MCG Capital Corporation (Nasdaq: MCGC) (“MCG” or the “Company”) announced today its financial results for the quarter and year ended December 31, 2010. MCG will host an investment community conference call today, March 4, 2011 at 10:00 a.m. (Eastern Time). Slides and financial information to be reviewed during the investor conference call will be available on MCG’s website at http://www.mcgcapital.com prior to the call.

HIGHLIGHTS
  • Distributable net operating income, or DNOI, for the quarter ended December 31, 2010 was $12.9 million, or $0.17 per share. DNOI for all of 2010 was $44.9 million, or $0.60 per share. DNOI refers to net operating income adjusted for amortization of employee restricted stock awards.
  • Net operating income for the quarter ended December 31, 2010 was $11.9 million, or $0.16 per share. Net operating income for the full year was $40.6 million, or $0.54 per share.
  • Net loss for the quarter ended December 31, 2010 was $17.7 million, or $0.23 per share. Net loss for the full year was $13.1 million, or $0.17 per share.
  • Net investment loss for the quarter ended December 31, 2010 was $29.7 million, which represented 3.2% of the most recently reported fair value of MCG’s investment portfolio. Net investment loss for the year ended December 31, 2010 was $54.8 million.
  • During the quarter ended December 31, 2010, MCG made $160.1 million of advances and originations, including $122.4 million in investments to 11 new portfolio companies. Payoffs and portfolio monetization activities totaled $42.7 million during the quarter.
  • MCG’s ratio of total assets to total borrowings and other senior securities was 231% as of December 31, 2010.

DIVIDEND DECLARATION

MCG also announced today that its board of directors has declared a dividend of $0.15 per share. The dividend is payable as follows:
 

Record date: March 15, 2011

Payable date: April 15, 2011
 

OVERVIEW

Today, MCG reported a fourth quarter 2010 net loss of $17.7 million, or $0.23 per basic and diluted share, which represented a $19.3 million, or $0.25 per share, decrease from the net income of $1.6 million, or $0.02 per share, reported for the comparable period in 2009. This decrease was attributable primarily to: a $22.0 million increase in the net investment loss recognized on the fair value of MCG’s investment portfolio; partially offset by a $2.4 million increase in net operating income and a $0.3 million decrease in income tax provision.

MCG’s revenue for the fourth quarter of 2010 was $23.5 million, which represented a $0.2 million, or 0.8% decrease from the comparable period in 2009. This decrease was composed of a $1.3 million decrease in interest and dividend income primarily resulting from a reduction in the Company’s average portfolio balance and changes in the composition and average balance of loans on non-accrual status. The $1.3 million decrease was partially offset by a $1.1 million increase in advisory fees and other income, reflecting increased origination activity during the quarter ended December 31, 2010. MCG reported DNOI of $12.9 million, or $0.17 per share, which represented a $1.3 million, or $0.02 per share, increase over the fourth quarter of 2009. Net operating income during the fourth quarter of 2010 increased 26.1% to $11.9 million from the comparable period in 2009.

“Overall we are pleased with the volume of originations that we were able to close during the fourth quarter, the level of equity monetizations that occurred during the quarter and after year-end, the increase in our fourth quarter net operating income and distributable net operating income and the repositioning of low-yielding assets. Based on our results for the quarter and the full year, we will be increasing our dividend to $0.15 per share for the fourth quarter," said Steven Tunney, President and CEO. “This is our third consecutive quarterly dividend increase since we reinstated our dividend in April 2010. We believe, over the course of the year as we redeploy the debt and equity proceeds from our monetization activities, we can continue to increase our operating income and support the future growth of distributions to our stockholders.”

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2010, MCG’s cash and cash equivalents totaled $45.0 million and it had $546.9 million of borrowings (the majority of which was composed of $454.3 million of collateralized non-recourse borrowings). As a business development company, MCG is required to meet an asset coverage ratio of total net assets to total borrowings and other senior securities of at least 200% in order to borrow under new or existing borrowing facilities or to distribute dividends to its stockholders. MCG’s asset coverage ratio decreased from 233% as of September 30, 2010 to 231% as of December 31, 2010. The cash balance in the securitization and restricted accounts, which may be deployed for suitable new investment opportunities, was $71.6 million as of December 31, 2010. As of December 31, 2010, MCG had $6.0 million of funded borrowing capacity, subject to the United States Small Business Administration’s, or SBA’s, approval, available in its small business investment company, or SBIC, subsidiary that effectively is exempt from the statutory asset coverage ratio requirements. In addition, MCG has $50.0 million in available incremental capacity under its 2006-1 facility, subject to facility requirements.

In January 2011, the SBA increased the total borrowing potential under its license with Solutions Capital I, L.P. from $130.0 million to $150.0 million. To access the entire $150.0 million borrowing potential, the Company would have to fund $25.4 million in addition to the $49.6 million that it had funded through December 31, 2010. Additionally, the Company submitted an application to the SBA for a second SBIC license. If approved, the total borrowing capacity would increase from $150.0 million to $225.0 million.

PORTFOLIO ACTIVITY

The fair value of MCG’s investment portfolio totaled $1,009.7 million as of December 31, 2010, as compared to $924.3 million as of September 30, 2010. During the fourth quarter of 2010, MCG made $160.1 million of originations and advances, including $141.0 million in originations, $13.1 million of advances to existing portfolio companies under revolving and line of credit facilities and $6.0 million of paid-in-kind, or PIK, advances. The originations of $141.0 million include senior debt in ten new portfolio companies and three existing companies and secured subordinated debt in one new portfolio company. Gross payments, reductions and sales of securities during the fourth quarter of 2010 of $42.7 million were composed of $24.8 million of senior debt, $2.7 million of secured subordinated debt, $2.4 million in preferred equity and $12.8 million of common equity.

During the three months ended December 31, 2010, MCG reported net investment losses before income tax provision of $29.7 million, which are detailed below:
   
Three months ended December 31, 2010

(in thousands)
Industry Type  

Realized Gain/(Loss)
 

Unrealized (Depreciation)/ Appreciation
 

Reversal of Unrealized Depreciation/ (Appreciation)
 

Net (Loss)/ Gain
Portfolio Company            
Broadview Networks Holdings, Inc. Communications Control $ $ (24,340 ) $ $ (24,340 )
Avenue Broadband LLC Cable Control (3,791 ) (3,791 )
GSDM Holdings, LLC Healthcare Non-Affiliate (3,480 ) (3,480 )
Jet Plastica Investors, LLC Plastic Products Control (3,311 ) (3,311 )
Active Brands International, Inc. Consumer Products Non-Affiliate (1,812 ) (1,812 )
Metropolitan Telecommunications Holding Company Communications Non-Affiliate 10,157 (11,756 ) (1,599 )
Total Sleep Holdings, Inc. Healthcare Control (1,189 ) (1,189 )
Jenzabar, Inc. Technology Non-Affiliate 3,369 3,369
RadioPharmacy Investors, LLC Healthcare Control 2,573 2,573
Stratford School Holdings, Inc. Education Affiliate 1,717 1,717
Other (< $1 million net gain (loss))   (251 )     1,724       701       2,174  
Total $ 9,906     $ (28,540 )   $ (11,055 )   $ (29,689 )
 
                 
Conference Call

(Live Call)
      Date and time       Friday, March 4, 2011

at 10:00 a.m. Eastern Time
Dial-in Number (No Conference ID required) (877) 878-2269 domestic

(847) 829-0062 international
      Webcast      

http://investor.mcgcapital.com
Replay (Available through March 18, 2011) Call Replay (Conference ID for replay is #48072648) (800) 642-1687 domestic

(706) 645-9291 international
      Web Replay      

http://investor.mcgcapital.com
   

MCG Capital Corporation

Consolidated Balance Sheets
 
 
December 31, December 31,

(in thousands, except per share amounts)
2010   2009
 
Assets
Cash and cash equivalents $ 44,970 $ 54,187
Cash, securitization accounts 42,245 109,141
Cash, restricted 29,383 21,232
Investments at fair value
Non-affiliate investments (cost of $684,785 and $560,347, respectively) 646,116 531,974
Affiliate investments (cost of $43,721 and $38,845, respectively) 53,300 44,388
Control investments (cost of $517,167 and $555,732, respectively)   310,289       409,984  
Total investments (cost of $1,245,673 and $1,154,924, respectively) 1,009,705 986,346
Interest receivable 5,453 6,025
Other assets   13,521       14,218  
Total assets $ 1,145,277     $ 1,191,149  
Liabilities
Borrowings (maturing within one year of $18,858 and $13,327, respectively) $ 546,882 $ 557,848
Interest payable 2,291 2,736
Dividends payable 10,735
Other liabilities   7,353       14,882  
Total liabilities   567,261       575,466  
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 December 31, 2010 and 2009, 76,662 issued and outstanding on December 31, 2010 and 76,394 issued and outstanding on December 31, 2009 767 764
Paid-in capital 1,008,823 1,005,085
Distributions in excess of earnings
Paid-in capital (166,029 ) (162,783 )
Other (28,555 ) (57,066 )
Net unrealized depreciation on investments   (236,990 )     (170,317 )
Total stockholders’ equity   578,016       615,683  
Total liabilities and stockholders’ equity $ 1,145,277     $ 1,191,149  
Net asset value per common share at end of period $ 7.54 $ 8.06
 
   

MCG Capital Corporation

Consolidated Statements of Operations
 
Three months ended Years ended
December 31,   December 31,

(in thousands, except per share amounts)
2010   2009   2010   2009
Revenue    
Interest and dividend income
Non-affiliate investments (less than 5% owned) $ 15,273 $ 16,251 $ 61,396 $ 64,209
Affiliate investments (5% to 25% owned) 2,302 1,087 4,859 4,470
Control investments (more than 25% owned)   4,300       5,885       20,274       28,627  
Total interest and dividend income   21,875       23,223       86,529       97,306  
Advisory fees and other income
Non-affiliate investments (less than 5% owned) 1,257 252 1,982 1,333
Affiliate investments (5% to 25% owned) 320 320
Control investments (more than 25% owned)   32       204       738       1,195  
Total advisory fees and other income   1,609       456       3,040       2,528  
Total revenue   23,484       23,679       89,569       99,834  
Operating expenses
Interest expense 3,709 5,053 16,891 23,444
Employee compensation
Salaries and benefits 4,210 4,001 16,275 14,825
Amortization of employee restricted stock awards   979       2,124       4,342       7,727  
Total employee compensation 5,189 6,125 20,617 22,552
General and administrative expense   2,710       3,082       11,496       15,650  
Total operating expenses   11,608       14,260       49,004       61,646  
Net operating income before net investment loss, gain on extinguishment of debt and income tax provision (benefit)   11,876       9,419       40,565       38,188  
Net realized gain (loss) on investments
Non-affiliate investments (less than 5% owned) 9,692 (12,024 ) 17,529 (18,015 )
Affiliate investments (5% to 25% owned) 36 36 (1,947 )
Control investments (more than 25% owned)   178       (150,088 )     (5,711 )     (172,022 )
Total net realized gain (loss) gain on investments   9,906       (162,112 )     11,854       (191,984 )
Net unrealized (depreciation) appreciation on investments
Non-affiliate investments (less than 5% owned) (10,741 ) 8,321 (10,296 ) (6,803 )
Affiliate investments (5% to 25% owned) 1,985 (4,894 ) 4,036 (5,442 )
Control investments (more than 25% owned) (31,294 ) 150,525 (61,130 ) 110,642
Derivative and other fair value adjustments   455       518       717       (766 )
Total net unrealized (depreciation) appreciation on investments   (39,595 )     154,470       (66,673 )     97,631  
Net investment loss before income tax provision (benefit) (29,689 ) (7,642 ) (54,819 ) (94,353 )
Gain on extinguishment of debt before income tax provision (benefit) 2,983 5,025
Income tax provision (benefit)   (65 )     212       1,801       (81 )
Net income (loss) $ (17,748 )   $ 1,565     $ (13,072 )   $ (51,059 )
Earnings (loss) per basic and diluted common share $ (0.23 ) $ 0.02 $ (0.17 ) $ (0.68 )
Cash distributions declared per common share $ 0.14 $ $ 0.37 $
Weighted-average common shares outstanding—basic and diluted 75,648 76,267 75,422 74,692
 
 

MCG Capital Corporation

Consolidated Statements of Cash Flows
 
Years ended December 31,

(in thousands)
2010   2009
Cash flows from operating activities  
Net loss $ (13,072 ) $ (51,059 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Investments in portfolio companies (294,904 ) (58,673 )
Principal collections related to investment repayments or sales 216,879 196,575

Increase in interest receivable, accrued payment-in-kind interest and dividends
(395 ) (13,330 )
Amortization of restricted stock awards
Employee 4,342 7,727
Non-employee director 76 135

Decrease in cash—securitization accounts from interest collections
2,552 1,305
Depreciation and amortization 3,954 5,395
Unrealized appreciation on stockholder loans (31 )
Decrease in other assets 166 1,160
Increase (decrease) in other liabilities (7,223 ) 663
Realized (gain) loss on investments (11,854 ) 191,984
Net change in unrealized depreciation (appreciation) on investments 66,673 (97,631 )
Gain on extinguishment of debt   (2,983 )     (5,025 )
Net cash (used in) provided by operating activities   (35,789 )     179,195  
 
Cash flows from financing activities
Payments on borrowings (88,983 ) (73,776 )
Proceeds from borrowings 81,000
Decrease (increase) in cash in restricted and securitization accounts
Securitization accounts for repayment of principal on debt 64,344 (72,953 )
Restricted cash (8,151 ) (20,253 )
Payment of financing costs (3,353 ) (4,175 )
Distributions paid (17,608 )
Cancellation of common stock held as collateral for stockholder loans (92 )

Common stock withheld to pay taxes applicable to the vesting of restricted stock
(661 )
Net forfeitures of restricted common stock (16 )
Repayment of stockholder loans         92  
Net cash provided by (used in) financing activities   26,572       (171,157 )
Increase (decrease) in cash and cash equivalents (9,217 ) 8,038
Cash and cash equivalents
Beginning balance   54,187       46,149  
Ending balance $ 44,970     $ 54,187  
Supplemental disclosure of cash flow information
Interest paid $ 14,666 $ 22,056
Income taxes paid 3,247 59
Payment-in-kind interest collected 18,819 2,214
Dividend income collected 3,970 8,414
 
         

SELECTED FINANCIAL DATA

QUARTERLY OPERATING INFORMATION
 
2009 2010 2010 2010 2010

(in thousands, except per share amounts)
  Q4   Q1   Q2   Q3   Q4
Revenue
Interest and dividend income
Interest income $ 21,113 $ 19,558 $ 19,089 $ 19,519 $ 18,459
Dividend income 1,334 1,329 1,494 1,561 2,984
Loan fee income     776       724       570       810       432  
Total interest and dividend income 23,223 21,611 21,153 21,890 21,875
Advisory fees and other income     456       135       615       681       1,609  
Total revenue     23,679       21,746       21,768       22,571       23,484  
Operating expense
Interest expense 5,053 4,473 4,383 4,326 3,709
Salaries and benefits 4,001 4,796 3,742 3,527 4,210
Amortization of employee restricted stock awards 2,124 1,227 1,123 1,013 979
General and administrative (a)     3,082       2,811       3,670       2,305       2,710  
Total operating expense     14,260       13,307       12,918       11,171       11,608  
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) 9,419 8,439 8,850 11,400 11,876
Net investment loss before income tax provision (benefit) (7,642 ) (2,364 ) (12,966 ) (9,800 ) (29,689 )

Gain (loss) on extinguishment of debt before income tax provision (benefit)
(58 ) 3,490 (449 )
Income tax provision (benefit)     212       62       124       1,680       (65 )
Net earnings (loss)   $ 1,565     $ 5,955     $ (750 )   $ (529 )   $ (17,748 )
Reconciliation of DNOI to net operating income
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) $ 9,419 $ 8,439 $ 8,850 $ 11,400 $ 11,876
Amortization of employee restricted stock awards     2,124       1,227       1,123       1,013       979  
DNOI (b)   $ 11,543     $ 9,666     $ 9,973     $ 12,413     $ 12,855  
DNOI per share-weighted average common shares—basic and diluted (b) $ 0.15 $ 0.13 $ 0.13 $ 0.16 $ 0.17
Per common share statistics
Weighted-average common shares outstanding—basic and diluted 76,267 76,339 75,392 75,486 75,648
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) per common share—basic and diluted $ 0.12 $ 0.11 $ 0.12 $ 0.15 $ 0.16
Earnings (loss) per common share—basic and diluted $ 0.02 $ 0.08 $ (0.01 ) $ (0.01 ) $ (0.23 )
Net asset value per common share—period end $ 8.06 $ 8.16 $ 8.03 $ 7.92 $ 7.54
Dividends declared per common share (c) $ $ $ 0.11 $ 0.12 $ 0.14
 
_____________
(a)   Q4 2009 included $2 of costs associated with MCG’s restructuring expense.
 
(b) DNOI represents net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) as determined in accordance with U.S. generally accepted accounting principles, or GAAP, adjusted for amortization of employee restricted stock awards. MCG views DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities. These measures serve as an additional measure of MCG’s operating performance exclusive of employee restricted stock amortization, which represents an expense of the Company but does not require settlement in cash. DNOI does include PIK interest and dividend income which are generally not payable in cash on a regular basis, but rather at investment maturity or when declared. DNOI should not be considered as an alternative to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing.
 
(c) On March 1, 2011, MCG’s board of directors declared a dividend of $0.15 per share payable on April 15, 2011 to shareholders of record as of March 15, 2011.
 
         

SELECTED FINANCIAL DATA

KEY QUARTERLY STATISTICS
 
2009 2010 2010 2010 2010
(dollars in thousands)   Q4   Q1   Q2   Q3   Q4
Average quarterly loan portfolio at fair value $ 728,731 $ 684,370 $ 686,746 $ 670,726 $ 663,443
Average quarterly total investment portfolio - fair value 1,027,699 986,022 989,782 954,231 948,504
Average quarterly total assets 1,182,402 1,171,779 1,162,988 1,153,995 1,111,728
Average quarterly stockholders' equity 610,193 616,726 620,079 606,933 600,816
Return on average total assets (trailing 12 months)
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) 3.12 % 2.91 % 3.01 % 3.26 % 3.53 %
Net (loss) income (4.17 )% 0.49 % 0.93 % 0.53 % (1.14 )%
Return on average equity (trailing 12 months)
Net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit) 6.16 % 5.69 % 5.77 % 6.21 % 6.64 %
Net (loss) income (8.23 )% 0.96 % 1.79 % 1.02 % (2.14 )%
Yield on average loan portfolio at fair value
Average LIBOR (90-Day) 0.27 % 0.26 % 0.43 % 0.39 % 0.29 %
Spread to average LIBOR on average yielding loan portfolio at fair value (a)     11.97 %     12.37 %     11.89 %     12.45 %     11.51 %
12.24 % 12.63 % 12.32 % 12.84 % 11.80 %
Impact of fee accelerations of unearned fees on paid/restructured loans 0.14 % 0.14 % 0.05 % 0.20 % 0.00 %
Impact of non-accrual loans     (0.46 )%     (0.75 )%     (0.89 )%     (1.02 )%     (0.50 )%
Total yield on average loan portfolio at fair value     11.92 %     12.02 %     11.48 %     12.02 %     11.30 %
Cost of funds
Average LIBOR 0.27 % 0.26 % 0.43 % 0.39 % 0.29 %
Spread to average LIBOR excluding amortization of deferred debt issuance costs (a) 2.65 % 2.48 % 2.31 % 2.31 % 2.16 %
Impact of amortization of deferred debt issuance costs     0.60 %     0.55 %     0.57 %     0.50 %     0.46 %
Total cost of funds     3.52 %     3.29 %     3.31 %     3.20 %     2.91 %
Net portfolio yield margin 6.92 % 6.95 % 6.70 % 7.20 % 7.49 %
Selected period-end balance sheet statistics
Total investment portfolio at fair value $ 986,346 $ 991,032 $ 997,590 $ 924,253 $ 1,009,705
Total assets 1,191,149 1,171,385 1,170,463 1,136,665 1,145,277
Borrowings 557,848 534,892 534,278 508,899 546,882
Total equity 615,683 622,897 614,855 606,078 578,016
Cash, securitization and restricted accounts 130,373 103,643 108,612 124,545 71,628
Debt to equity 90.61 % 85.87 % 86.89 % 83.97 % 94.61 %
Debt, net of cash, securitization and restricted accounts to equity 69.43 % 69.23 % 69.23 % 63.42 % 82.22 %
Other statistics (at period end)
BDC asset coverage ratio 216 % 222 % 224 % 233 % 231 %
Number of portfolio companies 59 58 59 62 71
Number of employees 64 65 65 66 66
Loans on non-accrual as a percentage of total debt investments
Fair Value 3.74 % 4.08 % 4.69 % 4.35 % 3.43 %
Cost 10.80 % 12.92 % 15.12 % 18.33 % 15.87 %
 
_____________
(a)   The impact due to the timing of the LIBOR resets and floors is included in the spread to average LIBOR. The impact to the yield on average loan portfolio at fair value due to the timing of LIBOR resets and floors for Q4 2009, Q1 2010, Q2 2010, Q3 2010 and Q4 2010 was approximately 0.94%, 0.78%, 0.73%, 1.25% and 1.34%, respectively. The impact to the cost of funds due to the timing of LIBOR resets for Q4 2009, Q1 2010, Q2 2010, Q3 2010 and Q4 2010 was approximately 0.18%, 0.01%, (0.01)%, 0.05% and 0.05%, respectively.
 
         

SELECTED FINANCIAL DATA

QUARTERLY INVESTMENT RISK AND CHANGES IN PORTFOLIO COMPOSITION
 
2009 2010 2010 2010 2010
(dollars in thousands)   Q4   Q1   Q2   Q3   Q4
Investment rating: (a)
IR 1 total investments at fair value (b) $ 573,231 $ 568,918 $ 555,745 $ 451,743 $ 330,605
IR 2 total investments at fair value 125,222 151,526 194,690 242,579 370,694
IR 3 total investments at fair value 271,447 256,380 204,892 195,342 173,447
IR 4 total investments at fair value 3,394 3,188 1,988 6,796 112,811
IR 5 total investments at fair value 13,052 11,020 40,275 27,793 22,148
 
IR 1 percentage of total portfolio 58.1 % 57.4 % 55.7 % 48.9 % 32.7 %
IR 2 percentage of total portfolio 12.7 % 15.3 % 19.5 % 26.3 % 36.7 %
IR 3 percentage of total portfolio 27.5 % 25.9 % 20.6 % 21.1 % 17.2 %
IR 4 percentage of total portfolio 0.4 % 0.3 % 0.2 % 0.7 % 11.2 %
IR 5 percentage of total portfolio 1.3 % 1.1 % 4.0 % 3.0 % 2.2 %
 
Originations and advances by security type:
Senior secured debt $ 1,468 $ 32,814 $ 34,596 $ 46,692 $ 145,440
Subordinated debt—Secured 4,956 6,387 4,001 17,986 9,116
Subordinated debt—Unsecured 134 132 10,178 2,855 75
Preferred equity 1,479 1,330 1,636 1,561 4,751
Common/common equivalents equity                 1             716  
Total   $ 8,037     $ 40,663     $ 50,412     $ 69,094     $ 160,098  
Exits and repayments by security type:
Senior secured debt $ 38,508 $ 32,649 $ 9,517 $ 21,315 $ 24,770
Subordinated debt—Secured 11,803 667 11,880 51,177 2,749
Subordinated debt—Unsecured 31,618
Preferred equity 70 8,844 16,579 2,410
Common/common equivalents equity     1,500       133       55       12,531       12,774  
Total   $ 51,881     $ 33,449     $ 30,296     $ 133,220     $ 42,703  
Exits and repayments by transaction type:
Scheduled principal amortization $ 7,537 $ 7,092 $ 16,933 $ 6,277 $ 12,186
Principal prepayments and loan sales 42,124 25,819 50 85,129 14,037
Payment of payment-in-kind interest and dividends 720 405 5,369 13,851 3,164
Sale of equity investments     1,500       133       7,944       27,963       13,316  
Total   $ 51,881     $ 33,449     $ 30,296     $ 133,220     $ 42,703  
 
 
(a)

MCG uses an investment rating system to characterize and monitor its expected level of returns on each investment in MCG’s portfolio.MCG uses the following 1 to 5 investment rating scale:

Investment

Rating
1     Capital gain expected or realized
2 Full return of principal and interest or dividend expected with customer performing in accordance with plan
3 Full return of principal and interest or dividend expected but customer requires closer monitoring
4 Some loss of interest or dividend expected but still expecting an overall positive internal rate of return on the investment
5 Loss of interest or dividend and some loss of principal investment expected which would result in an overall negative internal rate of return on the investment
 
(b)

As of December 31, 2009, March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, approximately, $219 million, $207 million, $205 million,$117 million and $112 million, respectively, of MCG’s investments with an investment rating of “1” represented loans to companies in which MCG also held equity.
 
 
SELECTED FINANCIAL DATA
PORTFOLIO COMPOSITION BY TYPE
         
2009 2010 2010 2010 2010
(dollars in thousands)   Q4   Q1   Q2   Q3   Q4
Composition of investments at period end, fair value
Senior secured debt $ 379,457 $ 379,600 $ 419,398 $ 437,709 $ 555,667
Subordinated debt
Secured 275,398 272,713 237,226 187,918 190,309
Unsecured     30,618       30,760       40,848       12,241       12,321  
Total debt investments     685,473       683,073       697,472       637,868       758,297  
Preferred equity 257,984 261,931 248,983 244,864 218,690
Common/common equivalents equity     42,889       46,028       51,135       41,521       32,718  
Total equity investments     300,873       307,959       300,118       286,385       251,408  
Total investments   $ 986,346     $ 991,032     $ 997,590     $ 924,253     $ 1,009,705  
 
Percentage of investments at period end, fair value
Senior secured debt 38.5 % 38.3 % 42.0 % 47.4 % 55.0 %
Subordinated debt
Secured 27.9 % 27.5 % 23.8 % 20.3 % 18.9 %
Unsecured     3.1 %     3.1 %     4.1 %     1.3 %     1.2 %
Total debt investments     69.5 %     68.9 %     69.9 %     69.0 %     75.1 %
Preferred equity 26.2 % 26.4 % 25.0 % 26.5 % 21.7 %
Common/common equivalents equity     4.3 %     4.7 %     5.1 %     4.5 %     3.2 %
Total equity investments     30.5 %     31.1 %     30.1 %     31.0 %     24.9 %
Total investments     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
 
SELECTED FINANCIAL DATA
KEY ANNUAL FINANCIAL AND STATISTICAL INFORMATION
 
Years Ended December 31,
(dollars in thousands)   2009   2010

Reconciliation of DNOI (a) to net operating income
 

Net operating income before investment losses, gain on extinguishment of debt and income tax provision
$ 38,188 $ 40,565
Amortization of employee restricted stock awards     7,727       4,342  

DNOI (a)
$ 45,915 $ 44,907
DNOI per share-weighted average common shares (a) $ 0.61 $ 0.60
Weighted-average common shares outstanding 74,692 75,422
Average loan portfolio - fair value $ 767,186 $ 676,249
Average total investment portfolio - fair value 1,095,934 969,490
Average total assets 1,223,800 1,149,969
Average stockholders' equity 620,243 611,084

Return on average total assets
Net operating income before net investment losses, gain on extinguishment of debt and income tax provision 3.12 % 3.53 %
Net income (4.17 )% (1.14 )%
Return on average equity

Net operating income before net investment losses, gain on extinguishment of debt and income tax provision
6.16 % 6.64 %
Net income (8.23 )% (2.14 )%
Yield on average loan portfolio at fair value
Average LIBOR 0.69 % 0.34 %
Spread to average LIBOR on average loan portfolio at fair value     12.00 %     12.05 %
12.69 % 12.39 %
Impact of fee accelerations of unearned fees on paid/restructured loans 0.03 % 0.10 %
Impact of non-accrual loans     (0.84 )%     (0.78 )%
Total yield on average loan portfolio at fair value     11.88 %     11.71 %
Cost of funds
Average LIBOR 0.69 % 0.35 %
Spread to LIBOR excluding amortization of deferred debt issuance costs 2.54 % 2.33 %
Impact of amortization of deferred debt issuance costs     0.67 %     0.50 %
Total cost of funds     3.90 %     3.18 %
Net portfolio yield margin     6.65 %     7.08 %

 
 

(a)
DNOI represents net operating income before net investment (loss) gain, gain on extinguishment of debt and income tax provision (benefit), as determined in accordance with U.S. generally accepted accounting principles, or GAAP, adjusted for amortization of employee restricted stock awards. MCG views DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities. These measures serve as an additional measure of MCG’s operating performance exclusive of employee restricted stock amortization, which represents an expense of the company but does not require settlement in cash. DNOI does include PIK interest and dividend income which are generally not payable in cash on a regular basis but rather at investment maturity or when declared. DNOI should not be considered as an alternative to net operating income, net (loss) income), earnings (loss) per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net (loss) income, earnings (loss) per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing.
 
 
SELECTED FINANCIAL DATA
ANNUAL CHANGES IN PORTFOLIO COMPOSITION
 
Years ended December 31,
(dollars in thousands)   2009   2010
Originations and advances by security type  
Secured senior debt $ 51,036 $ 259,541
Subordinated debt - Secured 16,011 37,490
Subordinated debt - Unsecured 3,900 13,240
Preferred equity 11,693 9,279
Common/Common equivalents equity         717
Total   $ 82,640   $ 320,267
 
Exits and repayments by security type
Secured senior debt $ 89,097 $ 88,252
Subordinated debt - Secured 46,365 66,473
Subordinated debt - Unsecured 31,618
Preferred equity 67,259 27,832
Common/Common equivalents equity     4,482     25,493
Total   $ 207,203   $ 239,668
 
Exits and repayments by transaction type
Scheduled principal amortization $ 37,713 $ 42,488
Principal prepayments and loan sales 95,535 125,035
Payment of payment-in-kind interest and dividends 10,628 22,789
Sale of equity investments     63,327     49,356
Total   $ 207,203   $ 239,668
 

IMPORTANT INFORMATION ABOUT NON-GAAP REFERENCES

References by MCG Capital Corporation to distributable net operating income, or DNOI, refer to net operating income before net investment loss, gain (loss) on extinguishment of debt and income tax provision (benefit), as determined in accordance with GAAP adjusted for amortization of employee restricted stock awards.

The Company’s management uses DNOI and the related per share measures as useful and appropriate supplements to net operating income, net income (loss), earnings (loss) per share and cash flows from operating activities. These measures serve as an additional measure of MCG’s operating performance exclusive of employee restricted stock amortization, which represents an expense of the Company but does not require settlement in cash. DNOI does include PIK, interest and dividend income that generally are not payable in cash on a regular basis, but rather at investment maturity or when declared.

The Company believes that providing non-GAAP DNOI and DNOI per share affords investors a view of results that may be more easily compared to peer companies and enables investors to consider the Company’s results on both a GAAP and non-GAAP basis in periods when the Company is undertaking non-recurring activities. DNOI should not be considered as an alternative to, as an indicator of the Company’s operating performance, or as a substitute for net operating income, net (loss) income, earnings (loss) per share and cash flows from operating activities (each computed in accordance with GAAP). Instead, DNOI should be reviewed in connection with net operating income, net (loss) income , earnings (loss) per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing because the items excluded from the non-GAAP measures often have a material impact on the Company’s results of operations. Therefore, management uses, and investors should use, non-GAAP measures only in conjunction with its reported GAAP results.

ABOUT MCG CAPITAL CORPORATION

MCG Capital Corporation is a solutions-focused commercial finance company providing capital and advisory services to middle market companies throughout the United States. MCG’s investment objective is to achieve current income and capital gains. Portfolio companies generally use capital provided by MCG to finance acquisitions, recapitalizations, buyouts, organic growth and working capital.

Forward-looking Statements:

Statements in this press release regarding management’s future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: MCG’s results of operations, including revenues, net operating income, distributable net operating income, net investment losses and general and administrative expenses and the factors that may affect such results; management’s belief that, as the Company deploys debt and equity proceeds from monetization activities, it can continue to increase operating income and support the future growth of distributions to MCG stockholders; and general economic factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in MCG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by MCG from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. MCG is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Copyright Business Wire 2010