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, 2015


OR


o  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)


Delaware54-1889518(State or other jurisdictionof incorporation or organization)(I.R.S. EmployerIdentification No.)1001 19th Street North, 10th FloorArlington, VA(Address of principal executive offices)22209(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 o


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 o No o


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):


Large accelerated fileroAccelerated filerxNon-accelerated fileroSmaller reporting companyo(Do not check if a smaller reporting company)


Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes o No x


As of April 24, 2015, there were 37,074,117 shares of the registrant’s $0.01 par value Common Stock outstanding.







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MCG CAPITAL CORPORATION


FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015


TABLE OF CONTENTS








PART I. FINANCIAL INFORMATION1ITEM 1. FINANCIAL STATEMENTS1CONSOLIDATED BALANCE SHEETS1CONSOLIDATED STATEMENTS OF OPERATIONS2CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS3CONSOLIDATED STATEMENTS OF CASH FLOWS4CONSOLIDATED SCHEDULE OF INVESTMENTS5NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)6REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM22ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK39ITEM 4. CONTROLS AND PROCEDURES40PART II. OTHER INFORMATION40ITEM 1. LEGAL PROCEEDINGS40ITEM 1A. RISK FACTORS40ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS42ITEM 3. DEFAULTS UPON SENIOR SECURITIES42ITEM 4. MINE SAFETY DISCLOSURES42ITEM 5. OTHER INFORMATION42ITEM 6. EXHIBITS42SIGNATURES44







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PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


MCG Capital Corporation


Consolidated Balance Sheets


(in thousands, except per share amounts)March 31, 2015December 31, 2014(unaudited)AssetsCash and cash equivalents$115,863$105,826Cash, restricted1501,408Investments at fair valueNon-affiliate investments (cost of$208,129and $204,084, respectively)50,13446,096Control investments (cost of$0and$30,556, respectively)—29,236Total investments (cost of$208,129and $234,640, respectively)50,13475,332Receivable for investment sold13,095—Interest receivable658396Other assets1,018835Total assets$180,918$183,797Liabilities$4,780$4,896Commitments and contingencies (Note 10)Stockholders’ equityPreferred 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, 2015 and December 31, 2014,37,074issued and outstanding on March 31, 2015 and 38,136issued and outstanding on December 31, 2014371381Paid-in capital858,421862,472Distributions in excess of earnings(524,658)(524,644)Net unrealized depreciation on investments(157,996)(159,308)Total stockholders’ equity176,138178,901Total liabilities and stockholders’ equity$180,918$183,797Net asset value per common share at end of period$4.75$4.69





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


Consolidated Statements of Operations


(unaudited)


Three months endedMarch 31(in thousands, except per share amounts)20152014RevenueInterest and dividend incomeNon-affiliate investments (less than 5% owned)$1,311$7,738Affiliate investments (5% to 25% owned)—813Control investments (more than 25% owned)409704Total interest and dividend income1,7209,255Advisory fees and other incomeNon-affiliate investments (less than 5% owned)23478Control investments (more than 25% owned)—13Total advisory fees and other income23491Total revenue1,9549,346Operating expenseInterest expense—1,990Employee compensationSalaries and benefits1,3071,088Amortization of employee restricted stock awards104306Total employee compensation1,4111,394General and administrative expense8301,639Total operating expense2,2415,023Net operating (loss) income before net investment gain (loss) and income tax (benefit) provision(287)4,323Net realized gain (loss) on investmentsNon-affiliate investments (less than 5% owned)235(4,488)Control investments (more than 25% owned)36—Total net realized gain (loss) on investments271(4,488)Net unrealized appreciation (depreciation) on investmentsNon-affiliate investments (less than 5% owned)(7)3,247Affiliate investments (5% to 25% owned)—(15,510)Control investments (more than 25% owned)1,320(6,387)Other fair value adjustments—(117)Total net unrealized appreciation (depreciation) on investments1,313(18,767)Net investment gain (loss) before income tax provision1,584(23,255)Income tax (benefit) provision(2)4Net income (loss)$1,299$(18,936)Income (loss) per basic and diluted common share$0.03$(0.27)Cash distributions declared per common share$—$0.125Weighted-average common shares outstanding—basic and diluted37,34769,395


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


Consolidated Statements of Changes in Net Assets


(unaudited)


Three months endedMarch 31(in thousands, except per share amounts)20152014Increase (decrease) in net assets from operationsNet operating (loss) income before net investment gain (loss) and income tax benefit (provision)$(287)$4,323Net realized gain (loss) on investments271(4,488)Net unrealized appreciation (depreciation) on investments1,313(18,767)Income tax benefit (provision)2(4)Net income (loss)1,299(18,936)Distributions to stockholdersDistributions declared from net operating income—(5,175)Distributions declared in excess of net operating income—(3,514)Net decrease in net assets resulting from stockholder distributions—(8,689)Capital share transactionsRepurchase of common stock(4,175)(10,589)Amortization of restricted stock awardsEmployee awards accounted for as employee compensation104306Non-employee director awards accounted for as general and administrative expense1217Common stock withheld to pay taxes applicable to the vesting of restricted stock(3)(16)Net decrease in net assets resulting from capital share transactions(4,062)(10,282)Total decrease in net assets(2,763)(37,907)Net assetsBeginning of period178,901333,954End of period$176,138$296,047Net asset value per common share at end of period$4.75$4.37Common shares outstanding at end of period37,07467,745





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


Consolidated Statements of Cash Flows


(unaudited)


Three months endedMarch 31(in thousands)20152014Cash flows from operating activitiesNet income (loss)$1,299$(18,936)Adjustments to reconcile net income (loss) to net cash provided by operating activitiesInvestments in portfolio companies(515)(5,193)Principal collections related to investment repayments or sales20,73524,183Decrease (increase) in interest receivable, accrued payment-in-kind interest and dividends6,301(360)Increase in receivable for investment sold(13,095)—Amortization of restricted stock awardsEmployee104306Non-employee director1217Decrease in cash—securitization accounts from interest collections—1,399Decrease (increase) in restricted cash—escrow accounts1,125(1,124)Depreciation and amortization8294(Increase) decrease in other assets(192)2Decrease in other liabilities(116)(2,353)Realized (gain) loss on investments(271)4,488Net unrealized (appreciation) depreciation on investments(1,313)18,767Net cash provided by operating activities14,08221,490Cash flows from financing activitiesRepurchase of common stock(4,175)(10,589)Payments on borrowings—(25,172)Decrease in cash in restricted and securitization accountsSecuritization accounts for repayment of principal on debt—12,479Restricted cash1332,250Distributions paid—(8,689)Common stock withheld to pay taxes applicable to the vesting of restricted stock(3)(16)Net cash used in financing activities(4,045)(29,737)Net increase (decrease) in cash and cash equivalents10,037(8,247)Cash and cash equivalentsBeginning balance105,82691,598Ending balance$115,863$83,351Supplemental disclosure of cash flow informationInterest paid$—$3,452Income taxes paid76—Paid-in-kind interest accrued791,645Paid-in-kind interest collected2422,060Dividend income collected6,401183


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
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MCG Capital CorporationConsolidated Schedule of InvestmentsMarch 31, 2015(dollars in thousands)Interest Rate(4)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostNon-Affiliate Investments (less than 5% owned):Broadview Networks Holdings, Inc.(5)CommunicationsCommon Stock (132,779 shares)(3)$159,579$235Series A-1 Warrant to purchase Common Stock (expire 11/20)(3)——Series A-2 Warrant to purchase Common Stock (expire 11/20)(3)——C7 Data Centers, Inc.Business ServicesSenior Debt (Due 9/19)9.5%—9.5%$14,34114,18214,182GMC Television Broadcasting, LLC(1)BroadcastingSenior Debt (Due 12/16)4.3%—4.3%10,2037,8779,226Pharmalogic Holdings Corp.(6)HealthcareSenior Debt (Due 12/17)8.5%—8.5%17,50017,50017,500South Bay Mental Health Center, Inc.HealthcareSubordinated Debt (Due 10/17)12.0%2.5%14.5%9,0888,9918,991Total Investments$208,129$50,134


MCG Capital CorporationConsolidated Schedule of InvestmentsDecember 31, 2014(dollars in thousands)Interest Rate(4)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostControl Investments(2):RadioPharmacy  Investors, LLC(1)HealthcareSenior Debt (Due 12/16)9.5%—9.5%$17,195$17,192$17,192Preferred LLC Interest (19.7%, 70,000 units)(3)13,36412,044Total control investments (represents 38.8% of total investments at fair value)30,55629,236Non-Affiliate Investments (less than 5% owned):Broadview Networks Holdings, Inc.(5)CommunicationsCommon Stock (132,779 shares)(3)159,579266Series A-1 Warrant to purchase Common Stock (expire 11/20)(3)——Series A-2 Warrant to purchase Common Stock (expire 11/20)(3)——C7 Data Centers, Inc.Business ServicesSenior Debt (Due 9/19)9.5%—9.5%14,34114,17214,172GMC Television Broadcasting, LLC(1)BroadcastingSenior Debt (Due 12/16)4.3%—4.3%10,2037,8739,198Industrial Safety Technologies, LLCManufacturingSubordinated Debt (Due 6/19)9.5%2.0%11.5%7,2197,1307,130Intrafusion Holding Corp.HealthcareSubordinated Debt (Due 6/18)13.6%—13.6%6,5006,4046,404South Bay Mental Health Center, Inc.HealthcareSubordinated Debt (Due 10/17)12.0%2.5%14.5%9,0318,9268,926Total non-affiliate investments (represents 61.2% of total investments at fair value)204,08446,096Total Investments$234,640$75,332


__________________________________


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|(1) | Includes securities issued by one or more of the portfolio company’s affiliates.

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|(2) | Control investments represent companies in which we own more than 25% of the portfolio company’s voting securities.

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|(3) | Equity security is non-income producing at period-end.

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|(4) | Interest rates represent the weighted-average annual stated interest rate on debt securities, presented by nature of indebtedness for a single issuer.  PIK interest represents contractually deferred interest that is generally added to the principal balance of the debt security and compounded if contractually required and not paid on a current basis.  PIK may be prepaid by either contract or the portfolio company's choice, but generally is paid at the end of the loan term.  Rates on preferred stock and preferred LLC interests, where applicable, represent the contractual rate.

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|(5) | Broadview Networks Holdings, Inc.’s financial statements are currently publicly available and may be accessed on-line using either the company’s website (www.broadviewnet.com) or using the EDGAR System available on the SEC’s website (www.sec.gov).  In April 2015, we entered in to an agreement to sell our equity investments in Broadview Networks Holdings, Inc. for $235 thousand.

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|(6) | In connection with the sale of RadioPharmacy, we amended and restated our existing senior secured debt and provided first lien financing consisting of a $17.5 million term loan and a $1.0 million revolver at an interest rate of 8.5% due in December 2017.

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


Notes to the Condensed Consolidated Financial Statements (Unaudited)


NOTE 1—DESCRIPTION OF BUSINESS 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.


On April 28, 2015, we entered into an agreement and plan of merger with PennantPark Floating Rate Capital Ltd., or PennantPark, two of its wholly-owned subsidiaries and, solely for limited purposes, its investment advisor, pursuant to which PennantPark Floating Rate Capital Ltd. will acquire all outstanding shares of MCG in a stock and cash transaction.  The closing of the transaction is expected to occur in the third quarter of 2015.  See Note 13—Subsequent Events for further information about the pending transaction.


We are a solutions-focused commercial finance company that provides capital and advisory services to lower 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:


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 has held one or more portfolio investments previously listed on our Consolidated Schedules of Investments .  The purpose of these Taxable Subsidiaries was 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, and be included in the calculation of 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 .


Small Business Investment Subsidiary —We own Solutions Capital I, L.P., or Solutions Capital, a wholly owned subsidiary that, until September 19, 2014, had been licensed by the United States Small Business Administration, or SBA, and operated as a small business investment company, or SBIC, under the Small Business Investment Act of 1958, as amended, or SBIC Act.  In connection with the formation of Solutions Capital, MCG also established another wholly owned subsidiary, Solutions Capital G.P., LLC, to act as the general partner of Solutions Capital, while MCG is the sole limited partner.


Wholly Owned Special-Purpose Financing Subsidiary —This subsidiary was a bankruptcy remote, special-purpose entity to which we transferred certain loans.  The financing subsidiary, in turn, transferred the loans to a Delaware statutory trust.  For accounting purposes, the transfers of the loans to the Delaware statutory trust were structured as an on-balance sheet securitization.


The accompanying financial statements reflect the consolidated accounts of MCG and the following subsidiaries:  Solutions Capital; Solutions Capital G.P., LLC; and MCG’s former special-purpose financing subsidiary, 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, or GAAP, 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


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Consolidated Financial Statements , we have evaluated subsequent events that occurred after the balance sheet date as of March 31, 2015 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, 2014 .


Recent Accounting Pronouncement


In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) , or ASU 2014-09 . This update supersedes the revenue recognition requirements in Accounting Standards Update No. 2011-230: Revenue Recognition (Topic 605) , and most industry-specific guidance throughout the industry topics of the codification.  The core principal of the update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.  In applying the revenue model to contracts within its scope, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  We are currently evaluating the potential impact the adoption of this update will have on our consolidated financial statements.


NOTE 2—INVESTMENT PORTFOLIO


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


COST BASISFAIR VALUE BASISMarch 31, 2015December 31, 2014March 31, 2015December 31, 2014(dollars in thousands)Investments at Cost% of Total PortfolioInvestments at Cost% of Total PortfolioInvestments at Fair Value% of Total PortfolioInvestments at Fair Value% of Total PortfolioDebt InvestmentsSenior secured debt$39,55919.0%$39,23716.7%$40,90881.6%$40,56253.8%Subordinated secured debt8,9914.322,4609.68,99117.922,46029.8Total debt investments48,55023.361,69726.349,89999.563,02283.6Equity investmentsPreferred——13,3645.7——12,04416.0Common/common equivalents159,57976.7159,57968.02350.52660.4Total equity investments159,57976.7172,94373.72350.512,31016.4Total investments$208,129100.0%$234,640100.0%$50,134100.0%$75,332100.0%


Our debt instruments bear contractual interest rates ranging from 4.3% to 14.5% , a portion of which may be in the form of paid-in-kind interest, or PIK.  As of March 31, 2015 , approximately 82.0% of the fair value of our loan portfolio had variable interest rates, based on a London Interbank Offer Rate, or LIBOR, benchmark or the prime rate, and 18.0% of the fair value of our loan portfolio had fixed interest rates.  As of March 31, 2015 , approximately 62.9% of our loan portfolio, at fair value, had LIBOR floors of 2.0% on a LIBOR-based index or prime floors between 2.0% and 3.3% .  At origination, our loans generally have four- to six-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


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value of a loan is below cost, we may cease recognizing PIK interest and/or the accretion of a discount on the debt investment until such time that the fair value equals or exceeds cost.


As of each of March 31, 2015 and December 31, 2014 , our portfolio contained no loans that were more than 90 days past due or on non-accrual status.


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


March 31, 2015December 31, 2014(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioHealthcare$26,49152.8%$44,56659.2%Business services14,18228.314,17218.8Broadcasting9,22618.49,19812.2Other(a)2350.57,3969.8Total$50,134100.0%$75,332100.0%______________________(a)No individual industry within this category exceeds 1%.


We provide financial support to our portfolio companies for investment purposes in the form of originations or draws and advances.  Originations represent financial support for which we have not been previously contractually required to provide and draws and advances represent financial support for which we have been previously contractually required to provide.  During the three months ended March 31, 2015 , we made advances to our portfolio companies of $0.4 million and no originations.


As of March 31, 2015 , we have commitments to invest an additional $1.0 million to our portfolio companies.  See Note 10—Commitments and Contingencies.


Receivable for investment sold


On March 31, 2015, pursuant to a definitive agreement dated as of January 17, 2015, we completed the sale through a merger of 100% of our equity interest in RadioPharmacy Investors, LLC’s subsidiary, Pharmalogic Holdings Corp., to a private equity buyer.  On March 31, 2015, the proceeds from the sale in the amount of $13.1 million were wired to a third party acting as the buyer's funding agent.  Due to a delay in the receipt of the proceeds, the funding agent was unable to disburse the proceeds to us before the close of business on March 31, 2015.  We received the proceeds in full on April 1, 2015.  As of March 31, 2015, we have recorded the sale of our equity investment and a receivable for the proceeds on our Consolidated Balance Sheet.


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.


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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 HierarchyInputs to Fair Value MethodologyLevel 1Quoted prices in active markets for identical assets or liabilitiesLevel 2Quoted 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 informationLevel 3Pricing 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.


Assets Measured at Fair Value on a Recurring Basis


The following table presents the assets that we report at fair value on our Consolidated Balance Sheets by fair value hierarchy:


March 31, 2015(in thousands)Internal Models with SignificantTotal Fair Value  Reported in  Consolidated  Balance SheetObservable Market Parameters(Level 2)Unobservable  Market Parameters(Level 3)Non-affiliate investmentsSenior secured debt$—$40,908$40,908Subordinated secured debt—8,9918,991Common/common equivalents235—235Total assets at fair value$235$49,899$50,134


As of March 31, 2015 , we had no investments that had quoted market prices in active markets that we would categorize as Level 1 investments under ASC 820.  Cash and cash equivalents are carried at cost which approximates fair value and are Level 1 assets.  Interest receivable is carried at cost which approximates fair value.


Valuation Methodologies and Procedures


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 voting equity.  As of each of March 31, 2015 and December 31, 2014 , our portfolio contained no non-majority control investments.  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.


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|• | Majority-Owned Control Investments—As ofMarch 31, 2015, we had no majority-owned control investments.  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 earnings before interest, taxes, depreciation and amortization, or 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 in question.  Also, in a limited number of cases, we use income approaches to determine fair value, 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

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for majority-owned investments estimate the value upon a hypothetical sale or exit and then allocates such value to the investment's securities in order of their relative liquidation preference.  In addition, we assume that any outstanding debt or other securities that are senior to our securities are required to be repaid at par.  These valuation approaches consider the value of our ability to control the portfolio company’s capital structure and the timing of a potential exit.


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|• | Non-Control Investments—As ofMarch 31, 2015, our entire investment portfolio is comprised of non-control investments.  Quoted prices are not available for99.5%of our non-control investments as ofMarch 31, 2015.  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 for which no quoted prices are available, 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.  In the event the fair value of a non-control debt investment, as determined by the same market or income approach used to value our control investments, is below our cost, we estimate the fair value using the market or income approach.

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|• | 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 ofMarch 31, 2015, these securities represented0.5%of our investment portfolio.  We utilize independent pricing services to arrive at certain of our fair value estimates.  To corroborate “bid/ask” quotes from independent pricing services we perform a market-yield approach to validate prices obtained or obtain other evidence.

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.  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.  In total, as of March 31, 2015 , we either obtained a valuation or review from an independent firm, considered new investments made, pending sales of the investments or used market quotes in the preceding twelve-month period to calculate 100.0% of our investment portfolio, calculated on a fair value basis.


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 sets our valuation policies and procedures and determines the fair value of our investments.  The investment and valuation committee of our board of directors meets at least quarterly with our executive management to review management’s recommendations of fair value of our investments.  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.


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 the three months ended March 31, 2015 , there were no transfers in or out of Level 1, 2 or 3.  During the three months ended March 31,


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2014 , our investment in Broadview Networks Holdings, Inc. was transferred from level 3 to level 2, because its common stock began trading in an inactive market.


The following table provides a reconciliation of fair value changes during the three months ended March 31, 2015 for all investments for which we determine fair value using unobservable (Level 3) factors:


(in thousands)Fair value measurements using unobservable inputs (Level 3)Non-affiliate InvestmentsControl InvestmentsTotalFair value as of December 31, 2014Senior secured debt$23,370$17,192$40,562Subordinated secured debt22,460—22,460Preferred equity—12,04412,044Total fair value as of December 31, 201445,83029,23675,066Realized/unrealized gain (loss)Senior secured debt158—158Subordinated secured debt100—100Preferred equity—1,3571,357Total realized/unrealized gain2581,3571,615IssuancesSenior secured debt17,515(17,192)323Subordinated secured debt272—272Total issuances17,787(17,192)595SettlementsSenior secured debt(135)—(135)Subordinated secured debt(13,841)—(13,841)Total settlements(13,976)—(13,976)SalesPreferred equity—(13,401)(13,401)Total sales—(13,401)(13,401)Fair value as of March 31, 2015Senior secured debt40,908—40,908Subordinated secured debt8,991—8,991Preferred equity———Total fair value as of March 31, 2015$49,899$—$49,899


There were no purchases of level 3 investments during the three months ended March 31, 2015 .


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The following table provides a reconciliation of fair value changes during the three -month period ended March 31, 2014 for all investments for which we determine fair value using unobservable (Level 3) factors:


(in thousands)Fair value measurements using unobservable inputs (Level 3)Non-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalFair value as of December 31, 2013Senior secured debt$105,674$51,471$19,892$177,037Subordinated secured debt97,497—10,841108,338Unsecured subordinated debt42,452——42,452Preferred equity8,2613,65613,17525,092Common/common equivalents equity2,5041,665—4,169Total fair value as of December 31, 2013256,38856,79243,908357,088Realized/unrealized gain (loss)Senior secured debt106(14,976)(49)(14,919)Subordinated secured debt(33)——(33)Preferred equity(1,241)(381)(6,339)(7,961)Common/common equivalents equity(233)(152)—(385)Total realized/unrealized gain (loss)(1,401)(15,509)(6,388)(23,298)IssuancesSenior secured debt4,502520105,032Subordinated secured debt1,302—811,383Unsecured subordinated debt309——309Preferred equity120——120Total issuances6,233520916,844SettlementsSenior secured debt(2,086)(246)(2)(2,334)Subordinated secured debt(19,561)——(19,561)Preferred equity(64)——(64)Total settlements(21,711)(246)(2)(21,959)SalesPreferred equity(4,196)——(4,196)Total sales(4,196)——(4,196)Fair value as of March 31, 2014Senior secured debt108,19636,76919,851164,816Subordinated secured debt79,205—10,92290,127Unsecured subordinated debt42,761——42,761Preferred equity2,8803,2756,83612,991Common/common equivalents equity2,2711,513—3,784Total fair value as of March 31, 2014$235,313$41,557$37,609$314,479


There were no purchases of level 3 investments during the three months ended March 31, 2014 .


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Unrealized (Depreciation) Appreciation of Level 3 Investments


The following table summarizes the unrealized appreciation (depreciation) that we recognized on those investments for which we determined fair value using unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014 :


Three months ended March 31, 2015Three months ended March 31, 2014(in thousands)Non-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalNon-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalChange in unrealized appreciation (depreciation)Senior secured debt$23$—$—$23$106$(14,976)$(49)$(14,919)Subordinated secured debt————(33)——(33)Preferred equity——1,3201,3202,719(381)(6,339)(4,001)Common/common equivalents equity————297(152)—145Total change in unrealized appreciation (depreciation) on Level 3 investments$23$—$1,320$1,343$3,089$(15,509)$(6,388)$(18,808)


Significant Unobservable Inputs


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 distinct contract terms and conditions.  As such, our valuation of each investment in our portfolio is unique and complex, often factoring in numerous different 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.


The following table summarizes the significant unobservable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique as of March 31, 2015 :


($ in thousands)Fair ValueValuation TechniquesUnobservable InputsRangeWeighted AverageMinimumMaximumSenior debt$40,908Discounted Cash FlowMarket Interest Rate6.5%7.8%7.1%Pending TransactionsPending TransactionsN/AN/AN/ASubordinated debt8,991Discounted Cash FlowMarket Interest Rate14.5%14.5%14.5%$49,899


NOTE 4—CONCENTRATIONS OF INVESTMENT RISK


During the three months ended March 31, 2015 , we had concentrations in certain industries, including the healthcare, business services and broadcasting industries.  The following table summarizes our fair value and revenue concentrations in each of those industries:


Investments at fair valueRevenue for the three months endedMarch 31, 2015December 31, 2014March 31, 2015March 31, 2014(dollars in thousands)Amount% of Total PortfolioAmount% of Total PortfolioAmount% of Total RevenueAmount% of Total RevenueIndustryHealthcare$26,49152.8%$44,56659.2%$1,10156.3%$2,13122.8%Business services14,18228.314,17318.835017.91,71518.4Broadcasting9,22618.49,19812.21266.41641.8Total$49,89999.5$67,93790.2$1,57780.6$4,01043.0


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NOTE 5—BORROWINGS


As of March 31, 2015 and December 31, 2014 , we had no outstanding borrowings or borrowing facilities.


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 (which excluded our SBIC debentures) 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 ratio of at least 200% after deducting the amount of such dividend, distribution or purchase price.  During the three months ended March 31, 2014 , we had the following borrowing facilities:


SBIC Debentures


As of December 31, 2013, Solutions Capital had borrowed $150.0 million from the SBA.  In September 2014, we prepaid in full the $150 million of SBIC debentures owed to the SBA by Solutions Capital, using excess restricted cash.  After repayment, Solutions Capital surrendered its SBIC license to the SBA’s Office of SBIC Operations.  We were permitted to use these funds to provide debt and equity capital to qualifying small businesses.  However, we were not permitted to use these funds to provide working capital to MCG, Solutions Capital's parent company.


Bank of America Unsecured Revolver


In November 2012, we obtained an unsecured revolving credit facility with Bank of America, N.A. in the principal amount of $20.0 million.  On April 21, 2014, we terminated our undrawn unsecured revolving credit facility with Bank of America, N.A.


MCG Commercial Loan Trust 2006-1


As of December 31, 2013, we had $25.2 million of securitized Class D Notes outstanding under the MCG Commercial Loan Trust 2006-1, or 2006-1 Trust, which was secured by $76.3 million of loans and equity investments and $13.9 million of cash.  We retained all of the equity in the securitization.  In November 2013, we directed the trustee to redeem the remaining notes on the next quarterly payment date and, on January 21, 2014, we repaid the Class D Notes in full and the loan and equity investments held by the 2006-1 Trust were transferred back to MCG, the parent.


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.


Stock Repurchases


The following table summarizes our stock repurchases under our stock repurchase programs for the three months ended March 31, 2015 .


Three months ended March 31, 2015Dollar amount repurchased(in thousands)$4,175Shares repurchased1,061,075Average price per share$3.93Discount to quarterly weighted average net asset value per share16.1%


On January 17, 2012, our board of directors authorized a stock repurchase program of up to $35.0 million, which was terminated after we effected repurchases totaling approximately $29.4 million.  On October 25, 2013, our board of directors authorized a second stock repurchase program of up to $25.0 million.  On February 28, 2014, our board of directors increased the second stock repurchase program to $35.0 million.  On April 25, 2014, our board of directors terminated the second stock repurchase program effective as of May 2, 2014 and authorized a third stock repurchase


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program of up to $50.0 million effective as of May 5, 2014.  On August 5, 2014, our board of directors terminated the third stock repurchase program and authorized a fourth stock repurchase program of up to $50.0 million effective as of August 12, 2014.  On October 17, 2014, our board of directors suspended the fourth stock repurchase program.  On December 18, 2014, the fourth stock repurchase program, which had been suspended during our modified "Dutch Auction" tender offer, was reinstated.  In January 2015, the fourth stock repurchase program was discontinued.  We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements.  We retired all shares of common stock that we purchased in connection with the stock repurchase program.


Restricted Stock


We requested and received the assurance of the staff of the Division of Investment Management that it would not recommend enforcement action to the SEC under the 1940 Act or Rule 17d-1 thereunder if we engage in a stock repurchase program and agree not to issue additional restricted stock under any compensation plan unless such issuance, together with all restricted stock outstanding under all compensation plans, does not exceed 10% of our outstanding common stock at the time of such issuance less the total number of shares previously issued, in the aggregate, pursuant to all compensatory plans.  Although as of March 31, 2015 , there were 1,426,811 shares of our common stock available for issuance under our Third Amended and Restated 2006 Employee Restricted Stock Plan , or 2006 Plan, no shares of restricted stock could be issued under our 2006 Plan or our Third Amended and Restated 2006 Non-Employee Director Restricted Stock Plan , or 2006 Non-Employee Plan, because the 10% threshold set forth in the SEC's order had been reached due to shares we repurchased under our stock repurchase program.


Distributions


The following table summarizes our distributions per share declared since January 1, 2014:


Date DeclaredRecord DatePayment DateAmountAugust 5, 2014August 20, 2014August 29, 2014$0.050April 25, 2014May 9, 2014May 30, 2014$0.070February 28, 2014March 14, 2014March 28, 2014$0.125


NOTE 7—SHARE-BASED COMPENSATION


Employee Share-Based Compensation


Third Amended and Restated 2006 Employee Restricted Stock Plan


From time to time, we have awarded shares of restricted common stock to employees under our 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 each of the three months ended March 31, 2015 and 2014 , no shares of restricted stock were issued under the 2006 Plan.


During each of the three months ended March 31, 2015 and 2014 , we recognized $0.1 million and $0.3 million, respectively, of compensation expense related to share-based compensation awards.  As of March 31, 2015 , all the restricted share awards for which forfeiture provisions had not lapsed carried non-forfeitable dividend rights to the holder of the restricted shares.  As of March 31, 2015 , we had $0.4 million of unrecognized compensation cost related to restricted common stock awarded to employees.  We expect to recognize the remaining costs over the remaining weighted-average requisite service period of 1.0 years.


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Non-Employee Director Share-Based Compensation


During June 2006, our stockholders initially approved the 2006 Non-Employee Plan which was subsequently amended and restated.  In May 2010, our stockholders approved an amendment to the 2006 Non-Employee Plan that increased the number of shares we may award to non-employee members of our board of directors from 100,000 to 150,000 shares.  During each of the three months ended March 31, 2015 and 2014 , no shares of restricted stock were issued to non-employee directors.  Our board of directors has waived the right to an automatic award of 7,500 shares of restricted stock, previously awarded to non-employee directors upon the commencement of each three-year term of board service.  During each of the three months ended March 31, 2015 and 2014 , 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, 2015 , we had less than $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 1.0 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, 2015 :


SharesWeighted-Average Grant Date Fair Value per ShareSubject to forfeiture provisions as of December 31, 2014368,120$4.45Awarded—$—Forfeiture provision satisfied(11,565)$4.81Forfeited—$—Subject to forfeiture provisions as of March 31, 2015356,555$4.44


NOTE 8—INCOME TAXES


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 basis 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, 2015 , we recorded an income tax benefit of less than $0.1 million, which was primarily attributable to a refund received by one of our Taxable Subsidiaries.  During the three months ended March 31, 2014 , we recorded an income tax provision of less than $0.1 million, which was primarily attributable to flow-through taxable income on certain investments held by our subsidiaries.


Taxable income differs from net income recognized in accordance with 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 book basis.


Taxation as a RIC


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.  On a continuing basis, we monitor distribution requirements in order to comply with Subchapter M of the Internal Revenue Code.  To qualify as a RIC for federal income tax purposes, we must, among other things:


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|1. | continue to qualify as a BDC under the 1940 Act at all times during each taxable year;

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|   |                                                                                                                                                                                                                                                                                                                                                                                             
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|2. | derive in each taxable year at least 90% of our gross income from (1) dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (2) net income derived from an interest in a “qualified publicly traded partnership;” and

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|3. | diversify our holdings so that at the end of each quarter of the taxable year:

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|a. | at least 50% of the value of our assets consist of cash, cash items, U.S. government securities, securities of other RICs, and other securities, if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

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|b. | no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of (i) one issuer, (ii) two or more issuers that are controlled, as determined under applicable Internal Revenue Code rules, by us and are engaged in the same or similar or related trades or businesses or (iii) one or more “qualified publicly traded partnerships.”

If we fail to satisfy the distribution requirement or fail to qualify as a RIC in any taxable year, we would be subject to tax in that year on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders.  Distributions would not be required, and any distributions made in taxable years beginning on or after January 1, 2014 would be taxable to our stockholders as ordinary dividend income that, subject to certain limitations, may be eligible for the 15% or 20% maximum tax rate (depending on income thresholds) to the extent of our current and accumulated earnings and profits.  Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction.  Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.


Distributions


From December 2001 through March 31, 2015 , we declared aggregate per share distributions of $14.13 .  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, each of which are 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.  All or a portion of the distributions that we paid to stockholders during fiscal years 2014, 2013, 2012, 2011, 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.  There were no distributions declared from January 1, 2015 through March 31, 2015 .  As of March 31, 2015 , we have calculated an income tax loss for the full year resulting in no requirement for distributions.  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 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.


Capital Loss Carryforwards


On December  22, 2010, the Regulated Investment Company Modernization Act of 2010 , or the Modernization Act, was enacted, which changed various technical rules governing the tax treatment of RICs.  The changes are generally effective for taxable years beginning after the date of enactment.  One of the more prominent changes addresses capital loss carryforwards.  Under the Modernization Act, each RIC will be permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period.  However, any losses incurred during those subsequent taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date.  As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused.  Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.  For the tax years ended December  31, 2014, 2013, 2012 and 2011, we have total net capital losses of $174.5  million which have no expiration and will be carried forward indefinitely to offset future net capital gains.  Capital loss carryforwards from tax years 2009 of $54.2  million and 2010 of $5.2  million will expire December  31, 2017 and December  31, 2018, respectively, unless utilized to offset future net capital gains prior to those expiration dates to the extent permitted by federal tax law.


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Pursuant to Section 382 of the Internal Revenue Code, if an “ownership change” (generally defined as a greater than 50% change by value in our stock ownership within a three-year period) occurs or has occurred, our ability to use our pre-change net capital loss carryforwards and certain other pre-change tax attributes to offset our post-change income may be limited.  Similar rules and limitations may apply for state tax purposes as well.


NOTE 9—EARNINGS PER SHARE


The following table sets forth the computation of basic and diluted income per common share for the three months ended March 31, 2015 and 2014 :


(dollars in thousands, except per share amounts)Three months ended March 31,20152014Numerator for basic and diluted earnings per shareNet income (loss)$1,299$(18,936)Less: Dividends declared—common and restricted shares—(8,689)Undistributed income (loss)1,299(27,625)Percentage allocated to common shares(a)99.0%100.0%Undistributed earnings—common shares1,286(27,625)Add: Dividends declared—common shares—8,689Numerator for common shares outstanding excluding participating shares1,286(18,936)Numerator for participating unvested shares only13—Numerator for basic and diluted earnings per share—total$1,299$(18,936)Denominator for basic and diluted weighted-average shares outstandingCommon shares outstanding36,97969,395Participating unvested shares(b)368—Basic and diluted weighted-average common shares outstanding—total37,34769,395Earnings (loss) per share—basic and dilutedExcluding participating unvested shares$0.03$(0.27)Including participating unvested shares$0.03$(0.27)(a)Basic and diluted weighted-average common shares:Weighted-average common shares outstanding36,97969,395Weighted-average restricted shares(b)368—Total basic and diluted weighted-average common shares37,34769,395Percentage allocated to common shares99.0%100.0%(b)For the three months ended March 31, 2014, we excluded 895 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 in periods with net income.  Pursuant to the two-class method, we report basic and diluted loss per share both inclusive and exclusive of the impact of the participating securities.


NOTE 10—COMMITMENTS AND CONTINGENCIES


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.  Furthermore, third parties may try to seek to impose liability on us in connection with the activities of 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.


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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, 2015 and December 31, 2014 , we had $1.0 million and $2.0 million, respectively, of outstanding unused loan commitments.  We estimate that as of each of March 31, 2015 and December 31, 2014 , the fair value of these commitments was less than $0.1 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, 2015 and December 31, 2014 , we had no outstanding guarantees or standby letters of credit.


Lease Obligation


The lease on our headquarters in Arlington, Virginia has a term from December 2014 through December 2015.  The base rent for the lease is $0.7 million per year with a $0.2 million rent credit.  The base rent will not increase during the term of the lease.  As of March 31, 2015 , our obligation for the remaining term of the lease is $0.5 million , all of which will be payable during the next twelve months.


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NOTE 11—FINANCIAL HIGHLIGHTS


The following schedule summarizes our financial highlights for the three months ended March 31, 2015 and 2014 : Three months ended(in thousands, except per share amounts)March 3120152014Per share dataNet asset value at beginning of period(a)$4.69$4.74Net income (loss)(b)Net operating (loss) income before net investment gain (loss) and income tax (benefit) provision(0.01)0.06Net realized gain (loss) on investments0.01(0.06)Net unrealized appreciation (depreciation) on investments0.03(0.27)Net income (loss)0.03(0.27)Net decrease in net assets resulting from distributionsDistributions declared from net operating income—(0.08)Distributions declared in excess of net operating income—(0.05)Net decrease in net assets resulting from distributions—(0.13)Net increase in net assets relating to stock-based transactionsRepurchase of common stock(b)0.030.02Net increase in stockholders’ equity from restricted stock amortization(b)—0.01Net increase in net assets relating to stock-based transactions0.030.03Net asset value at end of period(a)4.754.37Market price per shareBeginning of period$3.83$4.26End of period$3.96$3.79Total Return(c)3.39%-8.10%Shares of Common Stock OutstandingWeighted-average—basic and diluted37,34769,395End of period37,07467,745Net assetsAverage$175,911$325,898End of period$176,138$296,047Ratios (annualized)Operating expenses to average net assets5.17%6.25%Net operating income to average net assets-0.66%5.38%General and administrative expense to average net assets1.91%2.04%Return on average equity2.99%-23.56%__________________(a)Based on total number of shares outstanding.(b)Based on weighted-average number of shares outstanding.(c)Total return = [(ending market price per share–beginning market price per share+dividends paid per share)/beginning market price per share].


NOTE 12—SIGNIFICANT SUBSIDIARY


We have determined that for the three months ended March 31, 2014 , RadioPharmacy Investors, LLC, or RadioPharmacy, was an unconsolidated portfolio company that met the conditions of a significant subsidiary and therefore, we are presenting unaudited summarized financial information of RadioPharmacy.  RadioPharmacy is a private company, which had prepared financial statements in accordance with GAAP but not in accordance with Regulation S-X.


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RadioPharmacy is a nuclear compounding pharmacy for regional hospitals and imaging centers.  During the three months ended March 31, 2014 , we recognized $0.6 million of total revenue from our investment in RadioPharmacy.  The following table sets forth summarized balance sheet information for RadioPharmacy as of March 31, 2014 .


(in thousands)March 31, 2014(unaudited)Assets:Total current assets$6,553Total non-current assets19,713Total assets$26,266Liabilities and Stockholders' Equity:Current liabilities$4,167Long-term liabilities19,728Preferred stock1Other stockholders' equity2,370Total liabilities and stockholders' equity$26,266


The following table sets forth summarized income statement information for RadioPharmacy for the three months ended March 31, 2014 .


Three months ended March 31,(in thousands)2014(unaudited)Sales$6,470Gross margin$3,737Net income$25


NOTE 13—SUBSEQUENT EVENTS


On April 28, 2015, we signed a definitive merger agreement with PennantPark, PFLT Panama, LLC, PFLT Funding II, LLC and PennantPark Investment Advisers, LLC.  Pursuant to the merger agreement, PFLT Panama, LLC will merge with and into MCG, with MCG as the surviving company and a wholly owned subsidiary of PennantPark and, immediately thereafter and as a single integrated transaction, MCG will merge with and into PFLT Funding II, LLC, with PFLT Funding II, LLC as the surviving company.  We refer to these transactions collectively as the Merger.  In the Merger, MCG stockholders will have the right to receive (i) a number of shares of PennantPark common stock, par value $0.001 per share, or the Exchange Ratio, equal to $4.521 divided by the greater of (A) the net asset value per PennantPark common share (computed no more than 48 hours before the effective time of the Merger, excluding Sundays and holidays), or the PFLT Closing NAV, and (B) the volume weighted average trading price of PennantPark common shares on the NASDAQ Global Select Market for the consecutive period of ten trading days concluding at the close of trading on the second trading day immediately preceding the date of the effective time of the Merger, or the Merger Share Price, (ii) $0.226 in cash and (iii) if the Merger Share Price is less than the PFLT Closing NAV, an amount in cash equal to the lesser of (A) the Exchange Ratio multiplied by $0.25 and (B) the Exchange Ratio multiplied by the amount by which the Merger Share Price is less than the PFLT Closing NAV.


The transaction has been approved by the boards of directors of MCG and PennantPark.  Completion of the transaction is subject to customary closing conditions, including the approval of MCG and PennantPark’s stockholders.





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Review 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, 2015 , the related consolidated statements of operations, changes in net assets, cash flows and financial highlights for the three -month periods ended March 31, 2015 and 2014 .  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, 2014 , 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 we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 2, 2015.  In our opinion, the accompanying consolidated balance sheet as of December 31, 2014 , 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


April 29, 2015





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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, net investment losses and general and administrative expenses and the factors that may affect such results; our expectations regarding the timetable for completing the transaction with PennantPark, future financial and operating results, benefits of the transaction and future opportunities for the combined company, disruption to our business as a result of the transaction with PennantPark; our ability to use net capital loss carryforwards and certain other pre-tax attributes; our decisions to make dividend distributions after taking into account 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; the sufficiency of liquidity to meet 2015 operating requirements, new origination opportunities and potential dividend distributions; our expectations regarding the full use of, and our belief that our operations, monetizations and unrestricted cash will provide sufficient liquidity to fund, as necessary, requests to draw on 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; our use of independent valuation firms to provide additional support for our internal analyses; our expectations regarding the outcome of legal proceedings incidental to our business; market conditions generally and specifically regarding the leveraged loan market; the state of the economy 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 that provides capital and advisory services to lower middle-market companies throughout the United States.  Generally, our portfolio companies use our capital investment to finance acquisitions, recapitalizations, refinance existing debt, buyouts, organic growth, working capital and other general corporate purposes.


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 limitations on our ability to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt generally may not exceed 50% of the value of our assets).


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 distributions, 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.


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RECENT DEVELOPMENTS— Q1 2015


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|• | Exit of Control Equity Investments- On March 31, 2015, we sold our last control equity investment, RadioPharmacy Investors, LLC, or RadioPharmacy:

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|◦ | Realized 8% IRR over our 9 year investment period based on $6.5 million invested and $13.4 million of sales proceeds;

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|◦ | In addition to the $2.6 million unrealized gain we recognized in the quarter ended December 31, 2015, we realized incremental proceeds in the quarter ended March 31, 2015 of $1.4 million above our prior valuation;

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|◦ | We closed the transaction at the end of the day on March 31, 2015, but due to the timing of wires we received $13.1 million of the proceeds on April 1, 2015.  As a result, on March 31, 2015 we recorded a $13.1 million receivable for investment sold; and

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|◦ | As a result of the successful exit, we recognized $0.6 million in transaction bonuses that were included in salaries and benefits for the quarter ended March 31, 2015.

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|• | Originations and Advances- We made $0.4 million in advances to existing portfolio companies.  Additionally, in connection with the sale of RadioPharmacy, we amended and restated our existing senior secured debt and provided first lien financing consisting of a $17.5 million term loan and a $1.0 million revolver at an interest rate of 8.5% due in December 2017.

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|• | Open-Market Purchases of Our Stock-In January 2015, we repurchased 1,061,075 shares of our common stock at a weighted average purchase price of $3.93, equal to a 17.2% discount to our March 31, 2015 Net Asset Value, or NAV, per share.  We acquired these shares in open market transactions.  We retire these shares upon settlement, thereby reducing the number of shares issued and outstanding.

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|• | Loan Monetizations- We received $14.0 million in loan payoffs and amortization payments, principally from the monetization of Industrial Safety Technologies, LLC and Intrafusion Holding Corp. at or above par.

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|• | Asset Quality -As of March 31, 2015, we had no loans on non-accrual, at cost or fair value, and reported leverage for each loan is less than 4.0x (including our lowest ranking security).

TRANSACTION ANNOUNCEMENT


On April 28, 2015, we signed a definitive merger agreement with PennantPark Floating Rate Capital Ltd., or PennantPark, PFLT Panama, LLC, PFLT Funding II, LLC and PennantPark Investment Advisers, LLC.  Pursuant to the merger agreement, PFLT Panama, LLC will merge with and into MCG, with MCG as the surviving company and a wholly owned subsidiary of PennantPark and, immediately thereafter and as a single integrated transaction, MCG will merge with and into PFLT Funding II, LLC, with PFLT Funding II, LLC as the surviving company.  We refer to these transactions collectively as the Merger.  Under the terms of the merger agreement, each outstanding share of MCG common stock (including shares of restricted stock) will be converted into (i) a number of shares of PennantPark common stock, par value $0.001 per share, or the Exchange Ratio, equal to $4.521 divided by the greater of (A) the net asset value per PennantPark common share (computed no more than 48 hours before the effective time of the Merger, excluding Sundays and holidays), or the PFLT Closing NAV, and (B) the volume weighted average trading price of PennantPark common shares on the NASDAQ Global Select Market for the consecutive period of ten trading days concluding at the close of trading on the second trading day immediately preceding the date of the effective time of the Merger, or the Merger Share Price, (ii) $0.226 in cash and (iii) if the Merger Share Price is less than the PFLT Closing NAV, an amount in cash equal to the lesser of (A) the Exchange Ratio multiplied by $0.25 and (B) the Exchange Ratio multiplied by the amount by which the Merger Share Price is less than the PFLT Closing NAV.  Based on the number of shares of MCG common stock outstanding on the date of the Merger agreement, this will result in approximately 11.8 million shares of PennantPark common stock being exchanged for approximately 37.0 million shares of MCG common stock, subject to adjustment in certain circumstances.  The merger agreement further provides that, in the event of termination of the merger agreement under certain circumstances, including in connection with the acceptance of an alternative transaction, MCG may be required to pay PennantPark a termination fee equal to $7.0 million.  The transaction is expected to close in the third quarter of 2015, subject to approval of MCG and PennantPark stockholders.


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ACCESS TO CAPITAL AND LIQUIDITY


At March 31, 2015 , we had $115.9 million of cash and cash equivalents available for general corporate purposes and $0.2 million of restricted cash held in escrow.  On April 1, 2015, we collected the $13.1 million receivable for investment sold from the sale of RadioPharmacy. Including this April 1, 2015 collection, we had $129.0 million or $3.48 per outstanding share of unrestricted cash.  We expect our cash per share to increase in 2015 as investments monetize.


PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY


As of March 31, 2015 , the fair value of our investment portfolio was $50.1 million , which represents a $25.2 million , or 33.4% , decrease from the $75.3 million fair value as of December 31, 2014 .  The following sections describe the composition of our investment portfolio as of March 31, 2015 and key changes in our portfolio during the three months ended March 31, 2015 .


Portfolio Composition


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


March 31, 2015December 31, 2014(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioDebt investmentsSenior secured debt$40,90881.6%$40,56253.8%Subordinated secured debt8,99117.922,46029.8Total debt investments49,89999.563,02283.6Equity investmentsPreferred equity——12,04416.0Common/common equivalents equity2350.52660.4Total equity investments2350.512,31016.4Total investments$50,134100.0%$75,332100.0%


Our debt instruments bear contractual interest rates ranging from 4.3% to 14.5% , a portion of which may be in the form of paid-in-kind interest, or PIK.  As of March 31, 2015 , approximately 82.0% of the fair value of our loan portfolio had variable interest rates, based on either the London Interbank Offer Rate, or LIBOR, or the prime rate, and 18.0% of the fair value of our loan portfolio had fixed interest rates.  As of March 31, 2015 , approximately 62.9% of our loan portfolio, at fair value, had LIBOR floors of 2.0% on a LIBOR-based index or prime floors between 2.0% and 3.3% .  At origination, our loans generally have four- to six-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, 2015December 31, 2014(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioHealthcare$26,49152.8%$44,56659.2%Business services14,18228.314,17218.8Broadcasting9,22618.49,19812.2Other(a)2350.57,3969.8Total$50,134100.0%$75,332100.0%______________________(a)No individual industry within this category exceeds 1%.


During the three months ended March 31, 2015 , we had concentrations in certain industries, including the healthcare, business services and broadcasting industries.  The following table summarizes our fair value and revenue concentrations in each of those industries:


Investments at fair valueRevenue for the three months endedMarch 31, 2015December 31, 2014March 31, 2015March 31, 2014(dollars in thousands)Amount% of Total PortfolioAmount% of Total PortfolioAmount% of Total RevenueAmount% of Total RevenueIndustryHealthcare$26,49152.8%$44,56659.2%$1,10156.3%$2,13122.8%Business services14,18228.314,17318.835017.91,71518.4Broadcasting9,22618.49,19812.21266.41641.8Total$49,89999.5$67,93790.2$1,57780.6$4,01043.0


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Changes in Investment Portfolio


The following table summarizes our total portfolio investment activity during the three months ended March 31, 2015 and 2014 :


Three months ended(in thousands)March 3120152014Beginning investment portfolio$75,332$368,873Originations and advances3846,706Gross payments, reductions and sales of securities(27,377)(26,426)Net realized gain (loss)271(4,488)Unrealized depreciation(7)(23,173)Reversals of unrealized depreciation1,3204,524Origination fees and amortization of unearned income211282Ending investment portfolio$50,134$326,298


Originations and Advances


The following table shows our originations and advances during the three months ended March 31, 2015 and 2014 by security type:


Three months ended March 31,20152014(dollars in thousands)Amount% of TotalAmount% of TotalDebt investmentsSenior secured debt$30579.4%$4,88072.8%Subordinated debtSecured7920.61,28319.1Unsecured——2824.2Total debt investments384100.06,44596.1Equity investmentsPreferred equity——2613.9Total equity investments——2613.9Total originations and advances$384100.0%$6,706100.0%


Additionally, in connection with the sale of RadioPharmacy, we amended and restated our existing senior secured debt and provided first lien financing consisting of a $17.5 million term loan and a $1.0 million revolver at an interest rate of 8.5% due in December 2017.


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, 2015 and 2014 by security type:


Three months ended March 31,20152014(dollars in thousands)Amount% of TotalAmount% of TotalDebt investmentsSenior secured debt$1350.5%$2,3358.8%Subordinated secured debt13,84150.619,56074.0Total debt investments13,97651.121,89582.8Equity investmentsPreferred equity13,40148.94,53117.2Total equity investments13,40148.94,53117.2Total gross payments, reductions and sales of securities$27,377100.0%$26,426100.0%


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During the three months ended March 31, 2015 and 2014 , our gross payments, reductions and sales of securities by transaction type included:


Three months ended March 31,(in thousands)20152014Principal repayments, reductions and loan sales$13,500$17,500Sale of equity investments7,0004,348Scheduled principal amortization2352,335Collection of accrued paid-in-kind interest and dividends6,6422,243Total gross payments, reductions and sales of securities$27,377$26,426


As shown in the following table, during the three months ended March 31, 2015 , we monetized 3 portfolio investments with proceeds totaling $27.1 million:


Three months endedMarch 31, 2015(in thousands)Principal Repayments and Proceeds from Loan SalesSale or Settlement of Equity InvestmentsPIK Interest and Dividend PrepaymentsTotalMonetizationsRadioPharmacy Investors, LLC$—$7,000$6,401$13,401Industrial Safety Technologies, LLC7,000—2417,241Intrafusion Holdings, Inc.6,500——6,500Total monetizations13,5007,0006,64227,142Other scheduled payments235——235Total gross payments, sales and other reductions of investment portfolio$13,735$7,000$6,642$27,377


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 RatingSummary Description1Capital gain expected or realized2Full return of principal and interest or dividend expected with customer performing in accordance with plan3Full return of principal and interest or dividend expected, but customer requires closer monitoring4Some loss of interest or dividend expected, but still expect an overall positive internal rate of return on the investment5Loss 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


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The following table shows the distribution of our investments on our 1 to 5 investment rating scale at fair value as of March 31, 2015 and December 31, 2014 :


(dollars in thousands)March 31, 2015December 31, 2014Investment RatingInvestments at Fair Value% of Total PortfolioInvestments at Fair Value% of Total  Portfolio1(a)$——%$——%2——22,46029.8349,89999.540,56253.84——12,04416.052350.52660.4Total$50,134100.0%$75,332100.0%


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 all or a portion of the loan on non-accrual status and will cease recognizing interest income on that loan until all principal and interest have been brought current through payment or 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 PIK interest and/or the accretion of a discount on the debt investment until such time that the fair value equals or exceeds cost.


As of each of March 31, 2015 and December 31, 2014 , our portfolio contained no loans that were more than 90 days past due or on non-accrual status.


Results of Operations


The following section compares our results of operations for the three months ended March 31, 2015 to the three months ended March 31, 2014 .


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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014


The following table summarizes the components of our net income for the three months ended March 31, 2015 and 2014 :


Three months ended March 31,Variance(dollars in thousands)20152014$PercentageRevenueInterest and dividend incomeInterest income$1,507$8,752$(7,245)(82.8)%Dividend income—151(151)(100.0)Loan fees213352(139)(39.5)Total interest and dividend income1,7209,255(7,535)(81.4)Advisory fees and other income23491143157.1Total revenue1,9549,346(7,392)(79.1)Operating expensesInterest expense—1,990(1,990)(100.0)Employee compensationSalaries and benefits1,3071,08821920.1Amortization of employee restricted stock104306(202)(66.0)Total employee compensation1,4111,394171.2General and administrative expense8301,639(809)(49.4)Total operating expense2,2415,023(2,782)(55.4)Net operating (loss) income before net investment gain (loss) and income tax (benefit) provision(287)4,323(4,610)NMNet investment gain (loss) before income tax provision1,584(23,255)24,839NMIncome tax (benefit) provision(2)4(6)NMNet income (loss)$1,299$(18,936)$20,235NMNM=Not Meaningful


TOTAL REVENUE


Total revenue includes interest and dividend income, loan fees, advisory fees and other income.  The following sections describe the reasons for the variances in each major component of our revenue during the three months ended March 31, 2015 from the three months ended March 31, 2014 .


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, 2015 , the total yield on our average debt portfolio at fair value was 11.7% compared to 11.4% during the three months ended March 31, 2014 .  The weighted-average yield varies each period because of changes in the composition of our portfolio of debt investments, changes in stated interest rates, accelerations of unearned fees on paid-off/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, 2015 and 2014 :


Three months ended March 31,20152014Average 90-day LIBOR0.2%0.2%Spread to average LIBOR on average loan portfolio10.212.1Impact of fee accelerations of unearned fees on paid/restructured loans1.3—Impact of non-accrual loans—(0.9)Total yield on average loan portfolio11.7%11.4%


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During the three months ended March 31, 2015 , interest income was $1.5 million , compared to $8.8 million during the three months ended March 31, 2014 , which represented a $7.2 million , or 82.8% , decrease .  This decrease reflected a $6.7 million decrease in interest income resulting from an 81.6% decrease in our average loan balance, and a $0.5 million decrease in interest income attributable to a decrease in our net spread to LIBOR.


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 principal balance of the loan and compounded if not paid on a current basis.  Borrowers may, in some instances, be required to prepay PIK because of certain contractual provisions or they may choose to prepay; however, more typically, PIK is paid at the end of the loan term.  The following table shows the PIK-related activity for the three months ended March 31, 2015 and 2014 , at cost :


Three months ended March 31,(in thousands)20152014Beginning PIK loan balance$1,707$12,132PIK interest earned during the period791,645Payments received from PIK loans(242)(2,060)Ending PIK loan balance$1,544$11,717


As of each of March 31, 2015 and 2014 , all of our PIK loans were accruing interest.  During the three months ended March 31, 2015 , we received $0.2 million in PIK loan repayment related to the repayment in full of our loan to Industrial Safety Technologies, LLC.  During the three months ended March 31, 2014 , we received $2.1 million in PIK loan repayment related to the repayment in full of our loan to G&L Investment Holdings, LLC.


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.  Dividend accretion is included in the cost basis of the related equity instrument on our Consolidated Balance Sheets and Consolidated Schedule of Investments .  We recognize dividends on 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.  During the three months ended March 31, 2015 , we recognized no dividend income.  During the three months ended March 31, 2014 , we recognized $0.2 million of dividend income.  In addition, during the three months ended March 31, 2015 , we received payments on accrued dividends of $6.4 million from RadioPharmacy representing all outstanding accrued dividends.  As of March 31, 2015 , we had no accrued dividends.


ADVISORY FEES AND OTHER INCOME


Advisory fees and other income primarily include fees related to prepayment, advisory and management services, equity structuring, syndication, 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, 2015 , we earned $0.2 million of advisory fees and other income, which represented a $0.1 million , or 157.1% , increase from the three months ended March 31, 2014 .  This increase resulted principally from increased loan prepayment fees in the first quarter of 2015.


TOTAL OPERATING EXPENSES


Total operating expenses include interest, employee compensation and general and administrative expenses.  The reasons for these variances are discussed in more detail below.


INTEREST EXPENSE


As of March 31, 2015 and December 31, 2014 , we had no outstanding borrowings or borrowing facilities.  During the three months ended March 31, 2014 , we incurred $2.0 million of interest expense related to our $150.0 million of small business investment company, or SBIC, debentures owed to the United States Small Business Administration, or SBA, by Solutions Capital I, L.P., or Solutions Capital and our notes outstanding under the MCG Commercial Loan Trust


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2006-1, or 2006-1 Trust.  On September 2, 2014, we prepaid in full the SBIC debentures, which had a cost of funds, including the amortization of deferred financing costs, of 4.6%.  In addition, on January 21, 2014, we repaid the 2006-1 Trust notes.


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, 2015 , our employee compensation expense was $1.4 million , which represented a 1.2%  increase from the same period in March 31, 2014 .  Our salaries and benefits expense increase d by $0.2 million , or 20.1% , due to a $0.7 million increase in incentive compensation.  Incentive compensation during the three months ended March 31, 2015 included $0.6 million related to the successful exit of RadioPharmacy in the first quarter of 2015.  The increase in incentive compensation was partially offset by a $0.5 million decrease in base salaries and benefits.  As of March 31, 2015 , we had six employees compared to 15 employees as of March 31, 2014 .  Amortization of employee stock awards decreased $0.2 million , or 66.0% .


GENERAL AND ADMINISTRATIVE


During the three months ended March 31, 2015 , general and administrative expense was $0.8 million , which represented a $0.8 million , or 49.4% , decrease compared to the same period in 2014 .


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|• | General and administrative expense decreased $0.2 million due to a decrease in legal fees related to our lawsuit against various defendants involved in our subordinated loan transaction with Color Star Growers of Colorado, Inc., Vast, Inc. and Color Star LLC.

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|• | General and administrative expense decreased $0.2 million due to a decrease in severance costs related to employee terminations during thethree months ended March 31, 2014.

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|• | General and administrative expense also decreased $0.4 million due to decreases in audit and accounting fees, corporate legal fees, employee recruiting costs and travel costs.

NET INVESTMENT GAIN (LOSS) BEFORE INCOME TAX PROVISION


During the three months ended March 31, 2015 , we recorded $1.6 million of net investment gain before income tax (benefit) provision, compared to $23.3 million of net investment loss during the same period in 2014 .  These amounts represent the total of net realized gains and (losses), net unrealized appreciation (depreciation), 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 gain and (loss) on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2015 :


Three months ended March 31, 2015(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanyRadioPharmacy Investors, LLCHealthcareControl$36$—$1,320$1,356Other (< $1.0 million net gain (loss))235(7)—228Total$271$(7)$1,320$1,584


On March 31, 2015, pursuant to a definitive agreement dated as of January 17, 2015, we completed the sale through a merger of 100% of our equity interest in RadioPharmacy’s subsidiary, Pharmalogic Holdings Corp., to a private equity buyer.  We received $13.4 million of proceeds resulting in a realized gain of $36,000 and a reversal of previously recorded unrealized depreciation of $1.3 million.  See Managements Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Q1 2015.


The remaining unrealized depreciation and appreciation shown in the above table resulted predominantly from the change in the performance of certain of our portfolio companies.


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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, 2014 :


Three months ended March 31, 2014(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanyNoteEducation Management, Inc.1EducationAffiliate$—$(15,151)$—$(15,151)RadioPharmacy Investors, LLC2HealthcareControl—(6,339)—(6,339)G&L Investment Holdings, LLC3InsuranceNon-Affiliate(4,523)—4,523—Other (< $1.0 million net gain (loss))35(1,800)—(1,765)Total$(4,488)$(23,290)$4,523$(23,255)


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|   |                                                                                                                                                                                                                 
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|1. | In the first quarter of 2014, we recorded $15.2 million of unrealized depreciation on our investment in Education Management, Inc. to reflect operational, financial and business challenges facing the company.

|   |                                                                                                                                                                                                              
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|2. | Furthermore, we reduced our valuation multiple for RadioPharmacy and recorded $6.3 million of unrealized depreciation based on volume, pricing and supply-cost challenges facing the company's core business.

|   |                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | In addition, during the three months ended March 31, 2014, we sold our preferred and common equity investments in G&L Investment Holdings, LLC resulting in a realized loss of $4.5 million and a reversal of previously recorded unrealized depreciation of $4.5 million.

INCOME TAX (BENEFIT) PROVISION


During the three months ended March 31, 2015 , we recorded an income tax benefit of $2,000 , which was primarily attributable a refund received by one of our taxable subsidiaries.  During the three months ended March 31, 2014 , we recorded an income tax provision of $4,000 , which was primarily attributable to flow-through taxable income on certain investments held by our subsidiaries.


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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES


Our financial liquidity principally comes from our cash on hand, portfolio monetizations and net operating income.  In addition to making investments in portfolio companies, we may use our available liquidity to pay dividends to our stockholders.  At March 31, 2015 , we had $115.9 million in cash and cash equivalents available for general corporate purposes and $0.2 million of restricted cash held in escrow.  On April 1, 2015, we collected the $13.1 million receivable for investment sold from the sale of RadioPharmacy.  Including this April 1, 2015 collection, we had $129.0 million or $3.48 per outstanding share of unrestricted cash.  We expect our cash per share to increase in 2015 as investments monetize.


As of March 31, 2015 , our cash and cash equivalents included $102.0 million held in interest-bearing accounts.  During the three months ended March 31, 2015 , our operating activities provided $14.1 million of cash and cash equivalents, and our financing activities used $4.0 million of cash and cash equivalents.


For the three months ended March 31, 2015 , we repurchased 1,061,075 shares of our common stock for $4.2 million at a weighted average price of $3.93 per share, representing a 16.1% discount from our quarterly weighted average net asset value per share.


For the three months ended March 31, 2015 , we earned 11.7% on our average loan portfolio at fair value of $59.6 million .


Although there can be no assurance, we believe we have sufficient liquidity to meet our operating requirements for the remainder of 2015, as well as liquidity for new origination opportunities and potential dividend distributions.





LIQUIDITY AND CAPITAL RESOURCES—BORROWINGS


As of March 31, 2015 , we had no outstanding borrowings or borrowing facilities.  During the three months ended March 31, 2014 , we had the following borrowing facilities:


SBIC DEBENTURES


In September, 2014, we prepaid in full the $150 million of SBIC debentures owed to the SBA by Solutions Capital using excess restricted cash.  After repayment, Solutions Capital surrendered its SBIC license to the SBA’s Office of SBIC Operations.


BANK OF AMERICA UNSECURED REVOLVER


In November 2012, we obtained an unsecured revolving credit facility with Bank of America, N.A. in the principal amount of $20.0 million.  On April 21, 2014, based on our assessment of our excess liquidity, we terminated our undrawn Bank of America Unsecured Revolver.


MCG COMMERCIAL LOAN TRUST 2006-1


As of December 31, 2013, we had $25.2 million of securitized Class D Notes outstanding under the 2006-1 Trust, which was secured by $76.3 million of loans and equity investments and $13.9 million of cash.  We retained all of the equity in the securitization.  In November 2013, we directed the trustee to redeem the remaining notes on the next quarterly payment date and, on January 21, 2014, we repaid the Class D Notes in full and the loan and equity investments held by the 2006-1 Trust were transferred back to MCG, the parent.


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 net asset value of such stock, except in limited circumstances, including approval by our stockholders of such a sale and certain determinations by our board of directors.


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STOCK REPURCHASE PROGRAMS


The following table summarizes our stock repurchases under our stock repurchase programs for the three months ended March 31, 2015 .


Three months ended March 31, 2015Dollar amount repurchased(in thousands)$4,175Shares repurchased1,061,075Average price per share$3.93Discount to quarterly weighted average net asset value per share16.1%


On January 17, 2012, our board of directors authorized a stock repurchase program of up to $35.0 million, which was terminated after we effected repurchases totaling approximately $29.4 million.  On October 25, 2013, our board of directors authorized a second stock repurchase program of up to $25.0 million.  On February 28, 2014, our board of directors increased the second stock repurchase program to $35.0 million.  On April 25, 2014, our board of directors terminated the second stock repurchase program effective as of May 2, 2014 and authorized a third stock repurchase program of up to $50.0 million effective as of May 5, 2014.  On August 5, 2014, our board of directors terminated the third stock repurchase program and authorized a fourth stock repurchase program of up to $50.0 million effective as of August 12, 2014.  On October 17, 2014, our board of directors suspended the fourth stock repurchase program.  On December 18, 2014, the fourth stock repurchase program, which had been suspended during our modified "Dutch Auction" tender offer, was reinstated.  In January 2015, the fourth stock repurchase program was discontinued.  We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements.  We retired all shares of common stock that we purchased in connection with the stock repurchase program.


RESTRICTED STOCK


We requested and received the assurance of the staff of the Division of Investment Management that it would not recommend enforcement action to the SEC under the 1940 Act or Rule 17d-1 thereunder if we engage in a stock repurchase program and agree not to issue additional restricted stock under any compensation plan unless such issuance, together with all restricted stock outstanding under all compensation plans, does not exceed 10% of our outstanding common stock at the time of such issuance less the total number of shares previously issued, in the aggregate, pursuant to all compensatory plans.  Although as of March 31, 2015 , there were 1,426,811 shares of our common stock available for issuance under our Third Amended and Restated 2006 Employee Restricted Stock Plan , or 2006 Plan, no shares of restricted stock could be issued under our 2006 Plan or our Third Amended and Restated 2006 Non-Employee Director Restricted Stock Plan , because the 10% threshold set forth in the SEC's order had been reached due to shares we repurchased under our stock repurchase program.


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, 2015 , we had $1.0 million of outstanding unused loan commitments.  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 less than $0.1 million based on the fees that we currently charge to enter into similar arrangements, taking into account the creditworthiness of the counterparties.


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From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies.  As of March 31, 2015 , we had no outstanding guarantees or standby letters of credit.


CONTRACTUAL OBLIGATIONS


The following table shows our contractual obligations as of March 31, 2015 :


(in thousands)Payments Due by PeriodContractual Obligations(a)TotalLess than 1 year1-3 years4-5 yearsAfter 5 yearsOperating leases$513$513$—$—$—Severance obligations(b)1,0731,073———Total contractual obligations$1,586$1,586$—$—$—


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|(a) | Excludes the unused commitments to extend credit to our customers of$1.0 millionas discussed above.

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|(b) | Represents remaining severance payments, employer taxes and incentive payments that we are obligated to pay stemming from the resignation of our former chief executive officer, which have been accrued in other liabilities on our Consolidated Balance Sheets.

DISTRIBUTIONS


We currently qualify as a RIC for federal income tax purposes, which generally allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders.  Generally, we intend to distribute sufficient dividends to eliminate taxable income and may distribute more than the taxable income, which amount would be considered a return of capital.  As a RIC, we are subject to a 4% excise tax to the extent that we do not distribute on an actual or deemed basis:  (i) 98.0% of our current year ordinary income; and (ii) 98.2% of our current year net capital gain income.


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.  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.  Since December 2001, we have declared aggregate per share distributions of $14.13 .


The following table summarizes the distributions that we declared since January 1, 2013:


Date DeclaredRecord DatePayable DateDividends per ShareAugust 5, 2014August 20, 2014August 29, 2014$0.050April 25, 2014May 9, 2014May 30, 2014$0.070February 28, 2014March 14, 2014March 28, 2014$0.125October 25, 2013November 8, 2013November 22, 2013$0.125July 26, 2013August 9, 2013August 30, 2013$0.125April 26, 2013May 10, 2013May 31, 2013$0.125March 1, 2013March 15, 2013March 29, 2013$0.125


There were no distributions declared from January 1, 2015 through March 31, 2015 .  As of March 31, 2015 , we have calculated an income tax loss for the full year resulting in no requirement for distributions.  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.  Therefore, a determination as to the tax attributes of the distributions made on a quarterly basis may not be representative of the actual tax attributes for a full year.  We intend to update stockholders quarterly with an estimated percentage of our distributions that resulted from taxable ordinary income.  The actual tax characteristics of distributions to stockholders will be reported to stockholders annually on a Form 1099-DIV.  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


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of our 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.


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, 2014 .


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 HierarchyInputs to Fair Value MethodologyLevel 1Quoted prices in active markets for identical assets or liabilitiesLevel 2Quoted 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 informationLevel 3Pricing 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.


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 premiums, financial covenants, operating covenants, ownership and corporate governance rights, 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;


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market prices, when available; estimates of market interest rates that would otherwise be made available to our portfolio companies; 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 business 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 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:


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|• | Majority-Owned Control Investments—As ofMarch 31, 2015, we had no majority-owned control investments.  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 earnings before interest, taxes, depreciation and amortization, or 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 in question.  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 upon a hypothetical sale or exit and then allocates such value to the investment's securities in order of their relative liquidation preference.  In addition, we assume that any outstanding debt or other securities that are senior to our securities are required to be repaid at par.  These valuation approaches also consider the value of our ability to control the portfolio company’s capital structure and the timing of a potential exit.

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|• | Non-Control Investments—As ofMarch 31, 2015, all of our investment portfolio is comprised of non-control investments.  Quoted prices are not available for99.5%of our non-control investments at fair value.  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 for which no quoted prices are available, 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.  In the event the fair value of a non-control debt investment, as determined by the same market or income approach used to value our control investments, is below our cost, we estimate the fair value using the market or income approach.

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|• | 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 ofMarch 31, 2015, these securities represented0.5%of our investment portfolio at fair value.  We utilize independent pricing services to arrive at certain of our fair value estimates.  To corroborate “bid/ask” quotes from independent pricing services we perform a market-yield approach to validate prices obtained or obtain other evidence.

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 engage 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.  In total, as of March 31, 2015 , we either obtained a valuation or review from an independent


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firm, considered new investments made, pending sales of the investments or used market quotes in the preceding twelve-month period to calculate 100.0% of the fair value of our investment portfolio.


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 sets our valuation policies and procedures and determines the fair value of our investments.  The investment and valuation committee of our board of directors meets at least quarterly with our executive management to review management’s recommendations of fair value of our investments.  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.


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.


SIGNIFICANT UNOBSERVABLE INPUTS


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 distinct contract terms and conditions.  As such, our valuation of each investment in our portfolio is unique and complex, often factoring in numerous different 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.


The following table summarizes the significant unobservable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique as of March 31, 2015 .


($ in thousands)Fair ValueValuation TechniquesUnobservable InputsRangeWeighted AverageMinimumMaximumSenior debt$40,908Discounted Cash FlowMarket Interest Rate6.5%7.8%7.1%Pending TransactionsPending TransactionsN/AN/AN/ASubordinated debt8,991Discounted Cash FlowMarket Interest Rate14.5%14.5%14.5%$49,899


RECENT ACCOUNTING PRONOUNCEMENT


In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) , or ASU 2014-09 . This update supersedes the revenue recognition requirements in Accounting Standards Update No. 2011-230: Revenue Recognition (Topic 605) , and most industry-specific guidance throughout the industry topics of the codification.  The core principal of the update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.  In applying the revenue model to contracts within its scope, an entity should identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  We are currently evaluating the potential impact the adoption of this update will have on our consolidated financial statements.


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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We are subject to financial market risks, including changes in interest rates.  In the event of financial downturns 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 their 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, 2015 , approximately 82.0% of our loan portfolio, at fair value, bore interest at a spread to either the LIBOR or the prime rate, and 18.0% of the fair value of our loan portfolio had fixed interest rates.  As of March 31, 2015 , approximately 62.9% of our loan portfolio, at fair value, had LIBOR floors of 2.0% on a LIBOR-base index or prime floors between 2.0% and 3.3% .  The three-month weighted-average LIBOR interest rate was 0.25% as of March 31, 2015 .  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.


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, 2015 and December 31, 2014 :


March 31, 2015December 31, 2014(in thousands)Interest Bearing Cash and Commercial LoansBorrowingsInterest Bearing Cash and Commercial LoansBorrowingsMoney market rate$102,179$—$77,392$—LIBOR90-day39,561—52,771—Fixed rate8,991—8,926—Total$150,731$—$139,089$—


In addition, as of March 31, 2015 , we had $13.8 million of non-interest-bearing cash and cash equivalents.


Based on our March 31, 2015 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, 2015 , the quarterly average LIBOR was 0.25% and a 100-basis point decrease could not occur:


(dollars in thousands)Basis Point ChangeInterest IncomeInterest ExpenseNet Income100$1,104$—$1,1042002,285—2,2853003,703—3,703


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ITEM 4.  CONTROLS AND PROCEDURES


DISCLOSURE CONTROLS AND PROCEDURES


Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015 .  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, 2015 , our Chief Executive Officer and our Chief Financial 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, 2015 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, 2015 , 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.  In addition to the other information contained in this Quarterly Report on Form 10-Q, including our financial statements, the related notes, schedules and exhibits, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 , which could materially affect our business, financial condition and/or operating results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.


Other than described below, there have been no material changes from the risk factors previously disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 , which should be read together with the other risk factors and information disclosed elsewhere in this Quarterly Report on Form 10-Q and our other reports filed with the SEC.


The following disclosure adds the new risk factor titled


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|• | "Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited."

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|• | "The announcement and pendency of the proposed merger could adversely affect our business, financial results and operations."

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|• | "Failure to complete the proposed merger could adversely affect our business and operations."

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|• | "The merger agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed merger."

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|• | "If the merger is not completed or we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties."

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.


For the tax years ended December  31, 2014, 2013, 2012 and 2011, we have total net capital losses of $174.5  million which have no expiration and will be carried forward indefinitely to offset future net capital gains.  Capital loss carryforwards from tax years 2009 of $54.2  million and 2010 of $5.2  million will expire December  31, 2017 and December  31, 2018, respectively, unless utilized to offset future net capital gains prior to those expiration dates to the extent permitted by federal tax law.  Pursuant to Section 382 of the Internal Revenue Code, if an “ownership change” (generally defined as a greater than 50% change by value in our stock ownership within a three-year period) occurs or has occurred, our ability to use our pre-change net capital loss carryforwards and certain other pre-change tax attributes to offset our post-change income may be limited.  Similar rules and limitations may apply for state tax purposes as well.


Risks Related to the Merger Agreement with PennantPark


The announcement and pendency of the proposed merger could adversely affect our business, financial results and operations.


The announcement and pendency of the proposed merger could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future borrowers and employees, which could have a significant negative impact on our future revenues and results of operations, regardless of whether the merger is completed.  In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed transaction.  Existing borrowers may refinance their loans with us and we could also potentially lose and we may have difficulty in hiring new employees.  In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the merger, which could have a significant negative impact on our future revenues and results of operations.


We are also subject to restrictions on the conduct of our business prior to the completion of the merger as provided in the merger agreement, generally requiring us to conduct our business only in the ordinary course  and subject to specific limitations, including, among other things, certain restrictions on our ability to make certain capital expenditures, investments and acquisitions, sell, transfer or dispose of our assets, amend our organizational documents and enter into or modify certain contracts.  These restrictions could prevent us from pursuing otherwise attractive business opportunities, industry developments and future opportunities and may otherwise have a significant negative impact on our future revenues and results of operations.


Failure to complete the proposed merger could adversely affect our business and operations.


There is no assurance that the proposed merger will occur or that the conditions to the proposed merger will be satisfied in a timely manner or at all.  Completion of the merger is subject to closing conditions, including the approval of MCG stockholders and PennantPark stockholders that, if not satisfied, will prevent the merger from being completed. If MCG stockholders do not adopt the merger agreement or if PennantPark stockholders do not approve the issuance of PennantPark common stock as required by the merger agreement and the merger is not completed, the resulting failure of the merger could have a material adverse impact on our business and operations.


Under certain circumstances, we are obligated to pay a termination fee or other amounts upon termination of the merger agreement.  The merger agreement with PennantPark contains certain termination rights for MCG and PennantPark and provides that, in connection with the termination of the merger agreement under specified circumstances, MCG may be required to pay PennantPark a termination fee of $7.0 million. There can be no assurance that the merger will be completed, and the obligation to make that payment in certain circumstances may have an adverse impact on our financial condition and our stock price.


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The merger agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed merger.


The merger agreement severely limits our ability to pursue alternatives to the merger.  The merger agreement contains non-solicitation and other provisions that, subject to limited exceptions, limit our ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of MCG.  We can consider and participate in discussions and negotiations with respect to an alternative proposal only in very limited circumstances so long as certain notice and other procedural requirements are satisfied.  In addition, subject to certain procedural requirements (including the ability of PennantPark to revise its offer) and the payment of a $7.0 million termination fee, we may terminate the merger agreement and enter into an agreement with a third party that makes a superior proposal.  These provisions may discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of us from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in the merger.


If the merger is not completed or we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties.


If the merger is not completed, the MCG board of directors may review and consider various alternatives available to us, including, among others, continuing as a standalone public company with no material changes to our business or seeking an alternate transaction.  These strategic or other alternatives available to us may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed merger, and risks and uncertainties related to our ability to complete any such alternatives and other variables which may adversely affect our operations.


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


STOCK REPURCHASE PROGRAM


On January 17, 2012, our board of directors authorized a stock repurchase program of up to $35.0 million, which was terminated after we effected repurchases totaling approximately $29.4 million.  On October 25, 2013, our board of directors authorized a second stock repurchase program of up to $25.0 million.  On February 28, 2014, our board of directors increased the second stock repurchase program to $35.0 million.  On April 25, 2014, our board of directors terminated the second stock repurchase program effective as of May 2, 2014 and authorized a third stock repurchase program of up to $50.0 million effective as of May 5, 2014.  On August 5, 2014, our board of directors terminated the third stock repurchase program and authorized a fourth stock repurchase program of up to $50.0 million effective as of August 12, 2014.  On October 17, 2014, our board of directors suspended the fourth stock repurchase program.  On December 18, 2014, the fourth stock repurchase program, which had been suspended during our modified "Dutch Auction" tender offer, was reinstated.  In January 2015, the fourth stock repurchase program was discontinued.  We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements.  We retired all shares of common stock that we purchased in connection with the stock repurchase program.  The following table summarizes our stock repurchases for the three months ended March 31, 2015 :


Three months ended March 31, 2015Dollar amount repurchased(in thousands)$4,175Shares repurchased1,061,075Average price per share$3.93Discount to quarterly weighted average net asset value per share16.1%


NET ISSUANCE OF RESTRICTED STOCK


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 the 2006 Plan for which the forfeiture provisions have lapsed to satisfy the applicable 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 the three months ended March 31, 2015 :


Period/PurposeTotal number  of sharesAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or ProgramsJanuary 1 – 31, 2015Stock repurchase program(a)1,061,075$3.931,061,075$—March 1 – 31, 2015Restricted stock vesting(b)518$3.96(c)n/an/aTotal1,061,593$3.931,061,075$—





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|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On August 5, 2014, our board of directors authorized a stock repurchase program of up to $50.0 million effective as of August 12, 2014.  On October 17, 2014, our board of directors suspended the stock repurchase program.  On December 18, 2014, the stock repurchase program was reinstated.  In January 2015, the stock repurchase program was discontinued.

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|(b) | 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.

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|(c) | 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.  MINE SAFETY DISCLOSURES.


Not Applicable.


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 ReferenceExhibit No.DescriptionForm and SEC File No.Filing Date with SECExhibit No.Filed with this 10-Q15.1Letter regarding unaudited interim financial information from Ernst & Young LLP, independent registered public accounting firm*31.1Certification 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*31.2Certification 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*32.1Certification 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†32.2Certification 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†*Filed herewith.†Furnished herewith.


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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 CorporationDate:April 29, 2015By:/s/KEITH KENNEDYKeith KennedyChief Executive Officer(Principal Executive Officer)Date:April 29, 2015By:/s/BEVERLY JANE ALLEYBeverly Jane AlleyChief Financial Officer(Principal Financial and Accounting Officer)





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