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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 June 30, 2004.

 

¨   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 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x  No ¨

 

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of August 5, 2004 was 43,048,293.

 

Table of Contents

MCG CAPITAL CORPORATION

 

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004

 

TABLE OF CONTENTS

 

PART I

    FINANCIAL INFORMATION    3
     Selected Financial Data    3

Item 1.

    Financial Statements (Unaudited)    4
     Consolidated Balance Sheets – June 30, 2004 and December 31, 2003    4
    

Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003

    5
    

Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2004 and 2003

    6
     Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003    7
     Consolidated Schedule of Investments as of June 30, 2004    8
     Consolidated Schedule of Investments as of December 31, 2003    16
     Notes to Consolidated Financial Statements    25
     Independent Accountants’ Review Report    34

Item 2.

    Management’s Discussion and Analysis of Financial Condition and Results of Operations    35

Item 3.

    Quantitative and Qualitative Disclosures About Market Risk    51

Item 4.

    Controls and Procedures    52

PART II

    OTHER INFORMATION    53

Item 1.

    Legal Proceedings    53

Item 2.

    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    53

Item 3.

    Defaults upon Senior Securities    53

Item 4.

    Submission of Matters to a Vote of Security Holders    53

Item 5.

    Other Information    54

Item 6.

    Exhibits and Reports on Form 8-K    55

Signatures

   56

 

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 consolidated subsidiaries and its affiliated securitization trusts unless the context otherwise requires.

 

Selected Financial Data

 

The following table sets forth selected financial data from our unaudited financial statements. The selected financial data 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 included in this Quarterly Report.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
(dollars in thousands except per share amounts and statistical data)    2004
    2003
    2004
    2003

Income statement data:

                            

Operating income

    $ 22,784    $ 19,636    $ 44,989    $ 38,175

Net operating income before investment gains and losses

      12,474      11,684      22,315      22,630

Net income

      17,643      8,989      19,740      17,886

Per common share data:

                            

Earnings per common share basic and diluted

      0.44      0.30      0.51      0.59

Net operating income before investment gains and losses per common share basic and diluted

      0.31      0.39      0.58      0.75

Net asset value per common share (a)

      12.09      11.42      12.09      11.42

Cash dividends declared per common share

      0.42      0.41      0.84      0.81

Selected period-end balances:

                            

Total investment portfolio

    $ 758,948    $ 620,365              

Total assets

      866,709      707,866              

Borrowings

      322,806      333,204              

Other data (at period-end):

                            

Number of portfolio companies

      91      76              

Number of employees

      100      57              

 

(a)   Based on common shares outstanding at period-end.

 

3

Table of Contents

Item 1.    Financial Statements (unaudited)

 

MCG Capital Corporation

Consolidated Balance Sheets (unaudited)

(in thousands, except per share amounts)

 

     June 30,
2004
     December 31,
2003
  

Assets

                 

Cash and cash equivalents

    $ 58,419     $ 60,072  

Cash, securitization accounts

      31,165       33,434  

Investments at fair value

                 

Commercial loans (cost of $674,243 and $615,253, respectively)

      663,336       605,551  

Investments in equity securities (cost of $125,349 and $112,850, respectively)

      110,190       93,391  

Unearned income on commercial loans

      (14,578 )     (16,416 )
    
 

Total investments

      758,948       682,526  

Interest receivable

      5,392       5,717  

Other assets

      12,785       9,166  
    
 

Total assets

    $ 866,709     $ 790,915  
    
 

Liabilities

                 

Borrowings

    $ 322,806     $ 304,131  

Interest payable

      868       1,185  

Dividends payable

      16,268       16,267  

Other liabilities

      6,499       5,382  
    
 

Total liabilities

      346,441       326,965  
    
 

Commitments and contingencies

                 

Stockholders’ Equity

                 

Preferred stock, par value $.01, authorized 1 share, none issued and outstanding

      —         —    

Common stock, par value $.01, authorized 100,000 shares, 43,047 issued and outstanding on June 30, 2004 and 38,732 issued and outstanding on December 31, 2003

      430       387  

Paid-in capital

      601,976       529,168  

Stockholder loans

      (5,139 )     (5,293 )

Unearned compensation—restricted stock

      (9,950 )     (4,911 )

Distributions in excess of earnings

      (40,983 )     (26,240 )

Net unrealized depreciation on investments

      (26,066 )     (29,161 )
    
 

Total stockholders’ equity

      520,268       463,950  
    
 

Total liabilities and stockholders’ equity

    $ 866,709     $ 790,915  
    
 

 

See notes to consolidated financial statements (unaudited).

 

4

Table of Contents

MCG Capital Corporation

Consolidated Statements of Operations (unaudited)

(in thousands, except per share amounts)

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

  
     2004
     2003
     2004
     2003
  

Operating income

                                 

Interest and dividend income

                                 

Non-affiliate investments (less than 5% owned)

    $ 12,856     $ 17,077     $ 25,176     $ 33,402  

Affiliate investments (5% to 25% owned)

      767       1,130       1,652       2,085  

Control investments (more than 25% owned)

      5,170       549       10,454       1,097  
    
 

Total interest and dividend income

      18,793       18,756       37,282       36,584  

Advisory fees and other income

                                 

Non-affiliate investments (less than 5% owned) and other income

      2,489       880       4,108       1,591  

Control investments (more than 25% owned)

      1,502       —         3,599       —    
    
 

Total advisory fees and other income

      3,991       880       7,707       1,591  
    
 

Total operating income

      22,784       19,636       44,989       38,175  
    
 

Operating expenses

                                 

Interest expense

      2,065       2,281       4,168       4,728  

Employee compensation:

                                 

Salaries and benefits

      3,343       2,157       6,228       4,041  

Long-term incentive compensation

      2,128       1,501       7,679       3,027  
    
 

Total employee compensation

      5,471       3,658       13,907       7,068  

General and administrative expense

      2,774       2,013       4,599       3,749  
    
 

Total operating expenses

      10,310       7,952       22,674       15,545  
    
 

Net operating income before investment gains and losses

      12,474       11,684       22,315       22,630  
    
 

Net realized gains (losses) on investments

                                 

Non-affiliate investments (less than 5% owned)

      84       (1,843 )     1,988       (10,142 )

Control investments (more than 25% owned)

      (7,658 )     —         (7,658 )     (11,397 )
    
 

Total net realized gains (losses) on investments

      (7,574 )     (1,843 )     (5,670 )     (21,539 )

Net change in unrealized appreciation (depreciation) on investments

                                 

Non-affiliate investments (less than 5% owned)

      3,368       3,656       (125 )     18,735  

Affiliate investments (5% to 25% owned)

      (1,947 )     1,570       (3,367 )     1,744  

Control investments (more than 25% owned)

      11,322       (6,078 )     6,587       (3,684 )
    
 

Total net change in unrealized appreciation (depreciation) on investments

      12,743       (852 )     3,095       16,795  
    
 

Net investment gains (losses)

      5,169       (2,695 )     (2,575 )     (4,744 )
    
 

Net income

    $ 17,643     $ 8,989     $ 19,740     $ 17,886  
    
 

Earnings per common share basic and diluted

    $ 0.44     $ 0.30     $ 0.51     $ 0.59  

Cash dividends declared per common share

    $ 0.42     $ 0.41     $ 0.84     $ 0.81  

Weighted average common shares outstanding

      39,650       30,121