10-Q 1 d10q.htm FORM 10-Q Form 10-Q
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, 2009

OR

 

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

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.

 

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 30, 2009, there were 76,398,325 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, 2009

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)

   15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   44

SELECTED FINANCIAL DATA

   45

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

   47

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   88

ITEM 4. CONTROLS AND PROCEDURES

   90

PART II. OTHER INFORMATION

   90

ITEM 1. LEGAL PROCEEDINGS

   90

ITEM 1A. RISK FACTORS

   90

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

   98

ITEM  3. DEFAULTS UPON SENIOR SECURITIES

   99

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   99

ITEM 5. OTHER INFORMATION

   99

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,
2009
    December 31,
2008
 
     (unaudited)        

Assets

    

Cash and cash equivalents

   $ 47,166      $ 46,149   

Cash, securitization accounts

     68,405        37,493   

Cash, restricted

     20,817        979   

Investments at fair value

    

Non-affiliate investments (cost of $618,841 and $605,906, respectively)

     582,147        584,336   

Affiliate investments (cost of $39,913 and $45,141, respectively)

     50,350        56,126   

Control investments (cost of $701,020 and $819,076, respectively)

     404,747        562,686   
                

Total investments (cost of $1,359,774 and $1,470,123, respectively)

     1,037,244        1,203,148   

Interest receivable

     6,141        8,472   

Other assets

     14,614        16,193   
                

Total assets

   $ 1,194,387      $ 1,312,434   
                

Liabilities

    

Borrowings (maturing within one year of $2,036 and $44,500, respectively)

   $ 568,507      $ 636,649   

Interest payable

     3,854        5,367   

Other liabilities

     10,059        11,507   
                

Total liabilities

     582,420        653,523   
                

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, 2009 and December 31, 2008, 75,970 issued and outstanding on September 30, 2009 and 76,075 issued and outstanding on December 31, 2008

     760        761   

Paid-in capital

     1,002,938        997,318   

Undistributed (distributions in excess of) earnings

    

Paid-in capital

     (162,783     (162,783

Other

     95,839        91,624   

Net unrealized depreciation on investments

     (324,787     (267,948

Stockholder loans

     —          (61
                

Total stockholders’ equity

     611,967        658,911   
                

Total liabilities and stockholders’ equity

   $ 1,194,387      $ 1,312,434   
                

Net asset value per common share at end of period

   $ 8.06      $ 8.66   

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)

   2009     2008     2009     2008  

Revenue

        

Interest and dividend income

        

Non-affiliate investments (less than 5% owned)

   $ 15,861      $ 18,198      $ 47,958      $ 55,652   

Affiliate investments (5% to 25% owned)

     1,115        1,656        3,383        5,205   

Control investments (more than 25% owned)

     6,082        10,529        22,742        42,065   
                                

Total interest and dividend income

     23,058        30,383        74,083        102,922   
                                

Advisory fees and other income

        

Non-affiliate investments (less than 5% owned)

     335        466        1,081        1,399   

Control investments (more than 25% owned)

     218        447        991        1,071   
                                

Total advisory fees and other income

     553        913        2,072        2,470   
                                

Total revenue

     23,611        31,296        76,155        105,392   
                                

Operating expenses

        

Interest expense

     5,518        7,991        18,391        26,706   

Employee compensation

        

Salaries and benefits

     4,115        4,081        10,824        13,673   

Amortization of employee restricted stock awards

     2,279        1,802        5,603        5,406   
                                

Total employee compensation

     6,394        5,883        16,427        19,079   

General and administrative expense

     3,041        4,408        12,568        12,377   
                                

Total operating expenses

     14,953        18,282        47,386        58,162   
                                

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

     8,658        13,014        28,769        47,230   
                                

Net realized loss on investments

        

Non-affiliate investments (less than 5% owned)

     (2,820     5,359        (5,991     5,484   

Affiliate investments (5% to 25% owned)

     —          1        (1,947     (61

Control investments (more than 25% owned)

     (1,502     (14,823     (21,934     (14,551
                                

Total net realized loss on investments

     (4,322     (9,463     (29,872     (9,128
                                

Net unrealized appreciation (depreciation) on investments

        

Non-affiliate investments (less than 5% owned)

     4,064        (12,644     (15,124     (24,725

Affiliate investments (5% to 25% owned)

     (1,400     4,214        (548     4,836   

Control investments (more than 25% owned)

     (1,652     (61,685     (39,883     (151,866

Derivative and other fair value adjustments

     (1,086     (146     (1,284     273   
                                

Total net unrealized appreciation (depreciation) on investments

     (74     (70,261     (56,839     (171,482
                                

Net investment loss before income tax (benefit) provision

     (4,396     (79,724     (86,711     (180,610

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

     (118     —          5,025        —     

Income tax (benefit) provision

     (39     236        (293     568   
                                

Net income (loss)

   $ 4,183      $ (66,946   $ (52,624   $ (133,948
                                

Earnings (loss) per basic and diluted common share

   $ 0.06      $ (0.90   $ (0.71   $ (1.87

Cash distributions declared per common share

   $ —        $ —        $ —        $ 0.71   

Weighted-average common shares outstanding—basic and diluted

     75,876        74,296        74,588        71,526   

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

 

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MCG Capital Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)

 

     Nine months ended
September 30,
 

(in thousands, except per share amounts)

   2009     2008  

(Decrease) increase in net assets from operations

    

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

   $ 28,769      $ 47,230   

Net realized loss on investments

     (29,872     (9,128

Net unrealized depreciation on investments

     (56,839     (171,482

Gain on extinguishment of debt

     5,025        —     

Income tax benefit (provision)

     293        (568
                

Net loss

     (52,624     (133,948
                

Distributions to stockholders

    

Distributions declared

     —          (49,185
                

Net decrease in net assets resulting from stockholder distributions

     —          (49,185
                

Capital share transactions

    

Issuance of common stock

     —          57,107   

Amortization of restricted stock awards

    

Employee

     5,603        5,406   

Restructuring expense

     —          88   

Non-employee director

     108        194   

Cancellation of common stock held as collateral for stockholder loans

     (92     (105

Stockholder loans

    

Unrealized (appreciation) depreciation on stockholder loans

     (31     328   

Repayment of stockholder loans

     92        105   
                

Net increase in net assets resulting from capital share transactions

     5,680        63,123   
                

Total decrease in net assets

     (46,944     (120,010

Net assets

    

Beginning of period

     658,911        834,689   
                

End of period

   $ 611,967      $ 714,679   
                

Net asset value per common share at end of period

   $ 8.06      $ 9.39   

Common shares outstanding at end of period

     75,970        76,117   

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

 

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MCG Capital Corporation

Consolidated Statements of Cash Flows

(unaudited)

 

     Nine months ended
September 30,
 

(in thousands)

   2009     2008  
Cash flows from operating activities     

Net loss

   $ (52,624   $ (133,948

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

    

Investments in portfolio companies

     (55,078     (70,817

Principal collections related to investment repayments or sales

     145,414        164,574   

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

     (8,753     (20,756

Amortization of restricted stock awards

    

Employee

     5,603        5,494   

Non-employee director

     108        194   

Decrease in cash—securitization accounts from interest collections

     1,644        64   

Depreciation and amortization

     4,195        2,755   

Unrealized (appreciation) depreciation on stockholder loans

     (123     328   

Decrease (increase) in other assets

     1,754        (1,635

Decrease in other liabilities

     (3,263     (4,232

Realized loss on investments

     29,872        9,128   

Change in unrealized depreciation on investments

     56,839        171,482   

Gain on extinguishment of debt

     (5,025     —     
                

Net cash provided by operating activities

     120,563        122,631   
                
Cash flows from financing activities     

Payments on borrowings

     (63,117     (98,067

Increase in cash in restricted and securitization accounts

    

Securitization accounts for repayment of principal on debt

     (32,556     (4,144

Restricted cash

     (19,838     —     

Payment of financing costs

     (4,127     (3,413

Issuance of common stock, net of costs

     —          57,107   

Distributions paid

     —          (78,130

Cancellation of common stock held as collateral for stockholder loans

     —          (105

Repayment of stockholder loans

     92        105   
                

Net cash used in financing activities

     (119,546     (126,647
                

Increase (decrease) in cash and cash equivalents

     1,017        (4,016
Cash and cash equivalents     

Beginning balance

     46,149        23,297   
                

Ending balance

   $ 47,166      $ 19,281   
                
Supplemental disclosure of cash flow information     

Interest paid

   $ 16,741      $ 25,687   

Income taxes paid

     51        1,105   

Payment-in-kind interest collected

     1,564        4,881   

Dividend income collected

     8,344        3,519   

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

 

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Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2009 (unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value

Control Investments(4):

              

Avenue Broadband LLC(2)

  

Cable

   Subordinated Debt (14.0%, Due 3/14-12/14)(1)    $ 14,254    $ 14,161    $ 14,161
      Preferred Units (10.0%, 17,100 units)(1)         20,366      22,842
      Warrants to purchase Class B Common Stock         —        —  
Broadview Networks Holdings, Inc.(6)    Communications-CLEC    Series A Preferred Stock (12.0%, 87,254 shares)         81,984      70,139
      Series A-1 Preferred Stock (12.0%, 100,702 shares)         77,495      68,695
      Class A Common Stock (4,698,987 shares)         —        —  
Cleartel Communications, Inc.(2)(6)(17)    Communications-CLEC    Subordinated Debt (11.1%, Due 10/09-3/11)(7)      46,379      37,398      —  
      Series B Preferred Stock (8.0%, 57,862 shares)         50,613      —  
      Common Stock (744,777 shares)         62,125      —  
      Guaranty ($2,000)         
GMC Television Broadcasting, LLC(2)(6)(20)   

Broadcasting

   Senior Debt (4.3%, Due 12/16)(1)(7)      23,720      21,328      20,711
      Subordinated Debt (14.0%, Due 12/16)(1)(7)      8,773      6,976      —  
      Subordinated Unsecured Debt (16.0%, Due 12/16)(7)      1,026      1,000      —  
      Class B Voting Units (8.0%, 86,700 units)         9,071      —  

Intran Media, LLC

  

Other Media

   Senior Debt (9.5%, Due 12/11)(1)      9,000      8,917      8,917
      Series A Preferred Units (10.0%, 86,000 units)         9,095      1,367
      Series B Preferred Units (10.0%, 30,000 units)         3,000      140
Jet Plastica Investors, LLC(2)   

Plastic Products

   Senior Debt (9.3%, Due 12/12)(1)      12,461      12,361      12,361
      Subordinated Debt A (15.6%, Due 3/13)(1)      18,072      17,864      17,864
      Subordinated Debt B (17.0%, Due 3/13)(1)(8)      18,887      17,582      13,909
      Preferred LLC Interest (8.0%, 301,595 units)         34,014      —  
JetBroadband Holdings, LLC(2)   

Cable

   Subordinated Unsecured Debt (14.9%, Due 8/15-2/16)      28,486      28,315      28,315
      Series A Preferred Units (10.0%, 133,204 units)         18,471      12,712
      Series B Preferred Units (24,441 units)         5,000      10,000

MTP Holding, LLC(6)

   Communications-Other    Common LLC Interest (79,171 units)         3      28
NPS Holdings Group, LLC(2)(5)(18)    Business Services    Senior Debt A1 and A2 (6.0%, Due 6/13)(1)      6,636      5,222      5,222
      Senior Debt A3 (6.0%, Due 6/13)(1)(7)      7,703      6,177      408
      Series A Preferred Units (347 units)         —        —  
      Series B Preferred Units (5.0%, 10,731 units)         10,731      —  
      Common Stock (36,500 units)         —        —  

Orbitel Holdings, LLC(2)

  

Cable

   Senior Debt (9.0%, Due 3/12)(1)      16,300      16,217      16,217
      Preferred LLC Interest (10.0%, 120,000 units)         13,996      14,335
PremierGarage Holdings, LLC(2)(6)    Home Furnishings    Senior Debt (8.0%, Due 12/10-9/11)(1)(7)      9,834      9,233      9,233
      Preferred LLC Units (8.0%, 400 units)         400      236
      Common LLC Units (79,935 units)         4,971      —  
RadioPharmacy Investors, LLC(2)   

Healthcare

   Senior Debt (7.0%, Due 12/10)(1)      8,500      8,480      8,480
      Subordinated Debt (15.0%, Due 12/11)(1)      10,062      10,029      10,029
      Preferred LLC Interest (8.0%, 70,000 units)         8,123      630
Superior Industries Investors, LLC(2)   

Sporting Goods

   Subordinated Debt (16.0%, Due 3/13)(1)      19,758      19,665      19,665
      Preferred Units (8.0%, 125,400 units)         14,978      14,296
Total Sleep Holdings, Inc.(2)(6)   

Healthcare

   Subordinated Debt (15.0%, Due 9/11-3/12)(7)      35,821      30,534      3,835
      Unsecured Note (0.0%, Due 6/11)(7)      375      332      —  
      Series A Preferred Stock (10.0%, 3,700 shares)         3,793      —  
      Common Stock (4,046,875 shares)         1,000      —  
                      

Total Control Investments (represents 39.0% of total investments at fair value)

        701,020      404,747
                      

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

 

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Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2009 (unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value

Affiliate Investments(3):

              
Advanced Sleep Concepts, Inc.(2)    Home Furnishings    Senior Debt (13.3%, Due 10/11)(1)    $ 6,195    $ 6,082    $ 5,637
      Subordinated Debt (16.0%, Due 4/12)(1)      5,073      4,971      4,731
      Series A Preferred Stock (20.0%, 49 shares)         297      —  
      Common Stock (423 shares)         525      —  
      Warrants to purchase Common Stock (expire 10/16)         348      —  
Cherry Hill Holdings, Inc.(6)    Entertainment    Series A Preferred Stock (10.0%, 750 shares)         907      738
Stratford SchoolHoldings, Inc.(2)    Education    Senior Debt (6.9%, Due 7/11-9/11)(1)      3,440      3,397      3,357
      Subordinated Debt (14.0%, Due 12/11)(1)      6,717      6,692      6,692
      Series A Convertible Preferred Stock (12.0%, 10,000 shares)         210      11,217
      Warrants to purchase Common Stock (expire 5/15)(1)         67      3,120
Sunshine Media Delaware, LLC(2)(6)    Publishing    Common Stock (145 shares)         581      —  
      Class A LLC Interest (8.0%, 563,808 units)         564      —  
      Options to acquire Warrants to purchase         —        —  
      Class B LLC Interest (expire 5/14)         
Velocity Technology Enterprises, Inc.(2)    Business Services    Senior Debt (8.0%, Due 12/12)(1)      13,849      13,772      13,358
      Series A Preferred Stock (1,506,602 shares)         1,500      1,500
                      

Total Affiliate Investments (represents 4.9% of total investments at fair value)

        39,913      50,350
                      

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

 

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Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2009 (unaudited)

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value

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

        
Active Brands International, Inc.(2)    Consumer Products    Senior Debt (10.2%, Due 6/12)(1)    $ 23,746    $ 23,646    $ 21,212
      Subordinated Debt (17.0%, Due 9/12)(1)(7)      14,986      12,437      5,011
      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 (7.8%, Due 12/12)(1)      6,580      6,555      6,555
      Subordinated Debt (10.3%, Due 12/12)(1)      2,463      2,413      2,337
      Warrants to purchase Common Stock (expire 11/15)         —        42
Amerifit Nutrition, Inc.(2)    Healthcare    Senior Debt (11.8%, Due 3/10)(1)      2,740      2,727      2,727
B & H Education, Inc.    Education    Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares)         1,622      2,678
BLI Holdings, Inc.(2)    Drugs    Senior Debt (11.3%, Due 12/09)(1)      10,333      10,208      10,208
Coastal Sunbelt Holding, Inc.(2)(19)    Food Services    Senior Debt (9.1%, Due 8/14-2/15)(1)      22,186      21,949      21,568
      Subordinated Debt (16.0%, Due 8/15)(1)      8,423      8,342      8,342
Coastal Sunbelt Real Estate, Inc.    Real Estate Investments    Subordinated Unsecured Debt (15.0%, Due 7/12)      2,173      2,163      2,161
      Series A-2 Preferred Stock (12.0%, 20,000 shares)         2,656      447
      Warrants to purchase Class B Common Stock         —        —  
Construction Trailer Specialists, Inc.(2)    Auto Parts    Senior Debt (14.1%, Due 7/12-10/12)(1)(8)      9,584      9,485      8,004
Cruz Bay Publishing, Inc.    Publishing    Subordinated Debt (12.8%, Due 12/13)(1)      20,000      19,793      17,590
CWP/RMK Acquisition Corp.(2)(6)    Home Furnishings    Senior Debt (8.5%, Due 6/11)(1)(7)      6,448      6,223      4,715
      Subordinated Debt (13.0%, Due 12/12)(1)(7)      12,416      9,501      —  
      Common Stock (500 shares)         500      —  
Cyrus Networks, LLC    Business Services    Senior Debt (4.3%, Due 7/13)(1)      5,167      5,139      5,126
      Subordinated Debt (7.5%, Due 1/14)(1)      6,066      6,058      6,037
Dayton Parts Holdings, LLC    Auto Parts    Preferred LLC Interest (10.0%, 16,470 units)         631      631
      Class A Common LLC Interest (8.0%, 10,980 units)         400      —  
Empower IT Holdings, Inc.(2)    Information Services    Senior Debt (11.0%, Due 5/12)(1)      6,806      6,744      6,744
Equibrand Holding Corporation(2)    Leisure Activities    Senior Debt (9.5%, Due 9/10)(1)      4,640      4,626      4,626
      Subordinated Debt (16.0%, Due 3/11)(1)      9,531      9,507      9,507
G&L Investment Holdings, LLC(2)    Insurance    Subordinated Debt (7.9%, Due 5/14)(1)      17,500      16,993      15,695
      Series A Preferred Shares (14.0%, 5,000,000 shares)         6,440      6,440
      Class C Shares (621,907 shares)         529      362
Golden Knight II CLO, Ltd.(6)    Diversified Financial Services    Income Notes (8.0%, Due 4/19)         3,575      1,287
GSDM Holdings, LLC(2)    Healthcare    Senior Debt (7.5%, Due 2/13)(1)      8,011      7,942      7,758
      Subordinated Debt (14.0%, Due 8/13)(1)      7,928      7,893      7,893
      Series B Preferred Units (12.5%, 4,213,333 units)         4,397      2,074
Home Interiors & Gifts, Inc.(6)(10)    Home Furnishings    Senior Debt (8.0%, Due 3/11)(7)      4,141      3,763      36
Jenzabar, Inc.    Technology    Senior Preferred Stock (11.0%, 3,750 shares)         5,916      5,916
      Subordinated Preferred Stock (109,800 shares)         1,098      1,098
      Warrants to purchase Common Stock (expire 4/16)         422      21,149
Lambeau Telecom Company, LLC(15)    Communications-CLEC    Senior Debt (12.0%, Due 2/13)(8)      1,428      1,415      1,062
Legacy Cabinets, Inc.(6)    Home Furnishings    Subordinated Debt (10.5%, Due 8/13)(1)(7)      2,328      2,184      —  
LMS INTELLIBOUND, INC.(2)    Logistics    Senior Debt (8.6%, Due 3/14–6/14)(1)      27,795      27,416      27,025
      Subordinated Debt (16.0%, Due 9/14)(1)      7,000      6,838      6,838
Marietta Intermediate Holding Corporation(6)    Cosmetics    Subordinated Debt (12.0%, Due 12/11)(1)(7)      2,474      2,028      —  
Maverick Healthcare    Healthcare    Subordinated Debt (16.0%, Due 4/14)(1)      12,779      12,630      12,630
Equity, LLC       Preferred Units (10.0%, 1,250,000 units)         1,403      1,282
      Class A Common Units (1,250,000 units)         —        —  

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, 2009 (unaudited)

(dollars in thousands)

 

Portfolio Company

   Industry   

Investment(9)

   Principal    Cost    Fair Value
MCI Holdings LLC(2)    Healthcare    Subordinated Debt (12.7%, Due 4/13)(1)    $ 32,088    $ 31,956    $ 31,956
      Class A LLC Interest (4,712,042 units)         3,000      9,269
Metropolitan Telecommunications Holding Company(2)    Communications-
CLEC
   Senior Debt (10.8%, Due 9/10-12/11)(1)      21,474      21,355      21,355
      Warrants to purchase Common Stock (expire 9/13)         1,843      10,080
Miles Media Group, LLC(2)    Publishing    Senior Debt (12.5%, Due 6/13)(1)      17,595      17,300      17,300
NDSSI Holdings, LLC(2)    Electronics    Senior Debt (9.9%, Due 9/13-3/14)(1)      19,421      19,242      18,468
      Subordinated Debt (15.0%, Due 9/14)(1)      22,102      22,038      22,038
      Series A Preferred Units (516,691 units)         718      718
      Class A Common Units (1,000,000 units)         333      476
New Century Companies, Inc.(6)    Industrial
Equipment
   Warrants to purchase Common Stock (expire 6/10)         —        —  
Philadelphia Newspapers, LLC(6)(13)    Newspaper    Subordinated Unsecured Debt (16.5%, Due 6/14)(7)      5,082      5,071      —  
Powercom Corporation(6)(15)    Communications-
CLEC
   Warrants to purchase Class A Common Stock (expire 6/14)         286      —  
Quantum Medical Holdings, LLC (2)    Laboratory    Senior Debt (6.3%, Due 5/11)(1)      15,500      15,471      15,471
   Instruments    Subordinated Debt (15.0%, Due 12/11)(1)      18,032      17,942      17,942
      Preferred LLC Interest (1,000,000 units)         617      1,186
Restaurant Technologies, Inc.    Food Services    Senior Debt (17.6%, Due 2/12)(1)      39,120      38,831      38,831
      Common Stock (47,512 shares)         352      35
      Warrants to purchase Common Stock (Expire 6/14)         —        —  
Sagamore Hill Broadcasting, LLC(2)    Broadcasting    Senior Debt (15.5%, Due 8/11)(1)(8)      26,356      25,971      25,121
Summit Business Media Intermediate Holding Company, LLC(6)    Information
Services
   Subordinated Debt (15.0%, Due 7/14)(1)(7)      6,402      5,996      1,196
Tegra Medical Holdings, LLC(12)    Industrial
Products
   Senior Debt (9.5%, Due 10/13)(1)      25,492      25,310      25,310
      Common Units (1,000,000 units)         1,000      1,043
Teleguam Holdings, LLC(2)    Communications-
Other
   Subordinated Debt (7.3%, Due 10/12)(1)      20,000      19,864      17,833
The e-Media Club I, LLC(6)    Investment Fund    LLC Interest (74 units)         88      7
The Matrixx Group, Incorporated    Plastic Products    Subordinated Debt (18.0%, Due 11/14)(1)      14,525      14,525      14,525
ValuePage, Inc.(6)    Communications-
Other
   Senior Debt (12.8%, Due 6/08)(7)      1,263      993      —  
VOX Communications Group Holdings, LLC(2)(6)    Broadcasting    Senior Debt (13.5%, Due 3/09)(1)(7)      11,424      10,463      6,505
      Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)(7)      2,103      1,414      —  
VS&A-PBI Holding LLC(6)    Publishing    LLC Interest         500      —  
WebMediaBrands Inc.(6)(14)    Information
Services
   Common Stock (148,373 shares)         2,114      107
Wireco Worldgroup Inc.    Industrial
Equipment
   Senior Debt (2.5%, Due 2/14)(1)      3,900      3,918      3,373
Xpressdocs Holdings, Inc.(2)    Business
Services
   Senior Debt (9.0%, Due 7/11-12/11)(1)      13,855      13,809      13,301
      Subordinated Debt (16.0%, Due 7/12)(1)(8)      6,512      6,427      3,888
      Series A Preferred Stock (161,870 shares)         500      —  
                      
Total Non-Affiliate Investments (represents 56.1% of total investments at fair value)         618,841      582,147
                      
Total Investments       $ 1,359,774    $ 1,037,244
                      

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

 

8


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

September 30, 2009 (unaudited)

(dollars in thousands)

 

Counterparty

  

Instrument

   Interest
Rate
    Expiring    Notional    Cost    Fair
Value
 

Interest Rate Swaps

                

SunTrust Bank

   Interest Rate Swap—Pay Fixed/Receive Floating    10.0   11/10    $ 16,000    $ —      $ (545
   Interest Rate Swap—Pay Fixed/Receive Floating    14.0   11/10      8,000      —        (272
   Interest Rate Swap—Pay Fixed/Receive Floating    13.0   08/11      12,500      —        (270
   Interest Rate Swap—Pay Fixed/Receive Floating    9.0   08/11      8,681      —        (188
                              
Total Interest Rate Swaps            $ 45,181    $ —      $ (1,275
                              

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, 2008

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value
Control Investments(4):               
Avenue Broadband LLC(2)    Cable    Subordinated Debt (14.0%, Due 3/14-12/14)(1)    $ 13,727    $ 13,619    $ 13,619
      Preferred Units (10.0%, 17,100 units)(1)         18,960      25,992
      Warrants to purchase Class B Common Stock         —        —  
Broadview Networks Holdings, Inc.(6)    Communications-CLEC    Series A Preferred Stock (12.0%, 87,254 shares)         81,984      70,666
      Series A-1 Preferred Stock (12.0%, 100,702 shares)         77,495      68,659
      Class A Common Stock (4,698,987 shares)         —        —  
Cleartel Communications, Inc.(2)(6)(17)    Communications-CLEC    Subordinated Debt (11.2%, Due 5/09-3/11)(7)      41,172      36,047      —  
      Series B Preferred Stock (8.0%, 57,862 shares)         50,612      —  
      Common Stock (744,777 shares)         62,125      —  
      Guaranty ($5,000)         
Coastal Sunbelt, LLC(2)(19)    Food Services    Senior Debt (8.4%, Due 1/12-7/12)(1)      22,246      22,127      22,127
      Subordinated Debt (14.8%, Due 1/13)(1)      8,223      8,115      8,115
      Preferred LLC Interest (12.0%, 123,250 units)         14,597      14,648
      Warrants to purchase Class B Common Stock         —        —  
Crystal Media Network, LLC(6)(5)    Broadcasting    LLC Interest         2,447      2,556
GMC Television Broadcasting, LLC(2)(6)(20)    Broadcasting    Senior Debt (9.2%, Due 4/12-6/12)(1)(7)      23,712      22,520      22,520
      Subordinated Debt (14.0%, Due 6/13)(1)(7)      8,000      7,076      5,465
      Class B Voting Units (8.0%, 86,700 units)         9,071      —  
Intran Media, LLC    Other Media    Senior Debt (10.7%, Due 12/11)(1)      9,000      8,888      8,888
      Series A Preferred Units (10.0%, 86,000 units)         9,095      1,956
      Series B Preferred Units (10.0%, 30,000 units)         3,000      1,096
Jet Plastica Investors, LLC(2)    Plastic Products    Subordinated Debt A (14.8%, Due 3/13)(1)      16,377      16,124      16,124
      Subordinated Debt B (15.0%, Due 3/13)(1)      17,050      17,050      13,823
      Preferred LLC Interest (8.0%, 301,595 units)         34,014      —  
JetBroadband Holdings, LLC(2)    Cable    Subordinated Unsecured Debt (14.8%, Due 8/15-2/16)      26,911      25,577      25,577
      Preferred Units (10.0%, 133,204 units)         18,470      16,562
LMS Intellibound Investors, LLC(2)    Logistics    Senior Debt (7.5%, Due 8/12)(1)      11,328      11,223      11,223
      Subordinated Debt (15.0%, Due 11/12)(1)      17,000      16,882      16,882
      Preferred Units (12.0%, 19,650 units)         23,780      38,845
      Warrants to purchase Class B Common Stock         —        —  
MTP Holding, LLC(6)    Communications-Other    Common LLC Interest (79,171 units)         3      28
National Product Services, Inc.(2)(5)(18)    Business Services    Senior Debt A1 and A2 (10.1%, Due 6/09)      6,456      5,504      5,504
      Senior Debt A3 (7.5%, Due 6/09)      7,430      4,717      3,988
      Subordinated Debt (16.0%, Due 6/09)(7)      16,010      12,305      —  
      Common Stock (995,428 shares)         —        —  
Orbitel Holdings, LLC(2)    Cable    Senior Debt (9.0%, Due 3/12)(1)      16,300      16,192      16,192
      Preferred LLC Interest (10.0%, 120,000 units)         13,324      11,597
      Letter of Credit ($97)         
PremierGarage Holdings, LLC(2)(5)    Home Furnishings    Senior Debt (9.7%, Due 6/10-12/10)(1)      8,782      8,702      7,832
      Preferred LLC Units (8.0%, 445 units)         4,971      —  
      Common LLC Units (356 units)         —        —  
RadioPharmacy Investors, LLC(2)    Healthcare    Senior Debt (8.1%, Due 12/10)(1)      8,500      8,469      8,469
      Subordinated Debt (15.0%, Due 12/11)(1)      9,837      9,793      9,793
      Preferred LLC Interest (8.0%, 70,000 units)         8,123      3,479
Superior Industries Investors, LLC(2)    Sporting Goods    Subordinated Debt (14.0%, Due 3/13)(1)      18,033      17,920      17,920
      Preferred Units (8.0%, 125,400 units)         14,978      18,611

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, 2008

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value

TNR Holdings

Corp.(2)(6)(16)

   Entertainment    Senior Debt (12.0%, Due 7/13)(7)    $ 2,104    $ 1,708    $ 1,708
      Series A Preferred Stock (8.0%, 43,264 shares)         28,770      25,682
      Legacy Series A Preferred Stock (12.5%, 585,939 shares)         15,000      —  
      Legacy Common Stock (1,806 shares)         3,000      —  
      Warrants to purchase Common Stock (expire 7/18)         —        —  
      Warrants to purchase Legacy Common Stock (expire 9/17)         —        —  
Total Sleep Holdings, Inc.(2)    Healthcare    Subordinated Debt (15.0%, Due 9/11-3/12)      32,429      29,579      26,540
      Unsecured Note (0.0%, Due 6/11)      375      327      —  
      Series A Preferred Stock (10.0%, 3,700 shares)         3,793      —  
      Common Stock (4,046,875 shares)         1,000      —  
WMAC II, Inc.(6)(11)    Publishing    Guaranty ($833)         
                      

Total Control Investments (represents 46.7% of total investments at fair value)

        819,076      562,686
                      

Affiliate Investments(3):

        
Advanced Sleep Concepts, Inc.(2)    Home Furnishings    Senior Debt (13.9%, Due 10/11)(1)      6,195      6,023      5,629
      Subordinated Debt (16.0%, Due 4/12)(1)      4,922      4,791      4,426
      Series A Preferred Stock (20.0%, 49 shares)         298      —  
      Common Stock (423 shares)         525      —  
      Warrants to purchase Common Stock (expire 10/16)         348      —  
Cherry Hill Holdings, Inc.(2)(6)    Entertainment    Series A Preferred Stock (10.0%, 750 shares)         907      878
Stratford School Holdings, Inc.(2)    Education    Senior Debt (6.8%, Due 7/11-9/11)(1)      3,700      3,634      3,634
      Subordinated Debt (14.0%, Due 12/11)(1)      6,717      6,683      6,683
      Series A Convertible Preferred Stock (12.0%, 10,000 shares)         120      12,842
      Warrants to purchase Common Stock (expire 5/15)(1)         67      3,903
Sunshine Media Delaware, LLC(2)(6)    Publishing    Common Stock (145 shares)         581      —  
      Class A LLC Interest (8.0%, 563,808 units)         564      —  
      Options to acquire Warrants to purchase Class B LLC Interest (expire 5/14)         —        —  
Velocity Technology Enterprises, Inc.(2)    Business Services    Senior Debt (8.0%, Due 12/12)(1)      16,817      16,705      16,204
      Series A Preferred Stock (1,506,602 shares)         1,500      1,500
XFone, Inc.(6)    Communications-Other    Common Stock (837,556 shares)         2,395      419
      Warrants to purchase Common Stock (expire 3/11)         —        8
                      

Total Affiliate Investments (represents 4.7% of total investments at fair value)

        45,141      56,126
                      

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

 

11


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value

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

Active Brands International, lnc.(2)    Consumer Products    Senior Debt (8.2%, Due 6/12)(1)    $ 20,000    $ 19,882    $ 18,942
      Subordinated Debt (15.0%, Due 9/12)(1)(7)      13,822      13,071      3,913
      Class A-1 Common Stock (3,056 shares)         3,056      —  
      Warrants to purchase Class A-1 Common Stock (expire 6/17)         332      —  
Allen’s T.V. Cable Service, Inc.    Cable    Senior Debt (8.2%, Due 12/12)(1)      7,430      7,394      7,351
      Subordinated Debt (10.5%, Due 12/12)(1)      2,349      2,288      2,214
      Warrants to purchase Common Stock (expire 11/15)         —        30
Amerifit Nutrition, Inc.(2)    Healthcare    Senior Debt (11.4%, Due 3/10)(1)      3,634      3,600      3,600
B & H Education, Inc.    Education    Series A-1 Convertible Preferred Stock (12.0%, 5,384 shares)         1,490      2,000
BLI Holdings, Inc.(2)    Drugs    Senior Debt (11.3%, Due 1/09)(1)      11,333      11,234      11,234
CEI Holdings Inc.    Cosmetics    Senior Debt (6.3%, Due 3/14)(1)      3,918      3,927      1,674
Cervalis LLC    Business Services    Senior Debt (7.3%, Due 3/12)(1)      19,625      19,525      19,034
Coastal Sunbelt Real Estate, Inc.    Real Estate Investments    Subordinated Unsecured Debt (15.0%, Due 7/12)      2,124      2,111      2,111
      Series A-2 Preferred Stock (12.0%, 20,000 shares)         2,507      3,080
      Warrants to purchase Class B Common Stock         —        —  
Construction Trailer Specialists, Inc.(2)    Auto Parts    Senior Debt (9.7%, Due 7/12-10/12)(1)      8,776      8,704      8,704
Cruz Bay Publishing, Inc.    Publishing    Subordinated Debt (10.5%, Due 12/13)(1)      20,000      19,858      17,348
CWP/RMK Acquisition Corp.(2)    Home Furnishings    Senior Debt (9.6%, Due 6/11)(1)      6,005      5,971      5,104
      Subordinated Debt (14.1%, Due 12/12)(1)(7)      11,929      10,198      3,489
      Common Stock (500 shares)         500      —  
Cyrus Networks, LLC    Business Services    Senior Debt (5.8%, Due 7/13)(1)      5,441      5,408      4,915
      Subordinated Debt (9.1%, Due 1/14)(1)      6,066      6,057      5,110
Dayton Parts Holdings, LLC(2)    Auto Parts    Subordinated Debt (6.5%, Due 6/11)(1)      21,500      21,380      21,380
      Preferred LLC Interest (10.0%, 16,470 units)         589      589
      Class A Common LLC Interest (8.0%, 10,980 units)         400      338
Empower IT Holdings, Inc.(2)    Information Services    Senior Debt (11.0%, Due 5/12)(1)      8,534      8,455      8,455
Equibrand Holding Corporation(2)    Leisure Activities    Senior Debt (11.1%, Due 9/10)(1)      4,640      4,604      4,604
      Subordinated Debt (16.0%, Due 3/11)(1)      9,248      9,212      9,212
Flexsol Packaging Corp.(6)    Plastic Products    Subordinated Debt (14.3%, Due 12/12)(1)(7)      3,081      3,058      1,133
G&L Investment Holdings, LLC(2)    Insurance    Subordinated Debt (9.7%, Due 5/14)(1)      17,500      16,912      15,164
      Series A Preferred Shares (14.0%, 5,000,000 shares)         5,810      5,810
      Class C Shares (621,907 shares)         529      284
Golden Knight II CLO, Ltd.    Diversified Financial Services    Income Notes (8.0%, Due 4/19)         3,575      435
GSDM Holdings, LLC(2)    Healthcare    Senior Debt (7.5%, Due 2/13)(1)      8,775      8,682      8,355
      Subordinated Debt (14.0%, Due 8/13)(1)      7,809      7,767      7,767
      Series B Preferred Units (12.5%, 4,213,333 units)         4,397      1,965
Home Interiors & Gifts, Inc.(6)(10)    Home Furnishings    Senior Debt (8.0%, Due 3/11)(7)      4,141      3,991      667
Jenzabar, Inc.    Technology    Senior Preferred Stock (11.0%, 5,000 shares)         7,475      7,475
      Subordinated Preferred Stock (109,800 shares)         1,098      1,098
      Warrants to purchase Common Stock (expire 4/16)         422      27,407
Jupitermedia Corporation(6)(14)    Information Services    Common Stock (148,373 shares)         2,114      56
Legacy Cabinets, Inc.    Home Furnishings    Subordinated Debt (9.8%, Due 8/13)(1)      2,328      2,313      752
Marietta Intermediate Holding Corporation(6)    Cosmetics    Subordinated Debt (12.0%, Due 12/11)(1)(7)      2,262      2,028      —  
Maverick Healthcare Equity, LLC    Healthcare    Subordinated Debt (13.5%, Due 4/14)(1)      12,596      12,493      12,494
      Preferred Units (10.0%, 1,250,000 units)         1,403      1,403
      Class A Common Units (1,250,000 units)         —        138
MCI Holdings LLC(2)    Healthcare    Subordinated Debt (12.7%, Due 4/13)(1)      31,446      31,280      31,280
      Class A LLC Interest (4,712,042 units)         3,000      8,305

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

 

12


Table of Contents

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2008

(dollars in thousands)

 

Portfolio Company

  

Industry

  

Investment(9)

   Principal    Cost    Fair Value
Metropolitan Telecommunications Holding Company(2)    Communications-CLEC    Senior Debt (10.8%, Due 6/10-9/10)(1)    $ 23,769    $ 23,530    $ 23,530
      Warrants to purchase Common Stock (expire 9/13)         1,843      9,655
Miles Media Group, LLC(2)    Publishing    Senior Debt (12.5%, Due 6/13)(1)      18,274      17,913      17,395
NDSSI Holdings, LLC(2)    Electronics    Senior Debt (9.9%, Due 9/13-3/14)(1)      19,921      19,697      19,189
      Subordinated Debt (15.0%, Due 9/14)(1)      21,284      21,211      21,211
      Series A Preferred Units (516,691 units)         718      718
      Class A Common Units (1,000,000 units)         333      900
New Century Companies, Inc.(6)    Industrial Equipment    Warrants to purchase Common Stock (expire 6/10)         —        —  

New England Precision

Grinding Holdings, LLC(12)

   Industrial Products    Senior Debt (11.1%, Due 10/13)(1)      25,685      25,464      25,033
      Common Units (1,000,000 units)         1,000      1,213
PartMiner, Inc.(2)    Information Services    Senior Debt (8.7%, Due 6/09)(1)      854      846      846
Philadelphia Newspapers, LLC(6)(13)    Newspaper   

Subordinated Unsecured Debt (16.5%,

Due 6/14)(7)

     5,082      5,070      —  
Powercom Corporation(15)    Communications-CLEC    Senior Debt (11.5%, Due 6/11)      1,357      1,357      1,279
      Warrants to purchase Class A Common Stock (expire 6/14)         286      —  
Quantum Medical Holdings, LLC(2)    Laboratory Instruments    Senior Debt (7.5%, Due 5/11)(1)      15,500      15,438      15,438
      Subordinated Debt (15.0%, Due 12/11)(1)      18,032      17,911      17,911
      Preferred LLC Interest (1,000,000 units)         557      1,704
Restaurant Technologies, Inc.    Food Services    Senior Debt (16.6%, Due 2/12)(1)      37,197      36,929      36,929
      Series B Preferred Stock (499 shares)         15      19
      Series A-4 Convertible Preferred Stock (7,813 shares)         336      97
Sagamore Hill Broadcasting, LLC(2)    Broadcasting    Senior Debt (11.5%, Due 8/12)(1)      25,800      25,664      24,793
Summit Business Media Intermediate Holding Company, LLC    Information Services    Subordinated Debt (7.5%, Due 7/14)(1)      6,000      5,995      4,261
Teleguam Holdings, LLC(2)    Communications-Other    Subordinated Debt (9.2%, Due 10/12)(1)      20,000      19,831      16,920
The e-Media Club I, LLC(6)    Investment Fund    LLC Interest (74 units)         88      9
The Matrixx Group, Incorporated    Plastic Products    Subordinated Debt (15.5%, Due 11/14)(1)      14,238      14,238      14,238
ValuePage, Inc.(6)    Communications-Other    Senior Debt (12.8%, Due 6/08)(7)      1,230      998      28

VOX Communications

Group Holdings, LLC(2)

   Broadcasting    Senior Debt (13.5%, Due 3/09)(1)      11,312      10,725      10,674
      Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)(7)      1,856      1,415      393
VS&A-PBI Holding LLC(6)    Publishing    LLC Interest         500      —  
Wireco Worldgroup Inc.    Industrial Equipment    Senior Debt (3.7%, Due 2/14)(1)      3,930      3,951      2,576
Xpressdocs Holdings, Inc.(2)    Business Services    Senior Debt (8.9%, Due 7/11-12/11)(1)      15,168      15,091      14,550
      Subordinated Debt (16.0%, Due 7/12)(1)      6,390      6,355      6,238
      Series A Preferred Stock (161,870 shares)         501      170
                      

Total Non-Affiliate Investments (represents 48.6% of total investments at fair value)

        605,906      584,336
                      

Total Investments

            $ 1,470,123    $ 1,203,148
                      

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, 2008

(dollars in thousands)

 

Counterparty

  

Instrument

   Interest
Rate
    Expiring    Notional    Cost    Fair
Value
 

Interest Rate Swaps

                

SunTrust Bank

   Interest Rate Swap—Pay Fixed/Receive Floating    10.0   11/10    $ 16,000    $ —      $ (649
   Interest Rate Swap—Pay Fixed/Receive Floating    14.0   11/10      8,000      —        (324
                              

Total Interest Rate Swaps

           $ 24,000    $ —      $ (973
                              

 

(1)

Some or all of this security is funded through 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 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)

During the quarter ended September 30, 2009, we did not recognize paid-in-kind 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 loans and debt securities, presented by nature of indebtedness for a single issuer. 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 April 29, 2008, Home Interiors & Gifts, Inc. filed for Chapter 11 bankruptcy protection.

(11)

On October 2, 2008, Working Mother Media, Inc. changed its name to WMAC II, Inc.

(12)

On January 14, 2009, New England Precision Grinding Holdings, LLC changed its name to Tegra Medical Holdings, LLC.

(13)

On February 22, 2009, Philadelphia Newspapers, LLC filed for Chapter 11 bankruptcy protection.

(14)

On February 24, 2009, Jupitermedia Corporation changed its name to WebMediaBrands Inc.

(15)

On February 28, 2009, this obligation and all of the assets of Powercom Corporation (other than its accounts receivable), were transferred to Lambeau Telecom Company, LLC, an affiliate of BCN Telecom, Inc., or BCN, in satisfaction of certain subordinated liabilities of Powercom Corporation owed to BCN.

(16)

On July 28, 2008, we converted our debt securities in TNR Entertainment Corp. into preferred stock of TNR Holdings Corp. and invested $2.0 million in debt in TNR Holdings Corp. The amounts reported herein for December 31, 2008 as Legacy Series A Preferred Stock, Legacy Common Stock and Warrants to purchase Legacy Common Stock, relate to our equity investment in TNR Entertainment Corp. On April 20, 2009, TNR Holdings Corp. repaid in full its debt together with all accrued interest and we concurrently sold our equity in TNR Holdings Corp. for an aggregate between the two transactions of $11.6 million in cash. On August 17, 2009, we dissolved TNR Entertainment Corp.

(17)

On August 25, 2009, Birch Communications, Inc. acquired substantially all of the operating assets of Cleartel Communications, Inc., or Cleartel, an MCG control investment. The cash portion of the purchase price was used primarily to pay off third-party senior debt under Cleartel’s senior credit facility with Textron Financial Corporation and its equipment leasing facility with Relational, LLC. On the closing date of the sale, Cleartel entered into a Transition Services Agreement, or TSA with Birch to provide certain services necessary to effect an orderly transition of the business from Cleartel to Birch. Once the TSA is terminated and Cleartel is dissolved, we expect to recognize a realized loss with an offsetting reduction in our unrealized losses, which is expected to occur in the fourth quarter of 2009.

(18)

On July 22, 2009, we recapitalized our investment in National Product Services, Inc. through a series of related debt and equity transactions. MCG’s new investment is in NPS Holdings Group, LLC.

(19)

On August 13, 2009, we sold our equity investment in Coastal Sunbelt Holdings, Inc., or Coastal, a subsidiary of Coastal Sunbelt, LLC for $15.2 million to Coastal’s management team and MSouth Equity Partners, LP, which resulted in the reclassification of our investment in Coastal from a control investment to a non-affiliate investment beginning in the quarter ended September 30, 2009.

(20)

On October 26, 2009, we completed an asset exchange transaction between HITV Operating Co., Inc., a subsidiary of GMC Television Broadcasting, LLC, and KHNL/KFVE, LLC, a wholly owned subsidiary of Raycom Media Inc. See Note 12—Subsequent Events for additional information about the exchange agreement.

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

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, LP, 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 connection with the formation of Solutions Capital I, LP, MCG also established another wholly owned subsidiary, Solutions Capital GP, LLC, to act as the general partner of Solutions Capital I, LP, while MCG is the sole limited partner.

Taxable SubsidiariesWe currently qualify as a regulated investment company, or RIC, for federal income tax purposes, which allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders. We have certain wholly owned taxable subsidiaries, or Taxable Subsidiaries, which each hold one or more portfolio investments listed on our Consolidated Schedule 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 for 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 Statement of Operations.

The accompanying financial statements reflect the consolidated accounts of MCG and the following subsidiaries: Solutions Capital I, LP; Solutions Capital GP, LLC; and MCG’s special-purpose financing subsidiaries: MCG Finance V, LLC; MCG Finance VII, LLC and MCG Finance VIII, 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. Certain prior period information has been reclassified to conform to current year presentation. Further, in connection with the preparation of these Condensed Consolidated Financial Statements, we have evaluated subsequent events that occurred after the balance sheet date of September 30, 2009 through the date these financial statements were issued on November 4, 2009.

 

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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, 2008.

CERTAIN RISKS AND UNCERTAINTIES

Economic conditions during 2008 and 2009, which include market dislocations, resulted in a significant decline in the availability of debt and equity capital. Generally, the limited amount of available debt financing in the overall capital markets has shorter maturities, higher interest rates and fees and more restrictive terms than debt facilities available in the past. In addition, during 2008 and the nine months ended September 30, 2009, the price of our common stock was well below our net asset value, thereby making it undesirable to issue additional shares of our common stock. Because of these challenges, our strategies shifted during 2008 from originating debt and equity investments, to deleveraging our balance sheet, preserving liquidity necessary to meet our operational needs and servicing our borrowing obligations. Key initiatives that we undertook beginning in 2008 to provide necessary liquidity include: monetizations; the suspension of dividends; the repurchase of debt at significant discounts; the renegotiation of our debt agreements, which was completed in February 2009, and the implementation of a corporate restructuring. During a subsequent strategic review conducted during the third quarter of 2009, we concluded that the implementation of these initiatives had resulted in sufficient improvement in our financial and liquidity metrics to allow us to once again begin to consider future investment opportunities. Although there can be no assurance, we believe we have sufficient liquidity to meet our remaining 2009 operating requirements, as well as liquidity for new origination opportunities.

RECENT ACCOUNTING PRONOUNCEMENTS

CODIFICATION OF ACCOUNTING STANDARDS

In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 168—The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, or SFAS 168. SFAS 168 introduced a new Accounting Standard Codification, or ASC, which organized current and future accounting standards into a single codified system. SFAS 168, which is now referred to as ASC Topic 105—Generally Accepted Accounting Principles, or ASC 105, under the new codification, superseded, but did not significantly change, all previously existing accounting standards. ASC 105 was effective for interim periods ending after September 15, 2009. We adopted ASC 105 beginning with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

As part of our adoption of this standard, our discussions about specific accounting standards must now reference the standards as set forth in the new codification. To assist readers of our financial statements, we have included the new ASC reference, as well as the reference to the standard as it was originally issued.

STANDARD ON SUBSEQUENT EVENTS

In May 2009, FASB issued SFAS 165—Subsequent Events, which was subsequently included in ASC Topic 855—Subsequent Events, or ASC 855. ASC 855 provides guidance on management’s assessment of subsequent events and requires additional disclosure about the timing of management’s assessment of subsequent events. ASC 855 did not significantly change the accounting requirements for the reporting of subsequent events. ASC 855 was effective for interim or annual financial periods ending after June 15, 2009 and we adopted this standard as of June 30, 2009. Our adoption of this standard did not affect our financial position or results of operations.

 

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FAIR VALUE MEASUREMENTS

FASB set forth most of the accounting guidance associated with the measurement and disclosure of fair value in ASC Topic 820—Fair Value Measurements and Disclosures. Prior to its adoption of the new codification, FASB issued a number of standards that either affected the measurement and disclosure of fair value or provided additional guidance or clarification. All such amendments have been incorporated into ASC 820, including the following:

 

   

In February 2008, FASB issued FASB Staff Position No. FAS 157-2—Effective Date of FASB No. 157, which deferred the date for which ASC 820 was required to be adopted for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, with early adoption permitted in certain cases. Our adoption of this standard as of January 1, 2009 did not have a material effect on our financial position or results of operations.

 

   

In October 2008, FASB issued FASB Staff Position No. FAS 157-3—Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which provided an illustrative example of how to determine the fair value of a financial asset in an inactive market. This standard did not change the fair value measurement principles previously set forth by FASB. We adopted this modification in January 2009. Our practice for determining the fair value of our investment portfolio has been, and continues to be, consistent with the guidance provided in the example included in the October 2008 guidance. Therefore, our adoption of this standard did not affect our practices for determining the fair value of our investment portfolio and did not have a material effect on our financial position or results of operations.

 

   

In April 2009, FASB issued FASB Staff Position No. FAS 157-4—Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly, which established standards for determining whether normal market activity exists for Level 2 assets and liabilities. In addition, the standard expands disclosure requirements for fair value reporting and requires a categorization of investments consistent with that required for ASC 320—Investments—Debt and Equity Securities. We adopted this standard for the period ended June 30, 2009. Since our Level 2 investments comprise less than 0.5% of our investment portfolio, our adoption of this standard, did not have a material effect on our financial position or results of operations.

In April 2009, FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1—Interim Disclosures about Fair Value of Financial Instruments, which was subsequently incorporated into ASC Topic 825—Financial Instruments. The April 2009 guidance requires disclosures about financial instruments, including fair value, carrying amount, and method and significant assumptions used to estimate the fair value. We adopted this standard as of June 30, 2009. Our adoption of this standard did not affect our financial position or results of operations.

In August 2009, FASB issued Accounting Standard Update No. 2009-05—Measuring Liabilities at Fair Value, or ASU 2009-05. The August 2009 update provides clarification to ASC 820 for the valuation techniques required to measure the fair value of liabilities. ASU 2009-05 also provides clarification around required inputs to the fair value measurement of a liability and definition of a Level 1 liability. ASU 2009-05 is effective for interim and annual periods beginning after August 28, 2009. We will adopt this standard beginning with our financial statements ending December 31, 2009. We do not anticipate that our adoption of this standard will have a material effect on our financial position and results of operations.

TWO-CLASS METHOD OF PRESENTING EARNINGS PER SHARE

In June 2008, FASB issued FASB Staff Position EITF 03-06-1—Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities, which was subsequently incorporated into ASC Topic 260—Earnings Per Share. The June 2008 guidance requires companies to include unvested share-based payment awards that contain non-forfeitable rights to dividends in the computation of earnings per share pursuant to the two-class method. In effect, this standard requires companies to report basic and diluted earnings per share in two broad categories. First, companies must report basic and diluted earnings per share associated with the unvested share-based payments with non-forfeitable dividend rights. Second, companies must report separately basic and diluted earnings per share for their remaining common stock. This standard was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. We adopted this standard beginning with our financial statements ended March 31, 2009. As

 

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required, we applied this standard retroactively to all reported periods. Our adoption of this standard did not have a material impact on our financial position or results of operations. See Note 9—Earnings (Loss) Per Share for additional information about our adoption of this standard.

DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In March 2008, FASB issued SFAS No. 161—Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which was subsequently incorporated into ASC Topic 815—Derivatives and Hedging, or ASC 815. The March 2008 guidance requires qualitative disclosures about: objectives and strategies for using derivatives; quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments; and disclosures about credit-risk-related contingent features in derivative agreements. This standard was effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We adopted this standard as of January 1, 2009. We have reflected the disclosure requirements for ASC 815 in Note 2—Investment Portfolio.

ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS

In June 2009, FASB issued SFAS 166—Accounting for Transfers of Financial Assets. This statement amends SFAS 140—Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was subsequently incorporated into ASC Topic 860—Transfers and Servicing, or ASC 860. The June 2009 guidance removed the concept of a qualifying special-purpose entity from ASC 860. The June 2009 guidance also established specific conditions for reporting the transfer of a portion of a financial asset as a sale. This June 2009 guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 and early application is prohibited. We will adopt this standard as of January 1, 2010. We do not anticipate that our adoption of this standard will have a material effect on our financial position and results of operations.

INCOME TAXES

In September 2009, FASB issued ASU 2009-06—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, or ASU 2009-06. The September 2009 update did not change existing GAAP but provides implementation guidance to ASC 740—Income Taxes, or ASC 740. In addition, ASU 2009-06 eliminates certain disclosures required by ASC 740 for nonpublic companies, but does not alter the disclosure requirements for public companies. ASU 2009-06 is effective for interim and annual periods ending after September 15, 2009. We adopted this standard as of September 30, 2009. Our adoption of this standard did not affect our financial position or results of operations.

 

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NOTE 2—INVESTMENT PORTFOLIO

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

 

     September 30, 2009           December 31, 2008  

(dollars in thousands)

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

Debt investments

               

Senior secured debt

   $ 441,687    32.5        $ 445,392    30.3

Subordinated debt

               

Secured

     401,237    29.5             439,440    29.9   

Unsecured

     38,295    2.8             34,500    2.3   
                               
 

Total debt investments

     881,219    64.8             919,332    62.5   
                               
 

Equity investments

               

Preferred equity

     393,617    28.9             463,333    31.5   

Common/common equivalents equity

     84,938    6.3             87,458    6.0   
                               

Total equity investments

     478,555    35.2             550,791    37.5   
                               

Total investments

   $ 1,359,774    100.0        $ 1,470,123    100.0
                               
The following table summarizes the composition of our investment portfolio at fair value:   
             
     September 30, 2009           December 31, 2008  

(dollars in thousands)

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

Debt investments

               

Senior secured debt

   $ 416,302    40.1        $ 428,817    35.7

Subordinated debt

               

Secured

     292,144    28.2             351,425    29.2   

Unsecured

     30,476    2.9             28,081    2.3   
                               

Total debt investments

     738,922    71.2             808,323    67.2   
                               
 

Equity investments

               

Preferred equity

     252,604    24.4             339,576    28.2   

Common/common equivalents equity

     45,718    4.4             55,249    4.6   
                               

Total equity investments

     298,322    28.8             394,825    32.8   
                               
 

Total investments

   $ 1,037,244    100.0        $ 1,203,148    100.0
                               

Our debt instruments bear contractual interest rates ranging from 2.5% to 18.0%, a portion of which may be deferred. As of September 30, 2009, approximately 58.8% of the fair value of our loan portfolio was at variable rates, based on a LIBOR benchmark or prime rate, and 41.2% of the fair value of our loan portfolio was at fixed rates. As of September 30, 2009, approximately 41.1% of our loan portfolio, at fair value, had LIBOR floors between 1.5% and 4.0% on the LIBOR base index and prime floors between 3.0% 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 interest and/or the accretion of a discount on the debt investment until such time that the fair value equals or exceeds cost.

 

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

 

     September 30, 2009           December 31, 2008  

(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

   $ 41,201    4.68        $ 10,060    1.10

Not on non-accrual status

     —      —               —      —     
                               

Total loans greater than 90 days past due

   $ 41,201    4.68        $ 10,060    1.10
                               
 

Loans on non-accrual status

               

0 to 90 days past due

   $ 131,850    14.96        $ 109,424    11.90

Greater than 90 days past due

     41,201    4.68             10,060    1.10   
                               

Total loans on non-accrual status

   $ 173,051    19.64        $ 119,484    13.00
                               

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

 

 
     September 30, 2009           December 31, 2008  

(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

   $ 10,377    1.40        $ 695    0.09

Not on non-accrual status

     —      —               —      —     
                               

Total loans greater than 90 days past due

   $ 10,377    1.40        $ 695    0.09
                               
 

Loans on non-accrual status

               

0 to 90 days past due

   $ 41,273    5.59        $ 38,619    4.77

Greater than 90 days past due

     10,377    1.40             695    0.09   
                               

Total loans on non-accrual status

   $ 51,650    6.99        $ 39,314    4.86
                               

 

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

 

     September 30, 2009           December 31, 2008  

(dollars in thousands)

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

Telecommunications—CLEC (competitive local exchange carriers)

   $ 334,514    24.6        $ 335,279    22.8

Communications—other

     20,860    1.5             23,227    1.6   

Cable

     125,494    9.2             115,824    7.9   

Healthcare

     134,239    9.9             133,706    9.1   

Food services

     69,474    5.1             82,119    5.6   

Plastic products

     96,346    7.1             84,484    5.7   

Broadcasting

     76,223    5.6             78,918    5.4   

Business services

     69,335    5.1             93,668    6.4   

Electronics

     42,331    3.1             41,959    2.9   

Publishing

     38,738    2.9             39,416    2.7   

Laboratory instruments

     34,030    2.5             33,906    2.3   

Logistics

     34,254    2.5             51,885    3.5   

Sporting goods

     34,643    2.5             32,898    2.2   

Technology

     7,436    0.5             8,995    0.6   

Education

     11,988    0.9             11,994    0.8   

Consumer products

     39,470    2.9             36,341    2.5   

Industrial products

     26,310    1.9             26,464    1.8   

Home furnishings

     48,998    3.6             48,631    3.3   

Insurance

     23,962    1.8             23,251    1.6   

Leisure activities

     14,133    1.0             13,816    0.9   

Other media

     21,012    1.5             20,983    1.4   

Drugs

     10,208    0.8             11,234    0.8   

Auto parts

     10,516    0.8             31,073    2.1   

Information services

     14,854    1.1             17,410    1.2   

Entertainment

     907    0.1             49,385    3.4   

Other(a)

     19,499    1.5             23,257    1.5   
                               

Total

   $ 1,359,774    100.0        $ 1,470,123    100.0
                               

 

(a)

No individual industry within this category exceeds 1%.

 

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

 

     September 30, 2009                December 31, 2008  

(dollars in thousands)

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

Telecommunications—CLEC

   $ 171,331    16.5           $ 173,789    14.4

Communications—other

     17,861    1.7                17,403    1.5   

Cable

     127,516    12.3                119,134    9.9   

Healthcare

     98,563    9.5                123,589    10.3   

Food services

     68,776    6.6                81,935    6.8   

Plastic products

     58,659    5.7                45,317    3.8   

Broadcasting

     52,337    5.0                66,401    5.5   

Business services

     48,840    4.7                77,213    6.4   

Electronics

     41,700    4.0                42,018    3.5   

Publishing

     34,890    3.4                34,743    2.9   

Laboratory instruments

     34,599    3.3                35,054    2.9   

Logistics

     33,863    3.3                66,950    5.6   

Sporting goods

     33,961    3.3                36,531    3.0   

Technology

     28,163    2.7                35,980    3.0   

Education

     27,064    2.6                29,062    2.4   

Consumer products

     26,223    2.5                22,855    1.9   

Industrial products

     26,353    2.5                26,246    2.2   

Home furnishings

     24,588    2.4                27,899    2.3   

Insurance

     22,497    2.2                21,258    1.8   

Leisure activities

     14,133    1.4                13,816    1.2   

Other media

     10,424    1.0                11,940    1.0   

Drugs

     10,208    1.0                11,234    0.9   

Auto parts

     8,635    0.8                31,011    2.6   

Information services

     8,047    0.8                13,618    1.1   

Entertainment

     738    0.1                28,268    2.4   

Other(a)

     7,275    0.7                9,884    0.7   
                                  

Total

   $ 1,037,244    100.0           $ 1,203,148    100.0
                                  

 

(a)

No individual industry within this category exceeds 1%.

We manage our interest rate exposure and financing facility requirements on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities, and from time to time, may enter into interest rate swaps. As of September 30, 2009, we included the $1.3 million fair value of these interest rate swaps in other liabilities on our Consolidated Balance Sheets. During the nine months ended September 30, 2009, we reported changes in the fair value of these interest rate swaps in net unrealized appreciation (depreciation) on investments on our Consolidated Statement of Operations. We did not designate any of our interest rate swaps as hedges for accounting purposes. Each quarter, we settle these interest rates swaps for cash.

As of September 30, 2008, the notional amount of our interest rate swaps was $24.0 million and the fair value of these interest rate swaps included in our liabilities was $0.1 million. The following table summarizes our existing interest rate swaps with SunTrust Bank, as the counterparty, for which we pay fixed interest rates and receive floating interest rates as of September 30, 2009:

 

(dollars in thousands)          As of September 30, 2009           Unrealized Appreciation (Depreciation)  
Date    Interest               Fair           Three months ended     Nine months ended  

Entered

  

Expiring

   Rate     Notional    Cost    Value           September 30, 2009     September 30, 2009  
07/08    11/10    10.0   $ 16,000    $ —      $ (545        $ 26      $ 104   
07/08    11/10    14.0     8,000      —        (272          13        52   
03/09    08/11    13.0     12,500      —        (270          (84     (270
03/09    08/11    9.0     8,681      —        (188          (59     (188
                                                
           Total         $ 45,181    $ —      $ (1,275        $ (104   $ (302
                                                

 

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NOTE 3—FAIR VALUE MEASUREMENT

As of January 1, 2008, we adopted SFAS 157—Fair Value Measurements, which was subsequently included in ASC Topic 820—Fair Value Measurements and Disclosures, or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.

FAIR VALUE HIERARCHY

ASC 820 establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:

 

ASC 820
Fair Value Hierarchy

  

Inputs to Fair Value Methodology

Level 1

   Quoted prices in active markets for identical assets or liabilities

Level 2

   Quoted prices for similar assets or liabilities; quoted markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the financial instrument; inputs, other than quoted prices, that are observable for the asset or liability; or inputs that are derived principally from, or corroborated by, observable market information

Level 3

   Pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption is unobservable or when the estimation of fair value requires significant management judgment

We categorize a financial instrument in the fair value hierarchy based on the lowest level of input that is significant to its fair value measurement.

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following table presents the assets and liabilities that we report at fair value on our Consolidated Balance Sheet by ASC 820 hierarchy:

 

     As of September 30, 2009

(in thousands)

   Quoted Market
Prices in Active
Markets

(Level 1)
   Internal Models with
Significant
Observable Market
Parameters

(Level 2)
   Internal Models
with Significant
Unobservable
Market Parameters
(Level 3)
   Total Fair Value
Reported in
Consolidated
Balance Sheet
ASSETS            

Non-affiliate investments

           

Senior secured debt

   $ —      $ 3,373    $ 309,028    $ 312,401

Subordinated secured debt

     —        —        201,258      201,258

Unsecured subordinated debt

     —        —        2,161      2,161

Preferred equity

     —        1,287      22,470      23,757

Common/common equivalents

     107      —        42,463      42,570
                           

Total non-affiliate investments

     107      4,660      577,380      582,147
                           

Affiliate investments

           

Senior secured debt

     —        —        22,352      22,352

Subordinated secured debt

     —        —        11,423      11,423

Preferred equity

     —        —        13,455      13,455

Common/common equivalents

     —        —        3,120      3,120
                           

Total affiliate investments

     —        —        50,350      50,350
                           

Control investments

           

Senior secured debt

     —        —        81,549      81,549

Subordinated secured debt

     —        —        79,463      79,463

Unsecured subordinated debt

     —        —        28,315      28,315

Preferred equity

     —        —        215,392      215,392

Common/common equivalents

     —        —        28      28
                           

Total control investments

     —        —        404,747      404,747
                           

Total assets at fair value

   $ 107    $ 4,660    $ 1,032,477    $ 1,037,244
                           

 

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     As of September 30, 2009  

(in thousands)

   Quoted Market
Prices in Active
Markets

(Level 1)
   Internal Models with
Significant
Observable Market
Parameters

(Level 2)
    Internal Models
with Significant
Unobservable
Market Parameters

(Level 3)
   Total Fair Value
Reported in
Consolidated
Balance Sheet
 
LIABILITIES           

Interest rate swaps(a)

     —        (1,275     —        (1,275
                              

Total liabilities at fair value

   $ —      $ (1,275   $ —      $ (1,275
                              

 

(a)

Represents interest rate swaps on loans used as collateral on a securitized borrowing facility. The fair values of the interest rate swaps are included in other liabilities on our Consolidated Balance Sheets. See Note 2—Investment Portfolio for additional information about these interest rate swaps.

VALUATION METHODOLOGIES

As required by the 1940 Act, we classify our investments by level of control. Control investments include both majority-owned control investments and non-majority owned control investments. A majority-owned control investment represents a security in which we own more than 50% of the voting interest of the portfolio company and generally control its board of directors. A non-majority owned control investment represents a security in which we own 25% to 50% of the portfolio company’s equity. Non-control investments represent both affiliate and non-affiliate securities for which we do not have a controlling interest. Affiliate investments represent securities in which we own 5% to 25% of the portfolio company’s equity. Non-affiliate investments represent securities in which we own less than 5% of the portfolio company’s equity.

 

 

Majority-Owned Control Investments—Majority-owned control investments comprise 38.5% of our investment portfolio. Market quotations are not readily available for these investments; therefore, we use a combination of market and income approaches to determine their fair value. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues or, in limited cases, book value. Generally, we apply multiples that we observe for other comparable companies to relevant financial data for the portfolio company. Also, in a limited number of cases, we use income approaches to determine the fair value of these securities, based on our projections of the discounted future free cash flows that the portfolio company will likely generate, as well as industry derived capital costs. Our valuation approaches for majority-owned investments estimate the value were we to sell or exit the investment. These valuation approaches assume the highest and best use of the investment by market participants and consider the value of our ability to control the portfolio company’s capital structure and the timing of a potential exit.

 

 

Non-Majority-Owned Control InvestmentsNon-majority owned investments comprise 0.5% of our investment portfolio. For our non-majority owned equity investments, we use the same market and income valuation approaches used to value our majority-owned control investments. For non-majority-owned control debt investments, we estimate fair value using the market yield approach based on the expected future cash flows discounted at the loans’ effective interest rates, based on our estimate of current market rates. We may adjust discounted cash flow calculations to reflect other market conditions or the perceived credit risk of the borrower.

 

 

Non-Control Investments—Non-control investments comprise 61.0% of our investment portfolio. Quoted prices are not available for 99.2% of our non-control investments, which represent 60.5% of our investment portfolio. For our non-control equity investments, we use the same market and income approaches used to value our control investments. For non-control debt investments, we estimate fair value using a market yield approach based on the expected future cash flows discounted at the loans’ effective interest rates, based on our estimate of current market rates. We may adjust discounted cash flow calculations to reflect other market conditions or the perceived credit risk of the borrower.

 

 

Thinly Traded and Over-the-Counter Securities—Generally, we value securities that are traded in the over-the-counter market or on a stock exchange at the average of the prevailing bid and ask prices on the date of the relevant period end. However, we may apply a discount to the market value of restricted or thinly traded public securities to reflect the impact that these restrictions have on the value of these securities. We review factors including the trading volume, total securities outstanding and our percentage ownership of securities to determine whether the trading levels are active (Level 1) or inactive (Level 2). As of September 30, 2009, these securities represented 0.5% of our investment portfolio.

 

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Our valuation analyses incorporate the impact that key events could have on the securities’ values, including private mergers and acquisitions, purchase transactions, public offerings, letters of intent and subsequent debt or equity sales. Our valuation analyses consider key external data, such as market changes and industry valuation benchmarks. We also use independent valuation firms to provide additional data points for our quarterly valuation analyses. Our general practice is to obtain an independent valuation or review of valuation once per year for each portfolio investment that had a fair value in excess of $5.0 million, unless the fair value has otherwise been validated through a sale of some or all of our investment in the portfolio company. Valuation firms performed independent valuations or reviewed valuations of 45 portfolio companies over the last four quarters, representing $979.4 million, or 94.4%, of the fair value of our total portfolio investments and $295.5 million, or 99.1%, of the fair value of our equity portfolio investments. In addition, the fair value of $50.6 million of our debt investments, representing 6.9% of the fair value of our debt portfolio and 4.9% of the fair value of our total portfolio, was validated with sales transactions involving the portfolio company. In total, either we obtained an independent valuation or review or we considered recent sales transactions for 99.3% of the fair value of our investment portfolio.

 

     As of September 30, 2009  
     Investments at Fair Value          Percent of  

(dollars in thousands)

   Debt    Equity    Total          Debt
Portfolio
    Equity
Portfolio
    Total
Portfolio
 

Quarter independent valuation/review prepared(a)

                    

Third quarter 2009

   $ 129,385    $ 149,915    $ 279,300         17.5   50.3   26.9

Second quarter 2009

     145,662      12,529      158,191         19.7      4.2      15.3   

First quarter 2009

     269,275      103,855      373,130         36.4      34.8      35.9   

Fourth quarter 2008

     139,508      29,225      168,733         18.9      9.8      16.3   
                                            

Total independent valuation/review

     683,830      295,524      979,354         92.5      99.1      94.4   
                                            

Quarter fair value validated with sales transaction

                    

Third quarter 2009

     50,621      —        50,621         6.9      —        4.9   
                                            

Total validated with sales transaction

     50,621      —        50,621         6.9      —        4.9   
                                            

Not evaluated during the 12 months ended September 30, 2009

     4,471      2,798      7,269         0.6      0.9      0.7   
                                            

Total investment portfolio

   $ 738,922    $ 298,322    $ 1,037,244         100.0   100.0   100.0
                                            

 

(a)

Independent valuations/reviews prepared more than one time during the twelve months ended September 30, 2009 have that investment’s fair value reflected in the most recent quarter for which an independent valuation/review was prepared.

The majority of the valuations performed by the independent valuation firms utilize proprietary models and inputs. We have used, and intend to continue to use, independent valuation firms to provide additional support for our internal analyses. Our board of directors considers our valuations, as well as the independent valuations and reviews, in its determination of the fair value of our investments. The fair value of our interest rate swaps is based on a binding broker quote, which is based on the estimated net present value of the future cash flows using a forward interest rate yield-curve in effect as of the measurement period.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and such differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to differ from the valuations currently assigned.

CHANGES IN LEVEL 3 FAIR VALUE MEASUREMENTS

We classify securities in the Level 3 valuation hierarchy based on the significance of the unobservable factors to the overall fair value measurement. Our fair value approach for Level 3 securities primarily uses unobservable inputs, but may also include observable, actively quoted components derived from external sources. Accordingly, the gains and losses in the table below include fair value changes due, in part, to observable factors. Additionally, we transfer investments in and out of Level 3 securities as of the ending balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the third quarter, there was no transfer activity in or out of Level 3 securities.

 

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The following table provides a reconciliation of fair value changes during the three-month period from June 30, 2009 through September 30, 2009 for all investments for which we determine fair value using unobservable (Level 3) factors.

 

     Fair value measurements using unobservable inputs (Level 3)  

(in thousands)

   Non-affiliate
Investments
    Affiliate
Investments
    Control
Investments
    Total  

Fair value June 30, 2009

        

Senior secured debt

   $ 294,718      $ 23,519      $ 107,152      $ 425,389   

Subordinated secured debt

     188,989        11,363        83,119        283,471   

Unsecured subordinated debt

     2,145        —          25,816        27,961   

Preferred equity

     23,769        14,468        232,519        270,756   

Common/common equivalents equity

     44,415        3,519        2,584        50,518   
                                

Total fair value June 30, 2009

     554,036        52,869        451,190        1,058,095   
                                

Realized/unrealized (loss) gain

        

Senior secured debt

     (240     46        (2,664     (2,858

Subordinated secured debt

     3,844        (4     3,010        6,850   

Unsecured subordinated debt

     (2     —          (1,000     (1,002

Preferred equity

     (1,703     (1,044     (2,740     (5,487

Common/common equivalents equity

     (1,950     (399     (1     (2,350
                                

Total realized/unrealized loss

     (51     (1,401     (3,395     (4,847
                                

Purchases, issuances and (settlements), net

        

Senior secured debt

     (6,878     (1,213     (1,511     (9,602

Subordinated secured debt

     172        64        1,587        1,823   

Unsecured subordinated debt

     18        —          3,499        3,517   

Preferred equity

     404        31        (14,387     (13,952

Common/common equivalents equity

     (2     —          (2,555     (2,557
                                

Total purchases, issuances and (settlements), net

     (6,286     (1,118     (13,367     (20,771
                                

Transfers into Level 3

        

Senior secured debt

     21,428        —          (21,428     —     

Subordinated secured debt

     8,253        —          (8,253     —     
                                

Total transfers into Level 3

     29,681        —          (29,681     —     
                                

Fair value as of September 30, 2009

        

Senior secured debt

     309,028        22,352        81,549        412,929   

Subordinated secured debt

     201,258        11,423        79,463        292,144   

Unsecured subordinated debt

     2,161        —          28,315        30,476   

Preferred equity

     22,470        13,455        215,392        251,317   

Common/common equivalents equity

     42,463        3,120        28        45,611   
                                

Total fair value as of September 30, 2009

   $ 577,380      $ 50,350      $ 404,747      $ 1,032,477   
                                

The following table summarizes the unrealized (depreciation) appreciation on our Level 3 investments for the three months ended September 30, 2009.

 

     Fair value measurements using unobservable inputs (Level 3)  

(in thousands)

   Non-affiliate
Investments
    Affiliate
Investments
    Control
Investments
    Total  

Change in unrealized (depreciation) appreciation

        

Senior secured debt

   $ (240   $ 46      $ (2,664   $ (2,858

Subordinated secured debt

     6,593        (4     4,584        11,173   

Unsecured subordinated debt

     (2     —          (1,000     (1,002

Preferred equity

     (1,703     (1,044     (2,461     (5,208

Common/common equivalents equity

     (1,950     (399     (110     (2,459
                                

Total change in unrealized (depreciation) appreciation on Level 3 investments

   $ 2,698      $ (1,401   $ (1,651   $ (354
                                

 

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