Market Overview

MCG Capital Corporation Reports Third Quarter 2012 Results and Distribution of $0.125 Per Share

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ARLINGTON, Va.--(BUSINESS WIRE)--

MCG Capital Corporation (Nasdaq: MCGC) (“MCG,” "we," "our," "us" or the “Company”) announced today its financial results for the third quarter ended September 30, 2012.

HIGHLIGHTS

As outlined in further detail in this earnings release and in our Quarterly Report on Form 10-Q, for the quarter ended September 30, 2012, the following highlights occurred during the three months ended September 30, 2012:

  • Net operating income, or NOI, was $4.1 million, or $0.06 per share;
  • Net income was $4.3 million, or $0.06 per share;
  • We incurred approximately $0.2 million of costs associated with our transition plan;
  • We funded $30.3 million of advances and originations, including $28.0 million to two new portfolio companies;
  • We monetized $38.9 million of our debt portfolio;
  • At September 30, 2012, we had $173.6 million of cash on-hand to make new investments using unrestricted cash and restricted cash from our SBIC. In addition, we had $10.5 million in securitization accounts and other restricted cash accounts; and
  • Under our stock repurchase program, we repurchased and retired 1,252,410 shares of our common stock at a total cost of $5.6 million, or an average of $4.49 per share.

DISTRIBUTION

On October 26, 2012, the MCG board of directors declared a distribution of $0.125 per share. The distribution is payable as follows:

Record date: November 16, 2012
Payable date: November 30, 2012

If we determined the tax attributes of our 2012 distributions as of September 30, 2012, 5% would be from ordinary income and 95% 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.

RECENT DEVELOPMENTS

  • Board and Management Changes — On October 29, 2012, we announced the election on October 26, 2012 of B. Hagen Saville as our new President and Chief Executive Officer, effective as of November 1, 2012. Mr. Saville succeeds Richard W. Neu, who will remain as Chair of the Company's Board of Directors. Mr. Saville has been the Company's President and Chief Operating Officer since October 2011, before which he was Executive Vice President of Business Development from March 1998 to October 2011. Mr. Saville co-founded the Company in March 1998 and earlier in his career worked in both commercial and investment banking. He became a member of the Board in 2006. In addition, Board members A. Hugh Ewing, III and Wallace B. Millner, III have tendered their resignations effective December 31, 2012, at which point the Board will be reduced from seven members to five.
  • Equity Monetizations — For the three and nine month periods ended September 30, 2012, we received $0.3 million and $64.4 million, respectively, in proceeds from the sale of equity investments, principally the sale of securities in each of Orbitel Holdings, LLC, Stratford School Holdings, Inc., GSDM Holdings, LLC and Jenzabar, Inc.
  • Loan Monetizations — For the three and nine month periods ended September 30, 2012, we received $38.9 million and $266.9 million, respectively, in loan payoffs and amortization payments.
  • Originations and Advances — For the three and nine month periods ended September 30, 2012, we made $30.3 million and $48.1 million, respectively, in originations and advances to new and existing portfolio companies.
  • Open-Market Purchases of Our Stock — During the three months ended September 30, 2012, we repurchased 1,252,410 shares of our common stock at a weighted average purchase price of $4.49 per share. During the nine months ended September 30, 2012, we repurchased 5,119,886 shares of our common stock at a weighted average purchase price of $4.38 per share. We acquired these shares from sellers in open market transactions. We retire these shares upon settlement, thereby reducing the number of shares issued and outstanding.
  • Operational Realignment — During the three months ended September 30, 2012, we incurred costs associated with our transition plan of $0.2 million, consisting of $0.1 million in retention and inducement payments that we recorded as salaries and benefits and $0.1 million in severance related expenses that we recorded as general and administrative expense. For the nine months ended September 30, 2012, we incurred $7.2 million, or $0.10 per share, of costs associated with our transition plan. Upon completion of the transition service periods for several of our employees, we anticipate completing our staff realignment such that we will have approximately 20 full-time employees. As of October 15, 2012, we had 23 full-time employees and one part-time employee.
  • Liquidity and De-Leveraging Actions In the third quarter, we continued to reduce our leverage by using $90.7 million of securitized cash to repay borrowings under our Commercial Loan Trust 2006-1. As of September 30, 2012, our debt to equity ratio was less than 0.7x and our asset coverage ratio was 481% excluding our small business investment company, or SBIC, debt which is exempt from the asset coverage ratio requirements under an SEC exemptive order.

OUTLOOK

As previously announced, we anticipate being substantially complete with our transition by the end of 2012, including moving to our new corporate office in November 2012. We are also evaluating a change to our internal investment software systems that we believe will help us further simplify our back office function and reduce the associated long-term carrying cost.

Excluding any residual transition costs and the costs that may be associated with running two information technology systems in parallel for part of 2013, we have finalized and reconfirmed our previous targets to operate with future annual base compensation and benefits levels within our expected targeted range of approximately $4.0 million to $5.0 million and we have identified specific cost reductions that we expect will result in an embedded annual non-compensation cost structure of approximately $5.0 million to $5.5 million.

In the next six months, we anticipate potentially recording approximately $1.8 million, or $0.03 per share, in additional charges related to the final stage of our realignment process, comprised of an estimated $0.3 million related to the termination of our existing corporate lease, $0.6 million to write-off leasehold improvements and other abandoned or obsolete fixed assets, $0.5 million related to the possible termination of a software contract and $0.4 million for staff realignment decisions.

Driven by a pickup in origination activity relative to the level of monetizations projected throughout 2013, combined with the full deployment of liquidity, we continue to anticipate a 2013 NOI earnings level of $0.45 to $0.55 per share. Furthermore, in the third quarter ended September 30, 2012, we submitted documentation to the SBA in support of a potential SBIC license for Solutions Capital II, L.P. There is no assurance that the SBA will grant the additional license in any specified time period or at all.

ACCESS TO CAPITAL AND LIQUIDITY

At September 30, 2012, we had $65.9 million of cash and cash equivalents available for general corporate purposes, as well as $107.7 million of cash in restricted accounts related to our SBIC that we could use to fund new investments in the SBIC and $5.9 million of restricted cash held in escrow. In addition, we had $3.7 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 September 30, 2012, cash in securitization accounts included $0.8 million in the principal collections account of our Commercial Loan Trust 2006-1. In October 2012, we used $1.0 million of securitized cash, including $0.2 million collected in October 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 September 30, 2012, $150.0 million of United States Small Business Administration, or 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 September 30, 2012 to the three months ended September 30, 2011.

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

The following table summarizes the components of our net income (loss) for the three months ended September 30, 2012 and 2011:

  Three months ended    
September 30, 2012   Variance

(dollars in thousands)

2012   2011   $   Percentage
Revenue  
Interest and dividend income
Interest income $ 10,326 $ 17,128 $ (6,802 ) (39.7 )%
Dividend income 867 1,226 (359 ) (29.3 )
Loan fees   642     1,426       (784 ) (55.0 )
Total interest and dividend income 11,835 19,780 (7,945 ) (40.2 )
Advisory fees and other income   234     930       (696 ) (74.8 )
Total revenue   12,069     20,710       (8,641 ) (41.7 )
Operating expenses
Interest expense 2,974 3,960 (986 ) (24.9 )
Employee compensation
Salaries and benefits 2,018 2,683 (665 ) (24.8 )
Amortization of employee restricted stock   505     348       157   45.1
Total employee compensation 2,523 3,031 (508 ) (16.8 )
General and administrative expense 2,504 3,657 (1,153 ) (31.5 )
Restructuring expense   12     4,109       (4,097 ) (99.7 )
Total operating expense   8,013     14,757       (6,744 ) (45.7 )
Net operating income before net investment gain (loss) and income tax provision 4,056 5,953 (1,897 ) (31.9 )
Net investment gain (loss) before income tax provision 228 (31,052 ) 31,280 NM
Income tax provision   18     10       8   80.0
Net income (loss) $ 4,266   $ (25,109 )   $ 29,375   NM
NM=Not Meaningful
 
 

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 September 30, 2012 from the three months ended September 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 September 30, 2012, the total yield on our average debt portfolio at fair value was 11.1% compared to 10.9% during the three months ended September 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-off/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 September 30, 2012 and 2011:

  Three months ended
September 30, 2012
2012   2011
Average 90-day LIBOR 0.4 %   0.3 %
Spread to average LIBOR on average loan portfolio 10.9 10.8
Impact of fee accelerations of unearned fees on paid/restructured loans 0.3 0.6
Impact of non-accrual loans (0.5 )   (0.8 )
Total yield on average loan portfolio 11.1 %   10.9 %
 

During the three months ended September 30, 2012, interest income was $10.3 million, compared to $17.1 million during the three months ended September 30, 2011, which represented a $6.8 million, or 39.7%, decrease. This decrease reflected a $7.4 million decrease resulting from a 41.8% decrease in our average loan balance, a $0.6 million decrease resulting from the net impact of loans that were on non-accrual status during the three months ended September 30, 2012 that were accruing interest during the three months ended September 30, 2011 and a decrease of $0.3 million due to interest rate floors. These decreases were partially offset by a $1.3 million increase in interest income resulting from a 0.4% increase in our net spread to LIBOR and a $0.2 million increase in interest income related to the increase 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 September 30, 2012 and 2011, at cost:

  Three months ended,
September 30

(in thousands)

2012   2011
Beginning PIK loan balance $ 5,625   $ 15,279
PIK interest earned during the period 1,112 2,365
Interest receivable converted to PIK 230
Payments received from PIK loans   (623 )     (2,366 )
Ending PIK loan balance $ 6,114     $ 15,508  
 

As of September 30, 2012 and 2011, we were not accruing interest on $1.4 million and $6.2 million, respectively, of the PIK loans, at cost, shown in the preceding table. During the three months ended September 30, 2012, we received payments on PIK loans from five investments. The payments received from PIK loans during the three months ended September 30, 2011, included $1.7 million collected in conjunction with the partial repayment of our investment in Sagamore Hill Broadcasting, LLC, as well as PIK collected from seven other portfolio investments.

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 September 30, 2012 and 2011, we recognized dividend income of $0.9 million and $1.2 million, respectively. In addition, during each of the three months ended September 30, 2012 and 2011, we received payments on accrued dividends of $0.3 million.

ADVISORY FEES AND OTHER INCOME

Advisory fees and other income primarily include fees related to prepayment, advisory and management services, equity structuring, syndication, 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 September 30, 2012, we earned $0.2 million of advisory fees and other income, which represented a $0.7 million, or 74.8%, decrease from the three months ended September 30, 2011. This decrease resulted from a decrease of $0.7 million in advisory fees due to our lower investment activity in the third quarter of 2012 compared to the third 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 September 30, 2012, we incurred $3.0 million of interest expense, which represented a $1.0 million, or 24.9%, decrease from the same period in 2011. Interest expense for the three months ended September 30, 2012 decreased $1.8 million due to a lower average borrowing balance in the third quarter of 2012 offset by a $0.8 million increase due to an increase in the average spread to LIBOR in the third 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 September 30, 2012, our employee compensation expense was $2.5 million, which represented a $0.5 million, or 16.8%, decrease from the same period in 2011. Our salaries and benefits decreased by $0.7 million, or 24.8%, due to a $1.0 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 $0.3 million.

GENERAL AND ADMINISTRATIVE

During the three months ended September 30, 2012, general and administrative expense was $2.5 million, which represented a $1.2 million, or 31.5%, decrease compared to the same period in 2011. General and administrative expense for third quarter of 2011 included professional fees paid for portfolio related litigation and other corporate initiatives that did not occur in the third quarter of 2012.

NET INVESTMENT GAIN BEFORE INCOME TAX PROVISION

During the three months ended September 30, 2012, we incurred $0.2 million of net investment gains before income tax provision, compared to $31.1 million during the same period in 2011. These amounts represent the total of net realized gains and losses, net unrealized appreciation (depreciation), 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 gain and (loss) on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended September 30, 2012:

    Three months ended September 30, 2012

(in thousands)

Industry Type   Realized
Gain/(Loss)
  Unrealized (Depreciation)/
Appreciation
  Reversal of
Unrealized
Depreciation/
(Appreciation)
  Net
(Loss)/
Gain
Portfolio Company            
Advanced Sleep Concepts, Inc. Home Furnishings Affiliate $ $ (2,618 ) $ $ (2,618 )
Cruz Bay Publishing, Inc. Publishing Non-Affiliate 1,987 1,987
PremierGarage Holdings, LLC Home Furnishings Control (5,371 ) 5,371
Other (< $1 million net gain (loss))   (23 )     1,017       (135 )     859  
Total $ (5,394 )   $ 386     $ 5,236     $ 228  
 
  • In the third quarter of 2012, we recorded $2.6 million of unrealized depreciation on our investment in Advanced Sleep Concepts, Inc., to reflect a decrease in that portfolio company's operating performance.
  • We also recorded $2.0 million of unrealized appreciation on our investment in Cruz Bay Publishing, Inc., to reflect an improvement in that portfolio company's operating performance.
  • In addition, during the three months ended September 30, 2012, we wrote off our preferred and common equity investments in PremierGarage Holdings, LLC resulting in a realized loss of $5.4 million and a reversal of previously recorded unrealized depreciation of $5.4 million.

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 September 30, 2011:

    Three months ended September 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 $ $ (24,697 ) $ $ (24,697 )
Jet Plastica Investors, LLC Plastic Products Control (5,637 ) (5,637 )
Intran Media, LLC Other Media Control (1,959 ) (1,959 )
Total Sleep Holdings, Inc. Healthcare Control (38,081 ) 38,054 (27 )
Stratford School Holdings, Inc. Education Affiliate 2,217 2,217
GSDM Holdings, Corp. Healthcare Non-Affiliate 1,857 1,857
NDSSI Holdings, LLC Electronics Non-Affiliate 1,277 1,277
Other (< $1 million net gain (loss))   254       (3,685 )     (652 )     (4,083 )
Total $ (37,827 )   $ (30,627 )   $ 37,402     $ (31,052 )
 

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 September 30, 2011, are summarized below:

  • We recorded $24.7 million of unrealized depreciation on our investment in Broadview Networks Holdings, Inc., or Broadview, primarily to reflect, among other factors, continuing challenges in the bond market, a downgrade of Broadview's corporate credit rating, delays by Broadview in refinancing its debt, as well as the near-term maturities of Broadview's debt facilities.
  • We recorded $5.6 million of unrealized depreciation on our investment in Jet Plastica Investors, LLC, to reflect a decrease in that company's operating performance and the multiple that we used to value the company.
  • We also wrote off our remaining investment in Total Sleep Holdings, Inc. during the quarter ended September 30, 2011, which resulted in the reversal of $38.1 million of previously unrealized depreciation and the realization of a $38.1 million loss.

INCOME TAX PROVISION

During the three months ended September 30, 2012, we incurred a $18,000 income tax provision compared to an $10,000 income tax provision during the three months ended September 30, 2011. The income tax provision for both periods was primarily attributable to flow-through taxable income on certain investments held by our subsidiaries.

MCG Capital Corporation
Consolidated Balance Sheets
   

(in thousands, except per share amounts)

September 30,

December 31,
2012   2011
(unaudited)
Assets
Cash and cash equivalents $ 65,898 $ 58,563
Cash, securitization accounts 3,675 40,306
Cash, restricted 114,543 34,964
Investments at fair value
Non-affiliate investments (cost of $334,410 and $552,642, respectively) 320,177 552,301
Affiliate investments (cost of $69,796 and $58,425, respectively) 61,566 69,602
Control investments (cost of $257,829 and $406,151, respectively)   63,050       119,263  
Total investments (cost of $662,035 and $1,017,218, respectively) 444,793 741,166
Interest receivable 4,158 4,049
Other assets   5,360       11,490  
Total assets $ 638,427     $ 890,538  
Liabilities
Borrowings (maturing within one year of $1,000 and $32,983, respectively) $ 249,053 $ 430,219
Interest payable 871 2,710
Dividends payable 13,092
Other liabilities   9,763       9,565  
Total liabilities   259,687       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 September 30, 2012 and December 31, 2011, 72,788 issued and outstanding on September 30, 2012 and 76,997 issued and outstanding on December 31, 2011 728 770
Paid-in capital 988,785 1,009,748
Distributions in excess of earnings
Paid-in capital (195,310 ) (195,310 )
Other (197,883 ) (103,912 )
Net unrealized depreciation on investments   (217,580 )     (276,344 )
Total stockholders' equity   378,740       434,952  
Total liabilities and stockholders' equity $ 638,427     $ 890,538  
Net asset value per common share at end of period $ 5.20 $ 5.65
 
 
MCG Capital Corporation
Consolidated Statements of Operations
       
Three months ended Nine months ended
September 30   September 30

(in thousands, except per share amounts)

2012   2011   2012   2011
Revenue
Interest and dividend income
Non-affiliate investments (less than 5% owned) $ 9,174 $ 15,954 $ 36,547 $ 49,168
Affiliate investments (5% to 25% owned) 1,418 1,801 3,710 5,284
Control investments (more than 25% owned)   1,243       2,025       4,696       8,952  
Total interest and dividend income   11,835       19,780       44,953       63,404  
Advisory fees and other income
Non-affiliate investments (less than 5% owned) 210 885 1,357 1,812
Control investments (more than 25% owned)   24       45       1,262       1,005  
Total advisory fees and other income   234       930       2,619       2,817  
Total revenue   12,069       20,710       47,572       66,221  
Operating expense
Interest expense 2,974 3,960 12,728 11,778
Employee compensation
Salaries and benefits 2,018 2,683 8,684 9,567
Amortization of employee restricted stock awards   505       348       1,694       1,378  
Total employee compensation 2,523 3,031 10,378 10,945
General and administrative expense 2,504 3,657 10,714 9,130
Restructuring expense   12       4,109       59       4,174  
Total operating expense   8,013       14,757       33,879       36,027  
Net operating income before net investment gain (loss), loss on extinguishment of debt and income tax provision   4,056       5,953       13,693       30,194  
Net realized (loss) gain on investments
Non-affiliate investments (less than 5% owned) 281 12,550 (47,288 )
Affiliate investments (5% to 25% owned) (1 ) 16,370 (917 )
Control investments (more than 25% owned)   (5,394 )     (38,107 )     (102,288 )     (25,755 )
Total net realized loss on investments   (5,394 )     (37,827 )     (73,368 )     (73,960 )
Net unrealized appreciation (depreciation) on investments
Non-affiliate investments (less than 5% owned) 2,463 (2,305 ) (13,892 ) 51,975
Affiliate investments (5% to 25% owned) (3,662 ) 1,613 (19,407 ) 3,150
Control investments (more than 25% owned) 6,838 7,613 92,109 (55,227 )
Derivative and other fair value adjustments   (17 )     (146 )     (46 )     618  
Total net unrealized appreciation on investments   5,622       6,775       58,764       516  
Net investment gain (loss) before income tax provision 228 (31,052 ) (14,604 ) (73,444 )
Loss on extinguishment of debt before income tax provision (174 ) (863 )
Income tax provision   18       10       329       29  
Net income (loss) $ 4,266     $ (25,109 )   $ (1,414 )   $ (44,142 )
Income (loss) per basic and diluted common share $ 0.06 $ (0.33 ) $ (0.02 ) $ (0.58 )
Cash distributions declared per common share $ 0.14 $ 0.17 $ 0.45 $ 0.49
Weighted-average common shares outstanding—basic and diluted 73,431 76,404 74,588 76,173
 
 
MCG Capital Corporation
Consolidated Statements of Changes in Net Assets
(unaudited)
   
Nine months ended
September 30

(in thousands, except per share amounts)

2012   2011
Decrease in net assets from operations
Net operating income before net investment gain (loss), loss on extinguishment of debt and income tax provision $ 13,693 $ 30,194
Net realized (loss) gain on investments (73,368 ) (73,960 )
Net unrealized appreciation (depreciation) on investments 58,764 516
Loss on extinguishment of debt before income tax provision (174 ) (863 )
Income tax provision   (329 )     (29 )
Net income (loss)   (1,414 )     (44,142 )
Distributions to stockholders
Distributions declared   (33,793 )     (37,784 )
Net decrease in net assets resulting from stockholder distributions   (33,793 )     (37,784 )
Capital share transactions
Repurchase of common stock (22,416 )
Amortization of restricted stock awards
Employee awards accounted for as employee compensation 1,694 1,378
Employee awards accounted for as restructuring expense 431
Non-employee director awards accounted for as general and administrative expense 53 46
Common stock withheld to pay taxes applicable to the vesting of restricted stock (336 ) (1,453 )
Net forfeitures of restricted common stock         (11 )
Net decrease in net assets resulting from capital share transactions   (21,005 )     391  
Total decrease in net assets (56,212 ) (81,535 )
Net assets
Beginning of period   434,952       578,016  
End of period $ 378,740     $ 496,481  
Net asset value per common share at end of period $ 5.20 $ 6.44
Common shares outstanding at end of period 72,788 77,035
 
 
MCG Capital Corporation
Consolidated Statements of Cash Flows
(unaudited)
   
Nine months ended
September 30

(in thousands)

2012   2011
Cash flows from operating activities
Net income (loss) $(1,414) $(44,142)

Adjustments to reconcile net loss to net cash provided by operating activities

Investments in portfolio companies (42,619) (243,966)
Principal collections related to investment repayments or sales 314,598 336,172
Decrease in interest receivable, accrued payment-in-kind interest and dividends 9,717 21,453
Amortization of restricted stock awards
Employee 1,694 1,809
Non-employee director 53 46
Decrease in cash—securitization accounts from interest collections 5,475 1,515
Decrease (increase) in restricted cash—escrow accounts 327 (3,648)
Depreciation and amortization 6,120 2,936
Decrease in other assets 1,039 1,021
Increase (decrease) in other liabilities (1,676) 428
Realized loss on investments 73,368 73,960
Net change in unrealized appreciation on investments (58,764) (516)
Loss on extinguishment of debt 174   863
Net cash provided by operating activities 308,092   147,931
Cash flows from financing activities
Repurchase of common stock (22,416)
Payments on borrowings (202,740) (62,726)
Proceeds from borrowings 21,400 5,000
Decrease (increase) in cash in restricted and securitization accounts
Securitization accounts for repayment of principal on debt 31,156 (58,686)
Restricted cash (79,906) 16,049
Payment of financing costs (1,030) (1,700)
Distributions paid (46,885) (35,418)
Common stock withheld to pay taxes applicable to the vesting of restricted stock (336) (1,453)
Net forfeitures of restricted common stock   (11)
Net cash used in financing activities (300,757)   (138,945)
Net increase in cash and cash equivalents 7,335 8,986
Cash and cash equivalents
Beginning balance 58,563   44,970
Ending balance $65,898   $53,956
Supplemental disclosure of cash flow information
Interest paid $9,261 $10,397
Income taxes (refunded) paid 61 297
Paid-in-kind interest collected 8,510 20,410
Dividend income collected 8,149 12,355
 
 
SELECTED FINANCIAL DATA
QUARTERLY OPERATING INFORMATION
         
2012 2012 2012 2011 2011
(in thousands, except per share amounts)   Q3   Q2   Q1   Q4   Q3
Revenue
Interest and dividend income
Interest income $ 10,326 $ 13,826 $ 15,596 $ 16,694 $ 17,128
Dividend income 867 896 1,077 1,504 1,227
Loan fee income     642     1,100       623       606       1,425  
Total interest and dividend income 11,835 15,822 17,296 18,804 19,780
Advisory fees and other income     234     2,122       263       671       930  
Total revenue     12,069     17,944       17,559       19,475       20,710  
Operating expense
Interest expense 2,974 4,552 5,202 3,856 3,960
Salaries and benefits 2,018 2,791 3,875 2,431 2,683
Amortization of employee restricted stock awards 505 711 478 703 348
General and administrative 2,504 4,274 3,936 4,906 3,657
Restructuring expense     12     21       26       115       4,109  
Total operating expense     8,013     12,349       13,517       12,011       14,757  
Net operating income before net investment income (loss), loss on extinguishment of debt and income tax provision 4,056 5,595 4,042 7,464 5,953
Net investment gain (loss) before income tax provision 228 (12,339 ) (2,493 ) (56,429 ) (31,052 )

Loss on extinguishment of debt before income tax provision

(174 )
Income tax provision     18     293       18       8       10  
Net income (loss)   $ 4,266   $ (7,037 )   $ 1,357     $ (48,973 )   $ (25,109 )
Per common share statistics
Weighted-average common shares outstanding—basic and diluted 73,431 75,142 77,050 76,514 76,404

Net operating income before net investment income (loss), loss on extinguishment of debt and income tax provision per common share—basic and diluted

$ 0.06 $ 0.07 $ 0.05 $ 0.09 $ 0.08
Income (loss) per common share—basic and diluted $ 0.06 $ (0.09 ) $ 0.02 $ (0.64 ) $ (0.33 )
Net asset value per common share—period end $ 5.20 $ 5.26 $ 5.45 $ 5.65 $ 6.44
Distributions declared per common share(a) $ 0.14 $ 0.14 $ 0.17 $ 0.17 $ 0.17

_____________

(a) The following table summarizes the distributions that were declared during the past five quarters:

     
Dividends
Date Declared Record Date Payable Date per Share
July 27, 2012 August 17, 2012 August 31, 2012 $ 0.14
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
 
 

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 timing of completion of MCG's transition and staff realignment and the costs and resulting headcount from such transition and realignment; potential cost reductions and efficiencies to be gained from changing internal investment software systems; projected future annual base compensation and benefits levels and annual non-compensation cost structure amounts, which may not be realized; forecasted 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 timing or approval of a second SBIC license by the SBA; 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.

MCG Capital Corporation
Keith Kennedy, 703-247-7513
KKennedy@MCGCapital.com

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