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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
   
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
    
For the Quarter Ended September 30, 2002.
¨
   
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
     
(I.R.S. Employer
incorporation or organization)
     
Identification No.)
1100 Wilson Boulevard, Suite 800
       
Arlington, VA
     
22209
(Address of principal executive office)
     
(Zip Code)
(703) 247-7500
(Registrant’s telephone number, including area code)
 
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 and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $.01 par value, outstanding as of November 13, 2002 was 31,259,462.
 

Table of Contents
MCG CAPITAL CORPORATION
 
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
 
TABLE OF CONTENTS
 
PART I
  
   
   
Item 1.
  
   
   
   
   
   
   
   
Item 2.
  
Item 3.
  
Item 4.
  
PART II
  
Item 1.
  
Item 2.
  
Item 3.
  
Item 4.
  
Item 5.
  
Item 6.
  
 

2

Table of Contents
 
PART I.    FINANCIAL INFORMATION
 
In this Quarterly Report, the “Company”, “MCG”, “we”, “us” and “our” refer to MCG Capital Corporation and its wholly owned subsidiaries and its affiliated securitization trusts unless the context otherwise requires.
 
Selected Consolidated Financial and Other Data
 
The selected consolidated financial and other data below should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements (unaudited) and notes thereto. Different accounting principles are used in the preparation of financial statements of a business development company under the Investment Company Act of 1940 and, as a result, the financial results for the periods ending before December 1, 2001 are not comparable to the period commencing on December 1, 2001 and are not expected to be representative of our financial results in the future.
 
(dollars in thousands except per share data)
   
Post-IPO as a Business Development Company Three Months Ended Sept. 30, 2002
     
Pre-IPO prior to becoming a Business Development Company Three Months Ended Sept. 30, 2001
       
Post-IPO as a Business Development Company Nine Months Ended Sept. 30, 2002
   
Pre-IPO prior to becoming a Business Development Company Nine Months Ended Sept. 30, 2001
Income Statement Data:
                                  
Operating income
   
$
20,138
 
   
$
18,725
 
     
$
56,625
   
$
54,326
Net operating income (a)
   
 
11,653
 
   
 
8,179
 
     
 
33,058
   
 
22,324
Income (loss) before cumulative effect of accounting changes
   
 
(3,461
)
   
 
(1,074
)
     
 
9,686
   
 
5,294
Net increase (decrease) in stockholders’ equity resulting from earnings (loss)
   
 
(3,461
)
   
 
(1,074
)
     
 
9,686
   
 
7,071
Per Common Share Data:
                                  
Net operating income (a) per common share:
                                  
basic
   
$
0.39
 
   
$
0.65
 
     
$
1.18
   
$
1.76
diluted
   
 
0.39
 
   
 
0.64
 
     
 
1.18
   
 
1.76
Income (loss) before cumulative effect of accounting changes per common share:
                                  
basic
   
 
(0.12
)
   
 
(0.08
)
     
 
0.35
   
 
0.42
diluted
   
 
(0.12
)
   
 
(0.08
)
     
 
0.34
   
 
0.42
Earnings (loss) per common share:
                                  
basic
   
 
(0.12
)
   
 
(0.08
)
     
 
0.35
   
 
0.56
diluted
   
 
(0.12
)
   
 
(0.08
)
     
 
0.34
   
 
0.56
Net asset value per common share
   
 
12.13
 
   
 
13.04
 
     
 
12.13
   
 
13.04
Dividends declared per common share
   
 
0.46
 
   
 
—  
 
     
 
1.34
   
 
—  
Selected Period-End Balances:
                                  
Total investment portfolio
   
$
707,258
 
   
$
574,879
 
                
Total assets
   
 
747,658
 
   
 
645,509
 
                
Borrowings
   
 
348,186
 
   
 
466,732
 
                
Other data:
                                  
Number of portfolio companies
   
 
81
 
   
 
74
 
                
Number of employees
   
 
55
 
   
 
58
 
                
 
(a)
 
Represents net operating income before provision for loan losses for periods ending prior to December 1, 2001.

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Table of Contents
Selected Operating Data
 
The following table shows our consolidated results of operations for the three and nine months ended September 30, 2002 and 2001. The three and nine months ended September 30, 2002 reflect our financial results as a business development company (BDC), whereas the three and nine months ended September 30, 2001 reflect our financial results prior to operating as a BDC. Different accounting principles are used in the preparation of our financial statements as a BDC under the Investment Company Act of 1940 and, as a result, our financial results as a BDC are not directly comparable to prior periods. The items in the table below were not affected by the change in accounting principles resulting from our conversion to a BDC.
 
(dollars in thousands)
     
Post-IPO as a Business Development Company Three Months Ended Sept. 30, 2002
   
Pre-IPO prior to becoming a Business Development Company Three Months Ended Sept. 30, 2001
     
Post-IPO as a Business Development Company Nine Months Ended Sept. 30, 2002
   
Pre-IPO prior to becoming a Business Development Company Nine Months Ended Sept. 30, 2001
Operating income
                                
Interest and fees on commercial loans
     
$
19,396
   
$
17,588
     
$
53,240
   
$
52,652
Advisory fees and other income
     
 
742
   
 
1,137
     
 
3,385
   
 
1,674
      
  
    
  
Total operating income
     
 
20,138
   
 
18,725
     
 
56,625
   
 
54,326
Operating expenses
                                
Interest expense
     
 
2,841
   
 
6,469
     
 
8,181
   
 
20,991
Employee compensation:
                                
Salaries and benefits
     
 
1,958
   
 
2,550
     
 
5,821
   
 
7,156
Long-term incentive compensation
     
 
1,816
   
 
—  
     
 
5,073
   
 
—  
      
  
    
  
Total employee compensation
     
 
3,774
   
 
2,550
     
 
10,894
   
 
7,156
General and administrative expense
     
 
1,870
   
 
1,527
     
 
4,492
   
 
3,855
      
  
    
  
Total operating expenses
     
 
8,485
   
 
10,546
     
 
23,567
   
 
32,002
      
  
    
  
Net operating income (a)
     
 
11,653
   
 
8,179
     
 
33,058
   
 
22,324
Long-term incentive compensation (b)
     
 
1,816
   
 
—  
     
 
5,073
   
 
—  
      
  
    
  
Distributable net operating income (c)
     
$
13,469
   
$
8,179
     
$
38,131
   
$
22,324
      
  
    
  
 
(a)
 
Represents net operating income before provision for loan losses for periods ending prior to December 1, 2001.
 
(b)
 
Includes expenses related to termination of the stock option plan and issuance of related restricted stock awards at the time of the IPO.
 
(c)
 
Distributable net operating income is presented for the three and nine months ended September 30, 2001 to facilitate the understanding of the amount of net earnings we may have potentially distributed if we had operated as a business development company and regulated investment company (without the effect of de-leveraging prior to December 1, 2001) for that period. The amounts of the distributable net operating income identified in this table are not intended to represent amounts we will distribute in future periods. Distributable net operating income may not be comparable to similarly titled measures reported by other companies. Distributable net operating income does not represent net increase (decrease) in stockholders’ equity resulting from earnings or cash generated from operating activities in accordance with GAAP and should not be considered an alternative to such items as an indication of our performance or to cash flows as a measure of liquidity or ability to make distributions. For additional information on distributions, see the section entitled “Financial Condition, Liquidity and Capital Resources—Dividends.”

4

Table of Contents
Item 1.     Financial Statements (unaudited)
 
MCG Capital Corporation
Consolidated Balance Sheets
(in thousands, except per share data)
 
    
September 30, 2002
     
December 31, 2001
  
    
    
(unaudited)
         
    
                   
Assets
                  
Cash and cash equivalents
   
$
22,283
 
   
$
48,148
 
Investments:
                  
Commercial loans, at fair value (cost of $712,931 and $604,232)
   
 
700,933
 
   
 
596,002
 
Investments in equity securities—at fair value (cost of $32,753 and $24,173)
   
 
19,794
 
   
 
21,201
 
Unearned income on commercial loans
   
 
(13,469
)
   
 
(12,134
)
    
Total investments
   
 
707,258
 
   
 
605,069
 
Interest receivable
   
 
7,632
 
   
 
5,623
 
Other assets
   
 
10,485
 
   
 
14,226
 
    
Total assets
   
$
747,658
 
   
$
673,066
 
    
Liabilities
                  
Borrowings
   
$
348,186
 
   
$
287,808
 
Interest payable
   
 
1,523
 
   
 
408
 
Dividends payable
   
 
14,394
 
   
 
24,327
 
Other liabilities
   
 
4,515
 
   
 
8,150
 
    
Total liabilities
   
 
368,618
 
   
 
320,693
 
    
Stockholders’ Equity
                  
Preferred stock, par value $.01, authorized 1 share, none issued and outstanding
   
 
—  
 
   
 
—  
 
Common stock
par value $.01, authorized 100,000 shares, 31,253 issued and outstanding on September 30, 2002 and 28,287 issued and outstanding on December 31, 2001
   
 
313
 
   
 
283
 
Paid-in capital
   
 
419,874
 
   
 
370,087
 
Stockholder loans
   
 
(5,663
)
   
 
(6,510
)
Unearned compensation—restricted stock
   
 
(9,524
)
   
 
(13,077
)
Earnings (loss) in excess of distributions
   
 
(1,003
)
   
 
12,792
 
Net unrealized depreciation on investments
   
 
(24,957
)
   
 
(11,202
)
    
Total stockholders’ equity
   
 
379,040
 
   
 
352,373
 
    
Total liabilities and stockholders’ equity
   
$
747,658
 
   
$
673,066
 
    
 
See notes to consolidated financial statements.

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Table of Contents
 
MCG Capital Corporation
Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
 
      
Post-IPO as a Business Development Company Three Months Ended September 30, 2002
       
Pre-IPO prior to becoming a Business Development Company Three Months Ended September 30, 2001
       
Post-IPO as a Business Development Company Nine Months Ended September 30, 2002
       
Pre-IPO prior to becoming a Business Development Company Nine Months Ended September 30, 2001
  
      
Operating income
                                            
Interest and fees on commercial loans
     
$
19,396
 
     
$
17,588
 
     
$
53,240
 
     
$
52,652
 
Advisory fees and other income
     
 
742
 
     
 
1,137
 
     
 
3,385