Schedules For the Nine Months Ended September 30, 2003 (Unaudited)

2 BALANCE SHEET (Unaudited) September 30, 2003 Assets Portfolio investments at fair value (cost $157,587,379) $ 154,020,404 Cash and cash equivalents 8,502,383 Accrued interest receivable 1,473,303 Receivable from securities sold 3,264,071 Receivable from portfolio companies 200,000 Prepaid expenses and other assets 54,087 Total Assets $ 167,514,248 Liabilities and Partners Capital Liabilities: Accounts payable and accrued expenses $ 21,219 Total liabilities 21,219 Partners capital: Limited Partners 132,394,106 Special Limited Partner 33,627,650 General Partner 1,471,273 Total partners capital 167,493,029 Total Liabilities and Partners Capital $ 167,514,248 The accompanying notes are an integral part of these financial statements. 1

3 SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited) As of September 30, 2003 Initial Investment Fair Investment Description Date Cost Value Public Securities: MICROS Systems, Inc. Columbia, MD Enterprise application developer serving the hospitality industry 451,551 shares of common stock May 2003 $ 11,424,240 $ 13,785,852 Total Public Securities 11,424,240 13,785,852 Private Securities: STC Wireless Resources, Inc. Victorville, CA Engineering and technical support services for the wireless industry 89,000 shares of Series A preferred stock May ,811,000 2,202,750 82,800 shares of Series B preferred stock 8,280,000 2,070,000 89,000 shares of common stock 89,000 22,250 15% promissory note 300,000 75,000 17,480,000 4,370,000 Emeritus Corporation (a) Seattle, WA Residential-style assisted living communities 32,653 shares of Series B preferred stock Dec ,653,000 32,653,000 $4,710, % convertible subordinated debentures due 1/1/06 1,672,050 1,672,050 Warrant to purchase 937,500 shares of common stock at $4.30 per share, expiring 8/31/ ,325,050 34,325,050 EUR Holding Corporation Mechanicsburg, PA Outsourced billing and support services to telecommunications companies 32,700 shares of common stock May ,700,000 32,700, shares of Series A preferred stock 186, ,000 10% subordinated installment promissory note 3,276,315 5,557,728 Warrant to purchase 1,195 shares of common stock of Electric and Unit Record Datacenter, Inc. at $4, per share, expiring 3/5/ ,162,315 38,443,728 Communications Software Consultants, LLC Albany, NY Software and services for telecommunications companies 100% membership interest May ,000 5,000,000 2

4 SCHEDULE OF PORTFOLIO INVESTMENTS (Unaudited), continued As of September 30, 2003 Initial Investment Fair Investment Description Date Cost Value Sericol Holding, L.P. (b) Kansas City, KS Screen printing inks and related pre-press products 94.51% Class A limited partnership interest Jan $ 20,998,560 $ 20,998, % Class B limited partnership interest 2,227,214 2,227,214 23,225,774 23,225,774 NAT Holding Company, Inc. Chicago, IL Provider of transaction processing software 27,387 shares of common stock Feb ,000,000 5,000,000 Data Return, LLC (c) Irving, TX Provider of advanced Microsoft-based internet hosting services 920 Class A common units May , ,000 8,280 preferred units 8,280,000 8,280,000 11% promissory note due 5/15/06 9,420,000 9,420,000 18,620,000 18,620,000 Advanced Lighting Technologies, Inc. Solon, OH Produces and markets materials, component and complete lighting systems 713,672 shares of Series A Aug convertible preferred stock 11,250,000 11,250,000 Total Private Securities 146,163, ,234,552 Total Portfolio Investments $ 157,587,379 $ 154,020,404 (a) (b) (c) During 2003, the Partnership received in-kind dividends from Emeritus Corporation totaling 959 Series B preferred shares valued at $959,000. Since March 2000, the Partnership has received in-kind dividends from Emeritus totaling 4,528 Series B preferred shares valued at $4,528,000. This is in addition to the Partnership s original $28,125,000 investment in the company. During 2003, the Partnership sold a portion of its Class A and Class B limited partnership interests of bridge financing in Sericol Holding, L.P. for net proceeds of $20,637,716, realizing a gain of $1,310,744. In August 2003, the Partnership received $1,479,160 from Data Return LLC representing $1,440,000 of principal repayment on its 11% promissory note and $39,160 of accrued interest. The accompanying notes are an integral part of these financial statements. 3

5 STATEMENTS OF OPERATIONS (Unaudited) For the Three and Nine Months Ended September 30, 2003 Investment Income and Expenses Three Months Nine Months Ended Ended September 30, September 30, Income: Interest from short-term investments $ 11,049 $ 41,112 Dividend income from portfolio investments 322, ,000 Interest from portfolio investments 517,631 1,125,590 Total income 850,680 2,125,702 Expenses: Advisory Board fees 20,252 61,252 Insurance expense 13,673 40,270 Professional fees 5,000 15,000 Foreign currency exchange loss - 18,058 Other expenses 819 3,818 Total expenses 39, ,398 Net investment income 810,936 1,987,304 Realized and Unrealized Gain from Portfolio Investments Realized gain from portfolio investments 1,220,649 24,013,962 Change in net unrealized appreciation (depreciation) of investments 374,787 (9,633,388) Net realized and unrealized gain from portfolio investments 1,595,436 14,380,574 Net Increase in Net Assets from Operations $ 2,406,372 $ 16,367,878 The accompanying notes are an integral part of these financial statements. 4

6 STATEMENT OF CHANGES IN PARTNERS CAPITAL (Unaudited) For the Three Months Ended September 30, 2003 Special General Limited Limited Partner Partner Partners Total Balance as of June 30, 2003 $ 1,517,872 $ 34,408,222 $ 135,477,366 $ 171,403,460 Capital contributions 112,500 2,250,000 8,887,500 11,250,000 Net increase in net assets from operations: Pro rata allocation 24, ,273 1,901,035 2,406,372 Fee reallocation (7,495) 1,516 5,979 - Cash distributions (175,668) (3,513,361) (13,877,774) (17,566,803) Balance as of September 30, 2003 $ 1,471,273 $ 33,627,650 $ 132,394,106 $167,493,029 The accompanying notes are an integral part of these financial statements. 5

7 STATEMENT OF CHANGES IN PARTNERS CAPITAL (Unaudited) For the Nine Months Ended September 30, 2003 Special General Limited Limited Partner Partner Partners Total Balance as of December 31, 2002 $ 980,375 $ 21,618,402 $ 85,392,690 $ 107,991,467 Capital contributions 813,598 16,271,896 64,273,987 81,359,481 Net increase in net assets from operations: Pro rata allocation 141,199 2,823,975 11,154,702 14,119,876 Special allocation 2,137, ,152-2,248,002 Fee reallocation (2,302,584) 465,170 1,837,414 - Cash distributions (299,165) (7,661,945) (30,264,687) (38,225,797) Balance as of September 30, 2003 $ 1,471,273 $ 33,627,650 $ 132,394,106 $167,493,029 The accompanying notes are an integral part of these financial statements. 6

8 STATEMENTS OF CASH FLOWS (Unaudited) For the Three and Nine Months Ended September 30, 2003 Cash Flows From Operating Activities Three Months Nine Months Ended Ended September 30, September 30, Net increase in net assets from operations $ 2,406,372 $ 16,367,878 Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: Change in net unrealized appreciation (depreciation) of investments (374,787) 9,633,388 Realized gain from portfolio investments (1,220,649) (24,013,962) In-kind dividends received from portfolio investment (322,000) (959,000) Increase in accrued interest receivable (330,283) (788,868) Increase in prepaid expenses and other assets (172,327) (229,976) Increase in accounts payable and accrued expenses 5,000 1,219 Net cash provided by operating activities (8,674) 10,679 Cash Flows From Investing Activities Cost of portfolio investments purchased (11,250,000) (78,862,746) Principal repayments received on debt securities 1,440,000 1,440,000 Net proceeds from sale of portfolio investments 17,566,803 38,027,623 Net cash provided by (used in) investing activities 7,756,803 (39,395,123) Cash Flows From Financing Activities Capital contributions received from Partners 11,250,000 81,359,481 Cash distributions to Partners (17,566,803) (38,225,797) Net cash (used in) provided by financing activities (6,316,803) 43,133,684 Increase in cash and cash equivalents 1,431,326 3,749,240 Cash and cash equivalents at beginning of period 7,071,057 4,753,143 Cash and Cash Equivalents at End of Period $ 8,502,383 $ 8,502,383 The accompanying notes are an integral part of these financial statements. 7

9 NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Organization and Purpose Saratoga Partners IV, L.P. (the Partnership ) is a limited partnership formed on September 17, 1998 pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware. The Partnership commenced operations on May 10, 1999 ( Commencement of Operations ). The general partner of the Partnership is Saratoga Associates IV LLC (the General Partner ). Saratoga Management Company LLC (the Manager ), an affiliate of the General Partner, manages the investment policy and operations of the Partnership. The Partnership was formed to purchase securities of corporate buyouts. The Partnership is scheduled to terminate on September 17, 2008, unless extended for up to two consecutive one-year periods at the discretion of the General Partner. The term of the Partnership may be extended beyond September 17, 2010 with the consent of 75% (in interest) of the Limited Partners. 2. Summary of Significant Accounting Policies Valuation of Portfolio Investments - Portfolio investments are carried at fair value as determined by the General Partner with the approval of the Advisory Board. Unrestricted publicly traded portfolio securities or restricted securities that are immediately salable under regulation of the Securities and Exchange Commission are valued at the closing public market price on the valuation date. Restricted and privately-held portfolio securities are valued by the General Partner. Factors considered in valuing such securities include: the sales price of recent transactions in similar securities; restrictions on transfer; recent trading volume; the current financial position of the issuer; significant recent events affecting the issuer; and any other factors affecting value. The financial statements include portfolio securities valued at $154.0 million (91.96% of partners capital) as of September 30, 2003 whose values have been estimated by the General Partner. The values assigned to portfolio securities are based on available information and do not necessarily represent the amounts that might ultimately be realized, since such amounts depend on future circumstances and cannot be determined until the securities are actually liquidated. Because of the inherent uncertainties of valuation, the assigned values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes - The Partnership is not subject to federal, state and local income taxes. Each Partner is responsible for the tax liability related to his proportionate share of taxable income, if any. Accordingly, no provision for federal, state and local income taxes is included in the financial statements. Interest and Dividend Income Interest income, including interest income paid in-kind, is recorded when earned. Management will continue to accrue interest income until such interest is deemed uncollectible. Dividend income, including dividend income paid in-kind, is recognized on the exdividend date. Cash and Cash Equivalents - Cash and cash equivalents include short-term interest bearing investments with original maturities of less than 90 days in commercial paper and other money market investments. The Partnership considers its money market accounts to be cash equivalents. 8

10 NOTES TO FINANCIAL STATEMENTS (Unaudited), continued 3. Partners Capital The Limited Partners have made capital commitments to the Partnership totaling $231.8 million, including a $46.8 million commitment from Tresser, L.P., successor in interest to UBS Capital LLC, (the Special Limited Partner and together with the other limited partners, the Limited Partners ). Such capital commitments are due and payable when called by the General Partner. As of September 30, 2003, the Limited Partners have contributed $176.8 million to the Partnership including $19.0 million that has been distributed to the Limited Partners and is recallable by the Partnership. The General Partner has contributed 1% of the total capital contributions to the Partnership and has committed to make additional capital contributions to maintain its 1% ownership interest. 4. Management Fee Each Limited Partner is responsible to pay a semi-annual management fee directly to the Manager. Initially, the semi-annual fee is equal to 1% (2% annually) of each Limited Partner s committed capital. After the earlier of: (i) September 17, 2004, (ii) the date on which all committed funds are invested, or (iii) the date on which the balance of undrawn capital commitments is reduced below $5 million, the semi-annual fee will be reduced to.5% (1% annually) of each Limited Partner s committed capital. The Partnership Agreement provides that the management fee may be paid out of distributions of Net Investment Income (as defined) payable to the Limited Partners. In the event that distributions of Net Investment Income are not sufficient to cover the management fee when payable, the Manager may request payment from the Limited Partners or may defer payment until subsequent distributions of Net Investment Income are made to the Limited Partners. Alternatively, at the Manager s request, the Partnership may advance the unpaid fees to the Manager, on behalf of the Limited Partners, from the assets of the Partnership not invested in portfolio investments. The Limited Partners are required to repay such advance at any time upon request by the Partnership. As of September 30, 2003, all management fees had been paid directly to the Manager by the Limited Partners and no management fees had been advanced by the Partnership. 5. Allocation of Profit or Loss Realized gains and portfolio investment income from each portfolio investment (other than bridge financings, as defined in the partnership agreement) are allocated to Partners pro rata, based on capital contributed with respect to each such investment, until participating Partners have been allocated an amount equal to: (i) the realized and unrealized losses previously allocated to such Partner, (ii) organization costs and management fees allocated to such investment and all other realized investments, and (iii) an 8% preferred return, compounded annually, on the capital contributed by such Partner with respect to such investment and the costs allocated to such investment. Realized gains and portfolio investment income are then allocated, as a special allocation, 76.08% to the General Partner, 3.92% to the Special Limited Partner and 20% to all Partners, until the General Partner and Special Limited Partner have been allocated 19.82% and 16.98%, respectively, of the amounts allocated to all Partners as a result of both the 8% preferred return and this special allocation. Thereafter, any additional realized gain and portfolio investment income from such investment is allocated 80% to participating Partners, pro rata based on capital contributed with respect to such investment, 19.02% to the General Partner and.98% to the Special Limited Partner. An amount otherwise allocable to the General Partner, equal to one-half of break-up fees received by the General Partner or its affiliates, plus the lesser of one-half of any fees received by the General Partner or its affiliates from a portfolio company or the management fee 9

11 NOTES TO FINANCIAL STATEMENTS (Unaudited), continued paid by the Limited Partners, shall be allocated to Limited Partners pro rata based on capital contributed ( Fee Reallocation ). The Fee Reallocation is effected through the allocation of unrealized appreciation (depreciation) until the Partnership has realized portfolio income or gains sufficient to provide for such Fee Reallocation. Realized losses from portfolio investments are allocated to Partners pro rata based on capital contributed with respect to such investment. Net operating income or loss (short-term investment income less Partnership operating expenses) and realized gains and income from bridge financings are allocated to all Partners pro rata based on capital contributed. 6. Portfolio Investments As of September 30, 2003, the Partnership s investments were categorized as follows: % of Type of Investment Cost Fair Value Net Assets* Preferred Stock $ 61,180,000 $ 48,361, % Common Stock 49,213,240 51,508, % Debt 14,668,365 16,724, % Partnership and Membership Interests 32,525,774 37,425, % Total $ 157,587,379 $154,020, % Geographic Region Eastern United States $ 47,686,555 $ 57,229, % Western United States 51,805,050 38,695, % Southern United States 18,620,000 18,620, % Midwestern United States 39,475,774 39,475, % Total $ 157,587,379 $154,020, % Industry Transaction processing services $ 41,162,315 $ 43,443, % Assisted living facilities 34,325,050 34,325, % Telecommunication services 17,580,000 9,370, % Specialty software 30,044,240 32,405, % Lighting technology 11,250,000 11,250, % Specialty chemical printing ink 23,225,774 23,225, % Total $ 157,587,379 $154,020, % * Fair value as a percentage of net assets. 7. Commitments and Contingencies In connection with the acquisition of Aptis Holdings, LLC by EUR, the Partnership has guaranteed a $2 million payment to the senior lenders of EUR Holding Corporation due on November 30, Included in cash and cash equivalents as of September 30, 2003 is $2 million on deposit with a major financial institution as collateral for a letter of credit that supports the guarantee. The Partnership has committed to invest an additional $1.7 million in NAT Holding Company, Inc. In the normal course of business the Partnership enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Partnership's maximum exposure under these arrangements is unknown as such exposure may involve future claims that may be made against the Partnership that have not yet occurred. However, based on experience, the Partnership expects the risk of loss from such arrangements to be remote. 10

12 Supplemental Schedule - Statement of Changes in Partners' Capital (Unaudited) For the Nine Months Ended September 30, 2003 Change in Balance December 31, 2002 Capital Contributions Net Investment Income (Loss) Net Realized Gain Unrealized Appreciation (Depreciation) Distributions Transfers Balance September 30, 2003 Allstate Insurance Company $ 4,615,822 $ 3,474,269 $ 85,763 $ 1,030,502 $ (413,988) $ (1,635,929) $ - $ 7,156,439 Brown University 2,307,911 1,737,135 42, ,252 (206,994) (817,965) - 3,578,220 BT Investment Partners, Inc. 6,923,731 4,490,796 61,590 1,545,753 (492,337) (1,138,127) (11,313,277) 78,129 CFO Transfers II LLC ,566 - (152,652) (190,542) 328,628 - Silver Leaf 1 LLC - 720,608 52,487-24,006 (1,125,224) 10,984,649 10,656,526 Indosuez Capital Private Equity Partners II, LLC 3,461,865 2,605,703 64, ,877 (310,491) (1,226,947) - 5,367,329 Credit Lyonnais Cayman Island Branch 6,923,731 5,211, ,643 1,545,753 (620,983) (2,453,893) - 10,734,655 The Equitable Life Assurance Society 6,923,731 5,211, ,643 1,545,753 (620,983) (2,453,893) - 10,734,655 Foster & Foster, LLC 2,307,910 1,737,135 42, ,252 (206,994) (817,965) - 3,578,219 LJH Partners, LP 1,153, ,567 21, ,626 (103,497) (408,981) - 1,789,111 Massachusetts Mutual Life Insurance Company 5,538,986 4,862, ,025 1,442,190 (579,377) (2,289,482) 920,856 10,015,439 Massachusetts Mutual Life Insurance Company 463, ,164 8, ,566 (41,606) (164,412) - 719,221 Mass Mutual High Yield Partners II LLC 920, (920,856) - NCR Corporation 6,923,731 5,211, ,643 1,545,753 (620,983) (2,453,893) - 10,734,655 Northrop Grumman Corp. Master Trust 11,539,552 8,685, ,406 2,576,257 (1,034,971) (4,089,823) - 17,891,095 Orix Venture Finance LLC 11,539,552 7,484,660 79,644 2,445,944 (820,562) (1,896,877) (18,832,361) - ORIX Finance Corp. I - 1,201, , ,313 (214,409) (2,192,946) 18,832,361 17,891,095 UPS Retirement Plan 9,231,644 6,948, ,525 2,061,006 (827,977) (3,271,859) - 14,312,879 WLD Capital Partners II Ltd. 4,615,822 3,474,269 85,763 1,030,502 (413,988) (1,635,929) - 7,156,439 Limited Partners 85,392,690 64,273,987 1,586,603 19,064,299 (7,658,786) (30,264,687) - 132,394,106 Special Limited Partner 21,618,402 16,271, ,673 4,936,556 (1,938,932) (7,661,945) - 33,627,650 General Partner 980, ,598 (972) 13,107 (35,670) (299,165) - 1,471,273 Total $ 107,991,467 $ 81,359,481 $ 1,987,304 $ 24,013,962 $ (9,633,388) $ (38,225,797) $ - $ 167,493,029

13 Supplemental Schedule - Statement of Changes in Partners' Capital (Unaudited) From Inception to September 30, 2003 Capital Contributions Net Investment Income Net Realized Gain Net Unrealized Appreciation (Depreciation) Distributions Transfers Balance September 30, 2003 Allstate Insurance Company $ 7,626,681 $ 308,672 $ 1,048,678 $ (152,319) $ (1,675,273) $ - $ 7,156,439 Brown University Third Century Fund 1,990,801 30,685 7,840 (153,175) (1,173) (1,874,978) - Brown University 1,822, , ,501 77,015 (836,465) 1,874,978 3,578,220 BT Investment Partners, Inc. 10,719, ,955 1,573,018 (99,834) (1,197,144) (11,313,277) 78,129 CFO Transfers II LLC - 14,566 - (152,652) (190,542) 328,628 - Silver Leaf 1 LLC 720,608 52,487-24,006 (1,125,224) 10,984,649 10,656,526 Credit Agricole Indosuez Cayman Branch 2,986,200 46,028 11,759 (229,762) (1,760) (2,812,465) - Indosuez Capital Private Equity Partners II, LLC 2,733, , , ,522 (1,254,695) 2,812,465 5,367,329 Credit Lyonnais Cayman Island Branch 11,440, ,008 1,573,018 (228,480) (2,512,910) - 10,734,655 The Equitable Life Assurance Society 11,440, ,008 1,573,018 (228,480) (2,512,910) - 10,734,655 Foster & Foster, LLC 3,813, , ,341 (76,160) (837,638) - 3,578,219 LJH Partners, LP 1,906,670 77, ,170 (38,080) (418,817) - 1,789,111 Massachusetts Mutual Life Insurance Company 9,845, ,518 1,464,002 (265,375) (2,336,696) 920,856 10,015,439 Massachusetts Mutual Life Insurance Company 766,481 31, ,393 (15,308) (168,367) - 719,221 Mass Mutual High Yield Partners II LLC 828,407 44,469 3,626 52,203 (7,849) (920,856) - NCR Corporation 11,440, ,008 1,573,018 (228,480) (2,512,910) - 10,734,655 Northrop Grumman Corp. Master Trust 19,066, ,678 2,621,698 (380,799) (4,188,184) - 17,891,095 Orix USA Corporation 10,381, ,136 45,380 (214,965) (98,361) (10,301,218) - Orix Venture Finance LLC 7,484, ,780 2,446,005 48,575 (1,896,877) (8,531,143) - ORIX Finance Corp. I 1,201, , ,313 (214,409) (2,192,946) 18,832,361 17,891,095 UPS Retirement Plan 15,253, ,342 2,097,359 (304,637) (3,350,548) - 14,312,879 WLD Capital Partners II Ltd. 7,626, ,672 1,048,678 (152,319) (1,675,273) - 7,156,439 Limited Partners 141,093,589 5,710,427 19,400,565 (2,817,913) (30,992,562) - 132,394,106 Special Limited Partner 35,719,896 1,445,677 5,021,686 (713,392) (7,846,217) - 33,627,650 General Partner 1,785,998 12,544 16,779 (35,670) (308,378) - 1,471,273 Total $ 178,599,483 $ 7,168,648 $ 24,439,030 $ (3,566,975) $ (39,147,157) $ - $ 167,493,029