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| 8-K - FORM 8-K - MCG CAPITAL CORP | mcgc20120630earningsrelease.htm |
Exhibit 99.1
 | MCG Capital Corporation | PRESS RELEASE | |
1100 Wilson Boulevard | |||
Suite 3000 | Contact: Keith Kennedy | ||
Arlington, VA 22209 | (703) 562-7110 | ||
(703) 247-7500 | KKennedy@MCGCapital.com | ||
(866) 904-4775 (FAX) | |||
www.MCGCapital.com | |||
FOR IMMEDIATE RELEASE | |||
MCG CAPITAL CORPORATION REPORTS SECOND QUARTER 2012 RESULTS
AND DISTRIBUTION OF $0.14 PER SHARE
ARLINGTON, VA—July 31, 2012—MCG Capital Corporation (Nasdaq: MCGC) (“MCG,” "we," "our," "us" or the “Company”) announced today its financial results for the second quarter ended June 30, 2012. We will host an investment community conference call today, July 31, 2012, at 9:00 a.m. (Eastern Time).
HIGHLIGHTS
As outlined in further detail in this earnings release and in our Quarterly Report on Form 10-Q, for the quarter ended June 30, 2012, the following highlights occurred during the three months ended June 30, 2012:
• | Net operating income, or NOI, was $5.6 million, or $0.07 per share; |
• | Net loss was $7.0 million, or $0.09 per share; |
• | We incurred approximately $3.2 million of costs associated with our transition plan, a $0.04 per share impact to NOI; |
• | We funded $11.5 million of advances and originations, including an $8.1 million loan to one new portfolio company; |
• | We monetized $40.1 million of our equity investments and $172.6 million of our debt portfolio; |
• | At June 30, 2012, we had $204.4 million of cash on-hand to make new investments using unrestricted cash and restricted cash from our SBIC. In addition, we had $84.5 million in securitization accounts and other restricted cash accounts; |
• | We paid off the SunTrust Warehouse financing facility and we reduced total borrowings by $63.0 million; and |
• | Under our stock repurchase program, we repurchased and retired 2,687,476 shares of our common stock at a total cost of $11.7 million, or an average of $4.36 per share. |
DISTRIBUTION
On July 27, 2012, the MCG board of directors declared a distribution of $0.14 per share. The distribution is payable as follows:
Record date: August 17, 2012
Payable date: August 31, 2012
If we determined the tax attributes of our 2012 distributions as of June 30, 2012, 100% would be a return of capital. However, actual determinations of the tax attributes of our distributions, including determinations of return of capital, are made annually as of the end of the fiscal year based upon our taxable income and distributions paid for the full year and will be reported to each stockholder on a Form 1099.
MCG Capital Corporation
July 31, 2012
Page 2
RECENT DEVELOPMENTS
We continue to execute on our strategic plan to return the Company to its roots as a leading middle-market lender. We continue to simplify our capital structure, redeploy unencumbered cash into yield-oriented investments, repay debt and return equity to our stockholders. We are also re-sizing the business to operate more efficiently. The following significant developments occurred during the three months ended June 30, 2012:
• | Equity Monetizations - For the three and six month period ended June 30, 2012, we received $40.1 million and $64.1 million,respectively, in proceeds from the sale of equity investments, principally the sale of Orbitel Holdings, LLC, Stratford School Holdings, Inc., GSDM Holdings, LLC and Jenzabar, Inc. |
• | Loan Monetizations and Fundings - For the three and six month periods ended June 30, 2012, we received $172.6 million and $227.9 million,respectively, in loan payoffs and amortization payments. During the three months ended June 30, 2012, eight borrowers repaid $145.1 million in principal at or above par and we funded $2.5 million in loan advances and draws to existing borrowers. For the three and six month period ended June 30, 2012, we originated and advanced $11.5 million and $17.7 million, respectively, to portfolio companies. |
• | Open-Market Purchases of Our Stock - In the second quarter of 2012, we repurchased and retired 2,687,476 shares of our common stock at a total cost of $11.7 million, or an average of $4.36 per share. We acquired these shares from sellers in open market transactions. We retire these shares upon settlement, thereby reducing the number of shares outstanding. |
• | Operational Realignment - Executing on our transition plan, during the second quarter of 2012 we reduced our headcount by an additional three positions. In the second quarter, we accrued $1.8 million in severance-related expenses and we anticipate accruing an additional $0.1 million in severance-related expenses over the remainder of 2012 in regard to terminated employees with remaining service periods. As of July 15, 2012, we had 24 full-time employees. |
• | Liquidity and De-Leveraging Events - On May 15, 2012, we paid off our SunTrust Warehouse facility. For the six months ended June 30, 2012, our asset coverage ratio improved from 244% at December 31, 2011 to 305% at June 30, 2012. |
OUTLOOK
As previously discussed, based on the successful execution of our strategic plan, we continue to target future annual base compensation and benefits levels of approximately $4.0 million to $5.0 million beginning in 2013. In addition, we are lowering our projected embedded annual non-compensation cost structure to approximately $5.0 million to $6.0 million from our previous projection of approximately $5.5 million to $6.5 million.
Consistent with our previous 2012 guidance, we expect to incur costs associated with our transition plan of approximately $0.10 per share to $0.15 per share, primarily attributable to severance costs and the related acceleration of restricted stock for terminated employees, the amendment and pay-off of our SunTrust Warehouse financing facility and employee compensation, primarily in the form of retention and inducement payments.
During the three months ended June 30, 2012, we incurred costs associated with our transition plan of $3.1 million or $0.04 per share, consisting of $0.8 million in accelerated deferred financing fees and other costs associated with the payoff of our SunTrust Warehouse financing facility that we recorded as interest expense, $0.3 million in retention and inducement payments that we recorded as salaries and benefits, $0.2 million in amortization expenses associated with the elimination of positions that we recorded as amortization of employee restricted stock awards, and $1.8 million in severance related expenses that we recorded as general and administrative expense. For the six months ended June 30, 2012, we incurred $6.8 million, or $0.09 per share, of costs associated with our transition plan.
Given the accelerated level of monetizations and payoffs experienced through the first six months of 2012, together with the slower than anticipated pace of new originations, we are presently carrying liquidity levels substantially higher than previously forecasted. We remain committed to making disciplined investments at appropriate risk-adjusted yields. Absent a significant pickup in liquidity redeployment opportunities or an increase in leverage from a second SBIC license or other sources, we would anticipate 2013 NOI levels of $0.45 to $0.55 per share, a reduction from the previous forecast of $0.50 to $0.60 per share.
MCG Capital Corporation
July 31, 2012
Page 3
ACCESS TO CAPITAL AND LIQUIDITY
At June 30, 2012, we had $79.9 million of cash and cash equivalents available for general corporate purposes, as well as $124.5 million of cash in restricted accounts related to our SBIC that we could use to fund new investments in the SBIC and $6.5 million of restricted cash held in escrow. In addition, we had $78.0 million of cash in securitization accounts, that may only be used to make interest and principal payments on our securitized borrowings or distributions to MCG in accordance with the indenture agreement.
At June 30, 2012, cash in securitization accounts included $71.3 million in the principal collections account of our Commercial Loan Trust 2006-1. In July 2012, we used $90.7 million of securitized cash, including $19.4 million collected in July 2012, to repay borrowings of our Commercial Loan Trust 2006-1. The reinvestment period for this facility ended on July 20, 2011 and all subsequent principal collections received have been, and will be, used to repay the securitized debt.
At June 30, 2012, $150.0 million of SBA borrowings were outstanding, the maximum available under our current SBIC license.
RESULTS OF OPERATIONS
The following section compares our results of operations for the three months ended June 30, 2012 to the three months ended June 30, 2011.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011
The following table summarizes the components of our net loss for the three months ended June 30, 2012 and 2011:
Three months ended | |||||||||||
June 30, 2012 | Variance | ||||||||||
(dollars in thousands) | 2012 | 2011 | $ | Percentage | |||||||
Revenue | |||||||||||
Interest and dividend income | |||||||||||
Interest income | $ | 13,826 | $ | 17,153 | $ | (3,327 | ) | (19.4 | )% | ||
Dividend income | 896 | 2,116 | (1,220 | ) | (57.7 | ) | |||||
Loan fees | 1,100 | 919 | 181 | 19.7 | |||||||
Total interest and dividend income | 15,822 | 20,188 | (4,366 | ) | (21.6 | ) | |||||
Advisory fees and other income | 2,122 | 1,020 | 1,102 | 108.0 | |||||||
Total revenue | 17,944 | 21,208 | (3,264 | ) | (15.4 | ) | |||||
Operating expenses | |||||||||||
Interest expense | 4,552 | 3,945 | 607 | 15.4 | |||||||
Employee compensation | |||||||||||
Salaries and benefits | 2,791 | 2,908 | (117 | ) | (4.0 | ) | |||||
Amortization of employee restricted stock | 711 | 406 | 305 | 75.1 | |||||||
Total employee compensation | 3,502 | 3,314 | 188 | 5.7 | |||||||
General and administrative expense | 4,274 | 2,646 | 1,628 | 61.5 | |||||||
Restructuring expense | 21 | 65 | (44 | ) | (67.7 | ) | |||||
Total operating expense | 12,349 | 9,970 | 2,379 | 23.9 | |||||||
Net operating income before net investment loss and income tax provision | 5,595 | 11,238 | (5,643 | ) | (50.2 | ) | |||||
Net investment loss before income tax provision | (12,339 | ) | (21,448 | ) | 9,109 | (42.5 | ) | ||||
Income tax provision | 293 | 8 | 285 | NM | |||||||
Net loss | $ | (7,037 | ) | $ | (10,218 | ) | $ | 3,181 | (31.1 | ) | |
NM=Not Meaningful | |||||||||||
MCG Capital Corporation
July 31, 2012
Page 4
TOTAL REVENUE
Total revenue includes interest and dividend income, loan fees, advisory fees and other income. The following sections describe the reasons for the variances in each major component of our revenue during the three months ended June 30, 2012 from the three months ended June 30, 2011.
INTEREST INCOME
The level of interest income that we earn depends upon the level of interest-bearing investments outstanding during the period, as well as the weighted-average yield on these investments. During the three months ended June 30, 2012, the total yield on our average debt portfolio at fair value was 11.5% compared to 10.4% during the three months ended June 30, 2011. The weighted-average yield varies each period because of changes in the composition of our portfolio of debt investments, changes in stated interest rates, fee accelerations of unearned fees on paid/restructured loans and the balance of loans on non-accrual status for which we are not accruing interest.
The following table shows the various components of the total yield on our average debt portfolio at fair value for the three months ended June 30, 2012 and 2011:
Three months ended | ||||
June 30, 2012 | ||||
2012 | 2011 | |||
Average 90-day LIBOR | 0.5 | % | 0.3 | % |
Spread to average LIBOR on average loan portfolio | 10.7 | 10.7 | ||
Impact of fee accelerations of unearned fees on paid/restructured loans | 0.6 | 0.2 | ||
Impact of non-accrual loans | (0.3 | ) | (0.8 | ) |
Total yield on average loan portfolio | 11.5 | % | 10.4 | % |
During the three months ended June 30, 2012, interest income was $13.8 million, compared to $17.2 million during the three months ended June 30, 2011, which represented a $3.3 million, or 19.4%, decrease. This decrease reflected a $4.7 million decrease resulting from a 25.5% decrease in our average loan balance and a $0.3 million decrease resulting from the net impact of loans that were on non-accrual status during the three months ended June 30, 2012 that were accruing interest during the three months ended June 30, 2011. These decreases were partially offset by a $1.7 million increase in interest income resulting from a 0.8% increase in our net spread to LIBOR and a $0.4 million increase in interest income related to the change in LIBOR.
PIK Income
Interest income includes certain amounts that we have not received in cash, such as PIK interest. PIK interest represents contractually deferred interest that is added to the principal balance of the loan 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 following table shows the PIK-related activity for the three months ended June 30, 2012 and 2011, at cost:
Three months ended, | ||||||
June 30, | ||||||
(in thousands) | 2012 | 2011 | ||||
Beginning PIK loan balance | $ | 16,656 | $ | 26,162 | ||
PIK interest earned during the period | 1,535 | 1,658 | ||||
Payments received from PIK loans | (7,554 | ) | (12,264 | ) | ||
Realized loss | (5,012 | ) | (277 | ) | ||
Ending PIK loan balance | $ | 5,625 | $ | 15,279 | ||
As of June 30, 2012 and 2011, we were not accruing interest on $1.0 million and $6.2 million, respectively, of the PIK loans, at cost, shown in the preceding table. During the three months ended June 30, 2012, we received payments on PIK loans from eight investments, including $2.9 million from Jet Plastica Investors, LLC, $1.8 million from GSDM Holdings Corp. and $1.3 million from Coastal Sunbelt Holding, Inc. The payments received from PIK loans during the three months ended June 30, 2011, included $8.2 million and $2.4 million of PIK collected in conjunction with the respective sales of our investments in Restaurant Technologies, Inc. and Avenue Broadband LLC, as well as PIK collected from six other portfolio investments.
MCG Capital Corporation
July 31, 2012
Page 5
DIVIDEND INCOME
We accrete dividends on equity investments with stated dividend rates as they are earned, to the extent that we believe the dividends will be paid ultimately and the associated portfolio company has sufficient value to support the accretion. We recognize dividends on our other equity investments when we receive the dividend payment. Our dividend income varies from period to period because of changes in the size and composition of our equity investments, the yield from the investments in our equity portfolio and the ability of the portfolio companies to declare and pay dividends. During the three months ended June 30, 2012 and 2011, we recognized dividend income of $0.9 million and $2.1 million, respectively. In addition, during the three months ended June 30, 2012 and 2011, we received payments on accrued dividends of $4.4 million and $7.9 million, respectively.
ADVISORY FEES AND OTHER INCOME
Advisory fees and other income primarily include fees related to prepayment fees, advisory and management services, equity structuring fees, syndication fees, bank interest and other income. Generally, advisory fees and other income relate to specific transactions or services and, therefore, may vary from period to period depending on the level and types of services provided. During the three months ended June 30, 2012, we earned $2.1 million of advisory fees and other income, which represented a $1.1 million, or 108.0%, increase from the three months ended June 30, 2011. This increase was attributable primarily to an increase in prepayment penalties of $1.9 million related to four investment repayments in the second quarter of 2012 offset by a decrease of $0.8 million in advisory fees due to our lower investment activity in the second quarter of 2012 compared to the second quarter of 2011.
TOTAL OPERATING EXPENSES
Total operating expenses include interest, employee compensation and general and administrative expenses. The reasons for these variances are discussed in more detail below.
INTEREST EXPENSE
During the three months ended June 30, 2012, we incurred $4.6 million of interest expense, which represented a $0.6 million, or 15.4%, increase from the same period in 2011. Interest expense for the three months ended June 30, 2012 increased $1.4 million related to increased amortization of debt issuance costs, including $0.8 million of accelerated deferred financing fees related to the repayment in full of our SunTrust Warehouse financing facility and $0.3 million of accelerated deferred financing fees related to prepayments of collateral in our Commercial Loan Trust 2006-1 facility. Interest expense also increased $0.3 million due to an increase in the average LIBOR rate by 0.20% during the second quarter of 2012. These increases were partially offset by a $1.1 million decrease in interest expense due to a lower average borrowing balance in the first quarter of 2012.
EMPLOYEE COMPENSATION
Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards. During the three months ended June 30, 2012, our employee compensation expense was $3.5 million, which represented a $0.2 million, or 5.7%, increase from the same period in 2011. Our salaries and benefits decreased by $0.1 million, or 4.0%, due to a $1.2 million decrease in salaries and benefits primarily resulting from a 42% reduction in our workforce that occurred as part of the corporate restructuring that we implemented during 2011 offset by an increase in incentive compensation of $1.1 million primarily resulting from incentive and inducement bonuses paid in the second quarter of 2012.
During the three months ended June 30, 2012, we recognized $0.7 million of compensation expense related to restricted stock awards, compared to $0.4 million for the three months ended June 30, 2011, which represented a $0.3 million, or 75.1%, increase. The amortization of restricted stock awards during the three months ended June 30, 2012 included accelerated amortization of $0.2 million related to employees who were terminated during 2012.
GENERAL AND ADMINISTRATIVE
During the three months ended June 30, 2012, general and administrative expense was $4.3 million, which represented a $1.6 million, or 61.5%, increase compared to the same period in 2011. General and administrative expense for second quarter of 2012 included $1.8 million in severance-related expenses.
MCG Capital Corporation
July 31, 2012
Page 6
NET INVESTMENT LOSS BEFORE INCOME TAX PROVISION
During the three months ended June 30, 2012, we incurred $12.3 million of net investment losses before income tax provision, compared to $21.4 million during the same period in 2011. These amounts represent the total of net realized gains and losses, net unrealized (depreciation) appreciation, and reversals of unrealized (appreciation) depreciation. We reverse unrealized (appreciation) depreciation at the time that we realize the gain or loss. The following table summarizes our realized and unrealized (loss) and gain on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended June 30, 2012:
Three months ended June 30, 2012 | ||||||||||||||
(in thousands) | Industry | Type | Realized Gain/(Loss) | Unrealized (Depreciation)/ Appreciation | Reversal of Unrealized Depreciation/ (Appreciation) | Net (Loss)/ Gain | ||||||||
Portfolio Company | ||||||||||||||
Broadview Networks Holdings, Inc. | Communications | Control | $ | — | $ | (8,917 | ) | $ | — | $ | (8,917 | ) | ||
Cruz Bay Publishing, Inc. | Publishing | Non-Affiliate | — | (3,355 | ) | — | (3,355 | ) | ||||||
Miles Media Group, LLC | Business Services | Non-Affiliate | — | (1,602 | ) | — | (1,602 | ) | ||||||
Jet Plastica Investors, LLC | Plastic Products | Control | (90,802 | ) | (1,786 | ) | 91,288 | (1,300 | ) | |||||
Orbitel Holdings, LLC | Cable | Control | (2,066 | ) | — | 805 | (1,261 | ) | ||||||
GSDM Holdings, LLC | Healthcare | Non-Affiliate | 1,576 | — | (1,976 | ) | (400 | ) | ||||||
Intran Media, LLC | Other Media | Control | (4,250 | ) | — | 4,250 | — | |||||||
Stratford School Holdings, Inc. | Education | Affiliate | 16,370 | — | (13,056 | ) | 3,314 | |||||||
NPS Holding Group, LLC | Business Services | Control | — | 1,330 | — | 1,330 | ||||||||
NDSSI Holdings, LLC | Electronics | Non-Affiliate | — | 1,002 | — | 1,002 | ||||||||
Philadelphia Media Network, Inc. | Newspaper | Non-Affiliate | (5,027 | ) | — | 5,064 | 37 | |||||||
Other (< $1 million net gain (loss)) | (153 | ) | (651 | ) | (383 | ) | (1,187 | ) | ||||||
Total | $ | (84,352 | ) | $ | (13,979 | ) | $ | 85,992 | $ | (12,339 | ) | |||
• | In July 2012, Broadview agreed with certain of its noteholders and equityholders to solicit consents to file a pre-packaged chapter 11 plan of reorganization. The holders of approximately 70% of Broadview’s outstanding preferred stock, including MCG, and approximately 66 2/3% of Broadview's $300 million 11 3/8% senior secured notes due in September 2012 have consented to vote for the plan, subject to the satisfaction of certain terms and conditions, which percentages would be sufficient to approve the plan. The plan provides that upon effectiveness of the plan, Broadview's existing noteholders will exchange their notes for new Broadview common stock representing 97.5% of the common stock of the reorganized company and $150 million in principal amount of new 10 1/2 % senior secured notes due in July 2017, and existing stockholders, including MCG, will each receive a pro rata share of the remaining 2.5% of the common stock of the reorganized company and two tranches of eight-year warrants with exercise prices set at equity values that imply full recovery for existing noteholders. As of June 30, 2012, our fair value estimate of our investment in Broadview reflects this potential restructuring if consummated on the contemplated terms. |
• | In April 2012, Jet Plastica Investors, LLC liquidated substantially all of its assets. Including the proceeds from the liquidation, we received $11.0 million in payments on our senior debt and anticipate receiving additional payments on our senior debt upon future collection of certain accounts receivable, resulting in a $90.8 million realized loss and a $91.3 million reversal of unrealized depreciation in the second quarter of 2012. |
• | In the second quarter of 2012, we received $34.0 million for the repayment of our debt and the sale of our equity investment in Stratford School Holdings, Inc., which resulted in a $16.4 million realized gain and a reversal of previously unrealized appreciation of $13.1 million. |
• | We also received $35.3 million for the repayment of our debt and the sale of our equity investment in Orbitel Holdings, LLC, which resulted in a $2.1 million realized loss and a reversal of previously unrealized depreciation of $0.8 million. |
• | We received $34.7 million for the repayment of our debt and the sale of our equity investment in GSDM Holdings, LLC, which resulted in a $1.6 million realized gain and a reversal of previously unrealized appreciation of $2.0 million. |
• | We also received $44,000 for our equity investment in Philadelphia Media Network, Inc. and wrote off part of our equity investment in Intran Media, LLC which resulted in realized losses and reversals of previously unrealized depreciation on those investments. |
MCG Capital Corporation
July 31, 2012
Page 7
The remaining unrealized depreciation and appreciation shown in the above table resulted predominantly from a change in the performance of certain of our portfolio companies and the multiples used to value certain of our investments.
The following table summarizes our realized and unrealized (loss) and gain on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended June 30, 2011:
Three months ended June 30, 2011 | ||||||||||||||
(in thousands) | Industry | Type | Realized Gain/(Loss) | Unrealized (Depreciation)/ Appreciation | Reversal of Unrealized Depreciation/ (Appreciation) | Net (Loss)/ Gain | ||||||||
Portfolio Company | ||||||||||||||
Broadview Networks Holdings, Inc. | Communications | Control | $ | — | $ | (24,829 | ) | $ | — | $ | (24,829 | ) | ||
Intran Media, LLC | Other Media | Control | — | (3,758 | ) | — | (3,758 | ) | ||||||
PremierGarage Holdings, LLC | Home Furnishings | Control | — | (2,141 | ) | — | (2,141 | ) | ||||||
VOX Communications Group Holdings, LLC | Broadcasting | Non-Affiliate | (7,688 | ) | — | 5,645 | (2,043 | ) | ||||||
Jet Plastica Investors, LLC | Plastic Products | Control | — | (1,274 | ) | — | (1,274 | ) | ||||||
Restaurant Technologies, Inc. | Food Services | Non-Affiliate | 1,527 | — | (1,842 | ) | (315 | ) | ||||||
Provo Craft & Novelty, Inc. | Leisure Activities | Non-Affiliate | (1,152 | ) | — | 1,151 | (1 | ) | ||||||
Active Brands International, Inc. | Consumer Products | Non-Affiliate | (12,052 | ) | — | 12,053 | 1 | |||||||
GMC Television Broadcasting, LLC | Broadcasting | Control | (1,000 | ) | 11 | 1,000 | 11 | |||||||
Avenue Broadband LLC | Cable | Control | 11,917 | — | (11,895 | ) | 22 | |||||||
Jenzabar, Inc. | Technology | Non-Affiliate | — | 1,531 | — | 1,531 | ||||||||
Coastal Sunbelt Real Estate, Inc. | Real Estate Investments | Non-Affiliate | — | 2,186 | — | 2,186 | ||||||||
GSDM Holdings, LLC | Healthcare | Non-Affiliate | — | 2,479 | — | 2,479 | ||||||||
RadioPharmacy Investors, LLC | Healthcare | Control | — | 2,727 | — | 2,727 | ||||||||
NPS Holding Group, LLC | Business Services | Control | — | 3,855 | — | 3,855 | ||||||||
Other (< $1 million net gain (loss)) | (58 | ) | (353 | ) | 512 | 101 | ||||||||
Total | $ | (8,506 | ) | $ | (19,566 | ) | $ | 6,624 | $ | (21,448 | ) | |||
A summary of the reasons for significant changes in realized and unrealized (loss) and gain on investments and changes in unrealized appreciation and depreciation on investments for the three months ended June 30, 2011, are summarized below:
• | During the quarter ended June 30, 2011, we recorded a $24.8 million decrease in the fair value of our investment in Broadview, our single largest portfolio investment at the time. On June 21, 2011, Broadview withdrew its tender offer for $300 million of its 113/8% Senior Secured Notes, due in 2012, following Broadview's review of market conditions. Due to these uncertain market conditions, we changed the methodology by which we valued Broadview to a trailing EBITDA basis as opposed to our prior methodology under which we valued our investment on a projected forward EBITDA basis and new owner cash flows. |
• | We also recorded unrealized depreciation on our investments in PremierGarage Holdings, LLC and Intran Media, LLC to reflect our portion of the estimated liquidation value of these portfolio companies. |
• | We also recorded unrealized depreciation on our investment in Jet Plastica Investors, LLC to reflect an incremental investment in this portfolio company during the quarter ended June 30, 2011, that we subsequently wrote down to zero. |
• | We received payments of $4.1 million in satisfaction of our $11.8 million debt investment in VOX Communications Group Holdings, LLC and wrote off our remaining investment in that portfolio company. As a result of that transaction, we reversed $5.6 million of previously unrealized depreciation and realized a $7.7 million loss. |
• | We wrote off our remaining subordinated debt investment in Active Brands International, Inc. resulting in the reversal of $12.1 million of previously unrealized depreciation and the realization of a $12.1 million loss. |
• | We sold our investment in Avenue Broadband LLC resulting in the reversal of $11.9 million of previously unrealized appreciation and the realization of an $11.9 million gain. |
MCG Capital Corporation
July 31, 2012
Page 8
INCOME TAX PROVISION
During the three months ended June 30, 2012, we incurred a $293,000 income tax provision compared to an $8,000 income tax provision during the three months ended June 30, 2011. The income tax provision for both periods was primarily attributable to flow-through taxable income on certain investments held by our subsidiaries.
Conference Call (Live Call) | Date and time | Tuesday, July 31, 2012 at 9:00 a.m. Eastern Time |
Dial-in Number (No Conference ID required) | (877) 878-2269 domestic (847) 829-0062 international | |
Webcast | http://investor.mcgcapital.com | |
Replay (Available through August 14, 2012) | Call Replay (Conference ID for replay is #14902343) | (855) 859-2056 domestic (404) 537-3406 international |
Web Replay | http://investor.mcgcapital.com | |
MCG Capital Corporation
July 31, 2012
Page 9
MCG Capital Corporation
Consolidated Balance Sheets
(in thousands, except per share amounts) | June 30, 2012 | December 31, 2011 | ||||
(unaudited) | ||||||
Assets | ||||||
Cash and cash equivalents | $ | 79,850 | $ | 58,563 | ||
Cash, securitization accounts | 77,995 | 40,306 | ||||
Cash, restricted | 130,946 | 34,964 | ||||
Investments at fair value | ||||||
Non-affiliate investments (cost of $388,470 and $570,209, respectively) | 368,862 | 570,133 | ||||
Affiliate investments (cost of $25,258 and $40,858, respectively) | 23,602 | 51,770 | ||||
Control investments (cost of $262,624 and $406,151, respectively) | 61,007 | 119,263 | ||||
Total investments (cost of $676,352 and $1,017,218, respectively) | 453,471 | 741,166 | ||||
Interest receivable | 3,272 | 4,049 | ||||
Other assets | 6,780 | 11,490 | ||||
Total assets | $ | 752,314 | $ | 890,538 | ||
Liabilities | ||||||
Borrowings (maturing within one year of $90,725 and $32,983, respectively) | $ | 339,778 | $ | 430,219 | ||
Interest payable | 2,586 | 2,710 | ||||
Dividends payable | 10,469 | 13,092 | ||||
Other liabilities | 9,555 | 9,565 | ||||
Total liabilities | 362,388 | 455,586 | ||||
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 June 30, 2012 and December 31, 2011, 74,062 issued and outstanding on June 30, 2012 and 76,997 issued and outstanding on December 31, 2011 | 741 | 770 | ||||
Paid-in capital | 993,950 | 1,009,748 | ||||
Distributions in excess of earnings | ||||||
Paid-in capital | (195,310 | ) | (195,310 | ) | ||
Other | (186,253 | ) | (103,912 | ) | ||
Net unrealized depreciation on investments | (223,202 | ) | (276,344 | ) | ||
Total stockholders’ equity | 389,926 | 434,952 | ||||
Total liabilities and stockholders’ equity | $ | 752,314 | $ | 890,538 | ||
Net asset value per common share at end of period | $ | 5.26 | $ | 5.65 | ||
MCG Capital Corporation
July 31, 2012
Page 10
MCG Capital Corporation
Consolidated Statements of Operations
(unaudited)
Three months ended | Six months ended | |||||||||||
June 30 | June 30 | |||||||||||
(in thousands, except per share amounts) | 2012 | 2011 | 2012 | 2011 | ||||||||
Revenue | ||||||||||||
Interest and dividend income | ||||||||||||
Non-affiliate investments (less than 5% owned) | $ | 13,016 | $ | 16,221 | $ | 27,373 | $ | 33,779 | ||||
Affiliate investments (5% to 25% owned) | 1,108 | 1,775 | 2,292 | 2,918 | ||||||||
Control investments (more than 25% owned) | 1,698 | 2,192 | 3,453 | 6,927 | ||||||||
Total interest and dividend income | 15,822 | 20,188 | 33,118 | 43,624 | ||||||||
Advisory fees and other income | ||||||||||||
Non-affiliate investments (less than 5% owned) | 910 | 420 | 1,146 | 927 | ||||||||
Control investments (more than 25% owned) | 1,212 | 600 | 1,239 | 960 | ||||||||
Total advisory fees and other income | 2,122 | 1,020 | 2,385 | 1,887 | ||||||||
Total revenue | 17,944 | 21,208 | 35,503 | 45,511 | ||||||||
Operating expense | ||||||||||||
Interest expense | 4,552 | 3,945 | 9,754 | 7,818 | ||||||||
Employee compensation | ||||||||||||
Salaries and benefits | 2,791 | 2,908 | 6,666 | 6,884 | ||||||||
Amortization of employee restricted stock awards | 711 | 406 | 1,189 | 1,030 | ||||||||
Total employee compensation | 3,502 | 3,314 | 7,855 | 7,914 | ||||||||
General and administrative expense | 4,274 | 2,646 | 8,210 | 5,473 | ||||||||
Restructuring expense | 21 | 65 | 47 | 65 | ||||||||
Total operating expense | 12,349 | 9,970 | 25,866 | 21,270 | ||||||||
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision | 5,595 | 11,238 | 9,637 | 24,241 | ||||||||
Net realized (loss) gain on investments | ||||||||||||
Non-affiliate investments (less than 5% owned) | (3,820 | ) | (19,652 | ) | 12,550 | (47,569 | ) | |||||
Affiliate investments (5% to 25% owned) | 16,370 | 1 | 16,370 | (916 | ) | |||||||
Control investments (more than 25% owned) | (96,902 | ) | 11,145 | (96,894 | ) | 12,352 | ||||||
Total net realized loss on investments | (84,352 | ) | (8,506 | ) | (67,974 | ) | (36,133 | ) | ||||
Net unrealized appreciation (depreciation) on investments | ||||||||||||
Non-affiliate investments (less than 5% owned) | (1,363 | ) | 23,195 | (19,532 | ) | 54,728 | ||||||
Affiliate investments (5% to 25% owned) | (12,717 | ) | (358 | ) | (12,568 | ) | 1,089 | |||||
Control investments (more than 25% owned) | 86,117 | (36,561 | ) | 85,271 | (62,840 | ) | ||||||
Derivative and other fair value adjustments | (24 | ) | 782 | (29 | ) | 764 | ||||||
Total net unrealized appreciation (depreciation) on investments | 72,013 | (12,942 | ) | 53,142 | (6,259 | ) | ||||||
Net investment loss before income tax provision | (12,339 | ) | (21,448 | ) | (14,832 | ) | (42,392 | ) | ||||
Loss on extinguishment of debt before income tax provision | — | — | (174 | ) | (863 | ) | ||||||
Income tax provision | 293 | 8 | 311 | 19 | ||||||||
Net loss | $ | (7,037 | ) | $ | (10,218 | ) | $ | (5,680 | ) | $ | (19,033 | ) |
Loss per basic and diluted common share | $ | (0.09 | ) | $ | (0.13 | ) | $ | (0.07 | ) | $ | (0.25 | ) |
Cash distributions declared per common share | $ | 0.14 | $ | 0.17 | $ | 0.31 | $ | 0.32 | ||||
Weighted-average common shares outstanding—basic and diluted | 75,142 | 76,343 | 75,793 | 76,056 | ||||||||
MCG Capital Corporation
July 31, 2012
Page 11
MCG Capital Corporation
Consolidated Statements of Changes in Net Assets
(unaudited)
Six months ended | ||||||
June 30 | ||||||
(in thousands, except per share amounts) | 2012 | 2011 | ||||
Decrease in net assets from operations | ||||||
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision | $ | 9,637 | $ | 24,241 | ||
Net realized (loss) gain on investments | (67,974 | ) | (36,133 | ) | ||
Net unrealized appreciation (depreciation) on investments | 53,142 | (6,259 | ) | |||
Loss on extinguishment of debt before income tax provision | (174 | ) | (863 | ) | ||
Income tax provision | (311 | ) | (19 | ) | ||
Net loss | (5,680 | ) | (19,033 | ) | ||
Distributions to stockholders | ||||||
Distributions declared | (23,519 | ) | (24,683 | ) | ||
Net decrease in net assets resulting from stockholder distributions | (23,519 | ) | (24,683 | ) | ||
Capital share transactions | ||||||
Repurchase of common stock | (16,797 | ) | — | |||
Amortization of restricted stock awards | ||||||
Employee | 1,189 | 1,030 | ||||
Non-employee director | 32 | 28 | ||||
Common stock withheld to pay taxes applicable to the vesting of restricted stock | (251 | ) | (1,314 | ) | ||
Net forfeitures of restricted common stock | — | (11 | ) | |||
Net decrease in net assets resulting from capital share transactions | (15,827 | ) | (267 | ) | ||
Total decrease in net assets | (45,026 | ) | (43,983 | ) | ||
Net assets | ||||||
Beginning of period | 434,952 | 578,016 | ||||
End of period | $ | 389,926 | $ | 534,033 | ||
Net asset value per common share at end of period | $ | 5.26 | $ | 6.93 | ||
Common shares outstanding at end of period | 74,062 | 77,046 | ||||
MCG Capital Corporation
July 31, 2012
Page 12
MCG Capital Corporation
Consolidated Statements of Cash Flows
(unaudited)
Six months ended | ||||||
June 30 | ||||||
(in thousands) | 2012 | 2011 | ||||
Cash flows from operating activities | ||||||
Net loss | $ | (5,680 | ) | $ | (19,033 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities | ||||||
Investments in portfolio companies | (14,312 | ) | (180,294 | ) | ||
Principal collections related to investment repayments or sales | 276,314 | 277,299 | ||||
Decrease in interest receivable, accrued payment-in-kind interest and dividends | 11,690 | 24,108 | ||||
Amortization of restricted stock awards | ||||||
Employee | 1,189 | 1,030 | ||||
Non-employee director | 32 | 28 | ||||
Decrease (increase) in cash—securitization accounts from interest collections | 1,643 | (2,503 | ) | |||
Increase in restricted cash—escrow accounts | (274 | ) | (7,518 | ) | ||
Depreciation and amortization | 5,023 | 1,765 | ||||
Decrease in other assets | 718 | 449 | ||||
Decrease in other liabilities | (186 | ) | (1,745 | ) | ||
Realized loss on investments | 67,974 | 36,133 | ||||
Net change in unrealized (appreciation) depreciation on investments | (53,142 | ) | 6,259 | |||
Loss on extinguishment of debt | 174 | 863 | ||||
Net cash provided by operating activities | 291,163 | 136,841 | ||||
Cash flows from financing activities | ||||||
Repurchase of common stock | (16,797 | ) | — | |||
Payments on borrowings | (112,015 | ) | (41,535 | ) | ||
Proceeds from borrowings | 21,400 | 5,000 | ||||
Increase in cash in restricted and securitization accounts | ||||||
Securitization accounts for repayment of principal on debt | (39,332 | ) | (48,834 | ) | ||
Restricted cash | (95,708 | ) | (5,253 | ) | ||
Payment of financing costs | (1,031 | ) | (1,700 | ) | ||
Distributions paid | (26,142 | ) | (22,317 | ) | ||
Common stock withheld to pay taxes applicable to the vesting of restricted stock | (251 | ) | (1,314 | ) | ||
Net forfeitures of restricted common stock | — | (11 | ) | |||
Net cash used in financing activities | (269,876 | ) | (115,964 | ) | ||
Net increase in cash and cash equivalents | 21,287 | 20,877 | ||||
Cash and cash equivalents | ||||||
Beginning balance | 58,563 | 44,970 | ||||
Ending balance | $ | 79,850 | $ | 65,847 | ||
Supplemental disclosure of cash flow information | ||||||
Interest paid | $ | 5,400 | $ | 6,290 | ||
Income taxes (refunded) paid | 38 | 312 | ||||
Paid-in-kind interest collected | 7,887 | 18,044 | ||||
Dividend income collected | 7,845 | 12,053 | ||||
MCG Capital Corporation
July 31, 2012
Page 13
SELECTED FINANCIAL DATA
QUARTERLY OPERATING INFORMATION
QUARTERLY OPERATING INFORMATION
2012 | 2012 | 2011 | 2011 | 2011 | |||||||||||
(in thousands, except per share amounts) | Q2 | Q1 | Q4 | Q3 | Q2 | ||||||||||
Revenue | |||||||||||||||
Interest and dividend income | |||||||||||||||
Interest income | $ | 13,826 | $ | 15,596 | $ | 16,694 | $ | 17,128 | $ | 17,153 | |||||
Dividend income | 896 | 1,077 | 1,504 | 1,227 | 2,116 | ||||||||||
Loan fee income | 1,100 | 623 | 606 | 1,425 | 919 | ||||||||||
Total interest and dividend income | 15,822 | 17,296 | 18,804 | 19,780 | 20,188 | ||||||||||
Advisory fees and other income | 2,122 | 263 | 671 | 930 | 1,020 | ||||||||||
Total revenue | 17,944 | 17,559 | 19,475 | 20,710 | 21,208 | ||||||||||
Operating expense | |||||||||||||||
Interest expense | 4,552 | 5,202 | 3,856 | 3,960 | 3,945 | ||||||||||
Salaries and benefits | 2,791 | 3,875 | 2,431 | 2,683 | 2,908 | ||||||||||
Amortization of employee restricted stock awards | 711 | 478 | 703 | 348 | 406 | ||||||||||
General and administrative | 4,274 | 3,936 | 4,906 | 3,657 | 2,646 | ||||||||||
Restructuring expense | 21 | 26 | 115 | 4,109 | 65 | ||||||||||
Total operating expense | 12,349 | 13,517 | 12,011 | 14,757 | 9,970 | ||||||||||
Net operating income before net investment (loss) income, loss on extinguishment of debt and income tax provision (benefit) | 5,595 | 4,042 | 7,464 | 5,953 | 11,238 | ||||||||||
Net investment loss before income tax provision (benefit) | (12,339 | ) | (2,493 | ) | (56,429 | ) | (31,052 | ) | (21,448 | ) | |||||
Loss on extinguishment of debt before income tax provision (benefit) | — | (174 | ) | — | — | — | |||||||||
Income tax provision | 293 | 18 | 8 | 10 | 8 | ||||||||||
Net (loss) income | $ | (7,037 | ) | $ | 1,357 | $ | (48,973 | ) | $ | (25,109 | ) | $ | (10,218 | ) | |
Per common share statistics | |||||||||||||||
Weighted-average common shares outstanding—basic and diluted | 75,142 | 77,050 | 76,514 | 76,404 | 76,343 | ||||||||||
Net operating income before net investment (loss) income, loss on extinguishment of debt and income tax provision (benefit) per common share—basic and diluted | $ | 0.07 | $ | 0.05 | $ | 0.09 | $ | 0.08 | $ | 0.15 | |||||
(Loss) income per common share—basic and diluted | $ | (0.09 | ) | $ | 0.02 | $ | (0.64 | ) | $ | (0.33 | ) | $ | (0.13 | ) | |
Net asset value per common share—period end | $ | 5.26 | $ | 5.45 | $ | 5.65 | $ | 6.44 | $ | 6.93 | |||||
Distributions declared per common share(a) | $ | 0.14 | $ | 0.17 | $ | 0.17 | $ | 0.17 | $ | 0.17 | |||||
_____________
(a) The following table summarizes the distributions that were declared during the past five quarters:
Date Declared | Record Date | Payable Date | Dividends per Share | ||
April 27, 2012 | June 13, 2012 | July 13, 2012 | $ | 0.14 | |
February 24, 2012 | April 13, 2012 | May 15, 2012 | $ | 0.17 | |
October 31, 2011 | December 15, 2011 | January 13, 2012 | $ | 0.17 | |
August 1, 2011 | September 14, 2011 | October 14, 2011 | $ | 0.17 | |
May 5, 2011 | June 15, 2011 | July 15, 2011 | $ | 0.17 | |
MCG Capital Corporation
July 31, 2012
Page 14
ABOUT MCG CAPITAL CORPORATION
We are a solutions-focused commercial finance company providing capital and advisory services to middle-market companies throughout the United States. For our core portfolio, we make debt and equity investments primarily in companies with annual revenue of $20 million to $200 million and earnings before interest, taxes, depreciation and amortization, or EBITDA, of $3 million to $25 million, which we refer to as “middle-market” companies. Generally, our portfolio companies use our capital investment to finance acquisitions, recapitalizations, buyouts, organic growth and working capital.
Forward-looking Statements:
Statements in this press release regarding management's future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: MCG's results of operations, including revenues, net operating income, net investment losses and general and administrative expenses and the factors that may affect such results; the accrual of severance-related expenses for the remainder of 2012; projected future annual base compensation and benefits levels and annual non-compensation cost structure amounts; expected levels of transition plan costs during 2012; forecasted 2012 and 2013 per share net operating income amounts, which may not be realized; the performance of current or former MCG portfolio companies; the cause of net investment losses; the consummation by Broadview Networks Holdings of its proposed plan of reorganization; and general economic factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in MCG's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by MCG from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. MCG is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.