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EX-32.2 - SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER - MCG CAPITAL CORPd250029dex322.htm
EX-15.1 - LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION FROM ERNST & YOUNG - MCG CAPITAL CORPd250029dex151.htm
EX-32.3 - SECTION 906 CERTIFICATION OF CHIEF ACCOUNTING OFFICER - MCG CAPITAL CORPd250029dex323.htm
EX-31.2 - SECTION302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - MCG CAPITAL CORPd250029dex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MCG CAPITAL CORPd250029dex311.htm
EX-31.3 - SECTION 302 CERTIFICATION OF CHIEF ACCOUNTING OFFICER - MCG CAPITAL CORPd250029dex313.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MCG CAPITAL CORPd250029dex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 0-33377

 

 

MCG CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   54-1889518

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1100 Wilson Boulevard, Suite 3000

Arlington, VA

  22209
(Address of principal executive offices)   (Zip Code)

(703) 247-7500

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 28, 2011, there were 77,043,042 shares of the registrant’s $0.01 par value Common Stock outstanding.

 

 

 


Table of Contents

MCG CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

     1   

ITEM 1. FINANCIAL STATEMENTS

     1   

CONSOLIDATED BALANCE SHEETS

     1   

CONSOLIDATED STATEMENTS OF OPERATIONS

     2   

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

     3   

CONSOLIDATED STATEMENTS OF CASH FLOWS

     4   

CONSOLIDATED SCHEDULE OF INVESTMENTS

     5   

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     14   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     43   

SELECTED FINANCIAL DATA

     44   

ITEM  2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     46   

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     83   

ITEM 4. CONTROLS AND PROCEDURES

     84   

PART II. OTHER INFORMATION

     85   

ITEM 1. LEGAL PROCEEDINGS

     85   

ITEM 1A. RISK FACTORS

     85   

ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     98   

ITEM  3. DEFAULTS UPON SENIOR SECURITIES

     98   

ITEM 4. RESERVED

     98   

ITEM 5. OTHER INFORMATION

     98   

ITEM 6. EXHIBITS

     99   

SIGNATURES

     100   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MCG Capital Corporation

Consolidated Balance Sheets

 

(in thousands, except per share amounts)

   September 30,
2011
    December 31,
2010
 
     (unaudited)        

Assets

    

Cash and cash equivalents

   $ 53,956      $ 44,970   

Cash, securitization accounts

     99,416        42,245   

Cash, restricted

     16,982        29,383   

Investments at fair value

    

Non-affiliate investments (cost of $593,285 and $684,785, respectively)

     606,710        646,116   

Affiliate investments (cost of $42,497 and $43,721, respectively)

     55,107        53,300   

Control investments (cost of $424,461 and $517,167, respectively)

     162,356        310,289   
  

 

 

   

 

 

 

Total investments (cost of $1,060,243 and $1,245,673, respectively)

     824,173        1,009,705   

Interest receivable

     3,182        5,453   

Other assets

     11,381        13,521   
  

 

 

   

 

 

 

Total assets

   $ 1,009,090      $ 1,145,277   
  

 

 

   

 

 

 

Liabilities

    

Borrowings (maturing within one year of $80,173 and $18,858, respectively)

   $ 490,019      $ 546,882   

Interest payable

     1,578        2,291   

Dividends payable

     13,101        10,735   

Other liabilities

     7,911        7,353   
  

 

 

   

 

 

 

Total liabilities

     512,609        567,261   
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock, par value $0.01, authorized 1 share, none issued and outstanding

     —          —     

Common stock, par value $0.01, authorized 200,000 shares on September 30, 2011 and December 31, 2010, 77,035 issued and outstanding on September 30, 2011 and 76,662 issued and outstanding on December 31, 2010

     770        767   

Paid-in capital

     1,009,211        1,008,823   

Distributions in excess of earnings

    

Paid-in capital

     (166,029     (166,029

Other

     (110,997     (28,555

Net unrealized depreciation on investments

     (236,474     (236,990
  

 

 

   

 

 

 

Total stockholders’ equity

     496,481        578,016   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,009,090      $ 1,145,277   
  

 

 

   

 

 

 

Net asset value per common share at end of period

   $ 6.44      $ 7.54   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

1


Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations

(unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 

(in thousands, except per share amounts)

   2011     2010     2011     2010  

Revenue

        

Interest and dividend income

        

Non-affiliate investments (less than 5% owned)

   $ 16,540      $ 16,198      $ 50,319      $ 46,123   

Affiliate investments (5% to 25% owned)

     1,215        792        4,133        2,557   

Control investments (more than 25% owned)

     2,025        4,900        8,952        15,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     19,780        21,890        63,404        64,654   
  

 

 

   

 

 

   

 

 

   

 

 

 

Advisory fees and other income

        

Non-affiliate investments (less than 5% owned)

     885        260        1,812        725   

Control investments (more than 25% owned)

     45        421        1,005        706   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total advisory fees and other income

     930        681        2,817        1,431   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     20,710        22,571        66,221        66,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

        

Interest expense

     3,960        4,326        11,778        13,182   

Employee compensation

        

Salaries and benefits

     2,683        3,527        9,567        12,065   

Amortization of employee restricted stock awards

     348        1,013        1,378        3,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total employee compensation

     3,031        4,540        10,945        15,428   

General and administrative expense

     3,657        2,305        9,130        8,785   

Restructuring expense

     4,109        —          4,174        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     14,757        11,171        36,027        37,396   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income before net investment loss, (loss) gain on extinguishment of debt and income tax provision

     5,953        11,400        30,194        28,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized (loss) gain on investments

        

Non-affiliate investments (less than 5% owned)

     281        7,383        (47,288     7,837   

Affiliate investments (5% to 25% owned)

     (1     —          (917     —     

Control investments (more than 25% owned)

     (38,107     (3,911     (25,755     (5,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain on investments

     (37,827     3,472        (73,960     1,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized appreciation (depreciation) on investments

        

Non-affiliate investments (less than 5% owned)

     (2,634     (6,854     52,094        445   

Affiliate investments (5% to 25% owned)

     1,942        573        3,031        2,051   

Control investments (more than 25% owned)

     7,613        (6,890     (55,227     (29,836

Derivative and other fair value adjustments

     (146     (101     618        262   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation) on investments

     6,775        (13,272     516        (27,078
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss before income tax provision

     (31,052     (9,800     (73,444     (25,130

(Loss) gain on extinguishment of debt before income tax provision

     —          (449     (863     2,983   

Income tax provision

     10        1,680        29        1,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) earnings

   $ (25,109   $ (529   $ (44,142   $ 4,676   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings per basic and diluted common share

   $ (0.33   $ (0.01   $ (0.58   $ 0.06   

Cash distributions declared per common share

   $ 0.17      $ 0.12      $ 0.49      $ 0.23   

Weighted-average common shares outstanding—basic and diluted

     76,404        75,486        76,173        76,469   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

2


Table of Contents

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)

 

     Nine months ended
September 30,
 

(in thousands, except per share amounts)

   2011     2010  

Increase (decrease) in net assets from operations

    

Net operating income before net investment loss, (loss) gain on extinguishment of debt and income tax provision

   $ 30,194      $ 28,689   

Net realized (loss) gain on investments

     (73,960     1,948   

Net unrealized appreciation (depreciation) on investments

     516        (27,078

(Loss) gain on extinguishment of debt

     (863     2,983   

Income tax provision

     (29     (1,866
  

 

 

   

 

 

 

Net (loss) income

     (44,142     4,676   
  

 

 

   

 

 

 

Distributions to stockholders

    

Distributions declared

     (37,784     (17,608

Dividends forfeited

     —          7   
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (37,784     (17,601
  

 

 

   

 

 

 

Capital share transactions

    

Amortization of restricted stock awards

    

Employee awards accounted for as employee compensation

     1,378        3,363   

Employee awards accounted for as restructuring expense

     431        —     

Non-employee director awards accounted for as general and administrative expense

     46        58   

Common stock withheld to pay taxes applicable to the vesting of restricted stock

     (1,453     (86

Net forfeitures of restricted common stock

     (11     (15
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     391        3,320   
  

 

 

   

 

 

 

Total decrease in net assets

     (81,535     (9,605

Net assets

    

Beginning of period

     578,016        615,683   
  

 

 

   

 

 

 

End of period

   $ 496,481      $ 606,078   
  

 

 

   

 

 

 

Net asset value per common share at end of period

   $ 6.44      $ 7.92   

Common shares outstanding at end of period

     77,035        76,542   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

3


Table of Contents

MCG Capital Corporation

Consolidated Statements of Cash Flows

(unaudited)

 

     Nine months ended
September 30,
 

(in thousands)

   2011     2010  

Cash flows from operating activities

    

Net (loss) income

   $ (44,142   $ 4,676   

Adjustments to reconcile net (loss) income to net cash provided by operating activities

    

Investments in portfolio companies

     (243,966     (142,491

Principal collections related to investment repayments or sales

     336,172        177,340   

Decrease in interest receivable, accrued payment-in-kind interest and dividends

     21,453        3,166   

Amortization of restricted stock awards

    

Employee

     1,809        3,363   

Non-employee director

     46        58   

Decrease in cash—securitization accounts from interest collections

     1,515        3,191   

Increase in restricted cash—escrow accounts

     (3,648     —     

Depreciation and amortization

     2,936        3,073   

Decrease in other assets

     1,021        446   

Increase (decrease) in other liabilities

     428        (4,564

Realized loss (gain) on investments

     73,960        (1,948

Net change in unrealized (appreciation) depreciation on investments

     (516     27,078   

Loss (gain) on extinguishment of debt

     863        (2,983
  

 

 

   

 

 

 

Net cash provided by operating activities

     147,931        70,405   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Payments on borrowings

     (62,726     (73,466

Proceeds from borrowings

     5,000        27,500   

Decrease (increase) in cash in restricted and securitization accounts

    

Securitization accounts for repayment of principal on debt

     (58,686     (9,553

Restricted cash

     16,049        12,190   

Payment of financing costs

     (1,700     (2,056

Distributions paid

     (35,418     (8,421

Common stock withheld to pay taxes applicable to the vesting of restricted stock

     (1,453     (86

Net forfeitures of restricted common stock

     (11     (15
  

 

 

   

 

 

 

Net cash used in financing activities

     (138,945     (53,907
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,986        16,498   

Cash and cash equivalents

    

Beginning balance

     44,970        54,187   
  

 

 

   

 

 

 

Ending balance

   $ 53,956      $ 70,685   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Interest paid

   $ 10,397      $ 11,341   

Income taxes paid

     297        1,469   

Paid-in-kind interest collected

     20,410        17,522   

Dividend income collected

     12,355        2,103   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

4


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2011 (unaudited)

(dollars in thousands)

 

               Interest Rate(9)                   Fair
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     

Control Investments(4):

  

     

Broadview Networks

Holdings, Inc.(6)

   Communications    Series A Preferred Stock (12.0%, 87,254 shares)             $ 81,984       $ 13,443   
      Series A-1 Preferred Stock (12.0%, 100,702 shares)               77,496         15,514   
      Series B Preferred Stock (12.0%, 1,282 shares)               100         198   
      Class A Common Stock (4,731,031 shares)               —           —     

GMC Television

Broadcasting, LLC(2)

   Broadcasting    Senior Debt (Due 12/16)(1)      4.4     —          4.4   $ 19,103         16,644         17,791   
      Subordinated Debt (Due 12/16)(1)(7)      2.5     —          2.5     10,950         6,976         —     
      Class B Voting Units (8.0%, 86,700 units)               9,071         —     
Intran Media, LLC (6)    Other Media    Senior Debt (Due 12/15)(1)(7)      9.5     —          9.5     9,935         9,445         2,474   
      Series A Preferred Units (10.0%, 36,300 units)               9,095         —     
      Series B Preferred Units (10.0%, 12,700 units)               3,000         —     
      Series C Preferred Units (10.0%,15,000 units)               1,250         —     

Jet Plastica

Investors, LLC(2)

   Plastic Products    Senior Debt A (Due 3/15)(1)      2.4     7.0     9.4     15,046         15,007         15,007   
      Senior Debt B (Due 6/15)(1)(7)      2.4     5.0     7.4     23,459         19,110         16,227   
      Senior Debt C (Due 6/16)(7)      —          2.5     2.5     6,265         6,250         —     
      Senior Debt D (Due 3/13-9/16)(7)      —          2.5     2.5     28,834         21,560         —     
      Series B Preferred Stock (8.0%, 10,000 shares)               10,000         —     
      Preferred LLC Interest (8.0%, 301,595 units)               34,014         —     

NPS Holding Group,

LLC(2)(5)(6)

  

Business

Services

   Senior Debt Revolver (Due 6/13)(1)(7)      6.3     3.3     9.6     3,859         2,360         3,621   
      Senior Debt A1 (Due 6/13)(1)(7)      6.3     —          6.3     9,157         3,470         6,058   
      Senior Debt A2 (Due 6/13)(1)(7)      6.3     —          6.3     2,069         1,905         —     
      Senior Debt A3 (Due 6/13)(1)(7)      6.3     —          6.3     15,324         6,228         —     
      Series A Preferred Units (504 units)               50         —     
      Series B Preferred Units (5.0%, 10,731 units)               10,731         —     
      Common Units (36,500 units)               —           —     

Orbitel Holdings,

LLC(2)

   Cable    Senior Debt (Due 2/13)(1)      10.0     —          10.0     18,580         18,497         18,497   
      Preferred LLC Interest (10.0%, 150,000 units)(1)               17,486         17,503   

PremierGarage

Holdings, LLC(2)(6)

  

Home

Furnishings

   Senior Debt (Due 12/10-9/11)(1)(7)      3.4     4.7     8.1     11,198         9,498         1,035   
      Preferred LLC Units (400 units)               400         —     
      Common LLC Units (79,935 units)               4,971         —     

RadioPharmacy

Investors, LLC(2)

   Healthcare    Senior Debt (Due 12/12)(1)      7.5     —          7.5     8,176         8,176         8,176   
      Subordinated Debt (Due 12/12)(1)      12.0     3.0     15.0     10,373         10,365         10,365   
      Preferred LLC Interest (19.7%, 70,000 units)               9,322         16,447   
                 

 

 

    

 

 

 

Total Control Investments (represents 19.7% of total investments at fair value)

  

     424,461         162,356   
                 

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

5


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2011 (unaudited)

(dollars in thousands)

 

               Interest Rate(9)                   Fair
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     

Affiliate Investments(3):

  

     

Advanced Sleep

Concepts, Inc.(2)

   Home Furnishings    Senior Debt (Due 1/14)(1)      13.4     —          13.4   $ 5,859       $ 5,850       $ 5,850   
      Subordinated Debt (Due 1/14)(1)      12.0     4.0     16.0     5,583         5,554         5,554   
      Series A Preferred Stock (20.0%, 49 shares)               344         71   
      Series B Preferred Stock (1,000 shares)               —           310   
      Common Stock (423 shares)               524         —     
      Warrants to purchase Common Stock (expire 10/16)               348         —     
Cherry Hill Holdings, Inc.    Entertainment    Series A Preferred Stock (9.8%, 750 shares)               769         769   

Contract Datascan

Holdings, Inc.

   Business Services    Subordinated Debt (Due 3/16)(1)      12.0     2.0     14.0     7,875         7,270         7,351   
      Series A Preferred Stock (10.0%, 2,292 shares)(1)               2,367         2,367   
      Common Stock (4,751 shares)(1)               472         145   

Stratford School

Holdings, Inc.(2)

   Education    Senior Debt (Due 12/15)(1)      7.5     —          7.5     17,500         17,406         17,406   
      Series A Convertible Preferred Stock (12.0%, 10,000 shares)               93         10,214   
      Warrants to purchase Common Stock (expire 5/15)(1)               —           3,187   

Velocity Technology

Enterprises, Inc.(2)(6)(13)

   Business Services    Series A Preferred Stock (1,506,602 shares)               1,500         1,883   
                 

 

 

    

 

 

 

Total Affiliate Investments (represents 6.7% of total investments at fair value)

              42,497         55,107   
                 

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

6


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2011 (unaudited)

(dollars in thousands)

 

               Interest Rate(9)                   Fair 
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     

Non-Affiliate Investments (less than 5% owned):

  

     
BarBri, Inc.    Publishing    Senior Debt (Due 6/17)(1)      6.0     —          6.0   $ 7,000       $ 6,933       $ 6,873   
Bentley Systems, Incorporated    Information Services    Senior Debt (Due 12/16)(1)      5.8     —          5.8     9,925         9,831         9,627   
Capstone Logistics, LLC(12)    Logistics    Senior Debt (Due 9/16)(1)      10.5     —          10.5     30,000         29,853         29,853   
Chase Doors Holdings, Inc.    Manufacturing    Senior Debt (Due 12/15)(1)      9.5     —          9.5     24,425         24,191         24,191   
Coastal Sunbelt Holding, Inc.(2)    Food Services    Senior Debt (Due 8/14-12/15)(1)      9.1     —          9.1     20,261         20,105         20,105   
      Subordinated Debt (Due 8/15)(1)      16.0     —          16.0     9,038         8,964         9,042   
Coastal Sunbelt Real Estate, Inc.(14)    Real Estate Investments    Subordinated Unsecured Debt (Due 7/12)      15.0     —          15.0     2,257         2,254         2,254   
      Series A-2 Preferred Stock (12.0%, 20,000 shares)               2,816         4,730   
      Warrants to purchase Class B Common Stock               —           —     
Construction Trailer Specialists, Inc.(2)    Auto Parts    Senior Debt (Due 6/13)(1)      8.6     6.3     14.9     8,060         7,914         7,484   
Cruz Bay Publishing, Inc.    Publishing    Subordinated Debt (Due 12/13)(1)(8)      5.1     8.0     13.1     26,154         22,890         18,983   
CWP/RMK Acquisition Corp.(2)(6)    Home Furnishings    Senior Debt (Due 12/16)(7)      3.0     —          3.0     600         569         529   
Data Based Systems International, Inc.    Business Services    Subordinated Debt (Due 8/16)(1)      10.0     4.0     14.0     9,220         9,042         9,235   
Education Management, Inc.    Education    Senior Debt (Due 6/15)(1)      9.3     —          9.3     25,000         24,759         24,759   
Focus Brands Inc.    Restaurants    Senior Debt (Due 11/16)(1)      5.3     —          5.3     9,993         9,993         9,893   
Gans Communications, L.P.(2)    Cable    Senior Debt (Due 10/17)(1)      5.3     —          5.3     5,785         5,768         5,630   
G&L Investment Holdings, LLC(2)    Insurance    Subordinated Debt (Due 5/14)(1)      9.8     —          9.8     17,690         17,349         17,349   
      Series A Preferred Shares (14.0%, 5,000,000 shares)               8,191         7,288   
      Class C Shares (621,907 shares)               529         —     
Golden Knight II CLO, Ltd.    Diversified Financial Services    Income Notes (Due 4/19)      8.0     —          8.0        3,065         2,154   
Goodman Global, Inc.    Manufacturing    Senior Debt (Due 10/16)(1)      5.8     —          5.8     5,599         5,631         5,556   
GSDM Holdings Corp.(2)    Healthcare    Senior Debt (Due 1/16)(1)      11.5     6.0     17.5     26,373         26,124         26,124   
      Series B Preferred Stock (12.5%, 852,950 shares)               5,130         9,914   
Haws Corporation    Manufacturing    Senior Debt (Due 12/15)(1)      10.5     —          10.5     17,000         16,809         17,022   
Industrial Safety Technologies, LLC    Manufacturing    Senior Debt (Due 9/16)(1)      10.0     —          10.0     22,747         22,508         22,508   
Jenzabar, Inc.    Technology    Senior Preferred Stock (11.0%, 3,750 shares)               6,741         6,741   
      Subordinated Preferred Stock (109,800 shares)               1,098         1,098   
      Warrants to purchase Common Stock (expire 4/16)(10)               423         28,435   
Legacy Cabinets Holdings II, Inc.(6)    Home Furnishings    Class B-1 Common Stock (2,000 shares)               2,185         51   
Mailsouth, Inc.    Publishing    Senior Debt (Due 12/16)(1)      6.8     —          6.8     4,975         4,910         4,826   
Maverick Healthcare Equity, LLC    Healthcare    Preferred Units (10.0%, 1,250,000 units)               1,701         1,836   
      Class A Common Units (1,250,000 units)               —           543   
Metropolitan Telecommunications Holding Company(2)    Communications    Senior Debt (Due 3/14-12/16)(1)      8.0     —          8.0     24,770         24,612         24,612   
Miles Media Group, LLC(2)    Business Services    Senior Debt (Due 6/16)(1)      12.5     —          12.5     17,738         17,429         17,285   
      Warrants to purchase Class A Units (expire 3/21) (1)               123         386   
MLM Holdings, Inc.    Information Services    Senior Debt (Due 12/16)(1)      7.0     —          7.0     14,355         14,167         14,104   
NDSSI Holdings, LLC (2)    Electronics    Senior Debt (Due 12/12)(1)      12.8     1.0     13.8     29,789         29,633         28,617   
      Series D Preferred Units (30.0%, 2,000,000 units)               2,000         3,774   
      Series A Preferred Units (516,691 units)               718         —     
      Series B Convertible Preferred Units (165,003 units)               142         —     
      Class A Common Units (1,000,000 units)               333         —     

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

7


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2011 (unaudited)

(dollars in thousands)

 

               Interest Rate(9)                   Fair 
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     
Orbitz Worldwide, Inc.    Personal Transportation    Senior Debt (Due 7/14)(1)      3.3     —          3.3   $ 3,014       $ 2,871       $ 2,592   
Ozburn-Hessey Holding Company LLC    Logistics    Senior Debt (Due 4/16)(1)      7.5     —          7.5     4,937         4,988         4,407   
Philadelphia Media Network, Inc.(6)    Newspaper    Class A Common Stock (1,000 shares)               5,070         49   
Qualawash Holdings, LLC    Repair Services    Subordinated Debt (Due 1/16)(1)      12.0     —          12.0     20,000         19,829         20,175   
Sagamore Hill Broadcasting, LLC(2)    Broadcasting    Senior Debt (Due 8/14)(1)      12.0     1.0     13.0     13,833         13,730         13,730   
Sally Holdings LLC    Cosmetics    Senior Debt (Due 11/13)(1)      2.5     —          2.5     8,531         8,542         8,408   
SC Academy Holdings, Inc.    Education    Subordinated Debt (Due 7/16)(1)      12.0     —          12.0     13,500         13,392         13,499   
Scotsman Industries, Inc.    Manufacturing    Senior Debt (Due 4/16)(1)      5.8     —          5.8     5,337         5,338         5,231   
Service Champ, Inc.    Auto Parts    Subordinated Unsecured Debt ( Due 2/17)(1)      12.0     2.3     14.3     12,042         11,934         12,157   
ShowPlex Cinemas, Inc.    Entertainment    Senior Debt (Due 5/15)(1)      11.0     —          11.0     13,624         13,486         13,024   
Softlayer Technologies, Inc.    Business Services    Senior Debt (Due 11/16)(1)      7.3     —          7.3     13,895         13,747         13,704   
Summit Business Media Parent Holding Company LLC(6)(11)    Information Services    Class E Series I Units (636 units)(1)               4,120         205   
      Class E Series II Units (276 units) (1)               1,788         —     
Sunshine Media Group, Inc.(2)(6)    Publishing    Warrants to purchase Common Stock (expire 1/21)               —           —     
Tank Intermediate Holding Corp.    Manufacturing    Senior Debt (Due 4/16)(1)      5.0     —          5.0     5,506         5,493         5,451   
The e-Media Club I, LLC(6)    Investment Fund    LLC Interest (74 units)               88         11   
The Gavilon Group, LLC    Agriculture    Senior Debt (Due 12/16)(1)      6.0     —          6.0     9,625         9,513         9,539   
The Matrixx Group, Incorporated    Plastic Products    Subordinated Debt (Due 6/14)(1)      10.8     —          10.8     12,500         12,500         12,650   
Virtual Radiologic Corporation    Healthcare    Senior Debt (Due 12/16)(1)      7.8     —          7.8     13,925         13,732         13,298   
Visant Corporation    Consumer Products    Senior Debt (Due 12/16)(1)      5.3     —          5.3     5,112         5,128         4,692   
VS&A-PBI Holding LLC(6)    Publishing    LLC Interest               500         —     
West World Media, LLC    Information Services    Senior Debt (Due 9/15)(1)      11.0     3.0     14.0     11,259         10,501         10,501   
      Class A Membership Units (25,000 units)               1         271   
      Warrant to purchase Class A Membership Units (expire 9/15)               324         719   
Xpressdocs Holdings, Inc.(2)    Business Services    Senior Debt (Due 4/12-4/13)(1)      10.9     0.9     11.8     18,934         18,737         18,930   
      Series A Preferred Stock (161,870 shares)               500         56   
                 

 

 

    

 

 

 
Total Non-Affiliate Investments (represents 73.6% of total investments at fair value)               593,285         606,710   
                 

 

 

    

 

 

 
Total Investments                   $ 1,060,243       $ 824,173   
                 

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

8


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)

 

               Interest Rate(9)                   Fair 
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     

Control Investments(4):

                 
Avenue Broadband LLC(2)    Cable    Subordinated Debt (Due 3/14)(1)      9.0     5.0     14.0   $ 15,182       $ 15,115       $ 15,115   
      Preferred Units (10.8%, 17,100 units)(1)               23,151         35,371   
      Warrants to purchase Class B Common Stock               —           —     
Broadview Networks    Communications    Series A Preferred Stock (12.0%, 87,254 shares)               81,984         47,477   
Holdings, Inc.(6)       Series A-1 Preferred Stock (12.0%, 100,702 shares)               77,495         54,794   
      Series B Preferred Stock (12.0%, 1,282 shares)               100         698   
      Class A Common Stock (4,731,031 shares)               —           —     
GMC Television    Broadcasting    Senior Debt (Due 12/16)(1)      4.3     —          4.3     23,720         21,240         21,656   
Broadcasting, LLC(2)       Subordinated Debt (Due 12/16)(1)(7)      14.0     —          14.0     10,446         6,975         —     
      Subordinated Unsecured Debt (Due 12/16)(7)      16.0     —          16.0     1,248         1,000         —     
      Class B Voting Units (8.0%, 86,700 units)               9,071         —     
Intran Media, LLC    Other Media    Senior Debt (Due 12/11)(1)      9.5     —          9.5     9,200         9,164         7,430   
      Series A Preferred Units (10.0%, 86,000 units)               9,095         —     
      Series B Preferred Units (10.0%, 30,000 units)               3,000         —     

Jet Plastica Investors,

LLC(2)

   Plastic Products    Senior Debt (Due 12/12)(1)      13.3     —          13.3     14,052         13,990         13,990   
      Subordinated Debt A (Due 3/13)(1)(7)      3.7     11.5     15.2     22,038         19,365         7,143   
      Subordinated Debt B (Due 3/13)(1)(7)      17.0     —          17.0     27,485         21,560         —     
      Preferred LLC Interest (8.0%, 301,595 units)               34,014         —     
MTP Holding, LLC(6)    Communications    Common LLC Interest (79,171 units)               1         —     
NPS Holding    Business    Senior Debt A1 (Due 6/13)(1)(7)      6.0     —          6.0     4,702         3,470         3,348   
Group, LLC(2)(5)(6)    Services    Senior Debt A2 (Due 6/13)(1)(7)      6.0     —          6.0     2,070         1,905         —     
      Senior Debt A3 (Due 6/13)(1)(7)      6.0     —          6.0     7,872         6,228         —     
      Series A Preferred Units (347 units)               —           —     
      Series B Preferred Units (5.0%,10,731 units)               10,731         —     
      Common Units (36,500 units)               —           —     
Orbitel Holdings, LLC(2)    Cable    Senior Debt (Due 3/12)(1)      9.0     —          9.0     14,915         14,874         14,874   
      Preferred LLC Interest (10.0%, 120,000 units)               14,138         13,515   
PremierGarage    Home Furnishings    Senior Debt (Due 12/10-9/11)(1)(7)      8.0     —          8.0     10,441         8,998         5,916   
Holdings, LLC(2)(6)       Preferred LLC Units (400 units)               400         —     
      Common LLC Units (79,935 units)               4,971         —     
RadioPharmacy    Healthcare    Senior Debt (Due 10/11)(1)      7.0     —          7.0     8,500         8,500         8,500   
Investors, LLC(2)       Subordinated Debt (Due 12/12)(1)      12.0     3.0     15.0     10,372         10,357         10,357   
      Preferred LLC Interest (8.0%, 70,000 units)               8,123         7,219   
Superior Industries Investors, LLC(2)    Sporting Goods    Subordinated Debt (Due 3/13)(1)      7.0     9.0     16.0     23,662         23,603         23,603   
      Preferred Units (8.0%, 125,400 units)               16,495         19,283   
Total Sleep Holdings, Inc.(2)(6)    Healthcare    Subordinated Debt (Due 9/11)(7)      8.0     —          8.0     13,044         11,780         —     
      Unsecured Note (Due 6/11)(7)      0.0     —          0.0     375         332         —     
      Series A Preferred Stock (10.0%, 3,700 shares)               3,793         —     
      Series B Preferred Stock (10.0%, 2,752 shares)               21,149         —     
      Common Stock (40,469 shares)               1,000         —     
                 

 

 

    

 

 

 

Total Control Investments (represents 30.7% of total investments at fair value)

  

     517,167         310,289   
                 

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

9


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)

 

               Interest Rate(9)                   Fair 
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     

Affiliate Investments(3):

                 
Advanced Sleep    Home Furnishings    Senior Debt (Due 10/11)(1)      13.6     —          13.6   $ 5,355       $ 5,322       $ 5,322   
Concepts, Inc.(2)       Subordinated Debt (Due 4/12)(1)      12.0     4.0     16.0     5,336         5,285         5,274   
      Series A Preferred Stock (20.0%, 49 shares)               297         104   
      Common Stock (423 shares)               524         —     
      Warrants to purchase Common Stock (expire 10/16)               348         —     
Cherry Hill Holdings, Inc.    Entertainment    Series A Preferred Stock (10.0%, 750 shares)               945         1,076   
Contract Datascan    Business Services    Subordinated Debt (Due 3/16)(1)      12.0     2.0     14.0     7,756         7,074         7,074   
Holdings, Inc.       Series A Preferred Stock (1,987 shares)(1)               1,983         1,983   
      Common Stock (4,135 shares)(1)               410         410   
Stratford School    Education    Senior Debt (Due 12/15)(1)      7.5     —          7.5     19,000         18,885         18,885   
Holdings, Inc.(2)       Series A Convertible Preferred Stock (12.0%, 10,000 shares)               3         8,534   
      Warrants to purchase Common Stock (expire 5/15)(1)               —           2,910   
Sunshine Media    Publishing    Common Stock (145 shares)               581         116   
Delaware, LLC(2)(6)       Class A LLC Interest (8.0%, 563,808 units)               564         112   
      Options to acquire Warrants to purchase Class B LLC Interest (expire 5/14)               —           —     
Velocity Technology Enterprises, Inc.(2)(6)    Business Services    Series A Preferred Stock (1,506,602 shares)               1,500         1,500   
                 

 

 

    

 

 

 

Total Affiliate Investments (represents 5.3% of total investments at fair value)

  

     43,721         53,300   
                 

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

10


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)

 

               Interest Rate(9)                   Fair 
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK     Total     Principal      Cost     

Non-Affiliate Investments (less than 5% owned):

              
Active Brands International, Inc.(2)(6)    Consumer Products    Senior Debt (Due 6/12)(1)(7)      10.4     —          10.4   $ 29,263       $ 26,328       $ 1,939   
      Subordinated Debt (Due 9/12)(1)(7)      —          17.0     17.0     18,066         12,053         —     
      Class A-1 Common Stock (3,056 shares)               3,056         —     
      Warrants to purchase Class A-1 Common Stock (expire 6/17)               331         —     
Allen’s T.V. Cable Service, Inc.    Cable    Senior Debt (Due 12/12)(1)      7.3     —          7.3     5,080         5,069         5,069   
      Subordinated Debt (Due 12/12)(1)      10.0     —          10.0     2,415         2,384         2,343   
      Warrants to purchase Common Stock (expire 11/15)               —           47   
Chase Doors Holdings, Inc.    Manufacturing    Senior Debt (Due 12/15)(1)      9.5     —          9.5     29,250         28,935         28,935   
Coastal Sunbelt Holding, Inc.(2)    Food Services    Senior Debt (Due 8/14-2/15)(1)      9.1     —          9.1     21,411         21,239         21,239   
      Subordinated Debt (Due 8/15)(1)      12.0     4.0     16.0     8,859         8,795         8,795   
Coastal Sunbelt Real Estate, Inc.    Real Estate Investments    Subordinated Unsecured Debt (Due 7/12)      15.0     —          15.0     2,257         2,251         2,251   
      Series A-2 Preferred Stock (12.0%, 20,000 shares)               2,656         2,318   
      Warrants to purchase Class B Common Stock               —           —     
Construction Trailer Specialists, Inc.(2)    Auto Parts    Senior Debt (Due 06/13)(1)      14.9     —          14.9     7,690         7,531         6,889   
Cruz Bay Publishing, Inc.    Publishing    Subordinated Debt (Due 12/13)(1)(8)      5.0     8.0     13.0     24,630         22,855         17,365   
CWP/RMK Acquisition Corp.(2)(6)    Home Furnishings    Senior Debt (Due 12/16)(7)      3.0     —          3.0     600         583         518   
Empower IT Holdings, Inc.(2)    Information Services    Senior Debt (Due 5/12)(1)      11.0     —          11.0     3,387         3,343         3,343   
Equibrand Holding(16)    Leisure Activities    Senior Debt (Due 6/11)(1)      9.5     —          9.5     4,244         4,234         4,234   
Corporation(2)       Subordinated Debt (Due 12/11)(1)      12.0     5.0     17.0     10,142         10,109         10,109   
Focus Brands Inc.    Restaurants    Senior Debt (Due 11/16)(1)      7.3     —          7.3     11,018         11,047         11,150   
G&L Investment    Insurance    Subordinated Debt (Due 5/14)(1)      9.8     —          9.8     17,500         17,129         17,129   
Holdings, LLC(2)       Series A Preferred Shares (14.0%, 5,000,000 shares)               7,651         7,651   
      Class C Shares (621,907 shares)               529         213   
Golden Knight II CLO, Ltd.(6)    Diversified Financial Services    Income Notes (Due 4/19)      8.0     —          8.0        3,038         2,395   
Goodman Global, Inc.    Business Services    Senior Debt (Due 10/16)(1)      5.8     —          5.8     2,993         2,993         3,013   

GSDM Holdings,

LLC(2)

   Healthcare    Senior Debt (Due 12/13)(1)      12.9     —          12.9     26,130         25,980         25,980   
      Series B Preferred Units (12.5%, 4,213,333 units)               4,679         5,052   
Haws Corporation    Manufacturing    Senior Debt (Due 12/15)(1)      10.5     —          10.5     22,500         22,230         22,230   
Interactive Data Corporation    Diversified Financial Services    Senior Debt (Due 01/17) (1)      6.8     —          6.8     9,950         10,040         10,094   
Jenzabar, Inc.    Technology    Senior Preferred Stock (11.0%, 3,750 shares)               6,431         6,431   
      Subordinated Preferred Stock (109,800 shares)               1,098         1,098   
      Warrants to purchase Common Stock (expire 4/16)(10)               423         27,798   
Knology Inc.    Cable    Senior Debt (Due 10/16)(1)      5.5     —          5.5     6,090         6,098         6,133   
Lambeau Telecom Company, LLC(6)    Communications    Senior Debt (Due 2/13)(7)      12.0     —          12.0     1,067         1,002         675   
Legacy Cabinets Holdings II, Inc.(6)    Home Furnishings    Class B-1 Common Stock (2,000 shares)               2,185         17   
LMS INTELLIBOUND, INC.(2)(12)    Logistics    Senior Debt (Due 3/14–6/14)(1)      8.7     —          8.7     16,320         16,114         16,114   
      Subordinated Debt (Due 9/14)(1)      12.0     4.0     16.0     7,000         6,879         6,879   
Mailsouth, Inc.    Publishing    Senior Debt (Due 12/16)      7.0     —          7.0     5,000         4,925         4,950   
Massage Envy, LLC    Leisure Activities    Senior Debt (Due 12/14)(1)      11.0     —          11.0     10,222         10,023         10,023   
Maverick Healthcare Equity, LLC    Healthcare    Subordinated Debt (Due 4/14)(1)      12.5     3.5     16.0     13,357         13,223         13,223   
      Preferred Units (10.0%, 1,250,000 units)               1,580         1,710   
      Class A Common Units (1,250,000 units)               —           271   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

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MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)

 

               Interest Rate(9)                   Fair 
Value
 

Portfolio Company

  

Industry

  

Investment

   Current     PIK      Total     Principal      Cost     
Metropolitan Telecommunications Holding Company(2)    Communications    Senior Debt (Due 3/14-12/16)(1)      8.0     —           8.0   $ 27,770       $ 27,534       $ 27,534   
Miles Media Group, LLC(2)    Business Services    Senior Debt (Due 6/13)(1)      12.5     —           12.5     16,238         16,049         16,049   
MLM Holdings, Inc.    Information Services    Senior Debt (Due 12/16)(1)      7.0     —           7.0     14,464         14,248         14,301   
NDSSI Holdings, LLC(2)    Electronics    Senior Debt (Due 9/14)(1)      14.8     —           14.8     30,132         29,928         29,928   
      Series A Preferred Units (516,691 units)                718         125   
      Series B Convertible Preferred Units (165,003 units)                142         356   
      Class A Common Units (1,000,000 units)                333         —     
Orbitz Worldwide, Inc.    Personal Transportation    Senior Debt (Due 07/14)(1)      3.3     —           3.3     3,140         2,960         2,949   
Ozburn-Hessey Holding Company LLC    Logistics    Senior Debt (Due 04/16)(1)      7.5     —           7.5     4,975         5,034         5,043   
Philadelphia Media Network, Inc.(6)    Newspaper    Class A Common Stock (1,000 shares)                5,070         48   
Provo Craft & Novelty Inc.    Leisure Activities    Senior Debt (Due 3/16)(1)      8.0     —           8.0     8,077         7,841         7,850   
Restaurant Technologies, Inc.    Food Services    Senior Debt (Due 2/12)(1)      17.6     —           17.6     42,742         42,607         42,607   
      Common Stock (47,512 shares)                353         81   
      Warrants to purchase Common Stock (expire 6/14)                —           685   
Rural/Metro Operating Company, LLC    Healthcare    Senior Debt (Due 11/16) (1)      6.0     —           6.0     4,000         3,980         4,046   
Sagamore Hill Broadcasting, LLC(2)    Broadcasting    Senior Debt (Due 8/11)(1)      14.0     —           14.0     27,169         26,360         26,183   
Savvis Communications Corporation    Business Services    Senior Debt (Due 08/16)(1)      6.8     —           6.8     9,975         10,029         10,148   
SC Academy Holdings, Inc.    Education    Subordinated Debt (Due 7/16)(1)      12.0     —           12.0     13,500         13,375         13,375   
Service Champ, Inc.    Auto Parts    Subordinated Unsecured Debt (Due 1/16)(1)      14.3     —           14.3     10,158         10,070         10,070   
ShowPlex Cinemas, Inc.    Entertainment    Senior Debt (Due 5/15)(1)      9.0     —           9.0     11,025         10,882         10,706   
Softlayer Technologies, Inc.    Business Services    Senior Debt (Due 11/16)(1)      7.8     —           7.8     14,000         13,830         14,003   
Summit Business Media Intermediate Holding Company, LLC(6)(11)    Information Services    Subordinated Debt (Due 7/14)(1)(7)      11.0     —           11.0     7,158         5,996         296   
Teleguam Holdings, LLC(2)    Communications    Subordinated Debt (Due 10/12)(1)      7.3     —           7.3     20,000         19,921         19,729   
The e-Media Club I, LLC(6)    Investment Fund    LLC Interest (74 units)                88         10   
The Gavilon Group, LLC    Agriculture    Senior Debt (Due 12/16)(1)      6.0     —           6.0     8,500         8,373         8,418   
The Matrixx Group, Incorporated    Plastic Products    Subordinated Debt (Due 6/14)(1)      10.8     —           10.8     12,500         12,500         12,500   
The SI Organization, Inc.    Defense    Senior Debt (Due 11/16)(1)      5.8     —           5.8     3,000         3,000         3,030   
The Telx Group, Inc.    Business Services    Senior Debt (Due 6/15)(1)      8.0     —           8.0     13,930         13,680         13,860   
Visant Corporation    Consumer Products    Senior Debt (Due 12/16)(1)      7.0     —           7.0     6,983         6,849         7,077   

VOX Communications

Group Holdings, LLC(2)(6)

   Broadcasting    Senior Debt (Due 3/09)(1)(7)      13.5     —           13.5     11,717         10,388         6,157   
      Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)(7)             2,459         1,414         —     
VS&A-PBI Holding LLC (6)    Publishing    LLC Interest                500         —     
Wireco Worldgroup Inc.    Industrial Equipment    Senior Debt (Due 2/14)(1)      5.3     —           5.3     3,850         3,856         3,807   

Xpressdocs Holdings,

Inc.(2)

   Business    Senior Debt (Due 4/12-4/13)(1)      11.6     —           11.6     19,533         19,328         19,522   
   Services    Series A Preferred Stock (161,870 shares)                500         —     
                  

 

 

    

 

 

 

Total Non-Affiliate Investments (represents 64.0% of total investments at fair value)

               684,785         646,116   
                  

 

 

    

 

 

 

Total Investments

                   $ 1,245,673       $ 1,009,705   
                  

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

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MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)

 

Counterparty

  

Instrument

   Pay Fixed
Rate of
    Receive
Floating
Rate of
    Expiring      Notional      Cost      Fair
Value(a)
 

Interest Rate Swaps

                  

SunTrust Bank

   Interest Rate Swap—Pay Fixed/Receive Floating      13.0     11.0     08/11       $ 12,500       $ —         $ (183
   Interest Rate Swap—Pay Fixed/Receive Floating      9.0     7.0     08/11         8,681         —           (127
            

 

 

    

 

 

    

 

 

 

Total Interest Rate Swaps

             $ 21,181       $ —         $ (310
            

 

 

    

 

 

    

 

 

 

 

(a) We include the fair value of these interest rate swaps in other liabilities on our Consolidated Balance Sheets.

 

(1) 

Some or all of this security is held by our SBIC subsidiary or one of our other financing subsidiaries and may have been pledged as collateral in connection therewith. See Note 5—Borrowings to the Condensed Consolidated Financial Statements.

(2) 

Includes securities issued by one or more of the portfolio company’s affiliates.

(3) 

Affiliate investments represent companies in which we own at least 5%, but not more than 25% of the portfolio company’s voting securities.

(4) 

Control investments represent companies in which we own more than 25% of the portfolio company’s voting securities.

(5) 

Represents a non-majority-owned control portfolio company of which we own at least 25%, but not more than 50% of the portfolio company’s voting securities.

(6) 

Portfolio company is non-income producing at period-end.

(7) 

Loan or debt security is on non-accrual status.

(8) 

We did not recognize paid-in-kind, or PIK, interest or accretion income because the fair value of our investment was below its cost basis. However, we continue to accrue interest that is receivable in cash from the portfolio company.

(9) 

Interest rates represent the weighted-average annual stated interest rate on debt securities, presented by nature of indebtedness for a single issuer. PIK interest represents contractually deferred interest that is added to the principal balance of the debt security and compounded if not paid on a current basis. PIK may be prepaid by either contract or the portfolio company’s choice, but generally is paid at the end of the loan term. The maturity dates represent the earliest and the latest maturity dates. Rates on preferred stock and preferred LLC interests, where applicable, represent the contractual rate.

(10) 

On February 24, 2010, we exercised warrants to purchase 100,000 shares of common stock of Jenzabar, Inc. and we submitted the requisite payments for this stock. Our receipt of the common stock certificates from Jenzabar is pending.

(11) 

On January 25, 2011, Summit Business Media Intermediate Holding Company, LLC filed for Chapter 11 bankruptcy protection.

(12) 

In September 2011, LMS Intellibound, Inc. (a non-affiliate portfolio Company) and Progressive Logistics Systems (an unaffiliated company) entered into a combination where they are now subsidiaries of Capstone Logistics, LLC.

(13) 

In October 2011, we sold our Series A Preferred Stock investment in Velocity Technology Enterprises, Inc. for $1.9 million.

(14) 

In October 2011, Costal Sunbelt Real Estate, Inc. re-paid our subordinated unsecured debt investment in full and made a distribution in the amount of $2.6 million in respect of our series A-2 preferred stock investment in connection with the sale of the real estate previously owned by its subsidiary, Coastal Sunbelt Real Estate, L.L.C.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

 

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MCG Capital Corporation

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

These Condensed Consolidated Financial Statements present the results of operations, financial position and cash flows of MCG Capital Corporation and its consolidated subsidiaries. The terms “we,” “our,” “us” and “MCG” refer to MCG Capital Corporation and its consolidated subsidiaries.

We are a solutions-focused commercial finance company that provides capital and advisory services to middle-market companies throughout the United States. We are an internally managed, non-diversified, closed-end investment company that elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. Our organization includes the following categories of subsidiaries:

Wholly Owned Special-Purpose Financing Subsidiaries—These subsidiaries are bankruptcy remote, special-purpose entities to which we transfer certain loans. Each financing subsidiary, in turn, transfers the loans to a Delaware statutory trust. For accounting purposes, the transfers of the loans to the Delaware statutory trusts are structured as on-balance sheet securitizations.

Small Business Investment Subsidiaries—We own Solutions Capital I, L.P., a wholly owned subsidiary licensed by the United States Small Business Administration, or SBA, which operates as a small business investment company, or SBIC, under the Small Business Investment Act of 1958, as amended, or SBIC Act. In March 2011, we formed another wholly owned subsidiary, Solutions Capital II, L. P., and in May 2011, we submitted a license to the SBA to obtain an SBIC license for Solutions Capital II, L.P. On September 30, 2011, after discussions with the SBA, we elected to withdraw our application for a second license. MCG is also the sole member of Solutions Capital G.P., LLC, which acts as the general partner of Solutions Capital I, L.P.

Taxable SubsidiariesWe currently qualify as a regulated investment company, or RIC, for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to our stockholders. We have certain wholly owned taxable subsidiaries, or Taxable Subsidiaries, each of which holds one or more portfolio investments listed on our Consolidated Schedules of Investments. The purpose of these Taxable Subsidiaries is to permit us to hold portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income. Absent the Taxable Subsidiaries, a portion of the gross income of any LLC (or other pass-through entity) portfolio investment would flow through directly to us, and be included in the calculation of the 90% test. To the extent that such income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and, therefore, cause us to incur significant federal income taxes. The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. We do not consolidate the Taxable Subsidiaries for income tax purposes and they may generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect any such income tax expense on our Consolidated Statements of Operations.

The accompanying financial statements reflect the consolidated accounts of MCG and the following subsidiaries: Solutions Capital I, L.P.; Solutions Capital II, L.P.; Solutions Capital G.P., LLC; and MCG’s special-purpose financing subsidiaries: MCG Finance V, LLC and MCG Finance VII, LLC.

BASIS OF PRESENTATION AND USE OF ESTIMATES

These unaudited financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America and conform to Regulation S-X under the Securities Exchange Act of 1934, as amended. We believe we have made all necessary adjustments so that the financial statements are presented fairly and that all such adjustments are of a normal recurring nature. We eliminated all significant intercompany balances. In accordance with Article 6 of Regulation S-X of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, we do not consolidate portfolio company investments, including those in which we have a controlling interest. Further, in connection with the preparation of these Condensed Consolidated Financial Statements, we have evaluated subsequent events that occurred after the balance sheet date as of September 30, 2011 through the date these financial statements were issued.

 

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Table of Contents

Preparing financial statements requires us to make estimates and assumptions that affect the amounts reported on our Condensed Consolidated Financial Statements and accompanying notes. Although we believe the estimates and assumptions used in preparing these Condensed Consolidated Financial Statements and related notes are reasonable, actual results could differ materially.

Interim results are not necessarily indicative of results for a full year. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2011-02—A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, or ASU 2011-02. This standard amends previous guidance provided in Accounting Standards Codification 310-40—Receivables—Troubled Debt Restructurings by Creditors. ASU 2011-02 provides additional guidance and criteria on how companies should determine whether a restructuring or refinancing of an existing financial receivable represents a troubled debt restructuring. Companies must assess whether the restructuring or refinancing of an existing financial receivable is a troubled debt restructuring in order to determine how to account for the remaining unamortized portion of certain fees, such as origination fees, associated with the original debt investment. ASU 2011-02 is effective for the first interim period beginning on or after June 15, 2011. We adopted this standard beginning with the quarter ended September 30, 2011. Our adoption of this update did not have a material impact on our financial position or results of operations.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04—Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes the application of some requirements for measuring fair value and requires additional disclosure for fair value measurements. The disclosure requirements are expanded to include for fair value measurements categorized in Level 3 of the fair value hierarchy: 1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement; 2) a description of the valuation processes in place; and 3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, for public entities. We will adopt this standard beginning on January 1, 2012. We are evaluating the impact, if any, that our adoption of this update may have on our financial position or results of operations. However, since this accounting standards update primarily requires expanded disclosure related to Category 3 financial assets and liabilities, we do not anticipate that the implementation of this standard will have a significant impact on our process for measuring fair values, our financial position or results of operations.

NOTE 2—INVESTMENT PORTFOLIO

The following table summarizes the composition of our investment portfolio at cost:

 

     September 30, 2011     December 31, 2010  

(dollars in thousands)

   Investments
at Cost
     Percent of
Total Portfolio
    Investments
at Cost
     Percent of
Total Portfolio
 

Debt investments

          

Senior secured debt

   $ 588,951         55.5   $ 597,046         47.9

Subordinated debt

          

Secured

     134,131         12.7               266,333         21.4   

Unsecured

     14,188         1.3        15,067         1.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     737,270         69.5        878,446         70.5   
  

 

 

    

 

 

   

 

 

    

 

 

 
 

Equity investments

          

Preferred equity

     301,174         28.4        345,960         27.8   

Common/common equivalents equity

     21,799         2.1        21,267         1.7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     322,973         30.5        367,227         29.5   
  

 

 

    

 

 

   

 

 

    

 

 

 
 

Total investments

   $ 1,060,243         100.0   $ 1,245,673         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the composition of our investment portfolio at fair value:

 

     September 30, 2011     December 31, 2010  

(dollars in thousands)

   Investments at
Fair Value
     Percent of
Total Portfolio
    Investments at
Fair Value
     Percent of
Total Portfolio
 

Debt investments

          

Senior secured debt

   $ 535,247         64.9   $ 555,667         55.0

Subordinated debt

          

Secured

     124,203         15.1               190,309         18.9   

Unsecured

     14,411         1.8        12,321         1.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     673,861         81.8        758,297         75.1   
  

 

 

    

 

 

   

 

 

    

 

 

 
 

Equity investments

          

Preferred equity

     116,310         14.1        218,690         21.7   

Common/common equivalents equity

     34,002         4.1        32,718         3.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     150,312         18.2        251,408         24.9   
  

 

 

    

 

 

   

 

 

    

 

 

 
 

Total investments

   $ 824,173         100.0   $ 1,009,705         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our debt instruments bear contractual interest rates ranging from 2.5% to 17.5%, a portion of which may be in the form of paid in kind interest. As of September 30, 2011, approximately 88.6% of the fair value of our loan portfolio had variable interest rates, based on a LIBOR benchmark or prime rate, and 11.4% of the fair value of our loan portfolio had fixed interest rates. As of September 30, 2011, approximately 76.8% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on the LIBOR base index and prime floors between 1.75% and 6.0%. At origination, our loans generally have four- to eight-year stated maturities. Borrowers typically pay an origination fee based on a percent of the total commitment and a fee on undrawn commitments.

When one of our loans becomes more than 90 days past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place the loan on non-accrual status and generally will cease recognizing interest income on that loan until all principal and interest has been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. If the fair value of a loan is below cost, we may cease recognizing paid-in-kind, or PIK, interest and/or the accretion of a discount on the debt investment until such time that the fair value equals or exceeds cost.

The following table summarizes the cost of loans more than 90 days past due and loans on non-accrual status:

 

     September 30, 2011     December 31, 2010  

(dollars in thousands)

   Investments
at Cost
     % of Loan
Portfolio
    Investments
at Cost
     % of Loan
Portfolio
 

Loans greater than 90 days past due

          

On non-accrual status

   $ 23,461         3.18   $ 10,388         1.18

Not on non-accrual status

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans greater than 90 days past due

   $ 23,461         3.18   $ 10,388         1.18
  

 

 

    

 

 

   

 

 

    

 

 

 
 

Loans on non-accrual status

          

0 to 90 days past due

   $ 63,910         8.67   $ 128,989         14.69

Greater than 90 days past due

     23,461         3.18        10,388         1.18   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans on non-accrual status

   $ 87,371         11.85   $ 139,377         15.87
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the fair value of loans more than 90 days past due and loans on non-accrual status:

 

     September 30, 2011     December 31, 2010  

(dollars in thousands)

   Investments
at Fair Value
     % of Loan
Portfolio
    Investments
at Fair Value
     % of Loan
Portfolio
 

Loans greater than 90 days past due

          

On non-accrual status

   $ 10,714         1.59   $ 6,157         0.81

Not on non-accrual status

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans greater than 90 days past due

   $ 10,714         1.59   $ 6,157         0.81
  

 

 

    

 

 

   

 

 

    

 

 

 
 

Loans on non-accrual status

          

0 to 90 days past due

   $ 19,230         2.85   $ 19,835         2.62

Greater than 90 days past due

     10,714         1.59        6,157         0.81   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans on non-accrual status

   $ 29,944         4.44   $ 25,992         3.43
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the changes in the cost and fair value of the loans on non-accrual status from December 31, 2010 through September 30, 2011:

 

     Nine months ended
September 30, 2011
 

(In thousands)

   Cost     Fair Value  

Non-accrual loan balance as of December 31, 2010

   $  139,377      $ 25,992   

Additional loans on non-accrual status—other media

     9,247        4,235   

Advances to companies on non-accrual status

     9,543        9,543   

Loans converted to equity

     (5,904     (5,904

Payments received on loans on non-accrual status

     (7,458     (7,458

Change in valuation of loans on non-accrual status

     —          (256

Reversal of previously recognized unrealized loss on non-accrual loans

     —          61,226   

Realized loss on non-accrual loans

     (57,434 )(a)      (57,434 )(a) 
  

 

 

   

 

 

 

Total change in non-accrual loans

     (52,006     3,952   
  

 

 

   

 

 

 

Non-accrual loan balance as of September 30, 2011

   $ 87,371      $ 29,944   
  

 

 

   

 

 

 

 

(a) 

Primarily reflects our sales of Active Brands International, Inc. and Vox Communications Group Holdings, LLC, as well as the write-off of our investment in Total Sleep Holdings, Inc. during the nine months ended September 30, 2011. Our investments in the debt issued by these portfolio companies were on non-accrual status as of December 31, 2010. Upon the sales and write-off of these investments, we reversed the previously unrealized depreciation and recorded realized losses.

 

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Table of Contents

The following table summarizes our investment portfolio by industry at cost:

 

     September 30, 2011     December 31, 2010  

(dollars in thousands)

   Investments
at Cost
     Percent of
Total Portfolio
    Investments
at Cost
     Percent of
Total Portfolio
 

Healthcare

   $ 74,550         7.0   $ 114,476         9.2

Business services

     95,931         9.0                106,717         8.6   

Manufacturing

     79,970         7.5        54,158         4.3   

Education

     55,650         5.2        32,263         2.6   

Communications

     184,192         17.4        208,037         16.7   

Plastic products

     118,441         11.2        101,429         8.1   

Cable

     41,751         3.9        80,829         6.5   

Technology

     8,262         0.8        7,952         0.6   

Information services

     40,732         3.8        23,587         1.9   

Logistics

     34,841         3.3        28,027         2.3   

Electronics

     32,826         3.1        31,121         2.5   

Broadcasting

     46,421         4.4        76,448         6.1   

Publishing

     35,233         3.3        29,425         2.4   

Food services

     29,069         2.7        72,994         5.9   

Insurance

     26,069         2.5        25,309         2.0   

Repair services

     19,829         1.9        —           —     

Auto parts

     19,848         1.9        17,601         1.4   

Entertainment

     14,255         1.4        11,827         0.9   

Home furnishings

     30,243         2.9        28,913         2.3   

Restaurants

     9,993         0.9        11,047         0.9   

Agriculture

     9,513         0.9        8,373         0.7   

Cosmetics

     8,542         0.8        —           —     

Consumer products

     5,128         0.5        48,617         3.9   

Other media

     22,790         2.2        21,259         1.7   

Diversified financial services

     3,065         0.3        13,078         1.1   

Leisure activities

     —           —          32,207         2.6   

Sporting goods

     —           —          40,098         3.2   

Other(a)

     13,099         1.2        19,881         1.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,060,243         100.0   $ 1,245,673         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) 

No individual industry within this category exceeds 1%.

 

18


Table of Contents

The following table summarizes our investment portfolio by industry at fair value:

 

     September 30, 2011     December 31, 2010  

(dollars in thousands)

   Investments
at Fair  Value
     Percent of
Total Portfolio
    Investments at
Fair Value
     Percent of
Total Portfolio
 

Healthcare

   $ 86,703         10.5   $ 76,358         7.6

Business services

     81,021         9.8                87,897         8.7   

Manufacturing

     79,959         9.7        54,178         5.4   

Education

     69,065         8.4        43,704         4.3   

Communications

     53,767         6.5        150,907         14.9   

Plastic products

     43,884         5.3        33,633         3.3   

Cable

     41,630         5.1        92,467         9.2   

Technology

     36,274