MCG CAPITAL CORP - FORM 10-Q

MCG CAPITAL CORP - FORM 10-Q - May 9, 2011

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MCG CAPITAL CORP Reports

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EX-31.3 - SECTION 302 CAO CERTIFICATION - MCG CAPITAL CORP	dex313.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - MCG CAPITAL CORP	dex312.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - MCG CAPITAL CORP	dex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - MCG CAPITAL CORP	dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - MCG CAPITAL CORP	dex311.htm
EX-32.3 - SECTION 906 CAO CERTIFICATION - MCG CAPITAL CORP	dex323.htm
EX-15.1 - LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION FROM ERNST & YOUNG LLP - MCG CAPITAL CORP	dex151.htm

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 March 31, 2011

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

For the transition period from to

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. (Check one):

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 April 29, 2011, there were 77,060,736 shares of the registrant’s $0.01 par value Common Stock outstanding.

MCG CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011

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			40
SELECTED FINANCIAL DATA			41

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			43

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			67

ITEM 4. CONTROLS AND PROCEDURES			69

PART II. OTHER INFORMATION			70

ITEM 1. LEGAL PROCEEDINGS			70

ITEM 1A. RISK FACTORS			70

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.			82

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			82

ITEM 4. RESERVED			82

ITEM 5. OTHER INFORMATION			82

ITEM 6. EXHIBITS			83

SIGNATURES			84

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MCG Capital Corporation

Consolidated Balance Sheets


(in thousands, except per share amounts)	March 31, 2011			December 31, 2010
	(unaudited)

Assets

Cash and cash equivalents	$	40,571		$	44,970

Cash, securitization accounts		70,562			42,245

Cash, restricted		21,941			29,383

Investments at fair value
Non-affiliate investments (cost of $647,648 and $684,785, respectively)		640,512			646,116
Affiliate investments (cost of $43,137 and $43,721, respectively)		54,163			53,300
Control investments (cost of $492,831 and $517,167, respectively)		259,674			310,289


Total investments (cost of $1,183,616 and $1,245,673, respectively)		954,349			1,009,705

Interest receivable		3,492			5,453

Other assets		14,235			13,521


Total assets	$	1,105,150		$	1,145,277


Liabilities

Borrowings (maturing within one year of $0 and $18,858, respectively)	$	527,343		$	546,882

Interest payable		1,593			2,291

Dividends payable		11,582			10,735

Other liabilities		7,539			7,353


Total liabilities		548,057			567,261


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 March 31, 2011 and December 31, 2010, 77,065 issued and outstanding on March 31, 2011 and 76,662 issued and outstanding on December 31, 2010		771			767

Paid-in capital		1,008,293			1,008,823

Distributions in excess of earnings
Paid-in capital		(166,029	)		(166,029	)
Other		(55,635	)		(28,555	)

Net unrealized depreciation on investments		(230,307	)		(236,990	)


Total stockholders’ equity		557,093			578,016


Total liabilities and stockholders’ equity	$	1,105,150		$	1,145,277


Net asset value per common share at end of period	$	7.23		$	7.54

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

MCG Capital Corporation

Consolidated Statements of Operations

(unaudited)


	Three months ended March 31,
(in thousands, except per share amounts)	2011			2010
Revenue
Interest and dividend income
Non-affiliate investments (less than 5% owned)	$	17,558		$	14,846
Affiliate investments (5% to 25% owned)		1,143			982
Control investments (more than 25% owned)		4,735			5,783

Total interest and dividend income		23,436			21,611

Advisory fees and other income
Non-affiliate investments (less than 5% owned)		507			22
Control investments (more than 25% owned)		360			113

Total advisory fees and other income		867			135


Total revenue		24,303			21,746


Operating expense
Interest expense		3,873			4,473
Employee compensation
Salaries and benefits		3,976			4,796
Amortization of employee restricted stock awards		624			1,227

Total employee compensation		4,600			6,023
General and administrative expense		2,827			2,811


Total operating expense		11,300			13,307


Net operating income before net investment loss, loss on extinguishment of debt and income tax provision		13,003			8,439


Net realized (loss) gain on investments
Non-affiliate investments (less than 5% owned)		(27,917	)		(2,267	)
Affiliate investments (5% to 25% owned)		(917	)		—
Control investments (more than 25% owned)		1,207			—

Total net realized loss on investments		(27,627	)		(2,267	)


Net unrealized appreciation (depreciation) on investments
Non-affiliate investments (less than 5% owned)		31,533			4,730
Affiliate investments (5% to 25% owned)		1,447			1,200
Control investments (more than 25% owned)		(26,279	)		(6,114	)
Derivative and other fair value adjustments		(18	)		87

Total net unrealized appreciation (depreciation) on investments		6,683			(97	)

Net investment loss before income tax provision		(20,944	)		(2,364	)

Loss on extinguishment of debt before income tax provision		(863	)		(58	)
Income tax provision		11			62

Net (loss) income	$	(8,815	)	$	5,955

(Loss) earnings per basic and diluted common share	$	(0.12	)	$	0.08
Cash distributions declared per common share	$	0.15		$	—
Weighted-average common shares outstanding—basic and diluted		75,765			76,339

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

MCG Capital Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)


	Three months ended March 31,
(in thousands, except per share amounts)	2011			2010
Increase (decrease) in net assets from operations
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision	$	13,003		$	8,439
Net realized loss on investments		(27,627	)		(2,267	)
Net unrealized appreciation (depreciation) on investments		6,683			(97	)
Loss on extinguishment of debt		(863	)		(58	)
Income tax provision		(11	)		(62	)

Net (loss) income		(8,815	)		5,955


Distributions to stockholders
Distributions declared		(11,582	)		—

Net decrease in net assets resulting from stockholder distributions		(11,582	)		—


Capital share transactions
Amortization of restricted stock awards
Employee		624			1,227
Non-employee director		17			26
Common stock withheld to pay taxes applicable to the vesting of restricted stock		(1,167	)		—
Net forfeitures of restricted common stock and dividends		—			6

Net (decrease) increase in net assets resulting from capital share transactions		(526	)		1,259


Total (decrease) increase in net assets		(20,923	)		7,214

Net assets
Beginning of period		578,016			615,683

End of period	$	557,093		$	622,897


Net asset value per common share at end of period	$	7.23		$	8.16
Common shares outstanding at end of period		77,065			76,338

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

MCG Capital Corporation

Consolidated Statements of Cash Flows

(unaudited)


	Three months ended March 31,
(in thousands)	2011			2010
Cash flows from operating activities
Net (loss) income	$	(8,815	)	$	5,955
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Investments in portfolio companies		(89,483	)		(35,408	)
Principal collections related to investment repayments or sales		119,260			33,044
Decrease (increase) in interest receivable, accrued payment-in-kind interest and dividends		6,503			(6,385	)
Amortization of restricted stock awards
Employee		624			1,227
Non-employee director		17			26
Decrease (increase) in cash—securitization accounts from interest collections		(7,891	)		4,001
Increase in restricted cash—escrow accounts		(1,224	)		—
Depreciation and amortization		902			1,101
Decrease in other assets		85			113
Decrease in other liabilities		(419	)		(3,935	)
Realized loss on investments		27,627			2,267
Net change in unrealized (appreciation) depreciation on investments		(6,683	)		97
Loss on extinguishment of debt		863			58

Net cash provided by operating activities		41,366			2,161


Cash flows from financing activities
Payments on borrowings		(25,402	)		(23,014	)
Proceeds from borrowings		5,000			—
Decrease (increase) in cash in restricted and securitization accounts
Securitization accounts for repayment of principal on debt		(20,426	)		10,535
Restricted cash		8,666			12,194
Payment of financing costs		(1,701	)		(1,500	)
Distributions paid		(10,735	)		—
Common stock withheld to pay taxes applicable to the vesting of restricted stock		(1,167	)		—

Net cash used in financing activities		(45,765	)		(1,785	)

Net (decrease) increase in cash and cash equivalents		(4,399	)		376

Cash and cash equivalents
Beginning balance		44,970			54,187

Ending balance	$	40,571		$	54,563


Supplemental disclosure of cash flow information
Interest paid	$	3,952		$	3,049
Income taxes (refunded) paid		(103	)		188
Paid-in-kind interest collected		5,780			405
Dividend income collected		4,183			—

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

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2011 (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)⁽¹⁾⁽¹³⁾	$	15,372	$	15,310	$	15,310
Avenue Broadband LLC⁽²⁾	Cable	Preferred Units (10.8%, 17,100 units)⁽¹⁾⁽¹³⁾				23,762		35,657
		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		36,278
Broadview Networks Holdings, Inc.⁽⁶⁾	Communications- CLEC	Series A-1 Preferred Stock (12.0%, 100,702 shares)				77,495		41,869
		Series B Preferred Stock (12.0%, 1,282 shares)				100		533
		Class A Common Stock (4,731,031 shares)				—		—
GMC Television Broadcasting, LLC⁽²⁾	Broadcasting	Senior Debt (4.3%, Due 12/16)⁽¹⁾		23,720		21,248		21,607
		Subordinated Debt (14.0%, Due 12/16)⁽¹⁾⁽⁷⁾		10,812		6,976		—
		Subordinated Unsecured Debt (16.0%, Due 12/16)⁽⁷⁾		1,297		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⁾		10,000		9,974		7,470
		Series A Preferred Units (10.0%, 86,000 units)				9,095		—
		Series B Preferred Units (10.0%, 30,000 units)				3,000		—
Jet Plastica Investors, LLC⁽²⁾	Plastic Products	Senior Debt A (9.3%, Due 12/15)⁽¹⁾		14,522		14,468		14,468
Jet Plastica Investors, LLC⁽²⁾		Senior Debt B (7.3%, Due 3/16)⁽¹⁾⁽⁷⁾		22,982		19,365		19,143
		Senior Debt C (2.5%, Due 6/16)⁽⁷⁾		2,000		2,000		—
		Senior Debt D (2.5%, Due 9/16)⁽⁷⁾		28,653		21,560		—
		Series B Preferred Stock (8.0%, 10,000 shares)				10,000		—
		Preferred LLC Interest (8.0%, 301,595 units)				34,014		—
MTP Holding, LLC⁽⁶⁾	Communications- Other	Common LLC Interest (79,171 units)				1		—
	Communications- Other
NPS Holding Group, LLC⁽²⁾⁽⁵⁾⁽⁶⁾	Business	Senior Debt A1 (6.3%, Due 6/13)⁽¹⁾⁽⁷⁾		5,201		3,966		3,550
NPS Holding Group, LLC⁽²⁾⁽⁵⁾⁽⁶⁾	Services	Senior Debt A2 (6.3%, Due 6/13)⁽¹⁾⁽⁷⁾		2,069		1,905		—
		Senior Debt A3 (6.3%, Due 6/13)⁽¹⁾⁽⁷⁾		7,872		6,228		—
		Series A Preferred Units (347 units)				—		—
		Series B Preferred Units (5.0%, 10,731 units)				10,731		—
		Common Units (36,500 units)				—		—
Orbitel Holdings, LLC⁽²⁾	Cable	Senior Debt (9.0%, Due 3/12)⁽¹⁾		14,805		14,772		14,772
		Preferred LLC Interest (10.0%, 120,000 units)				14,486		14,537
PremierGarage Holdings, LLC⁽²⁾⁽⁶⁾	Home Furnishings	Senior Debt (8.0%, Due 12/10-9/11)⁽¹⁾⁽⁷⁾		11,006		9,438		3,075
PremierGarage Holdings, LLC⁽²⁾⁽⁶⁾	Home Furnishings	Preferred LLC Units (400 units)				400		—
		Common LLC Units (79,935 units)				4,971		—
RadioPharmacy Investors, LLC⁽²⁾	Healthcare	Senior Debt (7.5%, Due 3/16)⁽¹⁾		8,500		8,500		8,500
RadioPharmacy Investors, LLC⁽²⁾		Subordinated Debt (15.0%, Due 9/16)⁽¹⁾		10,450		10,439		10,439
		Preferred LLC Interest (19.7%, 70,000 units)				8,518		12,466
Total Sleep Holdings, Inc.⁽²⁾⁽⁶⁾	Healthcare	Subordinated Debt (8.0%, Due 9/11)⁽⁷⁾		13,305		11,780		—
Total Sleep Holdings, Inc.⁽²⁾⁽⁶⁾		Unsecured Note (0.0%, Due 6/11)⁽⁷⁾		375		332		—
		Series A Preferred Stock (10.0%, 3,700 shares)				3,793		—
		Series B Preferred Stock (10.0%, 2,752 shares)				21,149		—
		Common Stock (40,469 shares)				1,000		—


Total Control Investments (represents 27.2% of total investments at fair value)						492,831		259,674

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

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2011 (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 (13.6%, Due 1/14)⁽¹⁾	$	5,332	$	5,311	$	5,311
Advanced Sleep Concepts, Inc.⁽²⁾	Home Furnishings	Subordinated Debt (16.0%, Due 1/14)⁽¹⁾		5,416		5,375		5,286
		Series A Preferred Stock (20.0%, 49 shares)				312		94
		Series B Preferred Stock (1,000 shares)				—		414
		Common Stock (423 shares)				524		—
		Warrants to purchase Common Stock (expire 10/16)				348		—
Cherry Hill Holdings, Inc.	Entertainment	Series A Preferred Stock (10.0%, 750 shares)				963		1,553
Contract Datascan Holdings, Inc.	Business Services	Subordinated Debt (14.0%, Due 3/16)⁽¹⁾		7,795		7,122		7,122
Contract Datascan Holdings, Inc.	Business Services	Series A Preferred Stock (10.0%, 2,292 shares)⁽¹⁾				2,285		2,256
		Common Stock (4,751 shares)⁽¹⁾				472		308
Stratford School Holdings, Inc.⁽²⁾	Education	Senior Debt (7.5%, Due 12/15)⁽¹⁾		19,000		18,892		18,892
Stratford School Holdings, Inc.⁽²⁾		Series A Convertible Preferred Stock (12.0%, 10,000 shares)				33		8,585
		Warrants to purchase Common Stock (expire 5/15)⁽¹⁾				—		2,842
Velocity Technology Enterprises, Inc.⁽²⁾⁽⁶⁾	Business Services	Series A Preferred Stock (1,506,602 shares)				1,500		1,500
Velocity Technology Enterprises, Inc.⁽²⁾⁽⁶⁾	Business Services


Total Affiliate Investments (represents 5.7% of total investments at fair value)						43,137		54,163

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

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2011 (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⁾⁽⁶⁾	Consumer Products	Subordinated Debt (17.0%, Due 9/12)⁽¹⁾⁽⁷⁾	$	18,834	$	12,053	$	—
Allen’s T.V. Cable Service, Inc.	Cable	Senior Debt (7.3%, Due 12/12)⁽¹⁾		4,780		4,771		4,771
Allen’s T.V. Cable Service, Inc.		Subordinated Debt (10.0%, Due 12/12)⁽¹⁾		2,373		2,346		2,314
		Warrants to purchase Common Stock (expire 11/15)				—		78
Bentley Systems, Incorporated	Information Services	Senior Debt (5.8%, Due 12/16)⁽¹⁾		9,975		9,877		9,975
Chase Doors Holdings, Inc.	Manufacturing	Senior Debt (9.5%, Due 12/15)⁽¹⁾		19,444		19,240		19,240
Coastal Sunbelt Holding, Inc.⁽²⁾	Food Services	Senior Debt (9.1%, Due 8/14-2/15)⁽¹⁾		21,211		21,026		21,026
Coastal Sunbelt Holding, Inc.⁽²⁾		Subordinated Debt (16.0%, Due 8/15)⁽¹⁾		8,948		8,863		9,042
Coastal Sunbelt Real Estate, Inc.	Real Estate Investments	Subordinated Unsecured Debt (15.0%, Due 7/12)		2,257		2,252		2,252
Coastal Sunbelt Real Estate, Inc.	Real Estate Investments	Series A-2 Preferred Stock (12.0%, 20,000 shares)				2,656		2,445
		Warrants to purchase Class B Common Stock				—		—
Construction Trailer Specialists, Inc.⁽²⁾	Auto Parts	Senior Debt (14.9%, Due 6/13)⁽¹⁾		7,809		7,653		7,105
Cruz Bay Publishing, Inc.	Publishing	Subordinated Debt (13.1%, Due 12/13)⁽¹⁾⁽⁸⁾		25,122		22,866		18,900
CWP/RMK Acquisition Corp.⁽²⁾⁽⁶⁾	Home Furnishings	Senior Debt (3.0%, Due 12/16)⁽⁷⁾		600		578		513
Data Based Systems International, Inc.	Business Services	Subordinated Debt (14.0%, Due 8/16)⁽¹⁾		9,034		8,837		8,837
Equibrand Holding Corporation⁽²⁾⁽¹⁴⁾	Leisure Activities	Senior Debt (9.5%, Due 6/11)⁽¹⁾ Subordinated Debt (17.0%, Due 12/11)⁽¹⁾		4,244 10,268		4,239 10,243		4,239 10,243
Focus Brands Inc.	Restaurants	Senior Debt (5.3%, Due 11/16)⁽¹⁾		10,827		10,827		10,915
G&L Investment Holdings, LLC⁽²⁾	Insurance	Subordinated Debt (9.8%, Due 5/14)⁽¹⁾		17,500		17,095		16,977
G&L Investment Holdings, LLC⁽²⁾	Insurance	Series A Preferred Shares (14.0%, 5,000,000 shares)				7,915		7,915
		Class C Shares (621,907 shares)				529		164
Golden Knight II CLO, Ltd.	Diversified Financial Services	Income Notes (8.0%, Due 4/19)				3,046		2,639
Goodman Global, Inc.	Manufacturing	Senior Debt (5.8%, Due 10/16)⁽¹⁾		2,985		2,985		3,002
GSDM Holdings, LLC⁽²⁾	Healthcare	Senior Debt (12.9%, Due 12/13)⁽¹⁾		25,623		25,485		25,485
		Series B Preferred Units (12.5%, 4,213,333 units)				4,824		5,272
Haws Corporation	Manufacturing	Senior Debt (10.5%, Due 12/15)⁽¹⁾		17,500		17,286		17,286
Jenzabar, Inc.	Technology	Senior Preferred Stock (11.0%, 3,750 shares)				6,534		6,534
		Subordinated Preferred Stock (109,800 shares)				1,098		1,098
		Warrants to purchase Common Stock (expire 4/16)⁽¹⁰⁾				423		26,677
Legacy Cabinets Holdings II, Inc.⁽⁶⁾	Home Furnishings	Class B-1 Common Stock (2,000 shares)				2,185		21
LMS INTELLIBOUND, INC.⁽²⁾	Logistics	Senior Debt (8.7%, Due 3/14–6/14)⁽¹⁾		15,530		15,360		15,360
LMS INTELLIBOUND, INC.⁽²⁾	Logistics	Subordinated Debt (16.0%, Due 9/14)⁽¹⁾		7,000		6,887		7,027
Mailsouth, Inc.	Publishing	Senior Debt (6.8%, Due 12/16)⁽¹⁾		5,000		4,928		5,024
Massage Envy, LLC	Leisure Activities	Senior Debt (11.0%, Due 12/14)⁽¹⁾		10,054		9,866		10,042
Maverick Healthcare Equity, LLC	Healthcare	Preferred Units (10.0%, 1,250,000 units)				1,619		1,748
Maverick Healthcare Equity, LLC	Healthcare	Class A Common Units (1,250,000 units)				—		563
Metropolitan Telecommunications Holding Company⁽²⁾	Communications- CLEC	Senior Debt (8.0%, Due 3/14-12/16)⁽¹⁾		26,770		26,571		26,571
Miles Media Group, LLC⁽²⁾	Business Services	Senior Debt (12.5%, Due 6/16)⁽¹⁾		17,238		16,891		16,740
Miles Media Group, LLC⁽²⁾	Business Services	Warrants to purchase Class A Units (expire 3/21)⁽¹⁾				123		215
MLM Holdings, Inc.	Information Services	Senior Debt (7.0%, Due 12/16)⁽¹⁾		14,428		14,221		14,463
NDSSI Holdings, LLC⁽²⁾	Electronics	Senior Debt (13.8%, Due 9/14)⁽¹⁾		30,017		29,833		29,833
		Series A Preferred Units (516,691 units)				718		—
		Series B Convertible Preferred Units (165,003 units)				143		342
		Class A Common Units (1,000,000 units)				333		—

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

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2011 (unaudited)

(dollars in thousands)


Portfolio Company	Industry	Investment⁽⁹⁾	Principal		Cost		Fair Value
Orbitz Worldwide, Inc.	Personal Transportation	Senior Debt (3.3%, Due 7/14)⁽¹⁾		3,014		2,846		2,865
Ozburn-Hessey Holding Company LLC	Logistics	Senior Debt (7.5%, Due 4/16)⁽¹⁾		4,962		5,019		5,017
Philadelphia Media Network, Inc.⁽⁶⁾	Newspaper	Class A Common Stock (1,000 shares)				5,070		45
Provo Craft & Novelty Inc.⁽¹²⁾	Leisure Activities	Senior Debt (8.3%, Due 3/16)⁽¹⁾		8,077		7,855		6,704
Qualawash Holdings LLC	Repair Services	Subordinated Debt (12.0%, Due 1/16)⁽¹⁾		20,000		19,809		19,809
Restaurant Technologies, Inc.	Food Services	Senior Debt (17.6%, Due 2/12)⁽¹⁾		43,493		43,389		43,389
Restaurant Technologies, Inc.	Food Services	Common Stock (47,512 shares)				352		175
		Warrants to purchase Common Stock (expire 6/14)				—		2,019
Rural/Metro Operating Company, LLC	Healthcare	Senior Debt (6.2%, Due 11/16)⁽¹⁾		5,985		5,988		6,037
Sagamore Hill Broadcasting, LLC⁽²⁾	Broadcasting	Senior Debt (14.0%, Due 8/11-8/14)⁽¹⁾		27,305		26,506		26,611
Savvis Communications Corporation	Business Services	Senior Debt (6.8%, Due 8/16)⁽¹⁾		9,950		10,001		10,029
SC Academy Holdings, Inc.	Education	Subordinated Debt (12.0%, Due 7/16)⁽¹⁾		13,500		13,381		13,556
Service Champ, Inc.	Auto Parts	Subordinated Unsecured Debt (14.3%, Due 1/16)⁽¹⁾		10,215		10,132		10,336
ShowPlex Cinemas, Inc.	Entertainment	Senior Debt (9.0%, Due 5/15)⁽¹⁾		11,163		11,029		11,029
Softlayer Technologies, Inc.	Business Services	Senior Debt (7.3%, Due 11/16)⁽¹⁾		13,964		13,802		14,098
Summit Business Media Intermediate Holding Company, LLC⁽⁶⁾⁽¹¹⁾	Information Services	Subordinated Debt (11.0%, Due 7/14)⁽¹⁾⁽⁷⁾		7,158		5,996		296
Sunshine Media Group, Inc.⁽²⁾⁽⁶⁾	Publishing	Warrants to purchase Common Stock (expire 1/21)				—		—
Teleguam Holdings, LLC⁽²⁾	Communications-Other	Subordinated Debt (7.3%, Due 10/12)⁽¹⁾		20,000		19,932		19,883
The e-Media Club I, LLC⁽⁶⁾	Investment Fund	LLC Interest (74 units)				88		11
The Gavilon Group, LLC	Agriculture	Senior Debt (6.0%, Due 12/16)⁽¹⁾		9,875		9,748		9,935
The Matrixx Group, Incorporated	Plastic Products	Subordinated Debt (10.8%, Due 6/14)⁽¹⁾		12,500		12,500		12,587
The Telx Group, Inc.	Business Services	Senior Debt (6.5%, Due 6/15)⁽¹⁾		13,895		13,381		13,918
Virtual Radiologic Corp.	Healthcare	Senior Debt (7.8%, Due 12/16)⁽¹⁾		9,975		9,831		9,951
VOX Communications Group Holdings, LLC⁽²⁾⁽⁶⁾	Broadcasting	Senior Debt (13.5%, Due 3/09-4/11)⁽¹⁾⁽⁷⁾		11,776		10,374		6,143
VOX Communications Group Holdings, LLC⁽²⁾⁽⁶⁾		Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)⁽⁷⁾		2,537		1,414		—
VS&A-PBI Holding LLC⁽⁶⁾	Publishing	LLC Interest				500		—
Wireco Worldgroup Inc.	Industrial Equipment	Senior Debt (5.3%, Due 2/14)⁽¹⁾		3,840		3,846		3,847
Xpressdocs Holdings, Inc.⁽²⁾	Business Services	Senior Debt (11.7%, Due 4/12-4/13)⁽¹⁾		19,333		19,134		19,329
Xpressdocs Holdings, Inc.⁽²⁾	Business Services	Series A Preferred Stock (161,870 shares)				500		—


Total Non-Affiliate Investments (represents 67.1% of total investments at fair value)						647,648		640,512


Total Investments					$	1,183,616	$	954,349

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

MCG Capital Corporation

Consolidated Schedule of Investments

March 31, 2011 (unaudited)

(dollars in thousands)


Counterparty	Instrument	Interest Rate			Expiring		Notional		Cost		Fair Value^(a)
Interest Rate Swaps
SunTrust Bank	Interest Rate Swap—Pay Fixed/Receive Floating		13.0	%		08/11	$	12,500	$	—	$	(128	)
	Interest Rate Swap—Pay Fixed/Receive Floating		9.0	%		08/11		8,681		—		(88	)

Total Interest Rate Swaps							$	21,181	$	—	$	(216	)

⁽^a)	We include the fair value of these interest rate swaps in other liabilities on our Consolidated Balance Sheets.

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

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(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)⁽¹⁾⁽¹³⁾	$	15,182	$	15,115	$	15,115
		Preferred Units (10.8%, 17,100 units)⁽¹⁾⁽¹³⁾				23,151		35,371
		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		47,477
Broadview Networks Holdings, Inc.⁽⁶⁾	Communications- CLEC	Series A-1 Preferred Stock (12.0%, 100,702 shares)				77,495		54,794
		Series B Preferred Stock (12.0%, 1,282 shares)				100		698
		Class A Common Stock (4,731,031 shares)				—		—
GMC Television Broadcasting, LLC⁽²⁾	Broadcasting	Senior Debt (4.3%, Due 12/16)⁽¹⁾		23,720		21,240		21,656
		Subordinated Debt (14.0%, Due 12/16)⁽¹⁾⁽⁷⁾		10,446		6,975		—
		Subordinated Unsecured Debt (16.0%, Due 12/16)⁽⁷⁾		1,248		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⁾		9,200		9,164		7,430
		Series A Preferred Units (10.0%, 86,000 units)				9,095		—
		Series B Preferred Units (10.0%, 30,000 units)				3,000		—
Jet Plastica Investors, LLC⁽²⁾	Plastic Products	Senior Debt (13.3%, Due 12/12)⁽¹⁾		14,052		13,990		13,990
Jet Plastica Investors, LLC⁽²⁾		Subordinated Debt A (15.2%, Due 3/13)⁽¹⁾⁽⁷⁾		22,038		19,365		7,143
		Subordinated Debt B (17.0%, Due 3/13)⁽¹⁾⁽⁷⁾		27,485		21,560		—
		Preferred LLC Interest (8.0%, 301,595 units)				34,014		—
MTP Holding, LLC⁽⁶⁾	Communications- Other	Common LLC Interest (79,171 units)				1		—
NPS Holding Group, LLC⁽²⁾⁽⁵⁾⁽⁶⁾	Business Services	Senior Debt A1 (6.0%, Due 6/13)⁽¹⁾⁽⁷⁾		4,702		3,470		3,348
		Senior Debt A2 (6.0%, Due 6/13)⁽¹⁾⁽⁷⁾		2,070		1,905		—
		Senior Debt A3 (6.0%, Due 6/13)⁽¹⁾⁽⁷⁾		7,872		6,228		—
		Series A Preferred Units (347 units)				—		—
		Series B Preferred Units (5.0%, 10,731 units)				10,731		—
		Common Units (36,500 units)				—		—
Orbitel Holdings, LLC⁽²⁾	Cable	Senior Debt (9.0%, Due 3/12)⁽¹⁾		14,915		14,874		14,874
		Preferred LLC Interest (10.0%, 120,000 units)				14,138		13,515
PremierGarage Holdings, LLC⁽²⁾⁽⁶⁾	Home Furnishings	Senior Debt (8.0%, Due 12/10-9/11)⁽¹⁾⁽⁷⁾		10,441		8,998		5,916
PremierGarage Holdings, LLC⁽²⁾⁽⁶⁾		Preferred LLC Units (400 units)				400		—
		Common LLC Units (79,935 units)				4,971		—
RadioPharmacy Investors, LLC⁽²⁾	Healthcare	Senior Debt (7.0%, Due 10/11)⁽¹⁾		8,500		8,500		8,500
		Subordinated Debt (15.0%, Due 12/12)⁽¹⁾		10,372		10,357		10,357
		Preferred LLC Interest (8.0%, 70,000 units)				8,123		7,219
Superior Industries Investors, LLC⁽²⁾	Sporting Goods	Subordinated Debt (16.0%, Due 3/13)⁽¹⁾		23,662		23,603		23,603
Superior Industries Investors, LLC⁽²⁾		Preferred Units (8.0%, 125,400 units)				16,495		19,283
Total Sleep Holdings, Inc.⁽²⁾⁽⁶⁾	Healthcare	Subordinated Debt (8.0%, Due 9/11)⁽⁷⁾		13,044		11,780		—
		Unsecured Note (0.0%, Due 6/11)⁽⁷⁾		375		332		—
		Series A Preferred Stock (10.0%, 3,700 shares)				3,793		—
		Series B Preferred Stock (10.0%, 2,752 shares)				21,149		—
		Common Stock (40,469 shares)				1,000		—

Total Control Investments (represents 30.7% of total investments at fair value)						517,167		310,289

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

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)


Portfolio Company	Industry	Investment⁽⁹⁾	Principal		Cost		Fair Value

Affiliate Investments⁽³⁾:
Advanced Sleep Concepts, Inc.⁽²⁾	Home Furnishings	Senior Debt (13.6%, Due 10/11)⁽¹⁾	$	5,355	$	5,322	$	5,322
		Subordinated Debt (16.0%, Due 4/12)⁽¹⁾		5,336		5,285		5,274
		Series A Preferred Stock (20.0%, 49 shares)				297		104
		Common Stock (423 shares)				524		—
		Warrants to purchase Common Stock (expire 10/16)				348		—
Cherry Hill Holdings, Inc.	Entertainment	Series A Preferred Stock (10.0%, 750 shares)				945		1,076
Contract Datascan Holdings, Inc.	Business Services	Subordinated Debt (14.0%, Due 3/16)⁽¹⁾		7,756		7,074		7,074
Contract Datascan Holdings, Inc.	Business Services	Series A Preferred Stock (10.0%, 1,987 shares)⁽¹⁾				1,983		1,983
		Common Stock (4,135 shares)⁽¹⁾				410		410
Stratford School Holdings, Inc.⁽²⁾	Education	Senior Debt (7.5%, Due 12/15)⁽¹⁾		19,000		18,885		18,885
Stratford School Holdings, Inc.⁽²⁾	Education	Series A Convertible Preferred Stock (12.0%, 10,000 shares)				3		8,534
		Warrants to purchase Common Stock (expire 5/15)⁽¹⁾				—		2,910
Sunshine Media Delaware, LLC⁽²⁾⁽⁶⁾	Publishing	Common Stock (145 shares)				581		116
		Class A LLC Interest (8.0%, 563,808 units)				564		112
		Options to acquire Warrants to purchase Class B LLC Interest (expire 5/14)				—		—
Velocity Technology Enterprises, Inc.⁽²⁾⁽⁶⁾	Business Services	Series A Preferred Stock (1,506,602 shares)				1,500		1,500
Velocity Technology Enterprises, Inc.⁽²⁾⁽⁶⁾	Business Services


Total Affiliate Investments (represents 5.3% of total investments at fair value)						43,721		53,300

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

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)


Portfolio Company	Industry	Investment⁽⁹⁾	Principal		Cost		Fair Value
Non-Affiliate Investments (less than 5% owned):
Active Brands International,	Consumer	Senior Debt (10.4%, Due 6/12)⁽¹⁾⁽⁷⁾	$	29,263	$	26,328	$	1,939
Inc.⁽²⁾⁽⁶⁾	Products	Subordinated Debt (17.0%, Due 9/12)⁽¹⁾⁽⁷⁾		18,066		12,053		—
		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,	Cable	Senior Debt (7.3%, Due 12/12)⁽¹⁾		5,080		5,069		5,069
Inc.		Subordinated Debt (10.0%, Due 12/12)⁽¹⁾		2,415		2,384		2,343
		Warrants to purchase Common Stock (expire 11/15)				—		47
Chase Doors Holdings, Inc.	Manufacturing	Senior Debt (9.5%, Due 12/15)⁽¹⁾		29,250		28,935		28,935
Coastal Sunbelt Holding,	Food Services	Senior Debt (9.1%, Due 8/14-2/15)⁽¹⁾		21,411		21,239		21,239
Inc.⁽²⁾		Subordinated Debt (16.0%, Due 8/15)⁽¹⁾		8,859		8,795		8,795
Coastal Sunbelt Real Estate,	Real Estate	Subordinated Unsecured Debt (15.0%, Due 7/12)		2,257		2,251		2,251
Inc.	Investments	Series A-2 Preferred Stock (12.0%, 20,000 shares)				2,656		2,318
		Warrants to purchase Class B Common Stock				—		—
Construction Trailer Specialists, Inc.⁽²⁾	Auto Parts	Senior Debt (14.9%, Due 06/13)⁽¹⁾		7,690		7,531		6,889
Cruz Bay Publishing, Inc.	Publishing	Subordinated Debt (13.0%, Due 12/13)⁽¹⁾⁽⁸⁾		24,630		22,855		17,365
CWP/RMK Acquisition Corp.⁽²⁾⁽⁶⁾	Home Furnishings	Senior Debt (3.0%, Due 12/16)⁽⁷⁾		600		583		518
Empower IT Holdings, Inc.⁽²⁾	Information Services	Senior Debt (11.0%, Due 5/12)⁽¹⁾		3,387		3,343		3,343
Equibrand Holding	Leisure Activities	Senior Debt (9.5%, Due 6/11)⁽¹⁾		4,244		4,234		4,234
Corporation⁽²⁾		Subordinated Debt (17.0%, Due 12/11)⁽¹⁾		10,142		10,109		10,109
Focus Brands Inc.	Restaurants	Senior Debt (7.3%, Due 11/16)⁽¹⁾		11,018		11,047		11,150
G&L Investment Holdings,	Insurance	Subordinated Debt (9.8%, Due 5/14)⁽¹⁾		17,500		17,129		17,129
LLC⁽²⁾		Series A Preferred Shares (14.0%, 5,000,000 shares)				7,651		7,651
		Class C Shares (621,907 shares)				529		213
Golden Knight II CLO, Ltd.⁽⁶⁾	Diversified Financial Services	Income Notes (8.0%, Due 4/19)				3,038		2,395
Goodman Global, Inc.	Business Services	Senior Debt (5.8%, Due 10/16)⁽¹⁾		2,993		2,993		3,013
GSDM Holdings, LLC⁽²⁾	Healthcare	Senior Debt (12.9%, Due 12/13)⁽¹⁾		26,130		25,980		25,980
		Series B Preferred Units (12.5%, 4,213,333 units)				4,679		5,052
Haws Corporation	Manufacturing	Senior Debt (10.5%, Due 12/15)⁽¹⁾		22,500		22,230		22,230
Interactive Data Corporation	Diversified Financial Services	Senior Debt (6.8%, Due 01/17)⁽¹⁾		9,950		10,040		10,094
Jenzabar, Inc.	Technology	Senior Preferred Stock (11.0%, 3,750 shares)				6,431		6,431
		Subordinated Preferred Stock (109,800 shares)				1,098		1,098
		Warrants to purchase Common Stock (expire 4/16)⁽¹⁰⁾				423		27,798
Knology Inc.	Cable	Senior Debt (5.5%, Due 10/16)⁽¹⁾		6,090		6,098		6,133
Lambeau Telecom Company, LLC⁽⁶⁾	Communications-CLEC	Senior Debt (12.0%, Due 2/13)⁽⁷⁾		1,067		1,002		675
Legacy Cabinets Holdings II, Inc.⁽⁶⁾	Home Furnishings	Class B-1 Common Stock (2,000 shares)				2,185		17
LMS INTELLIBOUND,	Logistics	Senior Debt (8.7%, Due 3/14–6/14)⁽¹⁾		16,320		16,114		16,114
INC.⁽²⁾		Subordinated Debt (16.0%, Due 9/14)⁽¹⁾		7,000		6,879		6,879
Mailsouth, Inc.	Publishing	Senior Debt (7.0%, Due 12/16)		5,000		4,925		4,950
Massage Envy, LLC	Leisure Activities	Senior Debt (11.0%, Due 12/14)⁽¹⁾		10,222		10,023		10,023
Maverick Healthcare Equity,	Healthcare	Subordinated Debt (16.0%, Due 4/14)⁽¹⁾		13,357		13,223		13,223
LLC		Preferred Units (10.0%, 1,250,000 units)				1,580		1,710
		Class A Common Units (1,250,000 units)				—		271

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

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)


Portfolio Company	Industry	Investment⁽⁹⁾	Principal		Cost		Fair Value
Metropolitan Telecommunications Holding Company⁽²⁾	Communications- CLEC	Senior Debt (8.0%, Due 3/14-12/16)⁽¹⁾	$	27,770	$	27,534	$	27,534
Miles Media Group, LLC⁽²⁾	Business Services	Senior Debt (12.5%, Due 6/13)⁽¹⁾		16,238		16,049		16,049
MLM Holdings, Inc.	Information Services	Senior Debt (7.0%, Due 12/16)⁽¹⁾		14,464		14,248		14,301
NDSSI Holdings, LLC⁽²⁾	Electronics	Senior Debt (14.8%, Due 9/14)⁽¹⁾		30,132		29,928		29,928
		Series A Preferred Units (516,691 units)				718		125
		Series B Convertible Preferred Units (165,003 units)				142		356
		Class A Common Units (1,000,000 units)				333		—
Orbitz Worldwide, Inc.	Personal Transportation	Senior Debt (3.3%, Due 07/14)⁽¹⁾		3,140		2,960		2,949
Ozburn-Hessey Holding Company LLC	Logistics	Senior Debt (7.5%, Due 04/16)⁽¹⁾		4,975		5,034		5,043
Philadelphia Media Network, Inc.⁽⁶⁾	Newspaper	Class A Common Stock (1,000 shares)				5,070		48
Provo Craft & Novelty Inc.	Leisure Activities	Senior Debt (8.0%, Due 3/16)⁽¹⁾		8,077		7,841		7,850
Restaurant Technologies, Inc.	Food Services	Senior Debt (17.6%, Due 2/12)⁽¹⁾		42,742		42,607		42,607
Restaurant Technologies, Inc.		Common Stock (47,512 shares)				353		81
		Warrants to purchase Common Stock (expire 6/14)				—		685
Rural/Metro Operating Company, LLC	Healthcare	Senior Debt (6.0%, Due 11/16)⁽¹⁾		4,000		3,980		4,046
Sagamore Hill Broadcasting, LLC⁽²⁾	Broadcasting	Senior Debt (14.0%, Due 8/11)⁽¹⁾		27,169		26,360		26,183
Savvis Communications Corporation	Business Services	Senior Debt (6.8%, Due 08/16)⁽¹⁾		9,975		10,029		10,148
SC Academy Holdings, Inc.	Education	Subordinated Debt (12.0%, Due 7/16)⁽¹⁾		13,500		13,375		13,375
Service Champ, Inc.	Auto Parts	Subordinated Unsecured Debt (14.3%, Due 1/16)⁽¹⁾		10,158		10,070		10,070
ShowPlex Cinemas, Inc.	Entertainment	Senior Debt (9.0%, Due 5/15)⁽¹⁾		11,025		10,882		10,706
Softlayer Technologies, Inc.	Business Services	Senior Debt (7.8%, Due 11/16)⁽¹⁾		14,000		13,830		14,003
Summit Business Media Intermediate Holding Company, LLC⁽⁶⁾⁽¹¹⁾	Information Services	Subordinated Debt (11.0%, Due 7/14)⁽¹⁾⁽⁷⁾		7,158		5,996		296
Teleguam Holdings, LLC⁽²⁾	Communications-Other	Subordinated Debt (7.3%, Due 10/12)⁽¹⁾		20,000		19,921		19,729
The e-Media Club I, LLC⁽⁶⁾	Investment Fund	LLC Interest (74 units)				88		10
The Gavilon Group, LLC	Agriculture	Senior Debt (6.0%, Due 12/16)⁽¹⁾		8,500		8,373		8,418
The Matrixx Group, Incorporated	Plastic Products	Subordinated Debt (10.8%, Due 6/14)⁽¹⁾		12,500		12,500		12,500
The SI Organization, Inc.	Defense	Senior Debt (5.8%, Due 11/16)⁽¹⁾		3,000		3,000		3,030
The Telx Group, Inc.	Business Services	Senior Debt (8.0%, Due 6/15)⁽¹⁾		13,930		13,680		13,860
Visant Corporation	Consumer Products	Senior Debt (7.0%, Due 12/16)⁽¹⁾		6,983		6,849		7,077
VOX Communications Group Holdings, LLC⁽²⁾⁽⁶⁾	Broadcasting	Senior Debt (13.5%, Due 3/09)⁽¹⁾⁽⁷⁾		11,717		10,388		6,157
VOX Communications Group Holdings, LLC⁽²⁾⁽⁶⁾		Convertible Preferred Subordinated Notes (12.5%, Due 6/15-6/17)⁽⁷⁾		2,459		1,414		—
VS&A-PBI Holding LLC⁽⁶⁾	Publishing	LLC Interest				500		—
Wireco Worldgroup Inc.	Industrial Equipment	Senior Debt (5.3%, Due 2/14)⁽¹⁾		3,850		3,856		3,807
Xpressdocs Holdings, Inc.⁽²⁾	Business Services	Senior Debt (11.6%, Due 4/12-4/13)⁽¹⁾		19,533		19,328		19,522
Xpressdocs Holdings, Inc.⁽²⁾	Business Services	Series A Preferred Stock (161,870 shares)				500		—

Total Non-Affiliate Investments (represents 64.0% of total investments at fair value)						684,785		646,116


Total Investments					$	1,245,673	$	1,009,705

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

MCG Capital Corporation

Consolidated Schedule of Investments

December 31, 2010

(dollars in thousands)


Counterparty	Instrument	Interest Rate			Expiring		Notional		Cost		Fair Value^(a)
Interest Rate Swaps
SunTrust Bank	Interest Rate Swap—Pay Fixed/Receive Floating		13.0	%		08/11	$	12,500	$	—	$	(183	)
	Interest Rate Swap—Pay Fixed/Receive Floating		9.0	%		08/11		8,681		—		(127	)

Total Interest Rate Swaps							$	21,181	$	—	$	(310	)

^(a)	We include the fair value of these interest rate swaps in other liabilities on our Consolidated Balance Sheets.

⁽¹⁾	Some or all of this security is held by 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 Condensed 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⁾	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 February 24, 2010, we exercised warrants to purchase 100,000 shares of common stock of Jenzabar, Inc. and we submitted the requisite payments for this stock. Our receipt of the common stock certificates from Jenzabar is pending.

⁽¹¹⁾	On January 25, 2011, Summit Business Media Intermediate Holding Company, LLC filed for Chapter 11 bankruptcy protection.

⁽¹²⁾	On March 30, 2011, a trade confirmation was signed to sell all of our investment in Provo Craft & Novelty Inc. This trade settled on April 8, 2011.

⁽¹³⁾	In April 2011, Avenue Broadband, LLC repaid our debt and equity investment.

⁽¹⁴⁾	In May 2011, Equibrand Holding Corporation repaid our senior and subordinated debt investments.

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

MCG Capital Corporation

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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, L.P., 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. We also own Solutions Capital II, L.P., which is in the process of submitting a license application to the SBA. MCG is also the sole member of Solutions Capital G.P., LLC, which acts as the general partner of Solutions Capital I, L.P. and Solutions Capital II, L.P.

Taxable Subsidiaries—We currently qualify as a regulated investment company, or RIC, for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to our stockholders. We have certain wholly owned taxable subsidiaries, or Taxable Subsidiaries, each of which holds one or more portfolio investments listed on our Consolidated Schedules 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 Statements of Operations.

The accompanying financial statements reflect the consolidated accounts of MCG and the following subsidiaries: Solutions Capital I, L.P.; Solutions Capital II, L.P.; Solutions Capital G.P., LLC; and MCG’s special-purpose financing subsidiaries: MCG Finance V, LLC and MCG Finance VII, 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. Further, in connection with the preparation of these Condensed Consolidated Financial Statements, we have evaluated subsequent events that occurred after the balance sheet date as of March 31, 2011 through the date these financial statements were issued.

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, 2010.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2011-02—A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, or ASU 2011-02. This standard amends previous guidance provided in Accounting Standards Codification 310-40—Receivables—Troubled Debt Restructurings by Creditors. ASU 2011-02 provides additional guidance and criteria on how companies should determine whether a restructuring or refinancing of an existing financial receivable represents a troubled debt restructuring. Companies must assess whether the restructuring or refinancing of an existing financial receivable is a troubled debt restructuring in order to determine how to account for the remaining unamortized portion of certain fees, such as origination fees, associated with the original debt investment. ASU 2011-02 is effective for the first interim period beginning on or after June 15, 2011. We expect to adopt ASU 2011-02 by the quarter ending September 30, 2011. We do not believe that our adoption of this update will have a material impact on our financial position or results of operations.

NOTE 2—INVESTMENT PORTFOLIO

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


	March 31, 2011					December 31, 2010
(dollars in thousands)	Investments at Cost		Percent of Total Portfolio			Investments at Cost		Percent of Total Portfolio
Debt investments
Senior secured debt	$	592,013		50.0	%	$	597,046		47.9	%
Subordinated debt
Secured		217,810		18.4			266,333		21.4
Unsecured		15,130		1.3			15,067		1.2

Total debt investments		824,953		69.7			878,446		70.5


Equity investments
Preferred equity		341,744		28.9			345,960		27.8
Common/common equivalents equity		16,919		1.4			21,267		1.7

Total equity investments		358,663		30.3			367,227		29.5


Total investments	$	1,183,616		100.0	%	$	1,245,673		100.0	%

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


	March 31, 2011					December 31, 2010
(dollars in thousands)	Investments at Fair Value		Percent of Total Portfolio			Investments at Fair Value		Percent of Total Portfolio
Debt investments
Senior secured debt	$	547,280		57.4	%	$	555,667		55.0	%
Subordinated debt
Secured		177,628		18.6			190,309		18.9
Unsecured		12,588		1.3			12,321		1.2

Total debt investments		737,496		77.3			758,297		75.1


Equity investments
Preferred equity		183,735		19.2			218,690		21.7
Common/common equivalents equity		33,118		3.5			32,718		3.2

Total equity investments		216,853		22.7			251,408		24.9


Total investments	$	954,349		100.0	%	$	1,009,705		100.0	%

Our debt instruments bear contractual interest rates ranging from 2.5% to 17.6%, a portion of which may be deferred. As of March 31, 2011, approximately 79.4% of the fair value of our loan portfolio was at variable rates, based on a LIBOR benchmark or prime rate, and 20.6% of the fair value of our loan portfolio was at fixed rates. As of March 31, 2011, approximately 61.3% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on the LIBOR base index and prime floors between 2.25% 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.

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


	March 31, 2011					December 31, 2010
(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	$	16,370		1.98	%	$	10,388		1.18	%
Not on non-accrual status		—		—			—		—

Total loans greater than 90 days past due	$	16,370		1.98	%	$	10,388		1.18	%


Loans on non-accrual status
0 to 90 days past due	$	98,595		11.95	%	$	128,989		14.69	%
Greater than 90 days past due		16,370		1.98			10,388		1.18

Total loans on non-accrual status	$	114,965		13.93	%	$	139,377		15.87	%

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


	March 31, 2011					December 31, 2010
(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	$	6,439		0.87	%	$	6,157		0.81	%
Not on non-accrual status		—		—			—		—

Total loans greater than 90 days past due	$	6,439		0.87	%	$	6,157		0.81	%


Loans on non-accrual status
0 to 90 days past due	$	26,281		3.56	%	$	19,835		2.62	%
Greater than 90 days past due		6,439		0.87			6,157		0.81

Total loans on non-accrual status	$	32,720		4.43	%	$	25,992		3.43	%

The following table summarizes the changes in the cost and fair value of the loans on non-accrual status from December 31, 2010 through March 31, 2011:


	Three months ended March 31, 2011
(In thousands)	Cost			Fair Value
Non-accrual loan balance as of December 31, 2010	$	139,377		$	25,992
Advances to companies on non-accrual status		2,940			—
Payments received on loans on non-accrual status		(2,771	)		(2,771	)
Change in unrealized gain (loss) on non-accrual loans		—			34,080
Realized loss on non-accrual loans		(24,581	)		(24,581	)

Total change in non-accrual loans		(24,412	)		6,728

Non-accrual loan balance as of March 31, 2011	$	114,965		$	32,720

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


	March 31, 2011					December 31, 2010
(dollars in thousands)	Investments at Cost		Percent of Total Portfolio			Investments at Cost		Percent of Total Portfolio
Telecommunications—CLEC (competitive local exchange carriers)	$	186,150		15.7	%	$	188,115		15.1	%
Communications—other		19,933		1.7			19,922		1.6
Business services		116,878		9.9			106,717		8.6
Cable		75,447		6.4			80,829		6.5
Healthcare		113,258		9.6			114,476		9.2
Food services		73,630		6.2			72,994		5.9
Broadcasting		76,589		6.5			76,448		6.1
Plastic products		113,907		9.6			101,429		8.1
Education		32,306		2.7			32,263		2.6
Manufacturing		39,511		3.3			54,158		4.3
Technology		8,055		0.7			7,952		0.6
Leisure activities		32,203		2.7			32,207		2.6
Electronics		31,027		2.6			31,121		2.5
Logistics		27,266		2.3			28,027		2.3
Insurance		25,539		2.2			25,309		2.0
Information services		30,094		2.5			23,587		1.9
Publishing		28,294		2.4			29,425		2.4
Repair services		19,809		1.7			—		—
Auto parts		17,785		1.5			17,601		1.4
Home furnishings		29,442		2.5			28,913		2.3
Entertainment		11,992		1.0			11,827		0.9
Restaurants		10,827		0.9			11,047		0.9
Agriculture		9,748		0.8			8,373		0.7
Other media		22,069		1.9			21,259		1.7
Diversified financial services		3,046		0.3			13,078		1.1
Consumer products		12,053		1.0			48,617		3.9
Sporting goods		—		—			40,098		3.2
Other^(a)		16,758		1.4			19,881		1.6

Total	$	1,183,616		100.0	%	$	1,245,673		100.0	%

^(a)	No individual industry within this category exceeds 1%.

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


	March 31, 2011					December 31, 2010
(dollars in thousands)	Investments at Fair Value		Percent of Total Portfolio			Investments at Fair Value		Percent of Total Portfolio
Telecommunications—CLEC	$	105,251		11.0	%	$	131,178		13.0	%
Communications—other		19,883		2.1			19,729		1.9
Business services		97,902		10.3			87,897		8.7
Cable		87,439		9.2			92,467		9.2
Healthcare		80,461		8.4			76,358		7.6
Food services		75,651		7.9			73,407		7.3
Broadcasting		54,361		5.7			53,996		5.3
Plastic products		46,198		4.8			33,633		3.3
Education		43,875		4.6			43,704		4.3
Manufacturing		39,528		4.1			54,178		5.4
Technology		34,309		3.6			35,327		3.5
Leisure activities		31,228		3.3			32,216		3.2
Electronics		30,175		3.2			30,409		3.0
Logistics		27,404		2.9			28,036		2.8
Insurance		25,056		2.6			24,993		2.5
Information services		24,734		2.6			17,940		1.8
Publishing		23,924		2.5			22,543		2.2
Repair services		19,809		2.1			—		—
Auto parts		17,441		1.8			16,959		1.7
Home furnishings		14,714		1.5			17,151		1.7
Entertainment		12,582		1.3			11,782		1.2
Restaurants		10,915		1.2			11,150		1.1
Agriculture		9,935		1.0			8,418		0.8
Other media		7,470		0.8			7,430		0.7
Diversified financial services		2,639		0.3			12,489		1.2
Consumer products		—		—			9,016		0.9
Sporting goods		—		—			42,886		4.2
Other^(a)		11,465		1.2			14,413		1.5

Total	$	954,349		100.0	%	$	1,009,705		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. We include the fair value of these interest rate swaps in other liabilities on our Consolidated Balance Sheets. We do not designate any of our interest rate swaps as hedges for accounting purposes. Each quarter, we settle these interest rates swaps for cash. During each of the three months ended March 31, 2011 and 2010, we reported changes in the fair value of these interest rate swaps in net unrealized appreciation (depreciation) on investments on our Consolidated Statements of Operations.

As of each of March 31, 2011 and December 31, 2010, the notional amount of our interest rate swaps was $21.2 million, and the fair value of these interest rate swaps included in our liabilities was $0.2 million and $0.3 million, respectively. 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 March 31, 2011 and December 31, 2010:


(dollars in thousands)						As of March 31, 2011							As of December 31, 2010
Date			Interest							Fair							Fair
Entered	Expiration		Rate			Notional		Cost		Value			Notional		Cost		Value
03/09		08/11		13.0	%	$	12,500	$	—	$	(128	)	$	12,500	$	—	$	(183	)
03/09		08/11		9.0	%		8,681		—		(88	)		8,681		—		(127	)

Total						$	21,181	$	—	$	(216	)	$	21,181	$	—	$	(310	)

The following table summarizes the realized and unrealized gains and losses that we recorded on these interest rate swaps for the three months ended March 31, 2011 and 2010:


(in thousands)	Realized Loss			Unrealized Depreciation			Reversal of Unrealized Depreciation		Net Loss
Three months ended March 31:
2011	$	(106	)	$	(12	)	$	106	$	(12	)
2010		(308	)		(221	)		308		(221	)

NOTE 3—FAIR VALUE MEASUREMENT

We account for our investments in portfolio companies under Accounting Standard Codification 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. In the event that transfers between these levels were to occur in the future, we would recognize those transfers 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.

Our investment portfolio is not composed of homogeneous debt and equity securities that can be valued with a small number of inputs. Instead, the majority of our investment portfolio is composed of complex debt and equity securities with unique contract terms and conditions. As such, our valuation of each investment in our portfolio is unique and complex, often factoring in numerous unique inputs, including the historical and forecasted financial and operational performance of the portfolio company, projected cash flows, market multiples, comparable market transactions, the priority of our securities compared with those of other investors, credit risk, interest rates, independent valuations and reviews and other inputs too numerous to list quantitatively herein.

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 Sheets by ASC 820 hierarchy:


	As of March 31, 2011
(in thousands)	Internal Models with Significant					Total Fair Value Reported in Consolidated Balance Sheet
(in thousands)	Observable Market Parameters *(Level 2)*			Unobservable Market Parameters *(Level 3)*
ASSETS
Non-affiliate investments
Senior secured debt	$	125,780		$	304,712	$	430,492
Subordinated secured debt		—			139,471		139,471
Unsecured subordinated debt		—			12,588		12,588
Preferred equity		2,639			25,354		27,993
Common/common equivalents		—			29,968		29,968

Total non-affiliate investments		128,419			512,093		640,512

Affiliate investments
Senior secured debt		—			24,203		24,203
Subordinated secured debt		—			12,408		12,408
Preferred equity		—			14,402		14,402
Common/common equivalents		—			3,150		3,150

Total affiliate investments		—			54,163		54,163

Control investments
Senior secured debt		—			92,585		92,585
Subordinated secured debt		—			25,749		25,749
Preferred equity		—			141,340		141,340

Total control investments		—			259,674		259,674


Total assets at fair value	$	128,419		$	825,930	$	954,349


LIABILITIES
Interest rate swaps^(a)	$	(216	)	$	—	$	(216	)


Total liabilities at fair value	$	(216	)	$	—	$	(216	)

^(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.

As of March 31, 2011, we had no investments that had quoted market prices in active markets, which we would categorize as Level 1 investments under ASC 820.

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 26.9% of our investment portfolio as of March 31, 2011. 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 Investments—Non-majority-owned investments comprise 0.3% of our investment portfolio as of March 31, 2011. 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 72.8% of our investment portfolio as of March 31, 2011. Quoted prices are not available for 81.5% of our non-control investments as of March 31, 2011. 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 March 31, 2011, these securities represented 13.5% of our investment portfolio.

Our valuation analyses incorporate the impact that key events could have on the securities’ values, including public and private mergers and acquisitions, purchase transactions, public offerings, letters of intent and subsequent debt or equity sales. Our valuation analyses also include 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 at least 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 derived through a sale of some or all of our investment in the portfolio company or is a new investment made within the last twelve months. As set forth in more detail in the following table, in total, either we obtained a valuation or review from an independent firm, considered new investments made or used market quotes for 99.7% of the fair value of our investment portfolio as of March 31, 2011.


	March 31, 2011
	Investments at Fair Value						Percent of
(dollars in thousands)	Debt		Equity		Total		Debt Portfolio			Equity Portfolio			Total Portfolio
Independent valuations/reviews, recent transactions or market quotes
Independent valuation/review prepared
First quarter 2011	$	160,644	$	81,216	$	241,860		21.8	%		37.4	%		25.3	%
Fourth quarter 2010		147,844		74,317		222,161		20.0			34.3			23.3
Third quarter 2010		125,903		13,343		139,246		17.1			6.2			14.6
Second quarter 2010		75,356		5,487		80,843		10.2			2.5			8.5

Total independent valuations/reviews		509,747		174,363		684,110		69.1			80.4			71.7


Fair value from
Market quotes (Level 2)		125,780		2,639		128,419		17.0			1.2			13.5
Pending sales of investments or letters of intent		15,310		35,657		50,967		2.1			16.4			5.3

Fair value from market quotes and pending sales		141,090		38,296		179,386		19.1			17.6			18.8

New investments made during the 12 months ended March 31, 2011		85,850		2,564		88,414		11.7			1.2			9.2

Total portfolio evaluated		736,687		215,223		951,910		99.9			99.2			99.7
Not evaluated during the 12 months ended March 31, 2011		809		1,630		2,439		0.1			0.8			0.3

Total investment portfolio	$	737,496	$	216,853	$	954,349		100.0	%		100.0	%		100.0	%

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 1, 2 and 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 each of the three months ended March 31, 2011 and 2010, there were no transfers in or out of Level 1, 2 or 3.

The following table provides a reconciliation of fair value changes during the three-month period ended March 31, 2011 for all investments for which we determine fair value using unobservable (Level 3) factors.


(in thousands)	Fair value measurements using unobservable inputs (Level 3)
(in thousands)	Non-affiliate Investments			Affiliate Investments			Control Investments			Total
Fair value December 31, 2010
Senior secured debt	$	325,874		$	24,207		$	75,714		$	425,795
Subordinated secured debt		121,743			12,348			56,218			190,309
Unsecured subordinated debt		12,321			—			—			12,321
Preferred equity		24,741			13,197			178,357			216,295
Common/common equivalents equity		29,170			3,548			—			32,718

Total fair value December 31, 2010		513,849			53,300			310,289			877,438


Realized/unrealized gain (loss)
Senior secured debt		717			—			(28,183	)		(27,466	)
Subordinated secured debt		2,137			(77	)		33,783			35,843
Unsecured subordinated debt		205			—			—			205
Preferred equity		63			839			(30,671	)		(29,769	)
Common/common equivalents equity		692			(232	)		—			460

Total realized/unrealized gain (loss)		3,814			530			(25,071	)		(20,727	)


Purchases
Senior secured debt		—			—			10,000			10,000
Common/common equivalents equity		123			—			—			123

Total purchases		123			—			10,000			10,123


Issuances
Senior secured debt		2,993			469			35,168			38,630
Subordinated secured debt		29,106			137			887			30,130
Unsecured subordinated debt		62			—			—			62
Preferred equity		550			366			11,584			12,500
Common/common equivalents equity		—			62			—			62

Total issuances		32,711			1,034			47,639			81,384


Settlements
Senior secured debt		(14,666	)		(473	)		(114	)		(15,253	)
Subordinated secured debt		(13,515	)		—			(65,139	)		(78,654	)
Preferred equity		—			—			(5,390	)		(5,390	)
Common/common equivalents equity		(17	)		(228	)		—			(245	)

Total settlements		(28,198	)		(701	)		(70,643	)		(99,542	)


Sales
Senior secured debt		(10,206	)		—			—			(10,206	)
Preferred equity		—			—			(12,540	)		(12,540	)

Total sales		(10,206	)		—			(12,540	)		(22,746	)


Fair value as of March 31, 2011
Senior secured debt		304,712			24,203			92,585			421,500
Subordinated secured debt		139,471			12,408			25,749			177,628
Unsecured subordinated debt		12,588			—			—			12,588
Preferred equity		25,354			14,402			141,340			181,096
Common/common equivalents equity		29,968			3,150			—			33,118


Total fair value as of March 31, 2011	$	512,093		$	54,163		$	259,674		$	825,930

The following table provides a reconciliation of fair value changes during the three-month period ended March 31, 2010 for all investments for which we determine fair value using unobservable (Level 3) factors.


(in thousands)	Fair value measurements using unobservable inputs (Level 3)
(in thousands)	Non-affiliate Investments			Affiliate Investments			Control Investments			Total
Fair value December 31, 2009
Senior secured debt	$	273,319		$	21,789		$	80,995		$	376,103
Subordinated secured debt		183,684			11,511			80,202			275,397
Unsecured subordinated debt		2,179			—			28,439			30,618
Preferred equity		26,587			9,242			220,320			256,149
Common/common equivalents equity		40,885			1,846			28			42,759

Total fair value December 31, 2009		526,654			44,388			409,984			981,026


Realized/unrealized gain (loss)
Senior secured debt		(609	)		286			342			19
Subordinated secured debt		2			164			(8,721	)		(8,555	)
Unsecured subordinated debt		2			—			—			2
Preferred equity		(542	)		631			2,187			2,276
Common/common equivalents equity		3,073			118			77			3,268

Total realized/unrealized gain (loss)		1,926			1,199			(6,115	)		(2,990	)


Issuances
Senior secured debt		13,976			90			521			14,587
Subordinated secured debt		4,307			131			2,100			6,538
Unsecured subordinated debt		17			—			123			140
Preferred equity		438			30			862			1,330
Common/common equivalents equity		1			—			—			1

Total issuances		18,739			251			3,606			22,596


Settlements
Senior secured debt		(19,411	)		(13,069	)		(133	)		(32,613	)
Subordinated secured debt		(600	)		(67	)		—			(667	)

Total settlements		(20,011	)		(13,136	)		(133	)		(33,280	)


Fair value as of March 31, 2010
Senior secured debt		267,275			9,096			81,725			358,096
Subordinated secured debt		187,393			11,739			73,581			272,713
Unsecured subordinated debt		2,198			—			28,562			30,760
Preferred equity		26,483			9,903			223,369			259,755
Common/common equivalents equity		43,959			1,964			105			46,028


Total fair value as of March 31, 2010	$	527,308		$	32,702		$	407,342		$	967,352

There were no purchases or sales of Level 3 investments during the three months ended March 31, 2010.

Unrealized (Depreciation) Appreciation of Level 3 Investments

The following table summarizes the unrealized (depreciation) appreciation that we recognized on those investments for which we determined fair value using unobservable inputs (Level 3) for the three months ended March 31, 2011 and 2010.


	Three months ended March 31, 2011											Three months ended March 31, 2010
(in thousands)	Non-affiliate Investments		Affiliate Investments			Control Investments			Total			Non-affiliate Investments			Affiliate Investments		Control Investments			Total
Change in unrealized appreciation (depreciation)
Senior secured debt	$	25,298	$	—		$	(28,183	)	$	(2,885	)	$	(609	)	$	286	$	342		$	19
Subordinated secured debt		2,137		(77	)		33,783			35,843			2			164		(8,721	)		(8,555	)
Unsecured subordinated debt		205		—			—			205			2			—		—			2
Preferred equity		63		1,756			(31,878	)		(30,059	)		(542	)		631		2,187			2,276
Common/common equivalents equity		4,062		(232	)		—			3,830			3,359			118		77			3,554

Total change in unrealized appreciation (depreciation) on Level 3 investments	$	31,765	$	1,447		$	(26,278	)	$	6,934		$	2,212		$	1,199	$	(6,115	)	$	(2,704	)

NOTE 4—CONCENTRATIONS OF INVESTMENT RISK

As of March 31, 2011, approximately 13.1% of the fair value of our investment portfolio was composed of investments in the communications industry. The 13.1% included 11.0% invested in CLECs and 2.1% invested in other communications companies, including an incumbent local exchange carrier and a telecommunications tower company. As of December 31, 2010, approximately 14.9% of the fair value of our investment portfolio was composed of investments in the communications industry, including 13.0% invested in CLECs and 1.9% invested in other communications companies. For the three months ended March 31, 2011 and 2010, our portfolio companies in the communications industry contributed $1.0 million, or 3.9%, and $1.0 million, or 4.5%, respectively, of our total revenues.

Our investment in Broadview Networks Holdings, Inc., or Broadview, a CLEC that we control, represents our single largest investment. As of March 31, 2011 and December 31, 2010, the fair value of our investment in Broadview represented $78.7 million and $103.0 million, or 8.2% and 10.2%, respectively, of the fair value of our investment portfolio. We did not accrete any dividends with respect to our investment in Broadview during the three months ended March 31, 2011 or 2010, because we determined that the total value that we had recorded for this investment equaled the total enterprise value for our portion of this investment.

In addition to the communications industry, we have concentrations in the business services, cable, healthcare and food service industries. The following table summarizes, by industry, our fair value and revenue concentrations in our investments:


	Investments at Fair Value										Revenue for the three months ended
	March 31, 2011					December 31, 2010					March 31, 2011					March 31, 2010
(dollars in thousands)	Amount		% of Total Portfolio			Amount		% of Total Portfolio			Amount		% of Total Revenue			Amount		% of Total Revenue
Industry
Communications	$	125,134		13.1	%	$	150,907		14.9	%	$	951		3.9	%	$	969		4.5	%
Business services		97,902		10.3			87,897		8.7			2,168		8.9			858		3.9
Cable		87,439		9.2			92,467		9.2			2,050		8.4			2,722		12.5
Healthcare		80,461		8.4			76,358		7.6			2,630		10.8			2,599		12.0
Food services		75,651		7.9			73,407		7.3			2,770		11.4			2,650		12.2

NOTE 5—BORROWINGS

As of March 31, 2011, we reported $527.3 million of borrowings on our Consolidated Balance Sheets at cost. We estimate that the fair value of these borrowings as of March 31, 2011 was approximately $499.3 million, based on market data and current interest rates. The following table summarizes our borrowing facilities and the facility amounts and amounts outstanding and contingent borrowing eligibility of Solutions Capital I, L.P., a wholly owned subsidiary, as an SBIC, under the SBIC Act.

March 31, 2011

December 31, 2010

(dollars in thousands)

Maturity Date

Total
Facility/
Program

Amount
Outstanding

Total
Facility/
Program

Amount
Outstanding

Private Placement Notes

Series 2005-A

October 2011

—

17,434

Series 2007-A

October 2012

8,717

8,717

Commercial Loan Funding Trust

Variable Funding Note

January 2014^(a)

150,000

93,146

150,000

100,251

Commercial Loan Trust 2006-1

Series 2006-1 Class A-1 Notes

April 2018

106,250

106,250

Series 2006-1 Class A-2 Notes

April 2018

50,000

5,000

50,000

—

Series 2006-1 Class A-3 Notes

April 2018

85,000

85,000

Series 2006-1 Class B Notes

April 2018

58,750

58,750

Series 2006-1 Class C Notes^(b)

April 2018

45,000

32,000

45,000

32,000

Series 2006-1 Class D Notes^(c)

April 2018

47,500

29,880

47,500

29,880

SBIC (Maximum borrowing potential)^(d)

^(e)

150,000

108,600

130,000

108,600

Total borrowings

701,217

527,343

698,651

546,882

^(a)	In January 2011, the lender renewed this facility through January 2013 and the legal final maturity date was extended to January 2014.

⁽^b⁾

Amount outstanding excludes $5.0 million of notes that we repurchased in December 2008 for $1.6 million and $8.0 million of notes that we repurchased in April 2010 for $4.4 million. The notes that MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.

^(c)

Amount outstanding excludes $10.1 million of notes that we repurchased in December 2008 for $2.4 million and $7.5 million of notes that we repurchased in January 2009 for $2.1 million. The notes that MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.

^(d⁾

As of March 31, 2011, we had the potential to borrow up to $150.0 million of SBA-guaranteed debentures under the SBIC program. As of March 31, 2011, the SBA had approved and committed up to $150.0 million in borrowings to the SBIC. To utilize the full $150.0 million borrowing potential approved and committed by the SBA under this program, we would have to fund a total of $75.0 million to the SBIC, of which we have funded $49.6 million as of March 31, 2011. Based on our funded capital as of March 31, 2011, Solutions Capital I, L.P., subject to the SBA’s approval, may borrow up to an additional $6.0 million to originate investments. To access the entire $150.0 million that has been approved and committed by the SBA, we would have to fund an additional $25.4 million.

^(e⁾	As of March 31, 2011, we could originate new borrowings under the $150.0 million commitment made by the SBA through September 2015. We must repay borrowings under the SBIC program within ten years after the borrowing date, which will occur between September 2018 and September 2025.

Each of our credit facilities has certain collateral requirements and/or financial covenants. As of March 31, 2011, the net worth covenant of our Commercial Loan Funding Trust, or SunTrust Warehouse, requires that we maintain a consolidated tangible net worth of not less than $500.0 million, plus 50% of any equity raised after February 26, 2009. As of May 5, 2011, this covenant was amended to net worth of not less than $450 million, plus 50% of any equity raised after February 26, 2009. Under these covenants, we must also maintain an asset coverage ratio of at least 180%.

As a BDC, we are not permitted to incur indebtedness or issue senior securities, including preferred stock, unless immediately after such borrowing we have an asset coverage for total borrowings (excluding borrowings by our SBIC facility) of at least 200%. In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after deducting the amount of such dividend, distribution or purchase price. If we are unable to meet this asset coverage requirement, we may not be able to incur additional debt. As of March 31, 2011, our ratio of total assets to total borrowings and other senior securities was 233%.

We fund all of our current debt facilities, except our Series 2007-A unsecured notes, through our bankruptcy remote, special-purpose, wholly owned subsidiaries. Therefore, these subsidiaries’ assets may not be available to our creditors. In some cases, advances under our debt facilities are subject to certain collateral levels, collateral quality, leverage and other restrictive covenants. We continue to service the portfolio investments that we use as collateral in our secured borrowing facilities.

The following table summarizes repayments of our borrowings based on the final legal maturity or the contractual principal collections of the outstanding loans that comprise the collateral, where applicable. Certain of our borrowing facilities contain provisions that require that we apply a portion of the proceeds we receive from monetizations to pay down a portion of the outstanding balances. Actual repayments could differ significantly due to future prepayments by our borrowers, modifications of our borrowers’ existing loan agreements, and monetizations.


	March 31, 2011
(in thousands)	Debt with Recourse		Debt without Recourse		Total
2011	$	—	$	—	$	—
2012		8,717		—		8,717
2013		—		—		—
2014		—		93,146		93,146
2015		—		—		—
Thereafter^(a)		75,000		350,480		425,480


Total	$	83,717	$	443,626	$	527,343

^(a)	Our maximum exposure with respect to the indebtedness of Solutions Capital was $75.0 million, which represents the $49.6 million that MCG had funded in Solutions Capital as of March 31, 2011, plus MCG’s $25.4 million remaining commitment.

The following table summarizes our aggregate outstanding borrowings as of March 31, 2011 and December 31, 2010, by interest rate benchmark:


(in thousands)	March 31, 2011		December 31, 2010
Interest rate benchmark
LIBOR	$	316,880	$	311,880
Commercial paper rate		93,146		100,251
Fixed rate		117,317		134,751

Total borrowings	$	527,343	$	546,882

PRIVATE PLACEMENT NOTES

In October 2005, we issued $50.0 million of Series 2005-A unsecured notes, at a fixed-interest rate of 6.73% per annum. In October 2007, we issued an additional $25.0 million of Series 2007-A unsecured notes at a fixed-interest rate of 6.71% per annum. Both of these tranches, or the Private Placement Notes, were issued as five-year notes that require semi-annual interest payments. In 2009, the Private Placement Notes were amended. In connection with the amendments, the interest rate for the Series 2005-A unsecured notes was adjusted to 9.98% and the interest rate for the Series 2007-A unsecured notes was adjusted to 8.96%. The Series 2005-A unsecured notes were prepaid in March 2011 and the maturity date of the Series 2007-A unsecured notes is October 2012.

The amendments also require us to offer to repurchase the Private Placement Notes with a portion of certain monetization proceeds at a purchase price of 102% of the principal amount to be purchased. In addition, we agreed to limit the amount of debt from the 2006-1 Trust and our common stock that we may repurchase. For every $5.0 million of Private Placement Notes we offer to purchase after February 26, 2009, we may repurchase $2.5 million of debt from the 2006-1 Trust. We may also repurchase $1.0 million of shares of our common stock for every $5.0 million increment of Private Placement Notes offered to be repurchased after February 26, 2009, provided that the amount of permitted debt repurchases under the 2006-1 Trust shall be reduced by the amount of any of our common stock repurchases made.

Since the execution of these amendments in 2009, we have repurchased or prepaid a total of $66.3 million of Private Placement Notes as of March 31, 2011, including the prepayment of the remaining balance of the Series 2005-A Notes on March 29, 2011. In connection with the March 2011 prepayment of the Series 2005-A unsecured notes and pursuant to the terms set forth in the Series 2005-A unsecured notes note purchase agreement, we paid to the noteholders $17.4 million of principal, $0.8 million in accrued interest and $0.9 million in prepayment fees. We initially issued $50.0 million of the Series 2005-A unsecured notes in October 2005 and, prior to the March 2011 repayment, had repurchased or prepaid in the aggregate $32.6 million in principal. The outstanding balance under the Series 2007-A Private Placement Notes was $8.7 million as of March 31, 2011.

Under the 2009 amendments, we must offer to repurchase the remaining Series 2007-A unsecured notes with 45% of the cash net proceeds of any sale of unencumbered assets to reduce amounts outstanding under these notes as, and when, such sales occur in the event of proceeds of $5.0 million or more or otherwise on a semi-annual basis, unless an event of default under one of the financing subsidiary debt facilities had occurred and was continuing, in which case the percentage of net proceeds would increase to 60%.

The following table summarizes the reductions in the borrowing capacity from monetization proceeds:


(in thousands)	Series 2005-A				Series 2007-A				Total
Quarter/Year Ended	Monetization Payment		Outstanding Balances After Monetization Payment		Monetization Payment		Outstanding Balances After Monetization Payment		Monetization Payment^(a)^(c)		Outstanding Balances After Monetization Payment
Fiscal 2009^(b)	$	15,693	$	34,307	$	7,846	$	17,154	$	23,539	$	51,461
March 31, 2010		1,928		32,379		965		16,189		2,893		48,568
June 30, 2010		—		32,379		—		16,189		—		48,568
September 30, 2010		14,945		17,434		7,472		8,717		22,417		26,151
December 31, 2010		—		17,434		—		8,717		—		26,151
March 31, 2011^(c)		17,434		—		—		8,717		17,434		8,717

Total to date	$	50,000			$	16,283			$	66,283

^(a)

Private Placement Notes were repurchased at a price of 102% of the principal amount repurchased. In 2010 and 2009, the premiums paid on repurchases of Private Placement Notes were $0.5 million and $0.4 million, respectively. These premiums reduce our gain on extinguishment of debt on the Consolidated Statements of Operations.

^(b)	In 2009, the Private Placement Notes were amended and we made a $5.0 million prepayment at par.

^(c)	The Series 2005-A notes were prepaid in full and terminated on March 29, 2011. We paid $0.9 million in prepayment fees in connection with the repayment.

COMMERCIAL LOAN FUNDING TRUST

Through MCG Commercial Loan Funding Trust, we have a $150.0 million warehouse financing facility funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc. The SunTrust Warehouse, which is structured to operate like a revolving credit facility, is secured primarily by MCG Commercial Loan Funding Trust’s assets, including commercial loans that we sold to the trust. The pool of commercial loans in the trust must meet certain requirements, such as term, average life, investment rating, agency rating and industry diversity requirements. The pool of commercial loans must also meet certain requirements related to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. The facility is funded by third parties through the commercial paper market with SunTrust Bank providing a liquidity backstop, subject to SunTrust Bank’s annual liquidity commitment.

In January 2011, SunTrust Bank renewed this liquidity facility. In connection with this renewal, the legal final maturity date of the SunTrust Warehouse was extended to January 2014 and the new scheduled termination date was extended to January 2013. If a new agreement or extension is not executed by January 25, 2013, the SunTrust Warehouse enters a 12-month amortization period during which principal under the facility is paid down through orderly monetizations of portfolio company assets that are financed in the facility. Additionally, prior to the commencement of any amortization period, net proceeds from monetizations of collateral financed in the SunTrust Warehouse must be reinvested in additional collateral or used to repay outstanding borrowings. The interest rate on the SunTrust Warehouse is the commercial paper rate plus 3.25%, a 0.75% increase over the rate as of December 31, 2010. We paid a $1.5 million, or 1.0%, facility fee for this renewal.

Advances under this facility may be up to 64% of eligible collateral. The SunTrust Warehouse is non-recourse to us; therefore, in the event of a termination event or upon the legal final maturity date, the lenders under the SunTrust Warehouse may only look to the collateral to satisfy the outstanding obligations under this facility. The following table summarizes the collateral under the Commercial Loan Funding Trust as of March 31, 2011 and December 31, 2010:


	March 31, 2011					December 31, 2010
(dollars in thousands)	Amount		%			Amount		%
Securitized assets
Senior secured debt	$	125,262		69.8	%	$	128,330		69.0	%
Subordinated secured debt		44,773		25.0			50,932		27.5

Total securitized assets		170,035		94.8			179,262		96.5
Cash, securitization accounts		9,355		5.2			6,539		3.5

Total collateral	$	179,390		100.0	%	$	185,801		100.0	%

COMMERCIAL LOAN TRUST 2006-1

In April 2006, we completed a $500.0 million debt securitization through Commercial Loan Trust 2006-1, a wholly owned subsidiary. The 2006-1 Trust issued $106.25 million of Class A-1 Notes, $50.0 million of Class A-2 Notes, $85.0 million of Class A-3 Notes, $58.75 million of Class B Notes, $45.0 million of Class C Notes and $47.5 million of Class D Notes. The respective classes of notes bear interest at LIBOR plus 0.33%, 0.35%, 0.33%, 0.58%, 1.05% and 2.25%.

All the notes are secured by the assets of the 2006-1 Trust. The following table summarizes the assets securitized under this facility as of March 31, 2011 and December 31, 2010:


	March 31, 2011					December 31, 2010
(dollars in thousands)	Amount		%			Amount		%
Securitized assets
Senior secured debt	$	308,940		70.2	%	$	285,854		68.2	%
Subordinated secured debt		70,097		15.9			97,881		23.3

Total securitized assets		379,037		86.1			383,735		91.5
Cash, securitization accounts		61,207		13.9			35,706		8.5

Total collateral	$	440,244		100.0	%	$	419,441		100.0	%

We retain all of the equity in the securitization. The securitization includes a five-year reinvestment period ending in July 2011, unless we terminate this facility earlier, during which the trust may use principal collections received on the underlying collateral to purchase new collateral from us. Up to 55% of the collateral may be non-senior secured, and, in certain instances, unsecured commercial loans. The remaining 45% must be senior secured commercial loans.

The Class A-1, Class B, Class C and Class D Notes are term notes. The Class A-2 Notes are a revolving class of secured notes and have a five-year revolving period. The Class A-3 Notes are a delayed draw class of secured notes, which were drawn in full between July 2006 and April 2007. From time to time, the trust purchases additional commercial loans from us, primarily using the proceeds from the Class A-2 revolving notes and principal collections. The pool of commercial loans in the trust must meet certain requirements, such as asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

SBIC DEBENTURES

In December 2004, we formed a wholly owned subsidiary, Solutions Capital I, L.P. In March 2011, we formed another wholly owned subsidiary, Solutions Capital II, L.P. Solutions Capital I, L.P. has a license from the SBA to operate as an SBIC under the SBIC Act. As of March 31, 2011, the license gave Solutions Capital I, L.P. the potential to borrow up to $150.0 million. The SBA approved and committed $150.0 million in borrowings to Solutions Capital I, L.P., subject to certain capital requirements and customary procedures. These funds can be used to provide debt and equity capital to qualifying small businesses. We may use the borrowings from the SBA to fund new originations; however, we may not use these borrowings to originate debt to certain companies that are currently in our portfolio without SBA approval. In addition, we may not use these funds for MCG’s, the parent company’s, working capital. In January 2011, the SBA approved and committed an additional $20.0 million increasing their total commitment from $130.0 million as of December 31, 2010 to $150.0 million as of March 31, 2011.

To utilize the full $150.0 million potential borrowing for which we had been approved under this program, we would have had to fund a total of $75.0 million to Solutions Capital I, L.P., of which we had funded $49.6 million as of March 31, 2011. Based on our funded capital as of March 31, 2011, Solutions Capital I, L.P. may, subject to the SBA’s approval, borrow up to an additional $6.0 million to originate new investments. To access the entire $150.0 million that the SBA had approved and committed as of March 31, 2011, we would have had to fund an additional $25.4 million.

The maximum amount of outstanding leverage available to single-license SBIC companies is $150.0 million. The maximum amount of outstanding leverage available to SBIC companies with multiple licenses is $225.0 million on an aggregate basis. In March 2011, we received approval from the SBA to submit our application for a second SBIC license under Solutions Capital II, L.P., which is subject to SBA review and approval.

As of March 31, 2011 and December 31, 2010, we had $156.9 million and $144.9 million, respectively, of investments and we had $16.3 million and $29.4 million, respectively, of restricted cash to be used for additional investments in our SBIC.

Once drawn, the SBIC debt bears an interim interest rate of LIBOR plus 30 basis points. The rate becomes fixed at the time of SBA pooling, which is within nine months of funding, and is set to the then-current 10-year treasury rate plus a spread and an annual SBA charge. As of March 31, 2011, the SBIC had $108.6 million of borrowings outstanding summarized in the following table:


	Amount Outstanding								Treasury Rate at Pooling Date			Spread in basis points
(dollars in thousands)	March 31, 2011		December 31, 2010		Rate				Treasury Rate at Pooling Date			Spread in basis points
Tranche
2008-10B	$	2,600	$	2,600		6.44	%	Fixed		3.80	%		264
2009-10A		12,000		12,000		5.34	%	Fixed		2.81	%		253
2009-10B		13,000		13,000		4.95	%	Fixed		3.44	%		151
2010-10B		27,500		27,500		3.93	%	Fixed		2.56	%		137
2011-10A		8,500		8,500		4.80	%	Fixed		3.50	%		130
2011-10A		45,000		45,000		4.80	%	Fixed		3.50	%		130

Total	$	108,600	$	108,600		4.63	%			3.14	%		149

In October 2008, we received exemptive relief from the SEC, which effectively allows us to exclude debt issued by Solutions Capital I, L.P. from the calculation of our consolidated BDC asset coverage ratio.

NOTE 6—CAPITAL STOCK

We have one class of common stock and one class of preferred stock authorized. Our board of directors is authorized to: provide for the issuance of shares of preferred stock in one or more series; establish the number of shares to be included in each such series; and establish the designations, voting powers, preferences and rights of the shares of each such series, and any qualifications, limitations or restrictions thereof, subject to the 1940 Act.

The following table summarizes our distributions per share declared since January 1, 2010.


Date Declared	Record Date	Payment Date	Amount
May 5, 2011	June 15, 2011	July 15, 2011	$	0.17
March 1, 2011	March 15, 2011	April 15, 2011	$	0.15
November 2, 2010	December 9, 2010	January 6, 2011	$	0.14
August 3, 2010	September 7, 2010	October 4, 2010	$	0.12
April 29, 2010	June 2, 2010	July 2, 2010	$	0.11

NOTE 7—SHARE-BASED COMPENSATION

EMPLOYEE SHARE-BASED COMPENSATION

Third Amended and Restated 2006 Employee Restricted Stock Plan

From time to time, we award shares of restricted common stock to employees under our Third Amended and Restated 2006 Employee Restricted Stock Plan, or the 2006 Plan, which our stockholders initially approved in June 2006. In May 2010, our stockholders approved an amendment to the 2006 Plan increasing the number of shares we may award from 3,500,000 to 6,050,000 shares. Shares of restricted common stock awarded under the 2006 Plan may be subject to the employees’ meeting service or performance conditions specified at the time of award. The award date is the date on which the shares are awarded by the Compensation Committee of our board of directors, while the fair value of the respective stock award is based on the closing price of our common stock on the NASDAQ Global Select Market on the award date. We amortize restricted stock awards on a straight-line basis over the requisite service period and report this expense as amortization of employee restricted stock awards on our Consolidated Statements of Operations.

During the three months ended March 31 2011, we issued 586,500 shares of restricted stock under the 2006 Plan with a weighted-average fair value per share of common stock at the award date of $6.31. Of the shares awarded under the 2006 Plan during the first three months of 2011, 86,500 were awarded under the Long-Term Incentive Plan (discussed in more detail below). During the three months ended March 31, 2010, we did not issue any shares of restricted stock under the 2006 Plan.

During the three months ended March 31, 2011 and 2010, we recognized $0.6 million and $1.2 million, respectively, of compensation expense related to share-based compensation awards. As of March 31, 2011, all the restricted share awards for which forfeiture provisions had not lapsed carried non-forfeitable dividend rights to the holder of the restricted shares. We record dividends paid on shares of restricted common stock for which forfeiture provisions are expected to lapse to retained earnings, while we record dividends paid on shares of restricted common stock for which forfeiture provisions are not expected to lapse to compensation expense. No dividends paid during the three months ended March 31, 2011 were recorded as compensation expense. No dividends were paid during the three months ended March 31, 2010. As of March 31, 2011, we had $4.3 million of unrecognized compensation cost related to restricted common stock awarded to employees. We will recognize these costs over the remaining weighted-average requisite service period of 3.3 years.

Long-Term Incentive Plan

On July 23, 2009, our board of directors approved the Long-Term Incentive Plan, or the LTIP, which is effective for the three-year period ending July 22, 2012. LTIP participants, including our executive officers and key, non-executive employees, were eligible, in the sole discretion of the Compensation Committee of our board of directors, to receive their respective portions of up to an aggregate of 865,000 shares of our restricted common stock to be issued under the 2006 Plan and up to $5.2 million of cash bonuses if the closing price of our common stock achieves specific price thresholds for 20 consecutive trading days. We are under no obligation to issue restricted stock or to pay a cash award under the LTIP. The Compensation Committee of our board of directors makes such determination in its sole discretion, regardless of whether the share price thresholds have been achieved.

All of the 865,000 shares of restricted stock under the LTIP were issued during 2009 through 2011, following our achievement of share price thresholds set forth in the following table and authorization of the Compensation Committee of our board of directors. Forfeiture provisions for two-thirds of the respective stock awards lapsed immediately, with the forfeiture provisions for the remaining one-third of the respective stock awards lapsing twelve months later. Similarly, cash awards under the LTIP were subject to the achievement of the share price thresholds set forth in the following table. Upon satisfaction of a price threshold and the authorization of the Compensation Committee, the LTIP provides for the immediate payout of two-thirds of the associated cash with the remainder to be paid twelve months later.

The following table summarizes the price thresholds, the cumulative percentage, number of shares and cash bonus associated with each stock price threshold set forth in the LTIP. In addition, the following table summarizes the market thresholds that were achieved and the associated stock and cash awards through March 31, 2011.


	Market Thresholds, Shares and Cash Bonus Eligible for Award under *Long-Term Incentive Plan*							Date Market Thresholds Achieved and Shares and Dollar Amounts Awarded
	Potential Stock Awards					Aggregate Dollar Amount for Each Share Price threshold Achieved				Number of Shares Awarded^(a)
Share Price	% of Award			Number of Shares				Date Share Price Achieved		Number of Shares Awarded^(a)		Dollar Amount Awarded^(b)
$3.00		25	%		216,250	$	—		October 2009		216,250	$	—
$4.00		25	%		216,250		—		October 2009		216,250		—
$5.00		25	%		216,250		1,000,000		April 2010		216,250		1,000,000
$6.00		15	%		129,750		996,000		November 2010		129,750		996,000
$7.00		10	%		86,500		1,006,000		March 2011		86,500		1,006,000
$8.00		—	%		—		2,209,000

		100	%		865,000	$	5,211,000				865,000	$	3,002,000

^(a)

As of March 31, 2011, we awarded 865,000 shares under the LTIP program, for which the forfeiture provision have lapsed on 727,500 shares. Assuming that the associated LTIP participants meet the continuing service requirements, the forfeiture provisions for 68,750 shares, 41,250 shares and 27,500 shares will lapse in April 2011, November 2011 and February 2012, respectively.

^(b)

As of March 31, 2011, we awarded $3,002,000 of cash awards under the plan, of which $2,001,000 was paid out upon achievement of the market threshold. Cash in the amount of $46,000 was paid to an executive upon his resignation from the Company in March 2011. Assuming that the associated LTIP participants meet the continuing service requirements, $318,000 will be paid on April 2011, $317,000 will be paid in November 2011 and $320,000 will be paid in February 2012.

We account for the restricted stock awards as equity awards. As of the July 23, 2009 grant date for the LTIP, we estimated the fair value of these awards was $1.9 million, and we are amortizing this amount on a straight-line basis over the derived service period. During the three months ended March 31, 2011, we recognized less than $0.1 million of compensation expense for these equity awards. During the three months ended March 31, 2010, we recognized $0.3 million of compensation expense for these equity awards.

We account for the cash portion of the LTIP as liability awards. As liability awards, we are required to account for the awards based on the fair value of the award at the end of each reporting period and to recognize the expense over the then-current estimated requisite service period. In total, during the three months ended March 31, 2011, we recognized less than $0.1 million and during the three months ended March 31, 2010, we recognized $0.8 million of compensation expense for the cash awards for all tranches of the LTIP. As of March 31, 2011, the fair value of the $8.00 tranche was $0.7 million. Total fair value of this tranche could, however, vary from zero to $2.2 million over the term of the LTIP because we adjust the fair value of the LTIP awards each quarter.

Non-Employee Director Share-Based Compensation

During June 2006, our stockholders initially approved the 2006 Non-Employee Director Restricted Stock Plan, which was subsequently amended and restated and which we refer to as the 2006 Non-Employee Plan. In May 2010, our stockholders approved an amendment to the 2006 Non-Employee Plan that increased the number of shares we may award from 100,000 to 150,000 shares. During each of the three months ended March 31, 2011 and 2010, we did not award any shares of restricted common stock to non-employee directors. During each of the three months ended March 31, 2011 and 2010, we recognized less than $0.1 million of compensation costs related to share-based awards to non-employee directors. We include this compensation cost in general and administrative expense on our Consolidated Statements of Operations. As of March 31, 2011, we had $0.1 million of unrecognized compensation cost related to restricted common stock awarded to non-employee directors, which we expect to recognize over the remaining weighted-average requisite service period of 1.6 years.

SUMMARY OF EMPLOYEE AND NON-EMPLOYEE DIRECTOR SHARE-BASED COMPENSATION

The following table summarizes our restricted stock award activity during the three months ended March 31, 2011:


	Shares			Weighted-Average Grant Date Fair Value per Share
Subject to forfeiture provisions as of December 31, 2010		932,200		$	3.92
Awarded		586,500			6.31
Forfeiture provision satisfied		(736,360	)		3.67
Forfeited		(7,810	)		7.66

Subject to forfeiture provisions as of March 31, 2011		774,530		$	5.89

NOTE 8—INCOME TAXES

As a RIC, we are taxed under Subchapter M of the Internal Revenue Code. As such, our income generally is not taxable to the extent we distribute it to stockholders and we meet certain qualification tests as outlined in the Internal Revenue Code. However, income from certain investments owned by our wholly owned subsidiaries is subject to federal, state and local income taxes. During 2010, we declared and paid distributions from ordinary income that were sufficient to meet our distribution requirements as a RIC. On a continuing basis, we monitor distribution requirements in order to comply with Subchapter M of the Internal Revenue Code.

We use the asset and liability method to account for our Taxable Subsidiaries’ income taxes. Using this method, we recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and the tax bases of assets and liabilities. In addition, we recognize deferred tax benefits associated with net operating carryforwards that we may use to offset future tax obligations. We measure deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. During the three months ended March 31, 2011, we incurred less than a $0.1 million income tax provision compared to a $0.1 million income tax provision during the three months ended March 31, 2010, which were primarily attributable to unrealized depreciation or appreciation and flow-through taxable income on certain investments held by our subsidiaries.

Historically, we have declared dividends that were paid the following quarter. From December 2001 through March 31, 2011, we declared distributions per share of $12.30. Each year, we mail statements on Form 1099-DIV to our stockholders that identify whether we made distributions from ordinary income, net capital gains on the sale of securities, which are each taxable distributions, and/or a return of paid-in-capital surplus, which is a nontaxable distribution. A portion of our distributions may represent a return of capital to our stockholders, to the extent that the total distributions paid in a given year exceed current and accumulated taxable earnings and profits. A portion of the distributions that we paid to stockholders during fiscal years 2008, 2006, 2005, 2004 and 2003 represented a return of capital.

We determine the tax attributes of our distributions as of the end of our fiscal year based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

The following table summarizes the distributions that we declared during 2011:


Date Declared	Record Date	Payable Date	Dividends per Share
May 5, 2011	June 15, 2011	July 15, 2011	$	0.17
March 1, 2011	March 15, 2011	April 15, 2011	$	0.15

If we determined the tax attributes of these distributions as of March 31, 2011, 69% would be from ordinary income and 31% would be a return of capital. However, actual determinations of the tax attributes of our distributions, including determinations of return of capital, are made annually as of the end of our fiscal year, based upon our taxable income and distributions paid for the full year and will be reported to each stockholder on a Form 1099. Future distributions will take into account the requirements for us to distribute the majority of our taxable income to fulfill our distribution requirements as a RIC, together with an assessment of our current and forecasted gains and losses recognized or to be recognized for tax purposes, portfolio transactional events, liquidity, cash earnings and our asset coverage ratio at the time of such decision.

Taxable income differs from net income recognized in accordance with accounting principles generally accepted in the United States, or GAAP, because of temporary and permanent differences in income and expense recognition.

Taxable income generally excludes unrealized gains and losses from appreciation or depreciation of our investments, which are included in GAAP net income. Further, amounts recognized for financial reporting purposes may differ from amounts included in taxable income due to the accrued dividends on preferred stock, which increase the book basis but not the tax basis of our investments, and non-accrual interest on loans, which increase the tax basis but not the book basis.

The following table summarizes the cost as well as the unrealized appreciation and depreciation for federal income tax purposes, as of March 31, 2011 and December 31, 2010:


(in thousands)	March 31, 2011			December 31, 2010
Cost for federal income tax purposes	$	1,088,224		$	1,144,899


Gross unrealized appreciation
Unrealized appreciation of fair value of portfolio investments (GAAP)		60,682			56,950
Book to tax differences		89,295			90,981

Gross unrealized appreciation—tax basis		149,977			147,931


Gross unrealized depreciation
Unrealized depreciation of fair value of portfolio investments (GAAP)		(290,989	)		(293,940	)
Book to tax differences		(39,290	)		(37,981	)

Gross unrealized depreciation—tax basis		(330,279	)		(331,921	)

Net unrealized depreciation—tax basis		(180,302	)		(183,990	)
Less: Unrealized depreciation of fair value of other assets and liabilities (GAAP)		1,041			1,023

Gross realized depreciation
Book to tax differences		45,386			47,773

Net realized depreciation—tax basis		45,386			47,773


Total investments at fair value (GAAP)	$	954,349		$	1,009,705

The following table reconciles GAAP net loss to taxable income before deductions for distributions for the three months ended March 31, 2011 and the year ended December 31, 2010:


(in thousands)	Three months ended March 31, 2011			Year ended December 31, 2010
Net loss	$	(8,815	)	$	(13,072	)
Difference between book and tax losses on investments		6,255			(52,865	)
Net change in unrealized (appreciation) depreciation on investments not taxable until realized		(6,683	)		66,674
Capital losses in excess of capital gains		20,356			4,861
Timing difference related to deductibility of long-term incentive compensation		(4,740	)		1,594
Taxable interest income on non-accrual loans		1,309			14,857
Dividend income accrued for GAAP purposes that is not yet taxable		(2,497	)		(7,368	)
Distributions from taxable subsidiaries		294			3,529
Federal tax provision		11			1,801
Other, net		(36	)		24

Taxable income before deductions for distributions	$	5,454		$	20,035

NOTE 9— (LOSS) EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2011 and 2010:


	Three months ended March 31,
(dollars in thousands, except per share amounts)	2011			2010
Numerator for basic and diluted earnings per share
Net (loss) earnings	$	(8,815	)	$	5,955
Less: Dividends declared—common and restricted shares		(11,582	)		—

Undistributed (loss) earnings		(20,397	)		5,955
Percentage allocated to common shares^(a)		100.0	%		98.5	%

Undistributed earnings—common shares		(20,397	)		5,866
Add: Dividends declared—common shares		11,582			—

Numerator for common shares outstanding excluding participating shares		(8,815	)		5,866
Numerator for participating unvested shares only		—			89

Numerator for basic and diluted earnings per share—total	$	(8,815	)	$	5,955


Denominator for basic and diluted weighted-average shares outstanding
Common shares outstanding		75,765			75,158
Participating unvested shares^(b)		—			1,181

Basic and diluted weighted-average common shares outstanding—total^(b)		75,765			76,339


Earnings (loss) per share—basic and diluted
Excluding participating unvested shares	$	(0.12	)	$	0.08
Including participating unvested shares	$	(0.12	)	$	0.08
^(a) Basic and diluted weighted-average common shares:
Weighted-average common shares outstanding		75,765			75,158
Weighted-average restricted shares		—			1,181

Total basic and diluted weighted-average common shares		75,765			76,339

Percentage allocated to common shares		100	%		98.5	%

^(b)	For the three months ended March 31, 2011, we excluded 1,087 weighted-average shares of restricted common stock from the calculation of diluted loss per share because the inclusion of these shares would have had an anti-dilutive impact on the calculation of loss per share.

Holders of unvested shares of our issued and outstanding restricted common stock are eligible to receive non-forfeitable dividends. As such, these unvested shares are participating securities requiring the two-class method of computing earnings per share. Pursuant to the two-class method, we report basic and diluted (loss) earnings per share both inclusive and exclusive of the impact of the participating securities.

NOTE 10—CONTINGENCIES AND COMMITMENTS

LEGAL PROCEEDINGS

We are a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect on our financial condition or results of operations.

FINANCIAL INSTRUMENTS

During the normal course of business, we are party to certain financial instruments, including loans, participations in loans, guarantees, letters of credit and other financial commitments. We conduct extensive due diligence and, when appropriate, obtain collateral to limit our credit risk. Generally, these commitments have fixed expiration dates or other termination clauses, which may require payment of a fee by the counterparty. We expect many of these commitments will not be fully used before they expire; therefore, the total commitment amounts do not necessarily represent future cash requirements.

We do not report the unused portions of these commitments on our Consolidated Balance Sheets. As of March 31, 2011 and December 31, 2010, we had $34.1 million and $32.3 million, respectively, of outstanding unused loan commitments. We estimate that as of each of March 31, 2011 and December 31, 2010, the fair

value of these commitments was $0.2 million based on the fees that we currently charge to enter into similar arrangements, taking into account the creditworthiness of the counterparties. As of March 31, 2011 and December 31, 2010, we had no outstanding guarantees or standby letters of credit.

LEASE OBLIGATIONS

We lease our headquarters and certain other facilities and equipment under non-cancelable operating and capital leases which expire through 2014. We have sublet certain of our facilities to third parties. Certain facility leases contain provisions for rental options and rent escalations based on scheduled increases, as well as increases resulting from a rise in certain costs incurred by the lessor. As of March 31, 2011, our obligation for the remaining terms of these leases was $4.2 million, of which $2.2 million will be payable during the twelve months ending March 31, 2012. These lease obligations are partially offset by $0.2 million of sublease income due over the remaining term of the subleases, nearly all of which is due during the twelve months ending March 31, 2012.

NOTE 11—FINANCIAL HIGHLIGHTS

The following schedule summarizes our financial highlights for the three months ended March 31, 2011 and 2010:


(in thousands, except per share amounts)	Three months ended March 31,
	2011			2010
PER SHARE DATA

Net asset value at beginning of period^(a)	$	7.54		$	8.06


Net (loss) income^(b)
Net operating income before investment loss, loss on extinguishment of debt and income tax provision		0.17			0.11
Net change in unrealized appreciation (depreciation) on investments		0.08			—
Net realized loss on investments		(0.36	)		(0.03	)
Loss on extinguishment of debt		(0.01	)		—

Net (loss) income		(0.12	)		0.08


Net decrease in net assets resulting from distributions		(0.15	)		—

Net increase (decrease) in net assets relating to stock-based transactions
Issuance of shares of restricted common stock^(c)		(0.05	)		—
Net increase in stockholders’ equity from restricted stock amortization		0.01			0.02

Net increase (decrease) in net assets relating to share issuances		(0.04	)		0.02


Net asset value at end of period^(a)	$	7.23		$	8.16


MARKET PRICE PER SHARE
Beginning of period	$	6.97		$	4.32
End of period	$	6.52		$	5.21

TOTAL RETURN^(d)		(4.45	)%		20.60	%

SHARES OF COMMON STOCK OUTSTANDING^(d)
Weighted-average—basic and diluted		75,765			76,339
End of period		77,065			76,338

NET ASSETS
Average (annualized)	$	574,024		$	616,726
End of period	$	557,093		$	622,897

RATIOS (ANNUALIZED)
Operating expenses to average net assets		7.98	%		8.75	%
Net operating income to average net assets		9.19	%		5.55	%
General and administrative expense to average net assets		2.00	%		1.85	%
Return on average equity		(6.23	)%		3.92	%

^(a)	Based on total number of shares outstanding.

^(b)	Based on weighted-average number of shares outstanding.

^(c)	Represents the effects of shares issued during the period and the lapsing of forfeiture provisions on restricted stock on earnings per share.

^(d)	Total return = [(ending market price per share – beginning market price per share + dividends paid per share) / beginning market price per share].

NOTE 12—SUBSEQUENT EVENTS

In April 2011, Avenue Broadband LLC, a majority-owned, control investment of ours, and the other stockholders of Avenue Broadband Holdings, Inc. completed the sale of all outstanding shares of its capital stock. After transaction expenses, we anticipate that we will receive approximately $51.4 million in cash as a result of this transaction resulting from the repayment of our debt investment and distributions on our equity investment.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

MCG Capital Corporation

We have reviewed the accompanying consolidated balance sheet of MCG Capital Corporation, including the consolidated schedule of investments, as of March 31, 2011, and the related consolidated statements of operations, changes in net assets, cash flows and financial highlights for the three-month periods ended March 31, 2011 and 2010. These financial statements are the responsibility of MCG Capital Corporation’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MCG Capital Corporation as of December 31, 2010, including the consolidated schedule of investments, and the related consolidated statements of operations, changes in net assets, cash flows, and financial highlights for the year then ended (not presented herein), and in our report dated March 4, 2011 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010, including the consolidated schedule of investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

McLean, Virginia

May 9, 2011

Selected Financial Data

The following table summarizes key financial data for MCG Capital Corporation for the three months ended March 31, 2011 and 2010. You should refer to this data when reading our Management’s Discussion and Analysis of Financial Condition and Results of Operations and our unaudited Condensed Consolidated Financial Statements and notes thereto.


	Three months ended March 31,
(in thousands, except per share amounts)	2011			2010
INCOME STATEMENT DATA
Revenue	$	24,303		$	21,746
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision		13,003			8,439
Net investment loss before income tax provision		(20,944	)		(2,364	)
Distributable net operating income (“DNOI”)^(a)		13,627			9,666
Net (loss) income		(8,815	)		5,955

PER COMMON SHARE DATA
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision per common share—basic and diluted	$	0.17		$	0.11
DNOI per weighted-average common share—basic and diluted^(a)	$	0.18		$	0.13
(Loss) earnings per weighted-average common share—basic and diluted	$	(0.12	)	$	0.08
Cash dividends declared per common share	$	0.15		$	—

SELECTED PERIOD-END BALANCES
Investment portfolio balances
Fair value	$	954,349		$	991,032
Cost		1,183,616			1,159,794
Total assets		1,105,150			1,171,385
Borrowings		527,343			534,892
Total stockholders’ equity		557,093			622,897
Net asset value per common share outstanding^(b)	$	7.23		$	8.16

OTHER PERIOD-END DATA
Average size of investment
Fair value	$	14,244		$	17,087
Cost		17,666			19,996
Number of portfolio companies		67			58
Number of employees		63			65

RECONCILIATION OF DNOI TO NET OPERATING INCOME BEFORE INVESTMENT LOSS, LOSS ON EXTINGUISHMENT OF DEBT AND INCOME TAX PROVISION
Net operating income before investment loss, loss on extinguishment of debt and income tax provision	$	13,003		$	8,439
Amortization of employee restricted stock awards		624			1,227

DNOI^(a)	$	13,627		$	9,666

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING—BASIC AND DILUTED		75,765			76,339
NUMBER OF COMMON SHARES OUTSTANDING AT PERIOD-END		77,065			76,338

^(a)

DNOI is net operating income before net investment loss, loss on extinguishment of debt and income tax provision, as determined in accordance with accounting principles generally accepted in the United States, or GAAP, adjusted for amortization of employee restricted stock awards. We view DNOI and the related per share measures as useful and appropriate supplements to net operating income, net (loss) income, earnings 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 paid-in-kind, or PIK, interest and dividend income, which generally are 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 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 per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing.

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


	March 31,
(in thousands, except per share amounts)	2011			2010

PORTFOLIO COMPANY DATA (FAIR VALUE)
Portfolio by type
Debt investments
Senior secured debt	$	547,280		$	379,600
Subordinated debt
Secured		177,628			272,713
Unsecured		12,588			30,760

Total debt investments		737,496			683,073

Equity investments
Preferred equity		183,735			261,931
Common equity/equivalents		33,118			46,028

Total equity investments		216,853			307,959

Total portfolio	$	954,349		$	991,032

Percentage of total portfolio
Debt investments
Senior secured debt		57.4	%		38.3	%
Subordinated debt
Secured		18.6			27.5
Unsecured		1.3			3.1

Total debt investments		77.3			68.9

Equity investments
Preferred equity		19.2			26.4
Common equity/equivalents		3.5			4.7

Total equity investments		22.7			31.1

Total portfolio		100.0	%		100.0	%

YIELD ON AVERAGE LOAN PORTFOLIO AT FAIR VALUE
Average 90-Day LIBOR		0.3	%		0.3	%
Spread to average LIBOR on average loan portfolio		11.0			12.4
Impact of fee accelerations of unearned fees on paid/restructured loans		0.2			0.1
Impact of non-accrual loans		(0.3	)		(0.8	)

Total yield on average loan portfolio		11.2	%		12.0	%


COMPOSITION OF LOAN PORTFOLIO BY INTEREST TYPE (FAIR VALUE)
Percentage of loans with fixed interest rates		20.6	%		43.9	%
Percentage of loans with floating interest rates		79.4	%		56.1	%

PERCENTAGE OF TOTAL DEBT INVESTMENTS (FAIR VALUE)
Loans on non-accrual status		4.4	%		4.1	%
Loans greater than 90 days past due		0.9	%		0.9	%

PERCENTAGE OF TOTAL DEBT INVESTMENTS (COST)
Loans on non-accrual status		13.9	%		12.9	%
Loans greater than 90 days past due		2.0	%		2.9	%

WEIGHTED-AVERAGE PORTFOLIO COMPANY OPERATING METRICS^(a)
Annual revenue^(b)(c)	$	216,875		$	131,947
Annual EBITDA^(b)(c)		26,314			23,445
Loan to value of non-broadly syndicated portfolio companies		60.1	%		61.0	%
Trailing twelve-month equity EBITDA multiple^(b)(d)(e)		7.8x			8.2x
Forward twelve-month equity EBITDA multiple^(b)(c)(d)(e)		7.1x			7.2x
EBITDA to interest ratio^(b)		3.8x			2.8x
Debt to EBITDA ratio on the debt portfolio^(e)		4.7x			5.6x

^(a)	Weighted based on the portfolio company’s fair value as of the respective period end.

^(b)	Excludes portfolio companies with limited or no operations.

^(c)	Excludes public equity portfolio companies.

^(d)	Excludes portfolio companies valued on a liquidation basis.

^(e)	The maximum debt to EBITDA ratio is limited to 15x.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with the Selected Financial Data and our Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management including, without limitation: our expectations regarding our 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; our belief that our inability to access the equity and debt markets has impacted our growth; the reduction of investments in equity securities to no more than 10% to 20% of the fair value of our portfolio over the next few years; our expectations regarding the origination of higher-yielding investments that meet our risk and underwriting standards; our expectations regarding the origination of new loans, the monetization of lower-yielding investments and controlling corporate overhead and the effect of these initiatives will have on our operating performance, including our distributable net operating income; the cause of unrealized losses; the performance of our current and former portfolio companies; the sufficiency of liquidity to meet 2011 operating requirements, as well as new origination opportunities and potential dividend distributions during the upcoming year; our decision to make dividend distributions during 2011 based on the minimum statutorily required level of distributions, gains and losses recognized for tax purposes, portfolio transactional events, our liquidity, cash earnings and our BDC asset coverage ratio; the limitation of future investing activities principally to debt investments until such time that we have further narrowed the valuation gap between our stock price; our level of investments in control companies beyond those that are currently in our portfolio; the timing of, and our ability to, repurchase equity, additional debt securities and make stockholder distributions; our expectations regarding the repayment of outstanding debt; our assumptions regarding our competitors; general market conditions; the state of the economy and the potential for future growth and other factors. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “hope,” “target,” “project,” “goals,” “potential,” “predict,” “might,” “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. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those risk factors discussed in Item IA of Part II of this Quarterly Report on Form 10-Q.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

DESCRIPTION OF BUSINESS

We are a solutions-focused commercial finance company providing capital and advisory services to middle-market companies throughout the United States. For our core portfolio, we make debt and equity investments primarily in companies with annual revenue of $20 million to $200 million and earnings before interest, taxes, depreciation and amortization, or EBITDA, of $3 million to $25 million, which we refer to as “middle-market” companies. We may also purchase rated syndicated private debt in larger companies through our on-balance sheet securitization trust. Generally, our portfolio companies use our capital investment to finance acquisitions, recapitalizations, buyouts, organic growth and working capital. We identify and source new portfolio companies through multiple channels, including private equity sponsors, investment bankers, brokers, fund-less sponsors, institutional syndication partners, other club lenders and owner operators. We use our Commercial Loan Trust 2006-1 borrowing facility primarily to fund investments in syndicated private debt, while we use borrowings under Solutions Capital I L.P., our wholly owned subsidiary, licensed as a small business investment company, or SBIC, under the Small Business Investment Act of 1958, as amended, or SBIC Act, to fund unitranche, second lien and subordinated debt investments.

We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. As a BDC we must meet various regulatory tests, which include investing at least 70% of our total assets in private or thinly traded public U.S.-based companies and meeting a 200% asset coverage ratio of total net assets to total senior securities, which include most of our borrowings (including accrued interest payable) and any preferred stock we may issue in the future. In addition, we have elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code. In order to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. If we satisfy these requirements, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. From time to time, our wholly owned subsidiaries may execute transactions that trigger corporate-level tax liabilities. In such cases, we recognize a tax provision in the period when it becomes more likely than not that the taxable event will occur.

RECENT DEVELOPMENTS

During first three months of 2011, the Unites States’ economy continued to show modest improvement and leading indicators suggest that the economic recovery may continue during the remainder of 2011. Although the economy has not yet recovered to pre-recession levels, we are cautiously optimistic of the potential for future economic growth. Consistent with these improvements in the economy, our financial operating results for the three months ended March 31, 2011 has improved from the first quarter of last year. During this period our net operating income increased by $4.6 million, or 54.1%, primarily as a result of our resumption of origination activity beginning in 2010 and our the redeployment of proceeds from monetizations into higher-yielding investments and continuing cost control measures. This improvement in our operating results was offset by a $20.9 million net investment loss that we recorded during the quarter ended March 31, 2011. This net investment loss primarily resulted from a $24.3 million unrealized loss that we recorded on our investment in Broadview Network Holdings, Inc., or Broadview, as a result of a reduction in the multiples that we used to value this portfolio company.

Despite the improvements that have been made both in the United States’ economy and our financial performance, we believe that we continue to be constrained by the limited access we have to debt and equity capital. Because our stock continues to trade below net asset value and we do not have stockholder approval to sell equity below our net asset value, we cannot access the equity market. Lenders, in general, are reluctant to extend credit without equity capital access. As a result, the limited amount of debt available in the capital markets continues to have shorter maturities, higher interest rates and fees and more restrictive terms than debt facilities available prior to the recession.

We expect to continue to reduce our equity investments to no more than 10% to 20% of the fair value of our portfolio over the next few years. We also expect to continue to originate higher-yielding investments in portfolio companies that meet our risk and underwriting standards. As of March 31, 2011, we had $133.1 million of cash and cash equivalents and cash in secured and restricted accounts that we could use to fund our new investments, operating requirements and dividend distributions. We had $45.0 million of borrowing capacity available under our Series 2006-1 Class A-2 Notes, and we had $6.0 million of funded capacity to originate new investments in our wholly owned subsidiary, Solutions Capital I, L.P., or Solutions Capital, subject to approval by the United States Small Business Administration, or SBA. In January 2011, the SBA increased its total commitment for potential borrowings from $130.0 million to $150.0 million. To access the full $150.0 million SBA commitment, we would have to fund $25.4 million, in addition to the $49.6 million that we had funded through March 31, 2011. In January 2011, we also obtained a liquidity renewal from SunTrust Bank for our warehouse financing facility, or SunTrust Warehouse, and amended this facility to provide for a final legal maturity of January 2014. The following section provides an overview of our results of operations for 2010. A more detailed discussion of our results of operations for the three months ended March 31, 2011 is included in the Comparison of the Three Months Ended March 31, 2011 and 2010.

OVERVIEW OF RESULTS OF OPERATIONS

During the three months ended March 31, 2011, we reported a net loss of $8.8 million, or $0.12 per diluted share, compared to net income of $6.0 million, or $0.08 per diluted share, during the three months ended March 31, 2010. This decrease in net income resulted primarily from an $18.6 million increase in our net investment loss and a $0.8 million increase in the loss on extinguishment of debt, partially offset by a $4.6 million increase in net operating income.

Our net operating income during the three months ended March 31, 2011 was $13.0 million, or $0.17 per diluted share, compared to $8.4 million, or $0.11 per diluted share, during the three months ended March 31, 2010. This $4.6 million, or 54.1%, increase in our operating income from the comparable period in 2010 reflects a $2.6 million, or 11.8%, increase in revenue primarily resulting from a $1.2 million increase in dividend income on our existing investments, a $0.6 million, or 3.1%, increase in interest income reflecting the resumption of our investment activities, and a $0.6 million, or 13.4%, decrease in interest expense, primarily resulting from a narrowing of the interest rate spread from 2.5% during the three months ended March 31, 2010 to 2.1% during the three months ended March 31, 2011. In addition, compensation expense decreased by $1.4 million, or 23.6%, primarily due to a decrease in incentive compensation and the timing of the recognition of certain stock-based compensation.

During the three months ended March 31, 2011, we recorded $20.9 million of losses on our investments primarily reflecting from a $24.3 million unrealized loss on our Broadview investment that resulted from a reduction in the multiples that we used to value this portfolio company. In conjunction with our sale of Active Brands International, Inc., or Active Brands, senior debt during the quarter, we realized $27.7 million and reversed a $27.8 million unrealized loss that we had recognized in previous periods.

A more detailed discussion of our results of operations for the quarter ended March 31, 2011 begins on page 51. We expect to continue to originate new loans, monetize lower-yielding equity investments and control corporate overhead. We believe that these efforts will continue to improve our operating performance, including our distributable net operating income.

PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY

As of March 31, 2011, the fair value of our investment portfolio was $954.3 million, which represents a $55.4 million, or 5.5%, decrease from the $1,009.7 million fair value as of December 31, 2010. The following sections describe the composition of our investment portfolio as of March 31, 2011 and describe key changes in our portfolio during the three months ended March 31, 2011.

PORTFOLIO COMPOSITION

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


	March 31, 2011					December 31, 2010
(dollars in thousands)	Investments at Fair Value		Percent of Total Portfolio			Investments at Fair Value		Percent of Total Portfolio
Debt investments
Senior secured debt	$	547,280		57.4	%	$	555,667		55.0	%
Subordinated debt
Secured		177,628		18.6			190,309		18.9
Unsecured		12,588		1.3			12,321		1.2

Total debt investments		737,496		77.3			758,297		75.1


Equity investments
Preferred equity		183,735		19.2			218,690		21.7
Common/common equivalents equity		33,118		3.5			32,718		3.2

Total equity investments		216,853		22.7			251,408		24.9


Total investments	$	954,349		100.0	%	$	1,009,705		100.0	%

Our debt instruments bear contractual interest rates ranging from 2.5% to 17.6%, a portion of which may be deferred. As of March 31, 2011, approximately 79.4% of the fair value of our loan portfolio was at variable rates, based on a LIBOR benchmark or prime rate, and 20.6% of the fair value of our loan portfolio was at fixed rates. As of March 31, 2011, approximately 61.3% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on the LIBOR base index and prime floors between 2.25% and 6.0%. At origination, our loans generally have four- to eight-year stated maturities. Borrowers typically pay an origination fee based on a percentage of the total commitment and a fee on undrawn commitments.

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


	March 31, 2011					December 31, 2010
(dollars in thousands)	Investments at Fair Value		Percent of Total Portfolio			Investments at Fair Value		Percent of Total Portfolio
Telecommunications—CLEC	$	105,251		11.0	%	$	131,178		13.0	%
Communications—other		19,883		2.1			19,729		1.9
Business services		97,902		10.3			87,897		8.7
Cable		87,439		9.2			92,467		9.2
Healthcare		80,461		8.4			76,358		7.6
Food services		75,651		7.9			73,407		7.3
Broadcasting		54,361		5.7			53,996		5.3
Plastic products		46,198		4.8			33,633		3.3
Education		43,875		4.6			43,704		4.3
Manufacturing		39,528		4.1			54,178		5.4
Technology		34,309		3.6			35,327		3.5
Leisure activities		31,228		3.3			32,216		3.2
Electronics		30,175		3.2			30,409		3.0
Logistics		27,404		2.9			28,036		2.8
Insurance		25,056		2.6			24,993		2.5
Information services		24,734		2.6			17,940		1.8
Publishing		23,924		2.5			22,543		2.2
Repair services		19,809		2.1			—		—
Auto parts		17,441		1.8			16,959		1.7
Home furnishings		14,714		1.5			17,151		1.7
Entertainment		12,582		1.3			11,782		1.2
Restaurants		10,915		1.2			11,150		1.1
Agriculture		9,935		1.0			8,418		0.8
Other media		7,470		0.8			7,430		0.7
Diversified financial services		2,639		0.3			12,489		1.2
Consumer products		—		—			9,016		0.9
Sporting goods		—		—			42,886		4.2
Other^(a)		11,465		1.2			14,413		1.5

Total	$	954,349		100.0	%	$	1,009,705		100.0	%

^(a)	No individual industry within this category exceeds 1%.

As of March 31, 2011, approximately 13.1% of the fair value of our investment portfolio was composed of investments in the communications industry. The 13.1% included 11.0% invested in Competitive Local Exchange Carriers, or CLECs, and 2.1% invested in other communications companies, including an incumbent local exchange carrier, a paging service and a telecommunications tower company. As of December 31, 2010, approximately 14.9% of the fair value of our investment portfolio was composed of investments in the communications industry, including 13.0% invested in CLECs, and 1.9% invested in other communications companies. For the three months ended March 31, 2011 and 2010, our portfolio companies in the communications industry contributed $1.0 million, or 3.9%, and $1.0 million, or 4.5%, respectively, of our total revenues.

As of March 31, 2011, our ten largest portfolio companies represented approximately 41.5% of the total fair value of our investments. These ten companies accounted for 32.8% of our total revenue during the three months ended March 31, 2011. Our investment in Broadview, a CLEC that we control, represents our single largest investment. As of March 31, 2011 and December 31, 2010, the fair value of our investment in Broadview represented $78.7 million and $103.0 million, or 8.2% and 10.2%, respectively, of the fair value of our investment portfolio. We did not accrete any dividends with respect to our investment in Broadview during the three months ended March 31, 2011 or 2010, because we determined that the total value that we had recorded for this investment equaled the total enterprise value for this investment.


	Investments at Fair Value										Revenue for the three months ended
	March 31, 2011					December 31, 2010					March 31, 2011					March 31, 2010
(dollars in thousands)	Amount		% of Total Portfolio			Amount		% of Total Portfolio			Amount		% of Total Revenue			Amount		% of Total Revenue
Industry
Communications	$	125,134		13.1	%	$	150,907		14.9	%	$	951		3.9	%	$	969		4.5	%
Business services		97,902		10.3			87,897		8.7			2,168		8.9			858		3.9
Cable		87,439		9.2			92,467		9.2			2,050		8.4			2,722		12.5
Healthcare		80,461		8.4			76,358		7.6			2,630		10.8			2,599		12.0
Food services		75,651		7.9			73,407		7.3			2,770		11.4			2,650		12.2

CHANGES IN INVESTMENT PORTFOLIO

During the three months ended March 31, 2011, we completed $95.1 million of originations and advances, including $54.0 million of originations to six new portfolio companies and 13 originations and advances to existing portfolio companies, compared to $40.7 million of originations and advances during the three months ended March 31, 2010. The following table summarizes our total portfolio investment activity during the three months ended March 31, 2011 and 2010:


	Three months ended March 31,
(in thousands)	2011			2010
Beginning investment portfolio	$	1,009,705		$	986,346
Originations and advances		95,103			40,663
Gross payments, reductions and sales of securities		(129,223	)		(33,449	)
Net (loss)		(27,609	)		(2,267	)
Unrealized appreciation (depreciation)		(19,081	)		(2,457	)
Reversals of unrealized depreciation		25,782			2,273
Origination fees and amortization of unearned income		(328	)		(77	)

Ending investment portfolio	$	954,349		$	991,032

Originations and Advances

The following table shows our originations and advances during the three months ended March 31, 2011 and 2010 by security type:


	Three months ended March 31,
	2011					2010
(dollars in thousands)	Amount		% of Total			Amount		% of Total
Debt investments
Senior secured debt	$	61,918		65.1	%	$	32,814		80.7	%
Subordinated debt
Secured		30,143		31.7			6,387		15.7
Unsecured		57		0.1			132		0.3

Total debt investments		92,118		96.9			39,333		96.7


Equity investments
Preferred equity		2,801		2.9			1,329		3.3
Common/common equivalents equity		184		0.2			1		—

Total equity investments		2,985		3.1			1,330		3.3


Total originations and advances	$	95,103		100.0	%	$	40,663		100.0	%

The following table shows our significant originations and advances.


(in thousands)	Three months ended March 31, 2011
Company	Originations		Draws/ Advances		PIK Advances/ Dividends		Total
Debt
Qualawash Holdings, LLC	$	20,000	$	—	$	—	$	20,000
Jet Plastica Investors, LLC		12,000		—		471		12,471
Focus Brands, Inc.		11,000		—		—		11,000
Bentley Systems, Incorporated		10,000		—		—		10,000
Virtual Radiologic Corp.		10,000		—		—		10,000
Data Based Systems International, Inc.		9,000		—		34		9,034
Savvis Communications Corporation		4,993		—		—		4,993
Excelitas Technologies Corporation		3,990		—		—		3,990
Rural/Metro Operating Company, LLC		2,000		—		—		2,000
The Gavilon Group, LLC		1,500		—		—		1,500
Getty Images, Inc.		1,000		—		—		1,000
Miles Media Group, LLC		—		1,000		—		1,000
Other (< $1 million)		—		2,840		2,290		5,130

Total debt		85,483		3,840		2,795		92,118
Equity (< $1 million)		488		—		2,497		2,985

Total originations and advances	$	85,971	$	3,840	$	5,292	$	95,103

Repayments, Sales and Other Reductions of Investment Portfolio

The following table shows our gross payments, reductions and sales of securities during the three months ended March 31, 2011 and 2010 by security type:


	Three months ended March 31,
	2011					2010
(dollars in thousands)	Amount		% of Total			Amount		% of Total
Debt investments
Senior secured debt	$	73,186		56.6	%	$	32,649		97.6	%
Subordinated debt
Secured		37,568		29.1			667		2.0
Unsecured		—		—			—		—

Total debt investments		110,754		85.7			33,316		99.6

Equity investments
Preferred equity		18,224		14.1			—		—
Common/common equivalents equity		245		0.2			133		0.4

Total equity investments		18,469		14.3			133		0.4

Total gross payments, reductions and sales of securities	$	129,223		100.0	%	$	33,449		100.0	%

During the three months ended March 31, 2011 and 2010, our gross payments, reductions and sales of securities by transaction type included:

Three months ended
March 31,

(in thousands)

2011

2010

Principal repayments reductions and loan sales

100,068

25,819

Sale of equity investments

14,285

133

Collection of accrued paid-in-kind interest and dividends

9,963

405

Scheduled principal amortization

4,907

7,092

Total gross payments, reductions and sales of securities

129,223

33,449

As shown in the following table, during the three months ended March 31, 2011, we monetized all, or part of, 15 portfolio investments with proceeds totaling $118.6 million:


	Three months ended March 31, 2011
(in thousands)	Principal Repayments and Proceeds from Loan Sales		Sale of Equity Investments		PIK Interest and Dividend Prepayments		Total
Monetizations
Superior Industries Investors, LLC	$	19,333	$	13,528	$	8,903	$	41,764
Maverick Healthcare Equity, LLC		12,500		—		888		13,388
Focus Brands, Inc.		10,909		—		—		10,909
Chase Doors Holdings, Inc.		10,206		—		—		10,206
Interactive Data Corporation		9,950		—		—		9,950
Visant Corporation		6,983		—		—		6,983
Knology, Inc.		6,090		—		—		6,090
Savvis Communications Corporation		5,022		—		—		5,022
Excelitas Technologies Corporation		3,999		—		—		3,999
Empower IT Holdings, Inc.		3,387		—		—		3,387
The SI Organization, Inc.		3,000		—		—		3,000
Active Brands International, Inc.		2,062		—		—		2,062
Getty Images, Inc.		1,015		—		—		1,015
Lambeau Telecom Company, LLC		612		—		1		613
Sunshine Media Delaware, LLC		—		228		—		228

Total monetizations		95,068		13,756		9,792		118,616
Other scheduled payments		9,907		529		171		10,607

Total gross payments, sales and other reductions of investment portfolio	$	104,975	$	14,285	$	9,963	$	129,223

The proceeds from these monetizations correlated closely with the most recently reported fair value of the associated investments.

ASSET QUALITY

Asset quality is generally a function of portfolio company performance and economic conditions, as well as our underwriting and ongoing management of our investment portfolio. In addition to various risk management and monitoring tools, we use the following investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio:


Investment Rating		Summary Description
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 expect 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

The following table shows the distribution of our investments on our 1 to 5 investment rating scale at fair value as of March 31, 2011 and December 31, 2010:


(dollars in thousands)	March 31, 2011						December 31, 2010
Investment Rating	Investments at Fair Value			% of Total Portfolio			Investments at Fair Value			% of Total Portfolio
1	$	319,588	^(a)		33.5	%	$	330,605	^(a)		32.7	%
2		336,050			35.2			370,694			36.7
3		187,610			19.6			173,447			17.2
4		94,293			9.9			112,811			11.2
5		16,808			1.8			22,148			2.2

Total	$	954,349			100.0	%	$	1,009,705			100.0	%

^(a)	As of March 31, 2011 and December 31, 2010, Investment Rating “1” included $118.7 million and $112.2 million, respectively, of loans to companies in which we also hold equity securities.

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 have 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, or PIK, interest and/or the accretion of a discount on the debt investment until such time that the fair value equals or exceeds cost.

The following table summarizes loans on non-accrual status and loans greater than 90 days past due, at cost, as of March 31, 2011 and December 31, 2010:


	March 31, 2011					December 31, 2010
(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	$	16,370		1.98	%	$	10,388		1.18	%
Not on non-accrual status		—		—			—		—

Total loans greater than 90 days past due	$	16,370		1.98	%	$	10,388		1.18	%


Loans on non-accrual status
0 to 90 days past due	$	98,595		11.95	%	$	128,989		14.69	%
Greater than 90 days past due		16,370		1.98			10,388		1.18

Total loans on non-accrual status	$	114,965		13.93	%	$	139,377		15.87	%

The following table summarizes loans on non-accrual status and loans greater than 90 days past due, at fair value, as of March 31, 2011 and December 31, 2010:


	March 31, 2011					December 31, 2010
(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	$	6,439		0.87	%	$	6,157		0.81	%
Not on non-accrual status		—		—			—		—

Total loans greater than 90 days past due	$	6,439		0.87	%	$	6,157		0.81	%


Loans on non-accrual status
0 to 90 days past due	$	26,281		3.56	%	$	19,835		2.62	%
Greater than 90 days past due		6,439		0.87			6,157		0.81

Total loans on non-accrual status	$	32,720		4.43	%	$	25,992		3.43	%

The following table summarizes the changes in the cost and fair value of the loans on non-accrual status from December 31, 2010 through March 31, 2011:


	Three months ended March 31, 2011
(In thousands)	Cost			Fair Value
Non-accrual loan balance as of December 31, 2010	$	139,377		$	25,992

Advances to companies on non-accrual status		2,940			—
Payments received on loans on non-accrual status		(2,771	)		(2,771	)
Change in unrealized gain (loss) on non-accrual loans		—			34,080
Realized loss on non-accrual loans		(24,581	)		(24,581	)

Total change in non-accrual loans		(24,412	)		6,728

Non-accrual loan balance as of March 31, 2011	$	114,965		$	32,720

RESULTS OF OPERATIONS

The following section compares our results of operations for the three months ended March 31, 2011 to the three months ended March 31, 2010.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

The following table summarizes the components of our net (loss) income for the three months ended March 31, 2011 and 2010:


	Three months ended March 31,						Variance
(dollars in thousands)	2011			2010			$			Percentage
Revenue
Interest and dividend income
Interest income	$	20,158		$	19,558		$	600			3.1	%
Dividend income		2,497			1,329			1,168			87.9
Loan fees		781			724			57			7.9

Total interest and dividend income		23,436			21,611			1,825			8.4
Advisory fees and other income		867			135			732			542.2

Total revenue		24,303			21,746			2,557			11.8


Operating expense
Interest expense		3,873			4,473			(600	)		(13.4	)
Employee compensation
Salaries and benefits		3,976			4,796			(820	)		(17.1	)
Amortization of employee restricted stock awards		624			1,227			(603	)		(49.1	)

Total employee compensation		4,600			6,023			(1,423	)		(23.6	)

General and administrative expense		2,827			2,811			16			0.6

Total operating expense		11,300			13,307			(2,007	)		(15.1	)


Net operating income before net investment loss, loss on extinguishment of debt and income tax provision		13,003			8,439			4,564			54.1

Net investment loss before income tax provision		(20,944	)		(2,364	)		(18,580	)		NM

Loss on extinguishment of debt before income tax provision		(863	)		(58	)		(805	)		NM

Income tax provision		11			62			(51	)		(82.3	)


Net (loss) income	$	(8,815	)	$	5,955		$	(14,770	)		(248.0	)

NM=Not Meaningful

TOTAL REVENUE

Total revenue includes interest and dividend income and advisory fees and other income. During the three months ended March 31, 2011, our total revenue was $24.3 million, which represents a $2.6 million, or 11.8%, increase from the three months ended March 31, 2010. This increase resulted from a $1.2 million, or 87.9%, increase in dividend income, a $0.7 million, or 542.2%, increase in advisory fees and other income, a $0.6 million,

or 3.1%, increase in interest income; and a $0.1 million, or 7.9%, increase in loan fees. Dividend income increased significantly primarily because the fair value of six existing portfolio companies improved sufficiently to support the accretion of dividends. The increase in advisory fees and other income is attributable to our increased origination activity during the three months ended March 31, 2011, as well as higher prepayment fees. The following sections describe the reasons for the variances in each major component of our revenue during the three months ended March 31, 2011 from the three months ended March 31, 2010.

INTEREST INCOME

The level of interest income that we earn depends upon the level of interest-bearing investments outstanding during the period, as well as the weighted-average yield on these investments. During the three months ended March 31, 2011, the total yield on our average debt portfolio at fair value was 11.2% compared to 12.0% during the three months ended March 31, 2010. The weighted-average yield varies each period because of changes in the composition of our portfolio of debt investments, changes in stated interest rates, fee accelerations of unearned fees on paid/restructured loans and the balance of loans on non-accrual status for which we are not accruing interest.

The following table shows the various components of the total yield on our average debt portfolio at fair value for the three months ended March 31, 2011 and 2010:


	Three months ended March 31,
	2011			2010
Average 90-day LIBOR		0.3	%		0.3	%
Spread to average LIBOR on average loan portfolio		11.0			12.4
Impact of fee accelerations of unearned fees on paid/restructured loans		0.2			0.1
Impact of non-accrual loans		(0.3	)		(0.8	)

Total yield on average loan portfolio		11.2	%		12.0	%

During the three months ended March 31, 2011, interest income was $20.2 million, compared to $19.6 million during the three months ended March 31, 2010, which represented a $0.6 million, or 3.1%, increase. This increase reflected a $1.4 million increase resulting from a 10.6% rise in our average loan balance, a $0.8 million increase in interest income resulting from the impact of interest rate floors and a $0.1 million increase related to the change in LIBOR. These increases were partially offset by a $1.1 million decrease in interest income resulting from a 84 basis point decrease in our spread to LIBOR and a $0.6 million decrease resulting from the net impact of loans that were on non-accrual status during the three months ended March 31, 2011 that were accruing interest during the three months ended March 31, 2010.

PIK Income

Interest income includes certain amounts that we have not received in cash, such as PIK interest. PIK interest represents contractually deferred interest that is added to the loan balance. PIK may be prepaid by either contract or the portfolio company’s choice, but generally is paid at the end of the loan term. The following table shows the PIK-related activity for the three months ended March 31, 2011 and 2010, at cost:


	Three months ended March 31,
(in thousands)	2011			2010
Beginning PIK loan balance	$	30,923		$	33,436
PIK interest earned during the period		2,435			3,615
Interest receivable converted to PIK		360			233
Payments received from PIK loans		(5,780	)		(405	)
PIK converted to other securities		(876	)		—
Realized loss		(900	)		—

Ending PIK loan balance	$	26,162		$	36,879

As of March 31, 2011 and 2010, we were not accruing interest on $6.5 million and $4.6 million, respectively, of the PIK loans, at cost, shown in the preceding table. The increase in payments received from PIK loans during the three months ended March 31, 2011, includes $4.7 million of PIK collected in conjunction with the sale of our investment in Superior Industries Investors, LLC, or Superior.

DIVIDEND INCOME

We accrete dividends on equity investments with stated dividend rates as they are earned, to the extent that we believe the dividends will be paid ultimately and the associated portfolio company has sufficient value to support the accretion. We recognize dividends on our other equity investments when we receive the dividend payment. Our dividend income varies from period to period because of changes in the size and composition of our equity investments, the yield from the investments in our equity portfolio and the ability of the portfolio companies to declare and pay dividends.

The following table summarizes our dividend activity, at cost, for the three months ended March 31, 2011 and 2010:


	Three months ended March 31,
(in thousands)	2011			2010
Beginning accrued dividend balance	$	90,981		$	88,898
Dividend income earned during the period		2,497			1,329
Dividend collections		(4,183	)		—

Ending accrued dividend balance	$	89,295		$	90,227

During the three months ended March 31, 2011, our dividend income was $2.5 million, which represented a $1.2 million, or 87.9%, increase from the three months ended March 31, 2010. Dividend income increased $1.2 million primarily because the fair value of six existing portfolio companies improved sufficiently to support the accretion of dividends. Dividend income decreased $0.1 million as a result of the sale of three dividend-producing investments. The sale of our equity investment in Superior resulted in the collection of $4.2 million of dividends.

LOAN FEES

Loan fees include origination fees on loans that we defer and amortize into interest income over the life of the loan. When repayments or restructurings with major modifications occur, we accelerate the recognition of previously unamortized loan origination fees into loan income. These accelerations have the effect of increasing current period income and may reduce future amortizable income. Because the repayments and restructurings may vary from period to period, the level of loan origination fees included in interest income may also vary. During the three months ended March 31, 2011, our loan fees increased $0.1 million, or 7.9%, compared to the same period in 2010.

ADVISORY FEES AND OTHER INCOME

Advisory fees and other income primarily include fees related to advisory and management services, equity structuring fees, syndication fees, prepayment fees, bank interest and other income. Generally, advisory fees and other income relate to specific transactions or services and, therefore, may vary from period to period depending on the level and types of services provided. During the three months ended March 31, 2011, we earned $0.9 million of advisory fees and other income, which represented a $0.7 million, or 542.2%, increase from the three months ended March 31, 2010. Approximately half of this increase was attributable to higher prepayment penalty fees, while the remainder was attributable to additional advisory and management fees earned on our new investments, which resulted from increased origination activity during the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.

TOTAL OPERATING EXPENSE

Total operating expense includes interest, employee compensation and general and administrative expenses. During the three months ended March 31, 2011, we incurred $11.3 million of operating expense, representing a $2.0 million, or 15.1%, decrease from the same quarter in the prior year. This decrease was composed of a $1.4 million decrease in employee compensation expense and a $0.6 million decrease in interest expense. General and administrative expense increased slightly from the same quarter in the prior year. The reasons for these variances are discussed in more detail below.

INTEREST EXPENSE

During the three months ended March 31, 2011, we incurred $3.9 million of interest expense, which represented a $0.6 million, or 13.4%, decrease from the same period in 2010. A narrowing of the interest rate spread from 2.5%

during the three months ended March 31, 2010 to 2.1% during the three months ended March 31, 2011 caused interest expense to decrease by $0.5 million. Interest expense also decreased $0.1 million as a result of a reduction in our amortization of debt issuance costs.

EMPLOYEE COMPENSATION

Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards. During the three months ended March 31, 2011, our employee compensation expense was $4.6 million, which represented a $1.4 million, or 23.6%, decrease from the same period in 2010. Our salaries and benefits decreased by $0.8 million, or 17.1%, primarily due to a $0.9 million decrease in incentive compensation, partially offset by a $0.1 million increase in payroll taxes and benefits.

During the three months ended March 31, 2011, we recognized $0.6 million of compensation expense related to restricted stock awards, compared to $1.2 million for the three months ended March 31, 2010, which represented a $0.6 million, or 49.1%, decrease. The lapsing of forfeiture provisions for previously awarded restricted stock accounted for the reduction in amortization of employee restricted stock. Issuance of restricted stock under the 2009 Long-Term Incentive Plan, or LTIP, was contingent upon the closing price of MCG’s stock meeting certain price thresholds and the approval of the Compensation Committee of our board of directors. We achieved the final price threshold under which restricted stock could be issued during the three months ended March 31, 2011, resulting in the issuance of 86,500 shares of restricted common stock and the award of $1.0 million to LTIP participants.

GENERAL AND ADMINISTRATIVE

During the three months ended March 31, 2011, general and administrative expense was $2.8 million, which was essentially flat compared to the same period in 2010. Increases in employee related costs were offset by decreases in professional fees, depreciation and insurance costs.

NET OPERATING INCOME BEFORE NET INVESTMENT LOSS, LOSS ON EXTINGUISHMENT OF DEBT AND INCOME TAX PROVISION

Net operating income before net investment loss, loss on extinguishment of debt and income tax provision for the three months ended March 31, 2011 totaled $13.0 million, compared with $8.4 million for the three months ended March 31, 2010. This increase was due to the items discussed above.

DISTRIBUTABLE NET OPERATING INCOME

Distributable net operating income, or DNOI, is net operating income before net investment loss, loss on extinguishment of debt and income tax provision, as determined in accordance with accounting principles generally accepted in the United States, or GAAP, adjusted for amortization of employee restricted stock awards. We view DNOI and the related per share measures as useful and appropriate supplements to net operating income, net (loss) income, earnings 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 generally are 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 per share or 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 per share and cash flows from operating activities in MCG’s consolidated financial statements, to help analyze how MCG’s business is performing.

During the three months ended March 31, 2011, DNOI was $13.6 million, or $0.18 per share, compared to $9.7 million, or $0.13 per share for the three months ended March 31, 2010. The following table shows a reconciliation of our reported net operating income before net investment loss, loss on extinguishment of debt and income tax provision to DNOI for the quarters ended March 31, 2011 and 2010:


	Three months ended March 31,
(in thousands, except per share data)	2011			2010
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision	$	13,003		$	8,439
Amortization of employee restricted stock awards		624			1,227

DNOI	$	13,627		$	9,666


Per common share data (basic and diluted)
Weighted-average common shares outstanding		75,765			76,339
(Loss) earnings per common share	$	(0.12	)	$	0.08
Net operating income before net investment loss, loss on extinguishment of debt and income tax provision per common share	$	0.17		$	0.11
DNOI per common share	$	0.18		$	0.13

NET INVESTMENT LOSS BEFORE INCOME TAX PROVISION

During the three months ended March 31, 2011, we incurred $20.9 million of net investment losses before income tax provision, compared to $2.4 million during the same period in 2010. These amounts represent the total of net realized gains and losses, net unrealized (depreciation) appreciation, and reversals of unrealized (appreciation) depreciation. We reverse unrealized (appreciation) depreciation at the time that we realize the gain or loss. The following table summarizes our realized and unrealized (loss) and gain on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2011:


(in thousands)		Three months ended March 31, 2011
Portfolio Company	Industry	Type	Realized Gain/(Loss)			Unrealized (Depreciation)/ Appreciation			Reversal of Unrealized Depreciation/ (Appreciation)			Net (Loss)/ Gain
Broadview Networks Holdings, Inc.	Communications	Control	$	—		$	(24,289	)	$	—		$	(24,289	)
PremierGarage Holdings, LLC	Home Furnishings	Control		—			(3,281	)		—			(3,281	)
Superior Industries Investors, Inc.	Sporting Goods	Control		988			—			(2,788	)		(1,800	)
Provo Craft & Novelty, Inc.	Leisure Activities	Non-Affiliate		—			(1,160	)		—			(1,160	)
Jenzabar, Inc.	Technology	Non-Affiliate		—			(1,121	)		—			(1,121	)
RadioPharmacy Investors, LLC	Healthcare	Control		—			4,852			—			4,852
Cruz Bay Publishing, Inc.	Publishing	Non-Affiliate		—			1,524			—			1,524
Restaurant Technologies, Inc.	Food Services	Non-Affiliate		—			1,429			—			1,429
Active Brands International, Inc.	Consumer Products	Non-Affiliate		(27,654	)		—			27,776			122
Other (< $1 million net gain (loss))				(961	)		2,947			794			2,780

Total			$	(27,627	)	$	(19,099	)	$	25,782		$	(20,944	)

During the quarter ended March 31, 2011, we received payments of $2.1 million on the sale of Active Brands’ senior debt and wrote off our equity investment in that portfolio company. As a result of this transaction, we reversed $27.8 million of previously unrealized depreciation and realized a $27.7 million loss. During the quarter ended March 31, 2011, we sold our investment in Superior. As a result of this sale, we reversed $2.8 million of previously unrealized appreciation and realized a $1.0 million gain, including $1.8 million of transaction costs that we recorded at the time of sale.

During the quarter ended March 31, 2011, we recorded unrealized depreciation primarily related to Broadview; PremierGarage Holdings, LLC, or PremierGarage; Provo Craft & Novelty, Inc., or Provo Craft; and Jenzabar, Inc., or Jenzabar. The decreases in the fair values of PremierGarage and Jenzabar were attributable to a decrease in the performance of those companies. The decrease in the fair value of Broadview is primarily attributable to a decrease in the multiples used to value that company. The decrease in the fair value of Provo Craft resulted from a decrease in the company’s performance that resulted in a decrease in the market price of its debt. The remaining unrealized depreciation and appreciation shown in the above table resulted predominantly from a change in the performance of certain of our portfolio companies and the multiples used to value certain of our investments.

The following table summarizes our realized gain and (loss) on our investments and changes in unrealized appreciation and depreciation on our investments during the three months ended March 31, 2010:


(in thousands)		Three months ended March 31, 2010
Portfolio Company	Industry	Type	Realized Loss			Unrealized (Depreciation)/ Appreciation			Reversal of Unrealized Depreciation		Net (Loss)/ Gain
Jet Plastica Investors, LLC	Plastic Products	Control	$	—		$	(7,601	)	$	—	$	(7,601	)
Active Brands International, Inc.	Consumer Products	Non-affiliate		—			(1,786	)		—		(1,786	)
Superior Industries Investors, LLC	Sporting Goods	Control		—			(1,662	)		—		(1,662	)
Total Sleep Holdings, Inc.	Healthcare	Control		—			(1,119	)		—		(1,119	)
Avenue Broadband LLC	Cable	Control		—			4,506			—		4,506
Jenzabar, Inc.	Technology	Non-affiliate		—			2,113			—		2,113
Orbitel Holdings, LLC	Cable	Control		—			1,066			—		1,066
WebMediaBrands Inc.	Information Services	Non-affiliate		(1,981	)		—			1,984		3
Other				(286	)		2,113			289		2,116

Total			$	(2,267	)	$	(2,370	)	$	2,273	$	(2,364	)

During the quarter ended March 31, 2010, we sold our common stock in WebMediaBrands Inc. for approximately the fair value of this investment reported as of December 31, 2009. The remaining unrealized depreciation shown in the above table resulted predominantly from a change in the performance of certain of our portfolio companies.

LOSS ON EXTINGUISHMENT OF DEBT

We incurred a $0.9 million premium when we repurchased $17.4 million of our private placement notes during the first quarter of 2011. We incurred a $0.1 million premium when we repurchased $2.9 million of our private placement notes during the first quarter of 2010. The $0.1 million premium represents 102% of the principal amount to be purchased with monetization proceeds as required by our agreement with the holders of these unsecured notes.

INCOME TAX PROVISION

During the three months ended March 31, 2011, we incurred less than a $0.1 million income tax provision compared to a $0.1 million income tax provision during the three months ended March 31, 2010. The income tax provision for both periods was primarily attributable to unrealized depreciation or appreciation and flow-through taxable income on certain investments held by our subsidiaries.

NET (LOSS) INCOME

During the three months ended March 31, 2011, we recorded a net loss of $8.8 million, compared to net income of $6.0 million during the three months ended March 31, 2010. This change is attributable to the items discussed above.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

CASH AND CASH EQUIVALENTS, CASH, SECURITIZATION ACCOUNTS, AND CASH, RESTRICTED

Our Consolidated Balance Sheets and our Consolidated Statements of Cash Flows reflect three categories of cash: cash and cash equivalents; cash, securitization accounts; and cash, restricted. Each of these categories is described more fully below:

•

Cash and cash equivalents represents unrestricted cash, including checking accounts, interest bearing deposits collateralized by marketable debt securities and highly liquid investments with original maturities of 90 days or less. As of March 31, 2011 and December 31, 2010, we had $40.6 million and $45.0 million, respectively, in cash and cash equivalents. As of March 31, 2011, $33.9 million was held in secure interest-bearing accounts.

•

Cash, securitization accounts include principal and interest payments received on securitized loans, which in certain cases, are held in designated bank accounts until monthly or quarterly disbursements are made from the securitization trusts. In certain cases, we are required to use a portion of these amounts to pay interest expense, reduce borrowings or pay other amounts in accordance with the related securitization agreements. In other cases, we are permitted to use these amounts to acquire new loans into the securitization trusts. Cash in securitization accounts has a negative impact on our earnings since the interest we pay on borrowings typically exceeds the rate of return that we are able to earn on temporary cash investments. Our objective is to maintain sufficient cash-on-hand and availability under our debt facilities to cover current funding requirements. As of March 31, 2011 and December 31, 2010, we had $70.6 million and $42.2 million, respectively, in cash, securitization accounts. During 2011, we expect any balance in our cash, securitization accounts to decrease as we originate new loans.

•

Cash, restricted includes cash held for regulatory purposes and cash held in escrow. The largest component of restricted cash was represented by cash held by Solutions Capital I, L.P., our SBIC, which generally is restricted to the origination of new loans from our SBIC. As of March 31, 2011 and December 31, 2010, we had $21.9 million and $29.4 million respectively, of restricted cash.

During the three months ended March 31, 2011, our operating activities provided $41.4 million of cash and cash equivalents, compared to $2.2 million provided during the three months ended March 31, 2010. The $39.2 million increase in cash provided by operating activities resulted primarily from increased monetizations partially offset by increased investments in portfolio companies. During the three months ended March 31, 2011, our financing activities used $45.8 million of cash, compared to $1.8 million during the three months ended March 31, 2010. This $44.0 million increase in cash used by financing activities was due primarily to a $34.5 million net increase in cash held in securitization and restricted cash accounts, a $10.7 million increase in payments of dividends and a $2.4 million increase in payments on borrowings partially offset by a $5.0 million increase in proceeds from our borrowings.

Although there can be no assurance, we believe we have sufficient liquidity to meet our operating requirements for the remainder of 2011, as well as liquidity for new origination opportunities and potential dividend distributions.

LIQUIDITY AND CAPITAL RESOURCES

During 2009 and 2010, we implemented a strategic plan designed to establish a foundation for us to reposition our company in future years to close the gap between share price and net asset value, or NAV, and to enhance stockholder value. Initially, in late 2009 and early 2010, we focused our strategic plan on preserving capital, monetizing lower-yielding investments and deleveraging our balance sheet.

Throughout 2011, we expect to continue to monetize our equity investments to no more than 10% to 20% of the fair value of our portfolio over the next few years. We also expect to continue to originate higher-yield investments in portfolio companies that meet our risk and underwriting standards. Future distributions will take into account the minimum statutorily required level of distributions, gains and losses recognized for tax purposes, portfolio transactional events, our liquidity, cash earnings and our asset coverage ratio at the time of such decision.

We generally expect to limit our future investing activities principally to debt investments until such time that we have further narrowed the valuation gap between our stock price and our NAV and can validate the performance returns of our existing equity portfolio. We do not intend to make significant investments in control companies beyond those that are currently in our portfolio for the foreseeable future. When making new investments, we expect to underwrite credit in a manner consistent with our expectation that macro-economic conditions will be under pressure for an extended period of time. Over time, if we meet our goals with respect to leverage levels and unrestricted cash balances, we potentially may, depending on stock price and debt pricing levels, seek to repurchase our equity and additional debt securities, including our collateralized loan obligations, subject to the limitations set forth in our private placement borrowing agreements. To help provide sustainable stockholder value, we expect to make future distributions to stockholders based upon a quarterly assessment of the minimum statutorily required level of distributions, gains and losses recognized for tax purposes, portfolio transactional events, our liquidity, cash earnings and our asset coverage ratio at the time of such decision.

LIQUIDITY AND CAPITAL RESOURCES—BORROWINGS

As of March 31, 2011, we reported $527.3 million of borrowings on our Consolidated Balance Sheets at cost. We estimate that the fair value of these borrowings as of March 31, 2011 was approximately $499.3 million, based on market data and current interest rates. The following table summarizes our borrowing facilities and the potential borrowing capacity of those facilities and contingent borrowing eligibility of Solutions Capital I, L.P., a wholly owned subsidiary, as an SBIC, under the SBIC Act.

March 31, 2011

December 31, 2010

(dollars in thousands)

Maturity Date

Total
Facility/
Program

Amount
Outstanding

Total
Facility/
Program

Amount
Outstanding

Private Placement Notes

Series 2005-A

October 2011

—

17,434

Series 2007-A

October 2012

8,717

8,717

Commercial Loan Funding Trust

Variable Funding Note

January 2014^(a)

150,000

93,146

150,000

100,251

Commercial Loan Trust 2006-1

Series 2006-1 Class A-1 Notes

April 2018

106,250

106,250

Series 2006-1 Class A-2 Notes

April 2018

50,000

5,000

50,000

—

Series 2006-1 Class A-3 Notes

April 2018

85,000

85,000

Series 2006-1 Class B Notes

April 2018

58,750

58,750

Series 2006-1 Class C Notes^(b)

April 2018

45,000

32,000

45,000

32,000

Series 2006-1 Class D Notes^(c)

April 2018

47,500

29,880

47,500

29,880

SBIC (Maximum borrowing potential)^(d)

^(e)

150,000

108,600

130,000

108,600

Total borrowings

701,217

527,343

698,651

546,882

^(a)	In January 2011, the lender renewed this facility through January 2013. In conjunction with this renewal, the legal final maturity date became January 2014.

⁽^b⁾

^(c)

Amount outstanding excludes $10.1 million of notes that we repurchased in December 2008 for $2.4 million and $7.5 million of notes that we repurchased in January 2010 for $2.1 million. The notes that MCG, the parent company, purchased are eliminated from this schedule as part of the consolidation process.

^(d⁾

As of March 31, 2011, we had the potential to borrow up to $150.0 million of SBA-guaranteed debentures under the SBIC program. The SBA has approved and committed up to $150.0 million in borrowings to the SBIC. To utilize the full $150.0 million borrowing potential approved and committed by the SBIC under this program, we would have had to fund a total of $75.0 million to the SBIC, of which we had funded $49.6 million as of March 31, 2011. Based on our funded capital as of March 31, 2011, Solutions Capital I, L.P., subject to the SBA’s approval, could have borrowed up to an additional $6.0 million to originate investments.

^(e⁾	As of March 31, 2011, we could originate new borrowings, under the $150.0 million commitment made by the SBA, through September 2015. We must repay borrowings under the SBIC program within ten years after the borrowing date, which will occur between September 2018 and September 2025.

Each of our credit facilities has certain collateral requirements and/or financial covenants. As of March 31, 2011, the net worth covenant of our SunTrust Warehouse requires that we maintain a consolidated tangible net worth of not less than $500.0 million, plus 50% of any equity raised after February 26, 2010. As of May 5, 2011, this covenant was amended to net worth of not less than $450 million, plus 50% of any equity raised after February 26, 2009. Under these covenants, we must also maintain an asset coverage ratio of at least 180%.

As of March 31, 2011, our asset coverage ratio was 233% and we had $6.0 million of unused, currently available borrowing capacity remaining in our SBIC subsidiary (subject to the SBA’s approval) that is exempt from the asset coverage ratio requirements under the SEC exemptive order.

As of March 31, 2011, we were in compliance with all key financial covenants under each of our borrowing facilities, although there can be no assurance regarding compliance in future periods. On our website, we have provided a list of hyperlinks to each of our borrowing agreements where these covenant requirements can be reviewed. You may view this list at http://www.mcgcapital.com/. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q.

Our access to current and future liquidity from our borrowing facilities depends on several factors, including, but not limited to: the credit quality of our investment portfolio, including those investments used to collateralize borrowing facilities; the magnitude of our investments in individual companies and the industries in which they operate; our compliance with specific covenants in each borrowing agreement; and the specific provisions of our borrowing facilities.

Certain of our borrowing facilities contain provisions that require that we apply a portion of the proceeds we receive from monetizations to pay down a portion of the outstanding balances. In addition, as each of our borrowing facilities mature, it is important that we have sufficient liquidity available to repay our borrowing obligations. We may obtain the liquidity for repayment of our borrowing facilities from a number of sources, including cash on-hand, the maturity or monetization of our investment portfolio, other borrowing facilities and equity issuances, and from other borrowing arrangements.

We fund all of our current debt facilities, except our private placement notes, through our bankruptcy remote, special-purpose, wholly owned subsidiaries. Therefore, these subsidiaries’ assets may not be available to our creditors. In some cases, advances under our debt facilities are subject to certain collateral levels, collateral quality, leverage and other restrictive covenants. We continue to service those portfolio investments that we use as collateral in our secured borrowing facilities.

PRIVATE PLACEMENT NOTES

As of March 31, 2011, we had one series of fixed-term, unsecured notes, or the Series 2007-A unsecured notes, with a total outstanding balance of $8.7 million and an interest rate of 8.96%. Under the terms of the most recent amended agreement for the Series 2007-A unsecured notes, we are required to offer to repurchase such notes with a portion of certain monetization proceeds at a purchase price of 102% of the principal amount to be purchased. We are required to offer to repurchase these notes with 45% of the cash net proceeds of any sale of unencumbered assets to reduce amounts outstanding under the Series 2007-A unsecured notes as, and when, such sales occur in the event of proceeds of $5.0 million or more or otherwise on a semi-annual basis, unless an event of default under one of the financing subsidiary debt facilities has occurred and is continuing, in which case the percentage of net proceeds increases to 60%. When the Series 2007-A unsecured notes mature, we expect to repay these notes with the proceeds from monetizations of our unencumbered investments and unrestricted cash and cash equivalents.

In March 2011, we prepaid in full the Series 2005-A unsecured notes. In connection with the prepayment of the Series 2005-A unsecured notes and pursuant to the terms set forth in the Series 2005-A unsecured notes note purchase agreement, we paid to the noteholders $17.4 million of principal, $0.8 million in accrued interest and $0.9 million in prepayment fees. Prior to the repayment, the Series 2005-A unsecured notes had an interest rate of 9.98%. We initially issued $50.0 million of the Series 2005-A unsecured notes in October 2005 and, prior to the March 2011 prepayment, had repurchased or prepaid in the aggregate $32.6 million in principal.

COMMERCIAL LOAN FUNDING TRUST

As of March 31, 2011, we had a $93.1 million balance outstanding under the MCG Commercial Loan Funding Trust, or SunTrust Warehouse, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc. Structured to operate like a revolving credit facility, the SunTrust Warehouse is secured primarily by MCG Commercial Loan Funding Trust’s assets, including commercial loans that MCG Capital Corporation, the parent, sold to the trust. The SunTrust Warehouse is funded by third parties through the commercial paper market with SunTrust Bank providing a liquidity backstop, subject to SunTrust Bank’s annual liquidity commitment. The pool of commercial loans in the trust must meet certain requirements, such as term, average life, investment rating, agency rating and industry diversity requirements. The pool of commercial loans must also meet certain requirements related to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs.

In January 2011, SunTrust Bank renewed this liquidity facility through January 2013. The legal final maturity date of the SunTrust Warehouse is January 2014 and the scheduled termination date is January 2013. If a new agreement or extension is not executed by January 2013, the SunTrust Warehouse enters a 12-month amortization period during which principal under the facility is paid down through orderly monetizations of portfolio company assets that are financed in the facility. Prior to the commencement of any amortization period, net proceeds from monetizations of collateral financed in the SunTrust Warehouse must be reinvested in additional collateral or used to repay the outstanding borrowings. Under the terms of the renewal, investments in new collateral are limited to senior secured loans.

Under the SunTrust Warehouse, we are required to comply with various covenants, reporting requirements and other customary requirements for similar revolving credit facilities, including, without limitation, covenants related to: (a) limitations on the incurrence of additional indebtedness and liens; (b) limitations on certain investments; (c) limitations on certain restricted payments; (d) maintaining a certain minimum stockholders’ equity; (e) maintaining a ratio of total assets (less total liabilities and indebtedness not represented by senior securities) to total indebtedness represented by senior securities, of the Company and its subsidiaries, of not less than 1.8:1.0; and (f) maintaining minimum liquidity.

In addition to the asset coverage ratio described above, borrowings under the SunTrust Warehouse will be subject to compliance with a borrowing base that will apply different advance rates to different types of assets in MCG Commercial Loan Funding Trust’s portfolio.

The following table sets forth the maturity of the SunTrust Warehouse, as well as the maturity of the securitized assets and the March 31, 2011 balance of securitized cash in this borrowing facility.


	Maturities
(in thousands)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Borrowings	$	93,146	$	—	$	93,146	$	—	$	—


Collateral
Securitized investments		170,035		22,369		57,914		74,786		14,966
Cash, securitization accounts		9,355		9,355		—		—		—

Total collateral	$	179,390	$	31,724	$	57,914	$	74,786	$	14,966

COMMERCIAL LOAN TRUST 2006-1

As of March 31, 2011, we had $316.9 million of securitized debt outstanding under the Commercial Loan Trust 2006-1, which matures in April 2018. We retain all of the equity in the securitization. The pool of commercial loans in the trust must meet certain requirements, such as asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements. The securitization includes a five-year reinvestment period ending in July 2011, unless we terminate this facility earlier, during which the trust may use principal collections received on the underlying collateral to purchase new collateral from us. We have the ability to borrow up to an additional $45.0 million under our Series 2006-1 Class A-2 Notes.

The following table sets forth the maturity of this facility, as well as the maturity of the securitized assets and the current balance of securitized cash in this borrowing facility.


	Maturities
(in thousands)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Borrowings	$	316,880	$	—	$	—	$	—	$	316,880


Collateral
Fair value of securitized investments		379,037		42,323		74,220		118,001		144,493
Cash, securitization account		61,207		61,207		—		—		—

Total collateral	$	440,244	$	103,530	$	74,220	$	118,001	$	144,493

We may use the $61.2 million balance of cash in the securitized account, as well as proceeds from principal collections of securitized investments, to originate new loans until July 2011. Thereafter, we must apply the balance of unused cash in the securitized account to the outstanding balance of the Commercial Loan Trust 2006-1. In addition, we must apply principal collections from the securitized investments for this facility to repay the outstanding balance of the facility. Thus, we will likely repay this facility well before its maturity as the investments used to collateralize this facility mature and are monetized.

SBIC DEBENTURES

In total, the SBA has approved and committed $150.0 million in borrowings to Solutions Capital I, L.P., subject to certain capital requirements and customary procedures. We may use these funds to provide debt and equity capital to qualifying small businesses. We may use the borrowings from the SBA to fund new originations; however, we may not use these borrowings to originate debt to certain companies that are currently in our portfolio without SBA approval. In addition, we may not use these funds for MCG’s, the parent company’s, working capital.

To realize the full $150.0 million potential borrowing for which we have received approval under this program, we must fund a total of $75.0 million to Solutions Capital I, L.P., of which we have funded $49.6 million as of March 31, 2011. Based on our current funded capital as of March 31, 2011, Solutions Capital I, L.P. may borrow, subject to the SBA’s approval, up to an additional $6.0 million to originate new investments. To access the entire $150.0 million that the SBA has approved and committed, we would have to fund an additional $25.4 million in addition to the $49.6 million that we had funded through March 31, 2011.

SBICs are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that a SBIC will receive SBA guaranteed debenture funding, which is dependent upon continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have superior claim to Solutions Capital I, L.P.’s assets over our stockholders in the event we liquidate Solutions Capital I, L.P. or the SBA exercises its remedies under the SBA-guaranteed debentures issued by Solutions Capital I, L.P. upon an event of default.

The following table sets forth the maturity of Solutions Capital I, L.P. debentures, as well as the maturity of the assets and the current balance of securitized cash in this borrowing facility as of March 31, 2011.


	Maturities
(in thousands)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Borrowings	$	108,600	$	—	$	—	$	—	$	108,600


Collateral
Fair value of debt investments		139,669		3,207		14,703		98,424		23,335
Fair value of equity investments		17,270		—		—		—		17,270	^(a)
Cash, restricted account		16,314		16,314		—		—		—

Total collateral	$	173,253	$	19,521	$	14,703	$	98,424	$	40,605

^(a)	Equity investments do not have a stated maturity date.

As shown in the above table, the collateral in this facility exceeds the outstanding balance.

WEIGHTED-AVERAGE BORROWINGS AND COST OF FUNDS

The following table shows our weighted-average borrowings, the weighted-average interest rate on all of our borrowings, including amortization of deferred debt issuance costs and commitment fees, the average LIBOR, and the average spread to LIBOR for 2010 and 2010:


	For the three months ended
(dollars in thousands)	March 31, 2011			March 31, 2010
Weighted-average borrowings	$	545,054		$	543,082


Average LIBOR		0.31	%		0.26	%
Average spread to LIBOR, excluding amortization of deferred debt issuance costs		2.08			2.48
Impact of amortization of deferred debt issuance costs		0.45			0.55

Total cost of funds		2.84	%		3.29	%

The 2.8% weighted-average cost of funds for 2011 was 45 basis points less than the same period in 2010. This decrease resulted from a 40 basis point decrease in the average spread to LIBOR and a 10 basis point decrease in the impact of amortization of deferred debt issuance costs offset by a 5 basis point increase in the average LIBOR.

LIQUIDITY AND CAPITAL RESOURCES—COMMON STOCK

We are a closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV of such stock, except in limited circumstances, including approval by our stockholders of such a sale and certain determinations by our board of directors.

OFF-BALANCE SHEET ARRANGEMENTS

FINANCIAL INSTRUMENTS

We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our customers. These instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. We attempt to limit our credit risk by conducting extensive due diligence and obtaining collateral where appropriate.

Commitments to extend credit include the unused portions of commitments that obligate us to extend credit in the form of loans, participations in loans, guarantees, letters of credit and other financial commitments. Commitments to extend credit would also include loan proceeds we are obligated to advance, such as loan draws, rotating or revolving credit arrangements, or similar transactions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

We do not report the unused portions of these commitments on our Consolidated Balance Sheets. As of March 31, 2011, we had $34.1 million of outstanding unused loan commitments, as shown in the table below. We believe that our operations, monetizations and unrestricted cash will provide sufficient liquidity to fund, as necessary, requests to draw on these unfunded commitments. We estimate that the fair value of these commitments was $0.2 million based on the fees that we currently charge to enter into similar arrangements, taking into account the creditworthiness of the counterparties. From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies. As of March 31, 2011, we had no outstanding guarantees or standby letters of credit.


(in thousands)	As of March 31, 2011
Unused commitments to portfolio companies	Non-Affiliate Investments		Affiliate Investments		Control Investments		Total
Revolving credit facilities	$	15,086	$	7,684	$	2,855	$	25,625
Other		2,500		—		6,000		8,500

Total unused commitments to portfolio companies	$	17,586	$	7,684	$	8,855	$	34,125

CONTRACTUAL OBLIGATIONS

The following table shows our contractual obligations as of March 31, 2011:


(in thousands)	Payments Due by Period
Contractual Obligations^(a)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Borrowings
Term securitizations	$	316,880	$	—	$	—	$	—	$	316,880
Warehouse facility^(b)		93,146		—		93,146		—		—
Unsecured notes		8,717		—		8,717		—		—
SBIC		108,600		—		—		—		108,600

Total borrowings		527,343		—		101,863		—		425,480
Interest payments on borrowings^(c)		83,165		13,311		24,778		16,119		28,957
Operating and capital leases		4,304		2,300		2,004		—		—

Total contractual obligations	$	614,812	$	15,611	$	128,645	$	16,119	$	454,437

^(a)	Excludes the unused commitments to extend credit to our customers of $34.1 million as discussed above.

^(b)	Borrowings under the MCG Commercial Loan Funding Trust Facility are listed based on the contractual maturity due to the revolving nature of the facility.

^(c)	Interest payments are based on contractual maturity and the current outstanding principal balance of our borrowings and assume no changes in interest rate benchmarks.

In addition to our borrowings and lease obligations, we have entered into two interest rate swap agreements to manage our interest rate exposure related to our financing facilities. As of March 31, 2011, the swap agreements had a total notional amount of $21.2 million. Under the interest rate swap agreements, we will pay a fixed interest rate and receive a floating rate based on the prevailing three-month LIBOR. Our obligations under these swap agreements would be limited to the difference between these fixed and floating rates accrued on the notional amount. As of March 31, 2011, the fair value of these interest rate swaps was $0.2 million, and was included in our liabilities on our Consolidated Balance Sheets.

DISTRIBUTIONS

As a BDC that has elected to be treated as a RIC, we generally must distribute at least 90% of our investment company taxable income and 90% of any ordinary pre-RIC built-in gains that we recognize in order to deduct distributions made (or deemed made) to our stockholders. In addition, for calendar years ended December 31, 2010 and earlier, we were subject to a 4% excise tax to the extent that we did not distribute (actually or on a deemed basis): 98% of our ordinary income for each calendar year; 98% of our capital gain net income for each calendar year; and any income realized, but not distributed, in prior calendar years. Beginning in 2011, we will be subject to the 4% excise tax to the extent that we do not distribute (actually or on a deemed basis): 98% of our ordinary income for each calendar year; 98.2% of our capital gain net income for each calendar year; and any income realized but not distributed in prior calendar years.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions. In addition, we may be limited in our ability to make distributions due to the BDC asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in our credit facilities and due to SBA regulations. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. We may make distributions to our stockholders of certain net capital gains. From December 2001 through March 31, 2011, we have declared distributions of $12.30 per share.

The following table summarizes the distributions that we declared since January 1, 2010:


Date Declared	Record Date	Payable Date	Dividends per Share
May 5, 2011	June 15, 2011	July 15, 2011	$	0.17
March 1, 2011	March 15, 2011	April 15, 2011	$	0.15
November 2, 2010	December 9, 2010	January 6, 2011	$	0.14
August 3, 2010	September 7, 2010	October 4, 2010	$	0.12
April 29, 2010	June 2, 2010	July 2, 2010	$	0.11

If we determined the tax attributes of our 2011 distributions as of March 31, 2011, 69% would be from ordinary income and 31% would be a return of capital. However, actual determinations of the tax attributes of our distributions, including determinations of return of capital, are made annually as of the end of our fiscal year based upon our taxable income and distributions paid for the full year and will be reported to each shareholder on a Form 1099. Future distributions will take into account the requirements for us to distribute the majority of our taxable income to fulfill our distribution requirements as a RIC, together with an assessment of our current and forecasted gains and losses recognized or to be recognized for tax purposes, portfolio transactional events, liquidity, cash earnings and our asset coverage ratio at the time of such decision.

Each year, we mail statements on Form 1099-DIV to our stockholders, which identify the source of the distribution, such as paid from ordinary income, paid from net capital gains on the sale of securities and/or a return of paid-in-capital surplus, which is a nontaxable distribution. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for tax purposes. A portion of the distributions that we paid to stockholders during fiscal years 2008, 2006, 2005, 2004 and 2003 represented a return of capital. We determine the tax attributes of our distributions as of the end of our fiscal year based upon our taxable income for the full year and distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

The following table reconciles GAAP net loss to taxable income before deductions for distributions for the three months ended March 31, 2011 and the year ended December 31, 2010:


(in thousands)	Three months ended March 31, 2011			Year ended December 31, 2010
Net loss	$	(8,815	)	$	(13,072	)
Difference between book and tax losses on investments		6,255			(52,865	)
Net change in unrealized (appreciation) depreciation on investments not taxable until realized		(6,683	)		66,674
Capital losses in excess of capital gains		20,356			4,861
Timing difference related to deductibility of long-term incentive compensation		(4,740	)		1,594
Taxable interest income on non-accrual loans		1,309			14,857
Dividend income accrued for GAAP purposes that is not yet taxable		(2,497	)		(7,368	)
Distributions from taxable subsidiaries		294			3,529
Federal tax provision		11			1,801
Other, net		(36	)		24

Taxable income before deductions for distributions	$	5,454		$	20,035

CRITICAL ACCOUNTING POLICIES

These Condensed Consolidated Financial Statements are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. The following section describes our accounting policies associated with the valuation of our portfolio of investments. For a full discussion of our other critical accounting policies and estimates, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.

VALUATION OF INVESTMENTS

FAIR VALUE MEASUREMENTS AND DISCLOSURES

We account for our investments at fair value in accordance with Accounting Standard Codification 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.

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

DETERMINATION OF FAIR VALUE IN GOOD FAITH

As a BDC, we invest primarily in illiquid securities, including debt and equity securities of private companies. To protect our investments and maximize our returns, we negotiate the structure of each equity security and the majority of the debt securities in our investment portfolio. Our contracts with our portfolio companies generally include many terms governing interest rate, repayment terms, prepayment penalties, financial covenants, operating covenants, ownership and corporate governance parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. In some cases, our loan agreements also allow for increases in the spread to the base index rate, if the portfolio company’s financial or operational performance deteriorates or

shows negative variances from its business plan and, in some cases, allow for decreases in the spread if financial or operational performance improves or exceeds the portfolio company’s plan. Generally, our investments are subject to some restrictions on resale and have no established trading market. Because of the type of investments that we make and the nature of our business, our valuation processes require analyses of numerous market, industry and company-specific factors, including the performance of the underlying investment; the financial condition of the portfolio company; changing market events; market prices, when available; and other factors relevant to the individual security.

There is no single approach for determining fair value in good faith. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. As a result, for portfolio investments that do not have an active market, we must apply judgment to the specific facts and circumstances associated with each security to determine fair value.

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. When such market prices are not available, we use several valuation methodologies to estimate the fair value of our investment portfolio, which generally results in a range of fair values from which we derive a single estimate of the portfolio company’s fair value. To determine a portfolio company’s fair value, we analyze its historical and projected financial results, as well as key market value factors. In determining a security’s fair value, we assume we would exchange it in an orderly transaction at the measurement date. We use the following methods to determine the fair value of investments in our portfolio that are not traded actively:

•

Majority-Owned Control Investments—Majority-owned control investments comprise 26.9% 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 Investments—Non-majority owned investments comprise 0.3% 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 72.8% of our investment portfolio. Quoted prices are not available for 81.5% of our non-control investments. 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.

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at least 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 derived through a sale of some or all of our investment in the portfolio company or is a new investment made within the last twelve months. As set forth in more detail in the following table, in total, either we obtained a valuation or review from an independent firm, considered new investments made or used market quotes for 99.7% of the fair value of our investment portfolio as of March 31, 2011.


	March 31, 2011
	Investments at Fair Value						Percent of
(dollars in thousands)	Debt		Equity		Total		Debt Portfolio			Equity Portfolio			Total Portfolio
Independent valuations/reviews, recent transactions or market quotes
Independent valuation/review prepared
First quarter 2011	$	160,644	$	81,216	$	241,860		21.8	%		37.4	%		25.3	%
Fourth quarter 2010		147,844		74,317		222,161		20.0			34.3			23.3
Third quarter 2010		125,903		13,343		139,246		17.1			6.2			14.6
Second quarter 2010		75,356		5,487		80,843		10.2			2.5			8.5

Total independent valuations/reviews		509,747		174,363		684,110		69.1			80.4			71.7


Fair value from
Market quotes (Level 2)		125,780		2,639		128,419		17.0			1.2			13.5
Pending sales of investments or letters of intent		15,310		35,657		50,967		2.1			16.4			5.3

Fair value from market quotes and pending sales		141,090		38,296		179,386		19.1			17.6			18.8

New investments made during the 12 months ended March 31, 2011		85,850		2,564		88,414		11.7			1.2			9.2

Total portfolio evaluated		736,687		215,223		951,910		99.9			99.2			99.7

Not evaluated during the 12 months ended March 31, 2011		809		1,630		2,439		0.1			0.8			0.3


Total investment portfolio	$	737,496	$	216,853	$	954,349		100.0	%		100.0	%		100.0	%

Due to the uncertainty inherent in the valuation process, such fair value estimates may differ significantly from the values that would have been used had a ready market for the securities existed, and the 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 that we ultimately realize on these investments to differ from the valuations currently assigned.

RECENT ACCOUNTING PRONOUNCEMENTS

TROUBLED DEBT RESTRUCTURING

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the first three months of 2011, the United States economy continued to show modest improvement and leading economic indicators suggest that the economic recovery may continue during the remainder of 2011. Although the economy has not yet recovered to pre-recession levels, we are cautiously optimistic of the potential for future economic growth.

In the event of renewed financial turmoil affecting the banking system and financial markets, the financial position and results of operations of certain of the middle-market companies in our portfolio could be affected adversely, which ultimately could lead to difficulty in meeting debt service requirements and an increase in defaults.

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Our net interest income is affected by changes in various interest rates, including LIBOR, prime rates and commercial paper rates. As of March 31, 2011, approximately 79.4% of our loan portfolio, at fair value, bore interest at a spread to LIBOR or prime rate, and 20.6% at a fixed interest rate. As of March 31, 2011, approximately 61.3% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on the LIBOR base index and prime floors between 2.25% and 6.0%. The three-month weighted-average LIBOR interest rate was 0.31% as of March 31, 2011. Thus, the LIBOR floors in these loan investments lessen the impact of such historically low LIBOR rates.

We regularly measure exposure to interest rate risk. We assess interest rate risk and we manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. We also enter into derivative transactions in connection with our financing vehicles. During the quarter ended March 31, 2009, in connection with our financing vehicle requirements, we entered into two interest rate swaps, expiring in August 2011, having notional amounts of $8.7 million and $12.5 million at interest rates of 9.0% and 13.0%, respectively.

The following table shows a comparison of the interest rate base for our interest-bearing cash, outstanding commercial loans, at cost, and our outstanding borrowings as of March 31, 2011 and December 31, 2010:


	March 31, 2011				December 31, 2010
(in thousands)	Interest Bearing Cash and Commercial Loans		Borrowings		Interest Bearing Cash and Commercial Loans		Borrowings
Money market rate	$	33,920	$	—	$	23,244	$	—
Prime rate		47,929		—		49,227		—
LIBOR
30-day		56,243		—		92,787		—
60-day		—		—		—		—
90-day		493,048		316,880		478,896		311,880
180-day		19,104		—		—		—
Commercial paper		—		93,146		—		100,251
Fixed rate		208,629		117,317		257,536		134,751

Total	$	858,873	$	527,343	$	901,690	$	546,882

Based on our March 31, 2011 balance sheet, the following table shows the impact to net income of hypothetical base rate increases in interest rates, assuming no changes in our investment and borrowing structure. The impact to net income of hypothetical base rate decreases in interest rates is not shown in the following table because as of March 31, 2011, the quarterly average LIBOR was 0.31% and a 100-basis point decrease could not occur:


(dollars in thousands)					Unrealized
Basis Point Change	Interest Income		Interest Expense		(Depreciation)/ Appreciation			Net Loss
100	$	2,158	$	4,100	$	(103	)	$	(2,045	)
200		6,854		8,201		10			(1,337	)
300		13,428		12,301		124			1,251

We maintain a portion of our excess cash in secure interest-bearing accounts. As we redeploy additional cash into interest-bearing accounts and we originate new investments, our sensitivity to interest rate fluctuations and our net loss from a hypothetical increase in interest rates should decrease. As of March 31, 2011, we had a total of $133.1 million of unrestricted cash, restricted cash and cash in securitization accounts of which $99.2 million was in non-interest bearing accounts. For each $10.0 million of cash in these non-interest bearing accounts that we redeploy into variable interest rate investments, the net loss from our sensitivity to interest rate fluctuations will decrease by approximately $100,000 for each 100 basis point increase in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2011. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing evaluation of our disclosure controls and procedures as of March 31, 2011, our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred during the fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we are a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial condition or results of operations. During the quarter ended March 31, 2011, there were no new or material developments in legal proceedings.

ITEM 1A.

RISK FACTORS.

Investing in our common stock may be speculative and involves a high degree of risk. You should consider carefully the risks described below and all other information contained in this Quarterly Report on Form 10-Q, including our financial statements and the related notes and the schedules and exhibits to this Quarterly Report on Form 10-Q.

Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in other documents that we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. The description below includes any material changes to, and supersedes the description of, the risk factors affecting our business previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Substantially all of our portfolio investments are not publicly traded and, as a result, there is uncertainty as to the value of our portfolio investments. If our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposition of such investments, our NAV could be affected adversely.

In accordance with the 1940 Act and accounting principles generally accepted in the United States, we carry substantially all of our portfolio investments at fair value as determined in good faith by our board of directors. Typically, there is no public market for the securities of the privately held companies in which we have invested and generally will continue to invest. As a result, we value these securities quarterly at fair value as determined in good faith by our board of directors.

Whenever possible, we value securities at market value; however, only a small percentage of our investment portfolio is traded publicly. We value the investments that are not publicly traded based on various factors during our valuation process and our investment and valuation committee reviews and approves these valuations. The types of factors that may be considered in the determination of the fair value of these investments include public and private mergers and acquisitions transactions, comparisons to publicly traded comparable companies, third-party assessments of valuation, discounted cash flow analyses, the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments, the markets in which the portfolio company does business, market-based pricing and other relevant factors. In determining fair value in good faith, we generally obtain financial and other information from portfolio companies, which may include unaudited, projected or pro forma financial information. Our board of directors also uses several independent valuation firms to aid it in determining the fair value of these investments. Because our valuations, and particularly the valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ materially from the values that would have been used if a readily available market for these investments existed and from the amounts we may realize on any disposition of such investments. If our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposition of such investments, our NAV could be affected adversely.

Economic downturns or lingering effects of a capital market disruption and recession could impair our portfolio companies’ financial positions and operating results, which, in turn, could harm our operating results.

Many of the companies in which we have made, or may make, investments are, and may continue to be, susceptible to economic downturns or recessions. During the recession that occurred from late 2007 through mid-2009, the stock market declined and has not recovered to pre-recession levels. The U.S. government has

acted to restore liquidity and stability to business, taxpayers and the financial system, but there can be no assurance these regulatory programs, stimulus initiatives and tax reductions either will continue or will have a long-term beneficial impact. In addition, equity and credit markets were characterized by increasing asset prices, lower volatility and improved liquidity beginning in mid-2009. In the event of renewed financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry or significant financial service institution failures, there could be a new or incremental tightening in the credit markets, low liquidity and extreme volatility in fixed-income, credit, currency and equity markets. To the extent that recessionary conditions recur, the economy remains stagnate or the economy fails to return to pre-recession levels, the financial results of middle-market companies, like those in which we invest, may experience deterioration, which ultimately could lead to difficulty in meeting debt service requirements and an increase in defaults.

Adverse economic conditions have decreased the value of some of our loans and equity investments and lingering after-effects of these economic conditions, may further decrease such value. These conditions have contributed to, and could continue to contribute to, additional losses of value in our portfolio and decreases in our revenues, net income and net assets. If prolonged, unfavorable or uncertain economic and market conditions could affect the ability of our portfolio companies to repay our loans or engage in a liquidity event, such as a sale, merger, recapitalization or initial public offering. Therefore, the number of non-performing assets may increase and the value of one or more of our portfolio companies may decrease during such periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments.

Economic recessions or downturns could impair the ability of our portfolio companies to repay loans, which, in turn, could increase our non-performing assets, decrease the value of our portfolio, reduce our volume of new loans and have an adverse effect on our operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, an acceleration of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

Even though we have structured some of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt investments and subordinate all, or a portion, of our claims to that of other creditors. Holders of debt instruments ranking senior to our investments typically would be entitled to receive payment in full before we receive any distributions. After repaying such senior creditors, such portfolio company may not have any remaining assets to use to repay its obligation to us. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or in instances in which we exercised control over the borrower. It is possible that we could become subject to a lender’s liability claim, including claims associated with significant managerial assistance that we may have provided to our portfolio companies.

Investing in middle-market companies involves a high degree of risk and our financial results may be affected adversely if one or more of our significant portfolio investments defaults on its loans or fails to perform as we expect.

Our portfolio consists primarily of debt and equity investments in privately owned middle-market companies. Investing in middle-market companies involves a number of significant risks. Typically, the debt in which we invest may be rated below investment grade by one or more rating agency. Compared to larger publicly traded companies, these middle-market companies may be in a weaker financial position and experience wider variations in their operating results, which may make them more vulnerable to economic downturns. Typically, these companies need more capital to compete; however, their access to capital is limited and their cost of capital is often higher than that of their competitors. Our portfolio companies face intense competition from larger companies with greater financial, technical and marketing resources and their success typically depends on the managerial talents and efforts of an individual or a small group of persons. Therefore, the loss of any of its key employees could affect a portfolio company’s ability to compete effectively and harm its financial condition. Further, some of these companies conduct business in regulated industries that are susceptible to regulatory

changes. These factors could impair the cash flow of our portfolio companies and result in other events, such as bankruptcy. These events could limit a portfolio company’s ability to repay its obligations to us, which may have an adverse affect on the return on, or the recovery of, our investment in these businesses. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the value of the loan’s collateral.

Some of these companies cannot obtain financing from public capital markets or from traditional credit sources, such as commercial banks. Accordingly, loans made to these types of companies pose a higher default risk than loans made to companies that have access to traditional credit sources. Generally, little, if any, public information is available about such companies. Therefore, we must rely on our employees’ diligence to obtain information necessary to make well-informed investment decisions. If we do not uncover material information about these companies, we may not make a fully informed investment decision, which could, in turn, cause us to lose money on our investments.

If we fail to invest a sufficient portion of our assets in qualifying assets, we could lose our BDC status.

As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. Thus, we may be precluded from investing in potentially attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we fail to invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. In addition, there is a risk that this restriction could prevent us from making additional investments in our existing portfolio companies, which could cause our position to be diluted. We could also be forced to sell certain of our investments to comply with the 1940 Act, which may result in us receiving significantly less than the current value of such investments.

Portfolio company litigation could result in additional costs and the diversion of management time and resources.

In the course of providing significant managerial assistance to certain of our portfolio companies, we may serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, we may be named as a defendant in such litigation, which could result in additional costs and the diversion of management time and resources.

Our financial position and results of operations could be affected adversely if a significant portion of our portfolio were invested in industries that experience adverse economic or business conditions.

From time to time, we target specific industries in which to invest on a recurring basis. This practice could concentrate a significant portion of our portfolio in a specific industry. For example, as of March 31, 2011, our investments in communications companies represented 13.1% of the fair value of our portfolio. Of the 13.1% investment, 11.0% represented investments in CLECs and 2.1% represented investments in other communications companies. Typically, companies in the communications industries face a variety of risks that could have an adverse impact on their financial performance and fair value, including, but not limited to: competition with both traditional communications companies and other non-traditional service providers; ability to integrate technological developments; managing the obsolescence of their equipment and facility infrastructure; and exposure to natural or man-made disasters.

If an industry in which we have significant investments or revenue concentrations suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

Our financial results could be affected adversely if a significant portfolio investment fails to perform as expected or if the value of a portfolio company decreases.

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be affected adversely and the magnitude of the loss could be more significant than if we had made smaller investments in a greater number of companies.

Broadview Network Holdings, Inc., or Broadview, a CLEC serving primarily business customers, is our largest portfolio investment. As of March 31, 2011, we held preferred stock in Broadview with a $78.7 million fair value.

As of March 31, 2011, our investment in Broadview represented 8.2% of the fair value of our investment portfolio. If Broadview’s performance deteriorates or valuation multiples contract further in future periods, we may be required to recognize additional unrealized depreciation on this investment. Our ability to recognize income from our investment in Broadview in future periods depends on the performance and value of Broadview.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we make. We compete with public and private funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity funds. Additionally, because competition for investment opportunities generally has increased in recent years among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas in which traditionally they have not invested. As a result of these entrants, competition for investment opportunities has intensified in recent years and may intensify further in the future. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions and valuation requirements that the 1940 Act imposes on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this existing and potentially increasing competition, we may not be able to take advantage of attractive investment opportunities from time to time. We can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

We do not seek to compete primarily based on the interest rates we offer. We believe that some of our competitors make loans with interest rates that are comparable to, or lower than, the rates we offer.

We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss.

We have experienced a period of capital markets disruption. This disruption has contributed to a decrease in our NAV and stock price, and could have an adverse impact on our business and operations.

Through early 2009, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a lack of liquidity. Initially, these market conditions were triggered by declines in home prices and the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including equities. During this period of disruption, the global markets have been characterized by substantially increased volatility, short-selling and an overall loss of investor confidence. While recent economic indicators have shown modest improvements in the capital markets, these indicators could worsen. In the event of renewed financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significant financial service institution failures, there could be a new or incremental tightening in the credit markets, low liquidity and extreme volatility in fixed-income, credit, currency and equity markets. In addition, the risk remains that there could be a number of follow-on effects from the credit crisis on our business.

We may be unable to monetize assets in a challenging market environment that may preclude buyers from making investments at the fair values established by our board of directors. We are susceptible to the risk of significant loss, if we are forced to discount the value of our investments in order to monetize assets to provide liquidity to fund operations, meet our liability maturities and maintain compliance with our debt covenants. In addition, if the fair value of our assets declines substantially, we may fail to maintain the BDC asset coverage ratios stipulated by the 1940 Act. Any such failure would affect our ability to issue senior securities, including borrowings, pay dividends and could cause us to breach certain covenants in our credit facilities, which could materially impair our business operations. Further asset value degradation may result from circumstances that we may be unable to control, such as a severe decline in the value of the U.S. dollar, a protracted economic downturn or an operational problem that affects third parties or us. Ongoing disruptive conditions could cause our stock price and NAV to decline, restrict our business operations and adversely impact our results of operations and financial condition. As of March 31, 2011, our common stock was trading at $6.52 per share, or at 86.7% of NAV.

Fluctuations in interest rates could affect our income adversely.

Because we sometimes borrow to make investments, our net income depends, in part, on the difference between the rate at which we borrow funds and the rate at which we invest these funds. Because a significant portion of our assets and liabilities are priced using various short-term rate indices, including one-month to three-month LIBOR, commercial paper rates and the prime rate, the timing of changes in market interest rates or in the relationship between interest rate indices could affect the interest rates earned on our interest-earning assets differently than the interest rates we pay on interest-bearing liabilities. As a result, significant changes in market interest rates could have a material adverse effect on our net income.

A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans and investments, our non-performing assets could increase and the value of our portfolio could decrease because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. As of March 31, 2011, approximately 79.4% of the fair value of our loan portfolio was at variable rates based on a LIBOR benchmark or prime rate and approximately 20.6% of the fair value of our loan portfolio was at fixed rates. The weighted-average LIBOR interest rate was 0.31% as of March 31, 2011. As of March 31, 2011, approximately 61.3% of the fair value of our loan portfolio had LIBOR floors between 1.0% and 3.0% on the LIBOR base index and prime floors between 2.25% and 6.0%. These floors minimize our exposure to significant decreases in interest rates.

Our shares of common stock may continue to trade at discounts from NAV, which limits our ability to raise additional equity capital.

Shares of closed-end investment companies frequently trade at a market price that is less than the NAV attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our NAV per share may decline. It is not possible to predict whether our common stock will trade at, above, or below NAV. In the recent past, the stocks of BDCs as an industry, including shares of our common stock, have traded below NAV and at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. When our common stock trades below its NAV per share, we generally are unable to issue additional shares of our common stock at the then-current market price without first obtaining approval for such issuance from our stockholders and our independent directors.

If market constraints further prevent us from obtaining additional debt or equity capital, our liquidity could be affected adversely, our business prospects could be impacted negatively, we could lose key employees and our operating results could be affected negatively.

The economic recession in the United States resulted in a reduction in the availability of debt and equity capital for the market as a whole, and financial services firms in particular. The effects of the recession continue to constrain us and other companies in the financial services sector, limiting or completely preventing access to markets for debt and equity capital needed to maintain operations, continue investment originations and to grow. In addition, the available debt capital may be at a higher cost and/or less favorable terms and conditions. Equity capital is, and may continue to be, difficult to raise because we generally are not able to issue and sell our common stock at a price below NAV per share without stockholder approval. These economic and market conditions and inability to raise capital have had a negative effect on our origination process, curtailed our ability to grow and had a negative impact on our liquidity and operating results. The prolonged inability to raise additional capital could further constrain our liquidity, negatively impact our business prospects, cause the departure of key employees and have an adverse impact on our operating results.

Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then-current NAV per share of our common stock or if we issue debt securities that are convertible into shares of our common stock.

Since mid-2008, our common stock has traded consistently, and at times significantly, below NAV. The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of our stock, subject to certain exceptions. One of these exceptions allows the sale of common stock at a price below NAV if the sale is approved by the holders of a majority of our outstanding voting securities and by holders of a majority of our outstanding voting securities who are not affiliated persons of us, and our board of directors must make certain determinations prior to any such sale.

If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This dilution would occur as a result of the sale of shares at a price below the then-

current NAV per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. The greater the difference between the sale price and the NAV per share at the time of the offering, the more significant the dilutive impact would be. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect, if any, cannot currently be predicted.

If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you might experience dilution.

We may in the future decide to issue preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings.

Because preferred stock is another form of leverage and the dividends on any preferred stock we might issue must be cumulative, preferred stock has the same risks to our common stockholders as borrowings. Payment of any such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference. In addition, holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, could veto any such changes.

If we fail to qualify as a RIC, we will have to pay corporate-level taxes on our income and our income available for distribution would be reduced significantly or eliminated.

We have elected to be taxed for federal income tax purposes as a RIC, under Subchapter M of the Internal Revenue Code. To qualify as a RIC under the Internal Revenue Code, we must meet certain source-of-income, asset diversification and annual distribution requirements and maintain our status as a BDC, including:

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The annual distribution requirement for a RIC is satisfied if we distribute to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, on an annual basis. Because we may use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and we may be subject to certain financial covenants under our debt arrangements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and, thus, become subject to corporate-level income tax.

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The income source requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

•

The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy these requirements, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Internal Revenue Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and, therefore, will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

If we fail to qualify as a RIC for any reason and become subject to corporate-level income tax, the resulting corporate-level taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on our stockholders and us.

A failure on our part to maintain our qualification as a BDC would significantly reduce our operating flexibility.

If we were to continuously fail to qualify as a BDC, we might be subject to regulation as a registered closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility. In addition,

failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us. For additional information on the qualification requirements of a BDC, see the disclosure under the caption Item 1. Business—Regulation of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

We have substantial indebtedness and, if we do not service our debt arrangements adequately, our business could be harmed materially.

As of March 31, 2011, we had $527.3 million of outstanding borrowings under our debt facilities. As of March 31, 2011, the weighted-average annual interest rate on all of our outstanding borrowings was 2.5%, excluding the amortization of deferred debt issuance costs. Our ability to service our debt arrangements depends largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.

Under our warehouse financing facility, or SunTrust Warehouse, funded through Three Pillars Funding LLC, an asset-backed commercial paper conduit administered by SunTrust Robinson Humphrey, Inc., and our debt securitization through MCG Commercial Loan Trust 2006-1, we are subject to financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Internal Revenue Code and impact our liquidity. In addition, these facilities include various affirmative and negative covenants, as well as certain cross-default provisions, whereby a payment default or acceleration under one of our debt facilities could, in certain circumstances, constitute a default under other debt facilities. In the event that there is a breach of one of the covenants contained in one of our debt facilities that has not been cured within any applicable cure period the lenders thereunder would have the ability to, in certain circumstances, accelerate the maturity of the indebtedness outstanding under that facility and exercise certain other remedies. In addition, our subsidiaries have sold some of our loans to trusts that serve as the vehicles for our securitization facilities, and these trusts, which are bankruptcy remote, hold legal title to these assets. However, in the event of a default on these loans held by the trusts, we bear losses to the extent that the fair value of our collateral exceeds our borrowings. The fair value of our excess collateral was $233.9 million as of March 31, 2011.

Each of our SunTrust Warehouse and our debt securitization through MCG Commercial Loan Trust 2006-1 requires us to maintain credit ratings for each loan in the collateral pools of these facilities as determined by specified international independent rating agencies. We are subject to periodic review and updates of these credit estimates by these rating agencies that could cause portions of the collateral to become disqualified as eligible assets if credit estimates deteriorate. In the event that a portion of the eligible assets becomes disqualified, loan payments that inure to our benefit could be otherwise diverted to reduce outstanding debt within these facilities. Such diversions could be material in amount and could hinder our ability to finance additional loans, operate our business or make distributions to our stockholders. In addition, if credit estimates deteriorate significantly, an event of default or a termination event could be triggered under these facilities, which would entitle the trustee or administrative agent to exercise available remedies, including selling the collateral securing these facilities and applying the proceeds to reduce outstanding borrowings under these facilities.

Under the terms of our Series 2007-A unsecured notes we are also subject to financial and operating covenants that restrict our business activities, including our ability to incur certain additional indebtedness, effect debt and stock repurchases in specified circumstances or through the use of borrowings or unrestricted cash, or pay dividends above certain levels.

Decreases in the fair values of our portfolio company investments, which we record as unrealized depreciation, could affect certain covenants in our credit facilities. Our SunTrust Warehouse requires that we maintain a consolidated tangible net worth of not less than $500.0 million plus 50% of the proceeds from any equity issuances after February 26, 2009. In the event that our investments experience a significant amount of unrealized depreciation, we could breach one or more of the covenants in our credit facilities, pursuant to which our lenders might, among other things, require full and immediate payment. The Series 2007-A unsecured notes require that we maintain a consolidated stockholders’ equity of $500.0 million for the periods ending as of and after December 31, 2008. As of March 31, 2011, our stockholders’ equity was $557.1 million.

In addition to the credit facility, Solutions Capital I, L.P. has issued SBA debentures that require our SBIC to generate sufficient cash flow to make required interest payments. Further, Solutions Capital I, L.P. must maintain a minimum capitalization that if impaired could materially and adversely affect our liquidity, financial condition and results of operations. Our borrowings under our SBA debentures are collateralized by the assets of Solutions Capital I, L.P.

As a BDC, we are not permitted to incur indebtedness or issue senior securities, including preferred stock, unless immediately after such borrowing we have an asset coverage for total borrowings (excluding borrowings by our SBIC facility) of at least 200%. In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common stock, or purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after deducting the amount of such dividend, distribution or purchase price. If we are unable to meet this asset coverage requirement, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions until we are in compliance with the 200% threshold requirement. As of March 31, 2011, our asset coverage ratio was 233%.

If we are not able to refinance or renew our debt or are not able to do so on favorable terms, our operations could be affected adversely.

As of March 31, 2011, we had $527.3 million of borrowings. In January 2011, the liquidity facility that supports our SunTrust Warehouse was renewed through January 2013.

Absent any acceleration events, the SunTrust Warehouse matures in January 2014 and the Series 2007-A unsecured notes mature in October 2012. We cannot be certain that we will be able to renew our credit facilities as they mature or to establish new borrowing facilities to provide capital for normal operations, including new originations. Reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers. This market turmoil and tightening of credit has led to increased market volatility and widespread reduction of business activity generally. If we are unable to renew or refinance such facilities and establish new facilities, at a reasonable size, our liquidity will be reduced significantly. Even if we are able to renew or refinance these facilities or consummate new borrowing facilities, we may not be able to do so on favorable terms. If we are unable to repay amounts outstanding under such facilities and are declared in default or if we are unable to renew or refinance these facilities, our operations could be affected adversely.

In addition to the SunTrust Warehouse, Solutions Capital I, L.P. has issued SBA debentures that require our SBIC to generate sufficient cash flow to make required interest payments. Further, Solutions Capital I, L.P. must maintain a minimum capitalization that if impaired could materially and adversely affect our liquidity, financial condition and results of operations. Our borrowings under our SBA debentures are collateralized by the assets of Solutions Capital I, L.P.

Our continued compliance with these requirements depends on many factors, some of which are beyond our control. Material net asset devaluation in connection with additional borrowings could result in an inability to comply with our obligation to restrict the level of indebtedness that we are able to incur in relation to the value of our assets or to maintain a minimum level of stockholders’ equity.

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to have significant influence over the entity. The stockholders and management of the portfolio company may make decisions that could decrease the value of our portfolio holdings.

We make both debt and minority equity investments. For these investments, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of that company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings and have an adverse effect on our financial position and results of operations.

Investments in equity securities involve a substantial degree of risk.

We may purchase common stock and other equity securities, including warrants. Although equity securities historically have generated higher average total returns than debt securities over the long term, equity securities may experience more volatility in those returns than debt securities. The equity securities we acquire may fail to appreciate, decline in value or lose all value, and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including the risk of further dilution in the event of additional issuances. Investments in preferred securities involve special risks, such as the risk of deferred distributions, illiquidity and limited voting rights.

You may not receive future distributions.

In the event that our asset coverage ratio falls below 200%, we will be unable to make distributions until our asset coverage ratio improves. If we do not distribute at least 90% of our investment company taxable income annually, we will suffer adverse tax consequences, including the possible loss of our status as a RIC for the applicable period. We cannot assure you that you will receive any distributions or distributions at a particular level. As of March 31, 2011, our asset coverage ratio was 233%. From December 2001 through March 31, 2011, we declared distributions totaling $12.30 per common share. Due to the recent market dislocation, we suspended our distributions from the third quarter of 2008 through the first quarter of 2010. We reinstated our distribution on April 29, 2010 and have continued to declare quarterly dividend since that time; however, there can be no assurance that distributions will continue in the future.

Future distributions will take into account the requirements for us to distribute the majority of our taxable income to fulfill our distribution requirements as a RIC, together with an assessment of our current and forecasted gains and losses recognized or to be recognized for tax purposes, portfolio transactional events, liquidity, cash earnings and our asset coverage ratio at the time of such decision. We may not be able to achieve operating results or our business may not perform in a manner that will allow us to make any future distributions. In addition, we may not be able to make distributions at a specific level or to increase the amount of these distributions from time to time. Due to the BDC asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.

In the future, we may choose to pay distributions with shares of our own common stock. In that case, you may be required to pay tax in excess of the cash you receive.

While currently it is not our intention to do so, we may in the future elect to distribute taxable dividends that are payable, in part, in shares of our common stock. Under an IRS revenue procedure, we may treat a distribution of our stock payable with respect to our taxable years ending on or before December 31, 2011, as a taxable dividend if, among other things, our stock is publicly traded on an established securities market and each stockholder may elect to receive his or her entire distribution in either cash or our stock subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which must be at least 10% of the aggregate declared distribution. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution as ordinary income (or as a long-term capital gain to the extent such distribution is properly designated as a capital gain dividend). As a result, a U.S. stockholder may be required to pay tax with respect to such distribution in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. income taxes with respect to such distribution, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders decide to sell shares of our stock in order to pay taxes owed on distributions, it may put downward pressure on the trading price of our stock.

We may have difficulty paying our required distributions if we recognize income before, or without, receiving cash representing such income.

In accordance with applicable tax laws and regulations, we include in taxable income certain amounts that we have not yet received in cash, such as contractual paid-in-kind, or PIK, interest, interest on loans that are on non-accrual status and original issue discount. PIK interest represents contractual interest added to the loan balance and due at the end of the loan term. We include increases in loan balances resulting from contracted PIK arrangements in taxable income, in advance of receiving cash payment. For certain of our loans that are on non-accrual status, we may recognize income for tax purposes for which we are not currently receiving payments. In addition, we hold debt instruments that have original issue discount, which may arise if we receive warrants in connection with the issuance of a debt instrument or in other circumstances. We are required to include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Since we may recognize income before, or without, receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to maintain tax benefits as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and, thus, be subject to corporate-level income tax.

The disposition of our investments may result in contingent liabilities.

Most of our investments will involve private securities. In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.

If we need to sell any of our investments, we may not be able to do so at a favorable price and, as a result, we may suffer losses.

Our investments usually are subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price. As a result, we may suffer losses. In addition, if we were forced to liquidate some or all of the investments in our portfolio immediately, the proceeds of such liquidation could be significantly less than the current fair value of such investments. We may be required to liquidate some or all of our portfolio to meet our debt service obligations or to maintain our qualification as a BDC and as a RIC if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks.

Our business depends on our key personnel.

We depend on the continued services of our executive officers and other key management personnel. The loss of any of our executive officers or key management personnel could result in inefficiencies in our operations and lost business opportunities, which could have a negative impact on our business. In addition, under our SunTrust Warehouse, if either Steven F. Tunney, our Chief Executive Officer, or B. Hagen Saville, our Executive Vice President, Business Development, ceases to be involved actively in the management of MCG and is not replaced by a person reasonably acceptable to SunTrust within 90 consecutive calendar days of such occurrence, we would be in default under such facility. If we lose the services of Mr. Tunney or Mr. Saville and are unable to identify and hire suitably qualified replacements, it could trigger a covenant default under our SunTrust Warehouse, which could accelerate the termination date of that facility.

Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.

We have issued debt securities and may issue additional debt securities, preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, as a BDC, we are permitted to issue senior securities only in amounts such that our BDC asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we would be precluded from issuing senior securities and paying dividends and we may be required to sell a portion of our investments and, depending on the nature of our leverage, may be required to repay a portion of our indebtedness at a time when such sales may be disadvantageous. In addition, the 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV unless our stockholders approve such a sale and our board of directors makes certain determinations.

Any change in the regulation of our business could have a significant adverse effect on the profitability of our operations and our cost of doing business.

Changes in the laws, regulations or interpretations of the laws and regulations that govern BDCs, RICs, SBICs or non-depository commercial lenders could have a significant adverse effect on our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted requirements that are more stringent than those in which we currently conduct business, we may have to incur significant expenses in order to comply or we may have to restrict our operations.

Our wholly owned subsidiary is licensed by the SBA and is subject to SBA regulations.

Our wholly owned subsidiary, Solutions Capital I, L.P., is licensed to operate as an SBIC and is regulated by the SBA. The SBIC license allows our SBIC subsidiary to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary procedures. The SBA regulations require, among other things, that a licensed SBIC be examined periodically, by an SBA examiner, to determine the SBIC’s compliance with the relevant SBA regulations, and be audited by an independent auditor.

Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not exceeding $18.0 million and an average net income after federal income taxes not exceeding $6.0 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 25% of its investment activity to those entities that have a tangible net worth not exceeding $6.0 million and an average annual net income after federal income taxes not exceeding $2.0 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulations permit licensed SBICs to make long term loans to small businesses and invest in the equity securities of such businesses. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause our SBIC subsidiary to forego attractive investment opportunities that are not permitted under SBA regulations.

SBA regulations currently limit the amount that a single-license SBIC subsidiary may borrow up to a maximum of $150.0 million when it has at least $75.0 million in private capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of March 31, 2011, our SBIC subsidiary had investments in 14 portfolio companies with a total fair value of $156.9 million.

The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC. If our SBIC subsidiary fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the SBIC Act or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because our SBIC subsidiary is our wholly owned subsidiary.

Our wholly owned SBIC subsidiary may be unable to make distributions to us that will enable us to meet or maintain RIC status, which could result in the imposition of an entity-level tax.

In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries, which includes the income from our SBIC subsidiary. We will be partially dependent on our SBIC subsidiary for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiary may be limited by the SBIC Act and SBA regulations governing SBICs from making certain distributions to us that may be necessary to maintain our status as a RIC. If our SBIC is unable to make sufficient distributions to us to allow us to make the required annual distributions to maintain our status as a RIC, and we are not able to obtain cash from other sources, we may fail to qualify as a RIC and, thus, be subject to corporate-level income tax.

The impact of recent financial reform legislation on us is uncertain.

In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration and regulators have increased their focus on the regulation of the financial services industry. The Dodd-Frank Reform Act became effective on July 21, 2010, although many provisions of the Dodd-Frank Reform Act have delayed effectiveness or will not become effective until the relevant federal agencies issue new rules to implement the Dodd-Frank Reform Act. Nevertheless, the Dodd-Frank Reform Act may have a material adverse impact on the financial services industry as a whole and on our business, results of operations and financial condition. Accordingly, we cannot predict the effect the Dodd-Frank Act or its implementing regulations will have on our business, results of operations or financial condition.

Our stock price has been, and continues to be, volatile and purchasers of our common stock could incur substantial losses.

The stock market in general and the market prices for securities of financial services companies, and BDCs in particular, have experienced extreme volatility that often have been unrelated or disproportionate to the operating performance of these companies. If current levels of market volatility continue or worsen, there can be no assurance that we will not continue to experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The trading price of our common stock following an offering may fluctuate substantially. The price of the common stock that will prevail in the market after an offering may be higher or lower than the price you paid and the liquidity of our common stock may be limited, in each case depending on many factors, some of which are beyond our control and may not be related directly to our operating performance. The market price and the liquidity of the market for our shares may from time to time be affected by a number of factors, which include, but are not limited to, the following:

•

our quarterly results of operations;

•

our origination activity, including the pace of, and competition for, new investment opportunities;

•

price and volume fluctuations in the overall stock market from time to time;

•

investors’ general perception of our company, the economy and general market conditions;

•

actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;

•

the financial performance of the specific industries in which we invest on a recurring basis, including without limitation, our investments in the communications, cable and healthcare industries;

•

significant transactions or capital commitments by us or our competitors;

•

significant volatility in the market price and trading volume of securities of BDCs or other financial services companies;

•

volatility resulting from trading in derivative securities related to our common stock including puts, calls or short trading positions;

•

potential future sales of debt securities convertible into or exchangeable or exercisable for our common stock or the conversion of such securities;

•

changes in laws or regulatory policies or tax guidelines with respect to BDCs or RICs;

•

loss of RIC status;

•

the loss of a major funding source, including one of our lenders;

•

announcements of strategic developments, acquisitions and other material events by us or our competitors; or

•

departures of key personnel.

If any of these factors causes an adverse effect on our business, our results of operations or our financial condition, the price of our common stock could fall and investors may not be able to sell their common stock at or above their respective purchase prices.

Certain provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

The Delaware General Corporation Law, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our certificate of incorporation dividing our board of directors into three classes with the term of one class expiring at each annual meeting of stockholders. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price of our common stock.

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

As part of our dividend reinvestment plan for our common stockholders, we may direct the plan administrator to purchase shares of our common stock on the open market to satisfy dividend reinvestment requests related to dividends that we pay on outstanding shares of our common stock. In addition, for certain employees, we may be deemed to have purchased through the net issuance of shares, a portion of the shares of restricted stock previously issued under our Third Amended and Restated 2006 Employee Restricted Stock Plan, or the 2006 Plan, for which the forfeiture provisions have lapsed to satisfy the respective employee’s income tax withholding obligations. We retire immediately all such shares of common stock that we purchase in connection with such net issuance to employees. The following table summarizes the shares of common stock that we have purchased during each of the three months ended March 31, 2011.

Period/Purpose

Total number
of shares

Average Price Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs

January 1 – 31, 2011

Dividend reinvestment requirements^(a)

6,921

7.10

^(b)

n/a

February 1 – 28, 2011

—

n/a

March 1 – 31, 2011

Restricted stock vesting^(c)

176,188

6.62

^(d)

n/a

Total shares /weighted average price paid

183,109

6.64

n/a

^(a)	Represents stock purchased on the open market to satisfy dividend reinvestment requests related to the dividend we paid on January 6, 2011.

^(b)	Represents the weighted-average purchase price per share, including commissions, for shares purchased pursuant to the terms of our dividend reinvestment plan.

^(c)

Represents shares repurchased from our employees in connection with the net issuance of shares to satisfy employee tax withholding obligations in connection with the vesting of restricted stock. Includes 20,344 shares repurchased from an executive in connection with the net issuance of shares to satisfy the executive’s tax withholding obligations in connection with the vesting of restricted stock upon the executive’s resignation.

^(d)	Based on the weighted-average closing share prices of our common stock on the dates that the forfeiture restrictions lapsed.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable.

ITEM 4. RESERVED.

ITEM 5. OTHER INFORMATION.

Not Applicable.

ITEM 6. EXHIBITS.

The following table lists exhibits filed as part of this report, according to the number assigned to them in Item 601 of Regulation S-K. All exhibits listed in the following table are incorporated by reference except for those exhibits denoted in the last column.


		Incorporated by Reference
Exhibit No.	Description	Form and SEC File No.	Filing Date with SEC	Exhibit No.	Filed with this 10-Q

10.1	Amendment No. 2 to Amended and Restated Sale and Servicing Agreement, by and among MCG Capital Corporation, MCG Commercial Loan Funding Trust; Three Pillars Funding LLC; SunTrust Robinson Humphrey, Inc. and Wells Fargo Bank, National Association, dated as of January 25, 2011	8-K (0-33377)	January 27, 2011	10.1

15.1	Letter regarding unaudited interim financial information from Ernst & Young LLP, independent registered public accounting firm				*

31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				*

31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				*

31.3	Certification of Chief Accounting Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				*

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				†

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				†

32.3	Certification of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				†

*	Filed herewith.

†	Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		MCG Capital Corporation

Date: May 9, 2011	By:	/s/ STEVEN F. TUNNEY Sr
		Steven F. Tunney Sr
		Chief Executive Officer

Date: May 9, 2011	By:	/s/ STEPHEN J. BACICA
		Stephen J. Bacica
		Chief Financial Officer

Date: May 9, 2011	By:	/s/ LINDA A. NIMMONS
		Linda A. Nimmons
		Chief Accounting Officer

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